Optimizing Your Business Exit Plan - University at...
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Buying & Selling a Business Key Considerations
Transcript of Optimizing Your Business Exit Plan - University at...
Buying & Selling a BusinessKey Considerations
Today Due Diligence & Other Considerations
Tax Considerations
Legal Matters
Roundtable and Q&A
Presenters
Mark Ferm, CPAPartnerTronconi Segarra & Associates [email protected]
Pat Tronconi, CPAPartnerTronconi Segarra & Associates [email protected]
Phases of a Transaction
Pre Letter of Intent
Letter of Intent
Due Diligence
Transaction Agreements Closing Post
Closing
Initial Meeting With Client
Who is involved and when does each party become involved: Broker Accountant Lawyer Banker
Non-Disclosure Agreement
First step in due diligence process Mutual or one-sided Term
Due Diligence Checklist
Financial Information/Liabilities Assets Contracts Licenses/Intellectual Property Employee Information/Benefits Litigation Real Property/environmental
Middle Market EBITDA Multiples
What is it? Who asks for it? How is it utilized? Impact on deal price and financing
Quality of Earnings
Trailing Twelve-Month
Fiscal Fiscal Fiscal Period Ended2014 2015 2016 June 2016
Revenues $ 18,159 $ 19,432 $ 17,778 $ 18,465
Cost of Goods Sold 14,450 15,873 14,068 14,601
Gross Profit 3,709 3,559 3,710 3,864 % Margin 20.4% 18.3% 20.9% 20.9%
Operating Expenses 3,170 2,918 2,871 2,875
Operating Income 539 641 839 989
Depreciation/Amortization 1,446 1,393 1,413 1,413
EBITDA, as reported 1,985 2,034 2,252 2,402
Adjustments:Capitalized R&D Expense - - (524) (524) Excluded Bonus Expense paid in fiscal 2017 - - (70) -
Corrected EBITDA 1,985 2,034 1,658 1,878
Normalizing Adjustments:Business Insurance (75) (75) (75) (75) Audit & Tax (15) (15) (15) (15) IT Costs (15) (15) (15) (15) San Diego Lease Increase (20) (20) (20) (20) Straight-line rent adustment - (60) - - Medical insurance savings 130 130 130 130
5 (55) 5 5
Normalized EBITDA $ 1,990 $ 1,979 $ 1,663 $ 1,883
Purchase price expressed as a multiple of Normalized EBITDA 4.52 4.55 5.41 4.78
Quality of Earnings - Example
Common types of contingent liabilities we look for
Working capital considerations• Lack of Clarity / Ambiguity in defining Working
Capital• Highly Contentious Issue• Use of neutral Accounting Firm for Dispute
Resolution Pro forma opening balance sheet – what is
it and why does it matter?
Financial and Tax Due Diligence
PurchaseWorking Accounting Estimated
June 30, Capital and Other Opening2016 Adjustments Adjustments Balance Sheet
Current AssetsAccounts receivable – billed, net $ 1,521,888 $ - $ 500,000 (11) $ 2,021,888 Accounts receivable – unbilled, net 7,063,551 (275,000) (1) (2,138,688) (4) 4,649,863 Inventory, net 925,563 (525,000) (2) - 400,563 Other current assets 205,564 - - 205,564
Total current assets 9,716,566 (800,000) (1,638,688) 7,277,878
Property & Equipment 1,810,227 - 2,189,773 (5) 4,000,000
Other AssetsGoodwill 29,503,004 - (27,181,055) (6) 2,321,949 Intangibles, net 273,362 - (273,362) (7) - Deposits 28,050 - 28,050 Intercompany, net (1,318,233) - 1,318,233 (7) -
Total other assets 28,486,184 - (26,136,184) 2,349,999
$ 40,012,977 $ (800,000) $ (25,585,099) $ 13,627,878
Current LiabilitiesAccounts payable $ 2,216,214 $ - $ - $ 2,216,214 Accrued expenses 772,457 100,000 (3) 400,000 (8) 1,272,457 Income taxes – federal (210,365) - 210,365 (7) - Billings in excess 589,207 - - 589,207
Total current liabilities 3,367,513 100,000 610,365 4,077,878
Deferred tax liability, net - - 550,000 (9) 550,000
Long-Term Liabilities 57,390,230 - (57,390,230) (7) -
Stockholder' s Equity (Deficit) (20,744,766) - 29,744,766 (10) 9,000,000
$ 40,012,977 $ 100,000 $ (27,035,099) $ 13,627,878
Assets
Liabilities and Stockholder's Equity (Deficit)
Opening Balance Sheet Example
Stock Versus Asset Deals
Stock versus Asset Deals What is the objective of the
purchaser/seller? Why does it matter? How does it change due diligence? Step-up in basis and purchase price
allocation Potential/actual liabilities Labor issues/concerns Licenses/contracts to consider
Letter of Intent
Preliminary financial due diligence has been completed.
