Presentation Transcript

1. Advanced Mergers, Acquisitions and Sales

2. Overview

3. Advanced Mergers, Acquisitions and Sales

4. Chapter 1 – Introduction: Case Study – XYZ Company, Inc.

5. 2013 Tax Rates New tax rates – 2013 and Beyond: Maximum individual ordinary income – 39.8% Maximum individual capital gain – 20% Medicare surtax – 3.8% Self employment surtax – 0.9%
6. 1-1 Case Study Introduction XYZ Company Hypothetical business in Computer System Design Services industry John Smith 80% owner Authorized = 100,000 shares Issued and outstanding = 50,000 shares Par value $10 per share Total stock basis = $500,000 Assumed tax rates Federal-Corp 35% Federal-Personal 39.6% Capital Gain 20% State/Local n/a
7. 1-2 XYZ Company – Abbreviated Historical Income Statements
8. 1-3 XYZ Company – Abbreviated Forecasted Income Statements
9. 1-4 XYZ Company – Abbreviated Balance Sheet (12/31/20X3)

10. Chapter 2 – Transaction Valuation Fundamentals

11. 2-1a Transaction Valuation Fundamentals Purpose leads to “standard of value” Often suggests appropriate approaches/ methods Transaction price and terms Standard of Value for Transactions Fair Market Value (FMV) Investment Value Intrinsic or Fundamental Value Fair Value Emotional Value
12. 2-1b Transaction Valuation Fundamentals Types of buyers and sellers Hypothetical Financial Strategic Family
13. 2-1c Transaction Valuation Fundamentals Valuation approaches Income Market Asset
14. 2-1d Transaction Valuation Fundamentals Attributes of ownership Control or Enterprise Value Degrees of control Minority Empirical data Mergerstat Control Premium Studies
15. 2-1e Transaction Valuation Fundamentals Liquidity issues – Lack of Marketability Converting to cash FMV and liquidity/marketability Empirical data Restricted Stock Studies IPO Studies Additional adjustments to value
16. 2-2a Valuation Approaches Income Approach – Discounted Cash Flow (DCF) Future look using financial projections Rate of return Determination of terminal value
17. 2-2b Valuation Approaches Income Approach – Capitalization of Earnings Single number indicates economic return Capitalization rate
18. 2-2c Valuation Approaches Market Approach – Public Company Guideline Method Publicly traded companies used as basis of value Suitability
19. 2-2d Valuation Approaches Market Approach – Guideline Transaction Method Sale of company to another buyer used as basis of value Databases Considerations Control position Strategic buyer Terms of deal
20. 2-2e Valuation Approaches Asset Approach – Cost Principal of Accounting Reported book value Adjusted book value Premise of Value Continued use • Value in place Orderly disposition • Forced liquidation Asset deals Value vs. deal structure Allocating purchase price Restating assets to premise value for transaction
21. 2-3 Transaction Terms on Value Application of computed values Fair Market Value DCF: $8,260,000 Capitalization of Earnings: $8,350,000 Investment Value Guideline Transaction: $11,800,000

22. Chapter 3 – Transaction Structure: “The Art of the Deal”

23. 3-1 Negotiated Environment Seller and buyer Family members Business partners Third parties
24. 3-2 Seller’s Perspective Objectives and goals Preparing for transition Legal issues Advisory team Marketing strategy Offering memorandum Due diligence
25. 3-3 Buyer’s Perspective Objectives and goals Synergies and economies Advisory team Legal issues Due diligence
26. 3-4 Financing/Regulatory Overview Financing Arrangement Source Legal documentation Regulations Securities and labor laws
27. 3-5 Transaction Terms Revisited Transaction terms Cash deals Common terms Holdback Seller financing Performance payments – Earn-out provisions Non-competition agreement Employment/consulting agreement Contingent/unknown liabilities

28. Chapter 4 – Sale or Purchase of Assets

29. 4-1 Sale or Purchase of Assets Goals of buyer and seller Tax and transaction considerations Identification of assets Allocation of transaction price
30. 4-2a Asset-Based Transaction
31. 4-2b Asset-Based Transaction Investment value $11,800,000 Major steps Allocation of value Compute tax liability Proceeds to seller Additional considerations Terms Transaction costs
32. 4-2c Asset-Based Transaction Summary of strategic issues Buyer’s view Seller’s view

33. Chapter 5 – Sale or Purchase of Stock

34. 5-1 Sale or Purchase of Stock Goals of buyer and seller Tax and transaction considerations
35. 5-2a Stock-Based Transaction
36. 5-2b Stock-Based Transaction Investment value $11,800,000 Price per share $236 Major steps Compute tax liability Proceeds to seller Taxable stock purchase IRC Section 338 election/alternative election Additional considerations Terms Transaction costs
37. 5-2c Stock-Based Transaction Summary of strategic issues Buyer’s view Seller’s view

