The work you did in the previous two phases set the foundation for what comes next. In Phase One, we ensured you’re ready for an exit. In Phase Two, both parties conducted their due diligence.
That brings us to Phase Three: M&A Negotiation. Terms are discussed, risk is allocated, and the final price is set. If you like sports terms, it’s “game time.”
As a CPA-led M&A firm, we take the lead in M&A negotiations, calling on the expertise of internal team members and a network of legal partners skilled in contracts. Tax implications will play a major role in negotiations, as will due diligence, in particular. Why? Because when the numbers are there for everyone to see, there’s very little to debate.
Today, I’m going to give you a look at the big picture of our third phase and provide specifics where necessary. The big question is this: How do we evaluate the terms of a deal from a financial and tax perspective, and what kind of value can we add to the deal before you sign? Deals can be won or lost in this stage. There’s no room for error. Let’s get going.
Setting a final price for the acquisition is the last point of discussion in an M&A negotiation.
Each party has a number in mind, but several financial, legal, and structural terms must be agreed upon before the price can be set. That could include due diligence questions and valuation challenges.
The key elements negotiated during this phase include:
- Purchase price and payment structure, including whether the deal involves cash, stock, earnouts, or a combination
- Asset versus stock sale designation, which has significant tax implications for both parties
- Representations and warranties that define what the seller is guaranteeing about the business
- Indemnification clauses that allocate risk for undisclosed liabilities or post-closing issues
- Non-compete and employment agreements for key personnel
- Transition timelines and operational continuity provisions
Each of these terms affects the overall value of the deal.
A higher purchase price with unfavorable tax structuring could net the seller less than a lower price with favorable tax structuring.
See how that works? The value of the deal, from the seller’s perspective, emerges from the asking price and whether that asking price holds its value after taxation. That’s the simple version.
Deal structure is one of the most impactful decisions made during M&A negotiations, and it’s almost entirely a tax conversation.
Let’s start with an example: an asset sale has different tax consequences than a stock sale for both the buyer and the seller. Poor choices in this scenario can cause significant, long-term damage to your company's financial well-being.
In an asset sale, the buyer acquires specific assets and assumes specific liabilities.
They’re incentivized to “step up” the tax basis of the acquired assets to get higher depreciation deductions. Sellers are on the other side of the equation. They could face less favorable tax treatment depending on how the purchase price is allocated across asset categories.
In a stock sale, the buyer acquires ownership of the entire entity, including all assets and liabilities.
This structure is simpler from an operational standpoint, but the tax consequences are different. A stock sale is more favorable to the seller because the proceeds are taxed as capital gains. With an asset sale, a corporate seller may face double taxation.
Can you see the challenge here? Buyers prefer asset sales. Sellers would rather do a stock sale.
Much of the negotiating will center around these opposing viewpoints, with resolutions often containing elements of both. In this instance, our responsibility as an M&A firm is to ensure that we minimize your tax liability as much as possible, regardless of which side of the table you’re on.
How can we leverage due diligence to win at the negotiating table?
Every element of the buyer’s and seller’s due diligence is subject to review and challenge. That’s why being thorough in that phase is so important. Each data point, once verified, influences the terms of the deal. The better your financials, the stronger your position.
For buyers, due diligence findings provide leverage to negotiate in several ways.
- Outcome #1: Identified tax liabilities or compliance gaps can justify a reduction in the purchase price.
- Outcome #2: Inconsistencies in reported earnings support requests for earnout provisions tied to future performance.
- Outcome #3: Discovered risks can be addressed through indemnification clauses that protect the buyer after closing.
For sellers, due diligence is just as powerful because it means showing up with clean, consistent books.
- Outcome #1: Consistent, accurate financials justify your asking price and reduce the buyer’s ability to negotiate downward.
- Outcome #2: Current tax filings and full compliance eliminate common objections and accelerate the timeline.
