If you’re a business owner considering a sale or acquisition, understanding the key differences between mergers and acquisitions is crucial. In this third installment of our series about mergers and acquisitions, Deanna Salo, Managing Principal at Cray Kaiser, breaks down these concepts in simple terms and shares essential advice for navigating the transition. Deanna offers insights that can help make your transaction smoother. She also highlights the critical role an accountant plays in guiding business owners through financial readiness, due diligence, and post-sale planning.

Transcript:

My name is Deanna Salo, and I’m the Managing Principal here at Cray Kaiser, Limited CPAs and Advisors.

What is the difference between a merger and an acquisition?

There’s probably thousands of definitions on mergers and acquisitions if you Google it, and I think the best way that I like to quantify it is with a math problem. A merger is A plus B equals C. That’s where two joining companies come together and they decide to create something brand new. So C is the new company. An acquisition is a little bit different math problem. It’s A plus B equals A or B. And this is where somebody’s relayed the buyer and somebody’s the seller of the company. And whoever survives the acquisition is who absorbs the target. So, you know, I think in today’s environment, we really don’t see very many mergers going on anymore. They’re pretty much acquisitions where somebody at the end is absorbing the target or the selling company and they become part of the existing or the buyer’s company.

What advice do you have for a business owner who is preparing to sell their business?

I think the best piece of advice I have actually given to most of my clients who have gone through the process of thinking about selling their business is keep your eyes on your business. This effort to sell your business, while it might only be 45 to 60 to 90 days, it may take much longer than that. Certainly the readiness of getting ready to sell your company is a long and can be a longer process, if you take your eyes off of the business, you may fall upon economic hardship. You may not be pressing all the different strategies that you have within the company. So keeping your eyes on the business to keep it running successfully while you’re taking a lot of energy and time to this acquisition sale process is really the best piece of advice. It’s easy to get rolled up in the acquisition process because it’s an exciting time. A lot of people ask in your questions about a lot of things but keeping your eyes on the business is probably the single best piece of advice that I have actually given clients and they look at me and they say oh yes we definitely need to keep our eyes on the business during this process.

When should you tell your employees about the sale?

In sharing the news with your organization, I would suggest a best practice is you start with your C-suite in terms of understanding what this process is going to be because many of the executive team will need to be a participant in the due diligence. So start small. What happens sometimes is the deals don’t go through. We actually had a client who went all the way up until a week or two. I think it was 10 days before the actual closing was to happen and the seller decided not to sell their business and they were wise to only really include the ownership team and some executive team members within the journey that got them even there. They did not tell the entire company. What happens oftentimes is there’s going to be little, mini tornadoes in your company of information being shared and so you could lose employees, you could lose customers, you could lose vendors if there would be a word on the street that you could be sold. So keeping the information, which is super hard to do because most owners are very excited with this new opportunity and they want to share it with everybody, that keeping the information to the tight group until such time as it’s appropriate to tell the rest of the organization about the great new news is a best practice. I think in smaller organizations where everybody knows everybody’s birth dates and anniversaries and they know when they’re feeling well and they know when they’re not feeling well it’s much more difficult to hold back the news when there’s an opportunity to acquire another business. I think as owners and businesses we have to let our employees know that we’re constantly looking to improve our organizations and we may be looking at acquiring another firm, another practice, another group of professionals. I think that’s a growth mindset and so if that’s part of the tenor of the company to tell the team that you’re looking to acquire other businesses, other practices, other specialists. I think when it does in fact happen, it’s an easier conversation because it’s already part of the strategic plan that’s been shared within your existing small organization that we’re constantly looking to buy and acquire other companies, other specialties. And then when it does happen, It’s not really new news, it’s just, oh, we have these new team members that are going to be coming to join us. And I think that’s really, if it can be set the course in your strategic plan, which you’re sharing with your existing smaller company, I think it becomes less of a hurdle once the target is identified and once the target is acquired and you’ve got new people joining the firm or your organization, it’s just an easier transition because everybody was already in the know that you are already out seeking this opportunity.

As the seller, when that needs to be announced to your team, when it is really time to tell your team, it’s a very delicate matter. And I think if ownership has been clear with their team that they are selling, that we are looking to connect ourselves with other resources so that we can deploy our services and goods at a much more efficient pace and have a lot more resources. And yes, I’m here to ensure that the transition is going to take place between where we’re at now and when we join the new company, giving them some conversations around it, meeting individually. Sometimes it takes meeting individually with people to let them have a surety that you will be with them throughout this next process is an important part of that conversation.

I think for a company who’s looking to sell, again, there’s a lot of what I call head and heart. Head knows that it’s time to sell, I’m ready, but the heart is my people, my clients, my customers, my vendors, all the people that got me to here, I need to make sure that they’re well taken care of. And if you start those conversations a little bit earlier on, meaning you’re not going to tell them you’re going to be getting that you’re going to be sold, but you’re letting them know that we need to be, we can be better and bigger and greater by aligning ourselves with another organization and start that in your own strategic plan that we may be acquired, we may merge into another company because I want all of us to have the benefit of being able to do bigger, better, bolder work going forward. I think that that’s an important message to give to your existing employees so that they know that they want to stay with you for that next great opportunity and put some really positive energy around it is an important part of transitioning your company from who you are to the next owner.

What role does an accountant play in a merger or acquisition?

The role Cray Kaiser plays in a merger or acquisition process is really one of a consultant first. We really want to make sure that the client is ready for the transaction, that they’ve gotten their checks and balances with their financial warehouse, that they understand that the value is not going to be how much the seller needs to retire. It’s really providing them the consultancy piece, the reality check of what this next process is going to be. It’s kind of phase one. Phase two is really when we become the financial advisors and help them review the letter of intent before they sign it and sure it’s got all the right pieces that we believe are important. Certainly, we are not attorneys and we let legal counsel take care of the legalese of these letters of intent. And then we participate in the third phase, which is really the due diligence phase, supporting their internal accountants, controllers, CFOs and helping them provide the buyer with whatever information they need, making sure that the information is scrubbed in a great format so that the buyer has an ease of looking through it efficiently and with accuracy. And then lastly, we assist with the after-tax cash flow. We, you know, sometimes we start that at the beginning. Clients say, “Well, if I sell my company for X dollars, how much money am I actually going to be able to keep?” And we’ll help our clients provide those proformas, those projections of if I sell my company for $10 million, how much will I receive after tax? And what’s my actual cash flow? Which also helps the investment advisors understand how much money is that owner actually going to receive out of that 10 million when everything comes to close. So we are there from the beginning to help get them, get their mind and their mindset around the sale of their business. And we also help them through each of the phases as much or as little as they need us. And certainly in the life thereafter, many of our clients who have in fact sold their companies, we’re helping them in their next level of enterprise. Some of them become real estate enthusiasts and we help them with their accounting and tax on the real estate side. So we’re here to help clients throughout the entire cycle, life cycle of their existing business, and even in the life cycle after their business. All of this process, there’s lots of phases to this process, and at Cray Kaiser, you know, we’re here to help our clients, again, to and through their transactions at whatever point in their life cycle they’re at. And if you need any further assistance on that, please feel free to give us a call. Cray Kaiser is here for you during any part of this transaction.