Presentation Transcript

1. Introduction to Business Acquisitions

2. Introduction to Business Acquisitions
3. Introduction to Business Acquisitions
4. Overview Course Assumptions: Arm’s-Length Transactions Corporations Profitable Transactions Reporting Gains Commercial Real Estate Excluded Standard References Assumed Tax Rates The Changing Tax Environment
5. New Tax Rates – 2013 and Beyond Maximum ordinary income – 39.6% Maximum capital gain – 20.0% Medicare Surtax – 3.8% Earned income Surtax – 0.9%
6. Chapter 1

   Business Transaction Basics

7. Scope/Size of Transaction Smaller (Micro) company: Up to $1 million revenue Larger company (Middle Market): $1-50 million revenue Major transaction: Over $50 million revenue
8. Seller’s Objectives Optimize value of the business Negotiate most favorable terms Take advantage of economic/product life cycle Identify buyers willing to pay a premium for the business Structure to take advantage of favorable tax laws
9. Buyer’s Objectives Eliminate a competitor Increased economies of scale Expand into new territories/markets Acquire business under favorable circumstances Leverage acquisition company with complementary businesses
10. Seller’s Advisory Team Spouse/Family Members Partners/Key Employees Board of Directors CPA Attorney Valuation Advisor Financial Advisor Industry/Business Associates Business Intermediary/Investment Banker
11. Buyer’s Advisory Team Attorney CPA Banker Board of Directors
12. Common Types of Terms Escrow Account/Holdbacks Seller Financing Performance Payments/Earn-out Provisions Non-competition Agreements Employment/Consulting Agreements Contingent/Unknown Liabilities
13. Chapter 2

    Introduction to Due Diligence and Key Documentation

14. Seller’s Due Diligence Develop an Exit Plan Identify Your Advisory Team Plan to Optimize the Business Value Get the Business in a Position to be Sold Preparation of Offering Memorandum Consideration of Key Employees Investigate the Buyer Complete Seller’s Due Diligence Check List (Appendix 2A)
15. Offering Memorandum Executive Summary Strengths and Opportunities Business Description Financial Information Appendices as necessary
16. Buyer’s Due Diligence Identify Your Advisory Team Think about the Ideal Acquisition Identify Overall Structure of Deal Consider Asset vs. Stock Acquisition Identify Sources of Financing Identify Sources of Negotiation/Terms
17. Buyer’s Due Diligence Review Legal Issues Control Preparation of Legal Documents Review Financial Information Review Target Company Operations Complete Buyer’s Due Diligence Checklist (Appendix 2B)
18. Common Transaction Documents Confidentiality Agreement (Appendix 2C) Confidentiality Agreement with Recourse(Appendix 2D) Letter of Intent (Appendix 2E) Offering Memorandum Transaction Resolutions and Authorizations (Appendix 2F)
19. Common Transaction Documents Finance Documents Business Broker Agreement (Appendix 2G) Closing Checklist Preparation of a Deal Book
20. Chapter 3

    Valuation Considerations

21. Reasons for Valuations Selling to a Third Party Transfer Ownership via Gifting Litigation between Shareholders Divorce Estate Tax Determination Installing an Employee Stock Ownership Plan and Trust (ESOP) Acquiring a Business
22. Standards of Valuation Fair Market Value (FMV) Investment Value Intrinsic or Fundamental Value Fair Value Emotional Value
23. Terms Escrow/Holdback Provisions Seller Financing Contingent Payments/Earn out Provisions Non-competition Agreement Employment/Consulting Agreement Contingent/Unknown Liabilities
24. Types of Buyers and Sellers Hypothetical Buyer and Seller Financial Buyer Strategic Buyer Family Members Inside Buyers (e.g., Management or ESOP)
25. Approaches to Valuation Income Approach Discounted Future Returns Method Capitalization of Earnings Method Market Approach Public Company Guideline Method Transaction Guideline Method Asset Approach Cost Principle
26. Approaches to Valuation Other Considerations Ownership Attributes Control Position/Enterprise Value – Mergerstat information Minority Position Liquidity Issues Lack of Marketability
27. Chapter 4