Security deposit Purchase price and payment terms Time period for due diligence Expected closing date Continued due diligence Binding and non-binding terms
Tax Considerations
Tax Structure Stock Asset Section 338(h)(10)
Tax Considerations
Acquisition of Target StockGenerally results in….
One layer of tax for Seller, - generally capital gain Buyer obtains access to Seller’s tax attributes (which may be limited due
to Section 382/383) Buyer will inherit all of Seller’s liabilities No Step up in basis of acquired assets for Buyer Mitigation of some transfer taxes – (i.e. sales and use tax)
Tax Considerations
Acquisition of Target AssetsGenerally results in….
Generally two layers of tax (consider recapture provisions) The tax Attributes of the Seller do not transfer to Buyer but may be able
to offset some gain recognized by Seller Buyer can identify and assume only specified liabilities Step up in basis of assets if a premium is paid Need to consider additional transfer taxes
Tax Considerations
Section 338(h)(10) Election Used to treat a qualified stock purchase as an asset purchase for tax
purposes only Is a joint election between Buyer and Seller Seller must be a subsidiary of a consolidated group or an “S”
Corporation Form 8023 Must be filed by the 15th day of the 9th month after the transaction closes Complete the purchase price allocation of Form 8833 May have tax detriment to Seller (Recapture Taxes, Built in Gains Tax
Recognition etc. which may merit a tax gross up negotiation State tax considerations
Tax Considerations
Post Integration
Generally, costs will fall under Section 162 ordinary and necessary business expenditures and be currently deductible
When does a cost stop being an acquisition cost (requiring capitalization) and become a post integration cost?
Tax Considerations
Transaction Filing Fees & Regulatory Considerations
Hart Scott Rodino Fees
New York State Real Property Transfer tax
Federal Trade Commission Approval
Tax Considerations
Financing
Acquisition debt
Deferred Financing Fees
Use of transitory acquisition company
Corporate Attorney Role
Risk Mitigation
Legal Matters: Purchase/Sale Agreement
What exactly is being purchased?
What is being excluded?
Purchase Price and purchase price payment terms: All cash Cash and promissory note(s)
○ Payment terms under the notes○ Subordinated notes○ Security for repayment
Earn out possibilities Other sources of financing Allocation of purchase price Escrow of % of purchase price (payment of unpaid taxes, indemnity setoff)
Legal Matters: Purchase/Sale Agreement
Seller representations and warranties:
Not one size fits all.
The depth of the representations and warranties depend on the type of transaction and relationship of the parties.
Fundamental representations○ Authority○ Ownership/title○ Validity○ Taxes ○ Environmental○ Labor/benefits
Disclosure Schedules
Purchaser representations and warranties
Legal Matters: Purchase/Sale Agreement
Indemnity:
• Survival Period
• Basket
• Maximum Liability
• Insurance contributions and taxes
• Exclusion of certain damages
Setoff against promissory note(s)
Legal Matters: Purchase/Sale Agreement
Non-competition
Non-solicitation
Non-disparagement
Confidentiality
Breach of any of the above – cause for purchaser to stop payment under outstanding promissory note(s) or claw
back any payments made to seller. Non-payment by purchaser cause for such clauses to be void during the time of
breach or indefinitely.
All of the above must be reasonable in consideration of the transaction.
Legal Matters: Purchase/Sale Agreement
Closing Conditions Closing Deliverables:
Purchase price Tax filings/payments Assets/stock/membership units Ancillary agreements Stock/unit powers resignations
Post-Closing Matters
True up of working capital
Earn out calculations
Tax filings
Other transition matters
Roundtable and Q&A
