Potential Changes in Estate Planning Laws Impact M&A Activity

The 2017 Tax Cuts and Jobs Act (TCJA) nearly doubled the exemption threshold for individual and married couples. The planned “roll-back” is slated to take effect in 2026.

Taxes are probably the single most variable discussed among the current generation leading a family-owned business. Estate planning and looking into the future adds a tremendous catalyst to those family discussions. Unfortunately, most extended family discussions around estate planning becomes too complex. Your professional tax advisors should be on speed dial.

Congratulations on building a very nice and profitable business. Thinking of stepping back or taking some “chip” off the table? You probably need to make a decision to generate a return and use proceeds to fund your estate plan. Obviously, your middle market firm is in an illiquid state until you actually decide to sell the business.

What do you mean my firm is in an “illiquid state” until I sell the business? Certainly, many firms utilize S and LLC corporate designations for tax purposes. In many cases, the owners are so content that every business decision has some angle for tax purposes – and life is good. Most businesses just keep on moving forward over a couple generations. Being content as an owner works until you receive an unsolicited offer from a competitor or your family decides to hire an investment banker to sell the company.

Let’s look at a “normal” sell-side process with a typical timeframe of seven to nine months to complete the M&A transaction. Preparing for the process has two main components of 1) internal: how complete and accurate is the current corporate information (e.g., incorporation documents, Quick Books, inventory control, etc.) and 2) external: information needed to satisfy the buyer due diligence and legal confirmatory due diligence to complete the transaction.

Internal preparation. The business owner has certain key performance indicators (KPI) that they and their team track on a frequent business. Many owners fall into the trap of just looking at a few items and “their gut” to let them manage the busi- ness. Creating a KPI report is simple and this allows the owner to manage the business with his direct reports. One potential KPI report would track daily value of shipments versus shipments scheduled in the next seven days versus new orders. In this example, the owner keeps a pulse on both manufacturing operations and the sales department. Does this KPI report example also help the owner spot any payroll issues?

External preparation: A recent example might be helpful to the reader. The family has owned the business and light manufacturing facility for over 30 years since buying the company. They are contemplating selling the business and no longer want to be the owner of the building. Environmental regulations (some states have gotten tougher) have changed over three decades. My suggestion was to complete a Phase 1 Environmental Report at the start of the process – to understand if the company is in current compliance with all federal and state statutes. In addition, we wanted to ensure that no issue at the facility was serious enough to warrant a Phase 2 Report.

Finally, we wanted to establish a budget and timeline for remediation and include this information in our management presentation. During the closing process, the buyer’s legal team may want to “box- in” this budget expense in the purchase and sale agreement and ensure it’s the seller’s responsibility to fund the potential multi-year expenditure.

Why this rationale in Phase 1? We wanted to showcase that the owners take this seriously and they had a plan in place prior to starting buyer discussions. This particular example also brings into bear outside factors that impact the environmental status of the facility and property – a flood from the nearby local river five years ago was well documented. We wanted to ensure that potential contaminated river water was not causing the owner any unwelcome environmental issues and clean-up that would stop a deal from closing.

We are seeing a great run in our domestic markets, but what global headwinds continue to keep you up at night? Do you anticipate these global headwinds weakening? Are you getting any younger? Do you have a strong non-family related management team? Would you like to play more golf?

How about using net proceeds to satisfy a commitment for a charitable donation?

Recap of Variables impacting Value Creation

1. Personal: Age, Health, Successor, Family Issues, Liquidity, Partner Conflict, Estate Planning

2. Business: Cash Flow Needs, Capital Needs, Key Employee Risk, Competitive Risks

3. Environment: Policy Changes, Regulatory Risk, Benefits Complexity, Market Conditions

4. Industry: Structural Changes, Disintermediation, Commodification

As of this writing, a M&A transaction would probably close in January/February 2025. Some deals could be completed in Q4 2024, but that takes many variables to align.

If the “roll-back” does occur, the current exemption (Individual = $12.92M or Married Couples = $25.84M) is reduced to $7M and $12.92M, respectively.

Now might be a good time to learn about the timeline to complete a sell-side process. Please consider all your options and tools when considering your estate planning initiatives. We would encourage you to ask your professional advisors to invite an investment banking team to speak with you and your family.

By Bob McIlvaine President The McIlvaine Company

Bob McIlvaine is the president of The McIlvaine Company, which is helping filter suppliers understand the true cost of their products and the impact on the Serviceable Obtainable Market. He can be reached at rmcilvaine@ mcilvainecompany.com or +1 847.226.2391