    Analysis of Asset-Based Transactions

28. Seller’s Goals/Perspectives Optimize Price Bulk Sale and Transfer Pass Liabilities to Buyer When Favored by Seller
29. Buyer’s Goals/Perspective Obtain Increased Basis in Assets Favorable Allocation of Proceeds to Asset Categories Acquire Only Selected Assets Limitations on Unrecorded Liabilities Bulk Sales Laws
30. Buyer’s Goals/Perspective Termination of Unfavorable Agreements Avoid Minority Shareholder Issues Higher Transaction Costs Inability to Use Valuable Agreements
31. Tax Considerations IRC Sec. 1231 IRC Sec. 1221 IRC Sec. 1245 IRC Sec. 1250 IRC Sec. 197 Capital asset classification
32. Depreciation Recapture
33. Allocation of Price – IRC Sec. 1060 Residual Method of Allocation Seven Asset Classes: Class I: Cash and other general deposit accounts Class II: CDs, foreign currency, government securities, publicly traded stock Class III: Assets “marked to market”-accounts receivable, certain debt instruments Class IV: Inventories; property held for resale to customers Class V: All assets not defined in Classes I, II, III, IV, VI, and VII
34. Allocation of Price – IRC Sec. 1060 Class VI: IRC Sec. 197 intangible assets other than goodwill and going concern value Class VII: Goodwill and Going Concern Value Allocate first to Class I, then Class II, etc. Generally, allocate to class with shortest depreciation period Report on IRS Form 8594 (Asset Acquisition Statement); attach to tax return Buyer and seller can report differently Less likely audit issue if buyer and seller report same allocation
35. C Corporation Considerations Following Asset Sale Subject to Personal Holding Company Tax? Liquidating distribution eligible for capital gains rates? If only partial distributions, subject to dividend tax treatment? Ability to walk away from the business; end filing responsibilities
36. S Corporation Considerations Following Asset Sale Shareholders may wish to terminate connection to business Shareholders not faced with double taxation or personal holding company tax If a former C corporation may be exposed to taxes on excess net passive income Complete liquidation will qualify distributions for capital gain treatment End responsibility for regulatory filings and tax reporting
37. Illustrations Illustrated Asset-Based Transaction – Manufacturing Company Illustrated Asset-Based Transaction – Service Company Appendix 4A – IRS Tax Form 8594 – Asset Acquisition Statement under Section 1060 Asset Purchase Agreement – Appendix 4B
38. Effective Taxes from Transactions Service vs. Manufacturing Company Service companies generally lower than manufacturing Manufacturing companies – more equipment Depreciation recapture Recapture taxed at ordinary income rates
39. S Corporation – Built-in Gain Sale of assets of former C corporation Normally, 10 year recognition period 5 year recognition period for 2012, 2013
40. Chapter 5