38. Chapter 6 – Specialty Transaction: Employee Stock Ownership Plan and Trust (“ESOP”)

39. 6-1 Traditional Uses of an ESOP Provide liquidity Capital formation Finance corporate acquisitions Employee productivity and retention Succession plan Liquidity in divorce Negotiating leverage
40. 6-2 Basic Features of an ESOP Tax qualified defined contribution employee benefit plan Invested in securities of sponsor company Trust is legal entity Common funding methods Stock ownership Voting rights
41. 6-3 Tax Incentives Related to ESOPs C Corporation attributes S Corporation attributes Contributions are tax deductible C corp: debt reduction and limits S corp: debt reduction, limits, anti-abuse Contributions based on dividends C corp dividends S corp distributions
42. 6-4 C vs. S Corporation ESOPs
43. 6-5 Other Tax Incentives of ESOPs IRC Section 1042 Tax-Free Rollover C Corporation Non-taxable income related to ESOP stock S Corporation Assets in ESOP remain untaxed until retirement
44. 6-6 ESOP Summary Chart
45. 6-7 C Corp Stock – Leverage ESOP
46. 6-8 C Corp Stock – Leverage ESOP Multiple Classes, Control
47. 6-9 S Corp Stock to Prefunded ESOP, No Debt
48. 6-10 Convert to C Corp, Sell to Leverage ESOP

49. Chapter 7 – Specialty Transaction: Tax Preference Reorganizations

50. 7-1 Main Categories of Reorganizations Acquisitive Type A: Statutory merger or consolidation Type B: Stock for stock Type C: Stock for assets Type D: Stock for assets Divisive Type D: Stock for assets Restructuring Type E: Corporate recapitalization Type F: Change in identity, form, or place of incorporation Type G: Bankruptcy proceedings
51. 7-2 Regulatory and Case Law Requirements Business purpose Continuity of business enterprise Business continuity test Asset continuity test Step transactions Continuity of interest
52. 7-3a Type A Reorganization: Statutory Merger
53. 7-3b Type A Reorganization: Statutory Merger
54. 7-4a Type A Reorganization: Statutory Consolidation
55. 7-4b Type A Reorganization: Statutory Consolidation
56. 7-5a Type B Reorganization: Stock for Stock
57. 7-5b Type B Reorganization: Stock for Stock
58. 7-6a Type C Reorganization: Stock for Assets
59. 7-6b Type C Reorganization: Stock for Assets
60. 7-7 Triangular Transactions Corporate subsidiaries Type A, B, and C
61. 7-8a Type A Forward Triangular Merger
62. 7-8b Type A Forward Triangular Merger
63. 7-9a Type A Reverse Triangular Merger
64. 7-9b Type A Reverse Triangular Merger

65. Chapter 8 – Specialty Transaction: The Industry “Roll-Up”

66. 8-1 Industry Roll-Up Overview Public company acquires closely held company Roll-up involving only closely held companies Rationale for industry roll-ups
67. 8-2 Roll-Up Structures: Public Companies Standard of value Investment value: $11,800,000 Per share price: $236
68. 8-3a Roll-Up Type B Reorganization: Stock for Stock
69. 8-3b Roll-Up Type B Reorganization: Stock for Stock
70. 8-4a Roll-Up Taxable Stock Purchase
71. 8-4b Roll-Up Taxable Stock Purchase
72. 8-5a Roll-Up Type A Reorganization: Stock for Stock Closely Held Companies
73. 8-5b Roll-Up Type A Reorganization: Stock for Stock Closely Held Companies
74. 8-6 Common Transaction Considerations Practical considerations Frequent IPO failures/insights Success strategies Concerns with IPO Roll-ups Roll-up transactions with no IPO Common attributes Roll-up transactions and consolidations

75. Chapter 9 – Specialty Transactions: Between Family Members

76. 9-1 Sales/Gifts of Stock Between Related Parties Transaction price Standard of value Minority position Lack of marketability Range of value Computation of value FMV Control: $9,600,000 $192 per share FMV Minority: $8,300,000 $166 per share
77. 9-2 Sales of Stock Cash Stock bonus plan Private annuity Self-canceling installment note
78. 9-3 Gifting of Stock Donee annual exclusion Combination sale and gift using donee annual exclusion Unified transfer rate Minority vs. control issues Family Limited Partnership (FLP) Underlying theory IRS challenges