- Outcome #3: A transparent financial picture builds trust, making the buyer more willing to agree to favorable terms.
Sellers who are exit-ready with carefully reviewed due diligence can negotiate from a position of strength, particularly if they have an ongoing relationship with a CPA. There will be fewer concessions at the table if the numbers hold up under scrutiny.
Fortunately, the most persistent and damaging pitfalls that affect M&A negotiation are entirely avoidable.
Seasoned business owners bring well-earned confidence to the negotiation table. That confidence comes from business acumen and general experience, both of which are real and valid. But what’s missing is subject-matter expertise. Without an M&A team, there will be pitfalls.
Here are four of the most common pitfalls I see in small-business M&A negotiations:
- Pitfall #1: Outsized Focus on Purchase Price
- Result: Tax consequences, payment structure, and post-closing obligations compound and add additional complexity and hidden costs.
- Pitfall #2: Acceptance of Vague Representations and Warranties for the Sake of Expediency
- Result: Business owners face open-ended liability exposure.
- Pitfall #3: Incomplete Understanding of Purchase Price Allocation
- Result: Price allocation determines how the total price of the deal is distributed across asset categories for tax purposes and can drastically affect the value of the deal over time.
- Pitfall #4: Emotional Decision-Making
- Result: When emotion takes over, good people lose money for no reason. This is a touchy subject. As business owners, we take pride in our ability to make rational decisions under pressure. In this case, the rational decision is to delegate, right? It is normal to feel a deep and personal attachment to the business you built, but deals must be evaluated from an objective position.
Any mistake in the negotiation stage can reduce the selling price. That includes poor structuring, unfavorable allocations, and overlooked liabilities. Our team can catch those before the deal closes or advise you to walk away before it's too late.
Now that we’ve looked at the pitfalls, let’s talk about solutions.
We’re going to be working as your advisory team throughout negotiations and with the same level of precision and rigor that we offer during the preparation phase. Every proposed term will be evaluated through a financial and tax lens before it is agreed to.
- Solution #1: Tax-Optimized Deal Structuring
- Result: A substantial reduction in tax burden in the near- and long-term increases the overall value of the deal in real dollars.
- Solution #2: Financial Modeling of Proposed Terms
- Result: Financial modeling is going to show the real-dollar impact of different deal structures. Ultimately, you call the shots. We give you information to make profitable decisions.
- Solution #3: Tax Minimization and Wealth-Building Strategies Baked into the Deal Structure
- Result: Sellers are able to integrate the proceeds of the sale into a broader strategy to grow and protect their wealth now and into retirement.
- Solution #4: Coordination with Attorneys, Consultants, and Lenders
- Result: All parties work from the same set of facts and the same financial reality, which is critical in successfully navigating closing.
All four solutions boil down to selecting the right deal structure and creating a post-transaction plan that’s in your favor.
Our core responsibility is to add outsized value at every phase, including negotiation. Steering business owners clear of pitfalls is part of what we do at The Novyx Group, but it’s not about replacing radiators. It’s about building a winning race car.
With input from an on-demand CFO paired with financial analysis services, we can eliminate inefficiencies and cut operational expenses while you’re still at the negotiating table. So, what’s next?
Closing comes next.
The quality of the negotiation directly affects how smoothly the closing process goes. It's crucial to thoroughly address all issues, no matter how contentious they seem. A heated debate at the negotiating table is better than a legal battle or financial debacle after you close the deal. We’ve seen both in our time.
In the meantime, contact us if you’re approaching a merger or acquisition and want to make sure you’re positioned to win in M&A negotiations.
The terms of the contract should be well-defined, supporting documentation should be clear and well-organized, and a thorough tax plan should be in place. If anything is missing or unclear, we go back to the table and make it right. Schedule a discovery call to get an M&A team working on your behalf right now.
Talk soon,
Jeremy A. Johnson, CPA, CEPA®
Founder & CEO
The Novyx Group
