Succession & Exit Strategies for Your Operating Business · 2015. 11. 19. · Strategy Planning,...

An EFPR Group Company

Succession & Exit Strategies for Your Operating Business

Sponsored by

November 19th, 2015


Moderator

Randal Simonetti, MA MS Director, EFPR Group, LLP & Managing Partner, Ignition Consulting, LLC

[email protected]

(585) 295-0501

EFPR Group and Ignition Consulting 280 Kenneth Drive, Suite 100, Rochester, NY 14623


1. Which exit options are available? 2. How to develop a long term exit strategy? 3. How to identify the key value drivers of your business? 4. How to determine the current value of your business? 5. How to enhance your business worth? 6. How to develop a plan to turn the value of your business into

cash? 7. What buyers are looking for in an acquisition? 8. What are the tax implications of exiting a business? 9. How long the process may take to complete? 10. What are your responsibilities, involvement and time required

throughout the process?

Top 10 Key Areas That We Will Cover In This Webinar:


The Presenters in today’s Webinar:

• Moderator is Randal Simonetti, MA,MS, Director, EFPR Group, LLP & Ignition Consulting, LLC

• Thomas N. Agnello, Partner, Madison One and President and CEO, M- One Advisors, LLC

• Louis J. Camarella, Jr, CPA/ABV/CFF, ASA, Partner, StoneBridge Business Partners & EFPR Group, LLP, M&A and Business Valuation Practice Group

• Kurt J. Litzelfelner, ASA, Director, StoneBridge Business Partners, M&A and Business Valuation Practice Group

• William A. Hoy, Esq., Partner, Harter Secrest & Emery, LLP, Private Equity Practice Group


Randal Simonetti – Director of Business Development, EFPR Group & Managing Partner of Ignition Consulting Randal is the Managing Director of Ignition Consulting LLC, an EFPR Group Company, providing reputation, crisis and media management services to clients across the United States. He is also the Director of Business Development for EFPR Group, LLP. Randal has been in the business of protecting organizations and their leaders for over 25 years by providing a suite of comprehensive crisis management and communications services to clients in the private, public, non-profit, government, education and religious sectors. Randal has appeared on ABC Nightline, and has worked extensively with NBC, ABC, CBS and Fox News affiliates. He was the co-host of the nationally syndicated radio talk show, “Lawyers, Who Needs Them?”. He has held executive leadership positions at several Fortune 500 companies. These include: Vice President of Worldwide Marketing for Global Crossing, Corporate Vice President of Communications and Chief Reputation Officer for Frontier Corporation, Vice President of Retail Banking for Citicorp NYS and Division Manager for Multi-National Business at AT&T. He also spent four years as the CEO of the National M.S. Society for Upstate New York. Randal has an undergraduate degree from Manhattan College, a master’s degree in communications from Manhattanville College and a master’s degree in administration from Southern Connecticut State University. He has published a number of articles in crisis and reputation management, global marketing, mergers and acquisitions and post merger integration.


Thomas N. Agnello – Partner, Madison One and President and CEO, M- One Advisors, LLC As a Partner with Madison One Global Clearinghouse Network (www.madisonone.net) Tom directly interfaces with professional services firms, to determine their strategic needs and is charged with the responsibility of expanding the Madison One network of members in North America. The Madison One Clearinghouse Network is a private network for the confidential exchange of vetted business information relating to specific merger, acquisition, divestiture and capital funding opportunities. The Network, established in 1986, provides a platform for introductions to select opportunities in the hard-to-unearth mid-market. (Market value from $3 million to $200 million). The network’s private members consist of leading professional service firms, such as accountants, lawyers, bankers, wealth managers, investment banks and M&A advisors. Since inception, Madison One has introduced more than one-thousand opportunities to its members. Approximately sixty percent of the opportunities promulgated through our network, worth $1 billion, reached the actual negotiation stage, confirming that Madison One is a viable and essential tool. Tom is also the CEO of M-One Advisors, LLC, where he focuses on Corporate, Marketing and Sales Strategy Planning, Development and Execution. He assists high net worth individual business owners (baby boomers) with Acquisitions, Mergers, Divestitures and Family Business Transition services. He is also certified as a Core Value Advisor helping business owners looking to improve their business performance and value, before selling or transferring their business to the next generation of owners. These assessments benchmark how well or poorly companies are performing compared to best practices companies in their industry.


