introduction to business acquisitions
Skip this Video
Download Presentation
Introduction to Business Acquisitions

Loading in 2 Seconds...

play fullscreen
1 / 67

Introduction to Business Acquisitions - PowerPoint PPT Presentation

  • Uploaded on

Introduction to Business Acquisitions. Introduction to Business Acquisitions. Introduction to Business Acquisitions. Overview. Course Assumptions: Arm’s-Length Transactions Corporations Profitable Transactions Reporting Gains Commercial Real Estate Excluded Standard References

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about ' Introduction to Business Acquisitions' - kele

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
  • Course Assumptions:
    • Arm’s-Length Transactions
    • Corporations
    • Profitable Transactions Reporting Gains
    • Commercial Real Estate Excluded
    • Standard References
    • Assumed Tax Rates
  • The Changing Tax Environment
new tax rates 2013 and beyond
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%
scope size of transaction
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
seller s objectives
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
buyer s objectives
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
seller s advisory team
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
buyer s advisory team
Buyer’s Advisory Team
  • Attorney
  • CPA
  • Banker
  • Board of Directors
common types of terms
Common Types of Terms
  • Escrow Account/Holdbacks
  • Seller Financing
  • Performance Payments/Earn-out Provisions
  • Non-competition Agreements
  • Employment/Consulting Agreements
  • Contingent/Unknown Liabilities
seller s due diligence
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)
offering memorandum
Offering Memorandum
  • Executive Summary
  • Strengths and Opportunities
  • Business Description
  • Financial Information
  • Appendices as necessary
buyer s due diligence
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
buyer s due diligence1
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)
common transaction documents
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)
common transaction documents1
Common Transaction Documents
  • Finance Documents
  • Business Broker Agreement (Appendix 2G)
  • Closing Checklist
  • Preparation of a Deal Book
reasons for valuations
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
standards of valuation
Standards of Valuation
  • Fair Market Value (FMV)
  • Investment Value
  • Intrinsic or Fundamental Value
  • Fair Value
  • Emotional Value
  • Escrow/Holdback Provisions
  • Seller Financing
  • Contingent Payments/Earn out Provisions
  • Non-competition Agreement
  • Employment/Consulting Agreement
  • Contingent/Unknown Liabilities
types of buyers and sellers
Types of Buyers and Sellers
  • Hypothetical Buyer and Seller
  • Financial Buyer
  • Strategic Buyer
  • Family Members
  • Inside Buyers (e.g., Management or ESOP)
approaches to valuation
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
approaches to valuation1
Approaches to Valuation
  • Other Considerations
    • Ownership Attributes
      • Control Position/Enterprise Value – Mergerstat information
      • Minority Position
    • Liquidity Issues
      • Lack of Marketability
seller s goals perspectives
Seller’s Goals/Perspectives
  • Optimize Price
  • Bulk Sale and Transfer
  • Pass Liabilities to Buyer
  • When Favored by Seller
buyer s goals perspective
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
buyer s goals perspective1
Buyer’s Goals/Perspective
  • Termination of Unfavorable Agreements
  • Avoid Minority Shareholder Issues
  • Higher Transaction Costs
  • Inability to Use Valuable Agreements
tax considerations
Tax Considerations
  • IRC Sec. 1231
  • IRC Sec. 1221
  • IRC Sec. 1245
  • IRC Sec. 1250
  • IRC Sec. 197
  • Capital asset classification
allocation of price irc sec 1060
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
allocation of price irc sec 10601
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
c corporation considerations following asset sale
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
s corporation considerations following asset sale
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
  • 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
effective taxes from transactions
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
s corporation built in gain
S Corporation – Built-in Gain
  • Sale of assets of former C corporation
  • Normally, 10 year recognition period
  • 5 year recognition period for 2012, 2013
seller s goals perspectives1
Seller’s Goals/Perspectives
  • Optimize Price
  • Avoid Double Taxation as C Corporation
  • Stock Based Attributes May Shelter Some Gain
  • Pass Liabilities to Buyer
buyer s goals perspectives
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
irc section 338
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
irc section 1042
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)
irc section 368 tax free reorganization
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
stock attributes net operating losses
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))
nol limitation example
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
stock purchase agreement provisions
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
stock purchase agreement provisions1
Stock Purchase Agreement Provisions
  • Warranties and Representations
  • Covenants
  • Documents to be Delivered at Closing
  • General Provisions
  • Stock Purchase Agreement – Appendix 5A
contingent unknown liabilities
Contingent/Unknown Liabilities
  • Protection for Buyer
  • Some Risk Covered by Business Insurance?
  • Build in Contingency Reserve for Unforeseen
  • Adequate Due Diligence Reduces Risk
holdback escrow accounts
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
seller financing
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
contingent payments earn outs
Contingent Payments/Earn-Outs
  • Carefully Defined to Avoid Future Disputes
  • Best Practice to Compute Based Upon Verifiable Data
non competition agreements
Non-Competition Agreements
  • Typically 3-5 Years
  • To Buyer: IRC Sec. 197 Intangible Asset
    • 15 Year Amortization
  • To Seller: Ordinary Income (not FICA)
employment consulting agreement
Employment/Consulting Agreement
  • Typically 2-4 Years
  • To Buyer: Current Period Deductible Expenses
  • To Seller: Ordinary Income (subject to FICA)
    • Consulting Agreement – Appendix 6C
likely buyers
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
likely buyers1
Likely Buyers
  • Financial/Investment Buyer
    • Looking for returns on investment
    • Little interest in day-to-day management
  • Initial Public Offering
  • Liquidation
seller best practices
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
buyer best practices
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
cpa advisor best practices
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