    Analysis of Stock-Based Transactions

41. Seller’s Goals/Perspectives Optimize Price Avoid Double Taxation as C Corporation Stock Based Attributes May Shelter Some Gain Pass Liabilities to Buyer
42. Buyer’s Goals/Perspectives Favorable Agreements/Intangible Assets Remain in Place Insignificant Unknown/Contingent Liabilities Low FMV of Acquired Assets in Relation to Basis Tax Attributes May Be Passed to New Owner Too Many Assets for Seamless Transition Seller Insists on Stock Transaction Buyer May Elect to Treat as Asset Purchase
43. C Corp. – Proceeds to Selling Shareholders
44. S Corp. – Proceeds to Selling Shareholders
45. IRC Section 338 Taxable Stock Purchase Treated as Asset Sale Stepped-up Basis in Target Assets Target Incurs Tax on Gain for Increased Asset Basis Beneficial if Tax Offsets Exist to Absorb Additional Taxes Section 338(h)(10) Election – Treat as Part of Selling Group
46. IRC Section 1042 Selling Shareholder in C Corporation Sale of Stock to ESOP Proceeds Reinvested in Qualified Replacement Property Proceeds Received Tax Free (Carryover Basis)
47. IRC Section 368: “Tax Free” Reorganization Type A: Statutory Merger or Consolidation Type B: Stock for Stock Type C: Stock for Assets Type D: Spin-Off; Split-Off; Split-Up Type E: Corporate Recapitalization Type F: Change in Identity, Form, or Place of Incorporation Type G: Bankruptcy Proceedings
48. Stock Attributes – Net Operating Losses Remains with Acquired Corporation Limitations on Usage If Change in Control Three-Year Testing Period Greater than 50 percentage point increase in ownership by 5% shareholders Annual Limitation = Value of Old Loss Corporation times Federal Long Term Tax-exempt Rate (IRC Sec. 382(b)(1))
49. NOL Limitation Example Net Operating Loss Carryover $200,000 Value Old Loss Corporation $1,000,000 Long-Term Tax-Exempt Rate 7% Current Year Taxable Income $100,000 Annual NOL Usage Limitation $70,000 $70,000 NOL Offset to Current Year Taxable Income $130,000 NOL Carried Forward to Future Years
50. Stock Purchase Agreement Provisions Recitals Terms of Sale/Acquisition Agreement to Sell and Acquire Purchase Price Escrow Deposit Seller Financing Contingent Purchase Price Consulting Agreement
51. Stock Purchase Agreement Provisions Warranties and Representations Covenants Documents to be Delivered at Closing General Provisions Stock Purchase Agreement – Appendix 5A
52. Chapter 6

    Transaction Terms

53. Contingent/Unknown Liabilities Protection for Buyer Some Risk Covered by Business Insurance? Build in Contingency Reserve for Unforeseen Adequate Due Diligence Reduces Risk
54. Holdback/Escrow Accounts Quantified Amount Available Liquidity for Buyer if Seller Representations Inaccurate Negotiated between Parties Buyer likes more; seller likes less Escrow of Funds Agreement – Appendix 6A
55. Seller Financing Subordinated to Bank Debt Period of Note Should Be Reasonable Qualify for Installment Sale Treatment? IRC Sec. 453 Depreciation/Amortization Recapture Report on IRS Form 6252 (“Installment Sale Income”) Ineligible transactions: Loss transactions, related party, inventory Seller Look for Security/collateral Seller Financing Note and Loan Agreement – Appendix 6B
56. Contingent Payments/Earn-Outs Carefully Defined to Avoid Future Disputes Best Practice to Compute Based Upon Verifiable Data
57. Non-Competition Agreements Typically 3-5 Years To Buyer: IRC Sec. 197 Intangible Asset 15 Year Amortization To Seller: Ordinary Income (not FICA)
58. Employment/Consulting Agreement Typically 2-4 Years To Buyer: Current Period Deductible Expenses To Seller: Ordinary Income (subject to FICA) Consulting Agreement – Appendix 6C
59. Chapter 7

    Buyer Groups

60. Likely Buyers Family Members Gifting Annual exclusion increased to $14,000/donee Lifetime exclusion $5 million ($5.25 million indexed for 2013) Family Limited Partnership Inside Buyers Managers Employees (ESOP) Strategic Buyer Familiar with industry and company Often competitors/industry insiders
61. Likely Buyers Financial/Investment Buyer Looking for returns on investment Little interest in day-to-day management Initial Public Offering Liquidation
62. Chapter 8

    Closing and Attributes of Successful Transactions

63. Seller Best Practices Have an Exit Plan Clean Up Financial Statements Keep Running the Business Add Advisors Know the Buyer Understand Business Valuation, Tax and Cash Flow Implications of the Transaction
64. Buyer Best Practices Benchmark to Your Ideal Acquisition Control the Preparation of Documents Do Thorough Due Diligence Have Financing in Place Plan to Integrate the Target into Existing Businesses Understand Business Valuation
65. CPA/Advisor Best Practices Facilitate Being a Transaction Quarterback Know Buy Side and Sell Side Issues Master Communications Be Professional Understand Teamwork Be an Advisor on Negotiating Strategies Think Strategically beyond the Transaction
66. Chapter 9

    Resources

67. Introduction to Business Acquisitions

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