Louis J. Camarella, Jr., CPA/ABV/CFF, ASA Lou is a Partner of StoneBridge Business Partners, a business consulting firm. He is the Managing Director of the firm’s M&A, Business Valuation and Litigation Support Practice Group. He is also a Partner in EFPR Group, LLP, an affiliated certified public accounting firm. Over the course of more than 30 years in the field, he has served a wide variety of businesses, organizations, and individuals assisting them with accounting and tax services as well as succession and exit planning, M&A transactions services and issues involving valuations, mergers and acquisitions. His valuation and M&A experience has proved valuable in many litigation matters where he has been retained by businesses, attorneys, judges, and other CPAs for various cases involving a dispute over the value of a business interest, breach of contracts and various other legal disputes. Lou is an accomplished expert witness and speaker for a number of professional organizations. Lou is a Certified Public Accountant and is Accredited in Business Valuation (ABV) and Certified in Financial Forensics (CFF) by the American Institute of Certified Public Accountants (AICPA). In addition, he holds the Accredited Senior Appraiser (ASA) designation in business valuation from the American Society of Appraisers. Lou holds a BA in Accounting from Kent State University and an MBA from Arizona State University.


Kurt J. Litzelfelner, ASA

Kurt is a Director in the M&A, Business Valuation and Litigation Support Practice Group of

StoneBridge Business Partners. Since joining the firm in 2001, Kurt has performed numerous

business valuations for a variety of purposes including estate planning, estate tax and gift tax

filings, S-Corporation election and other corporate reorganizations, marital dissolution, shareholder

disputes, ESOP compliance, shareholder purchase/sale transactions, and mergers & acquisitions. In

his current role, Kurt also provides business succession and exit planning, merger & acquisition

consulting, and due diligence services to middle-market businesses and their owners.

Prior to joining StoneBridge, Kurt was a Vice President of Capital Formation Group of Rochester,

L.P. (CFG), a merger & acquisition advisory firm specializing in middle-market business transactions.

While at CFG, Kurt participated in the completion of approximately 25 merger & acquisition and

corporate financing transactions, as well as the preparation of a number of fairness and solvency

opinions for the firm’s clients. Before CFG, Kurt was employed with Fleet Bank of New York (now

part of Bank of America) as a Senior Credit Analyst, and later as a Commercial Banking Officer, both

in the Corporate Banking Group.

Kurt holds the Accredited Senior Appraiser (ASA) designation in business valuation from the

American Society of Appraisers and is a graduate of the State University of New York, College at

Fredonia and holds a BA in Economics.


William A. Hoy, IV, Esq.

Will Hoy is head of the firm’s Private Equity and Venture Capital practice group. He focuses his

practice on mergers and acquisitions, private equity, venture capital and general corporate

matters, with particular emphasis on the representation of private equity and venture capital

funds. Will represents:

Private equity funds in all aspects of leveraged buyout transactions, including portfolio company

acquisitions and dispositions, senior, mezzanine, equity and seller financing, management

employment and equity compensation arrangements, recapitalizations and portfolio company add

on acquisitions.

Venture capital funds in all aspects of venture financings including initial, follow-on and down

round financings, preferred equity structures, stockholder and registration rights arrangements and

equity incentive plans.

A private equity fund sponsor in connection with fund formation, including preparation of private

placement memorandum, limited partnership agreement, management agreement, subscription

materials and collateral documentation.

Management teams in companies controlled by financial investors in connection with change of

control transactions.

A broad range of private and public clients in mergers, acquisitions, dispositions, joint ventures and

general corporate matters.


The Agenda

• Moderator, Randal Simonetti - Introduction

• Thomas N. Agnello – Succession and Exit Strategies

• Louis J. Camarella, Jr – Exit Planning

• Kurt J. Litzelfelner - Understanding your Company Value

• William A. Hoy, IV, Esq.- Legal Perspective on Exit Options and Transaction Structure and Key Agreements

• Moderator, Randal Simonetti - Panel Discussion and Questions


Madison One Clearinghouse Network is a private global network of leading professional service firms, such as accountants,

lawyers, bankers, wealth managers, investment bankers and M&A advisors, for the confidential exchange of vetted business information relating to specific merger, acquisition, divestiture and capital funding opportunities. The Network, established in

1986, provides a platform for introductions to select

opportunities in the hard-to-unearth mid-market.

New York, Toronto, Hong Kong & London

Thank You to our Sponsors for Today’s Webinar


Succession & Exit Strategies

Thomas N. Agnello, Partner, Madison One and President & CEO, M- One Advisors, LLC

[email protected]

(585) 978-9523

Madison One Clearinghouse Network and M-One Advisors, LLC

New York, Toronto, Hong Kong & London Upstate NY and Tampa


Consider the following….

• Roughly 80-90% of U.S. businesses are privately owned • Only about 30% of family business survive into 2nd generation, 12%

into the 3rd generation and 3% into the 4th generation and beyond • 50% of privately owned businesses will change ownership in the next

15 years • Over 75% of business owners don’t have an exit plan • The landscape is evolving into a buyer’s market • The small business owning Baby Boomers will begin to exiting their

businesses between 2003 – 2020 • Over 80% of businesses are not saleable in their current state • 64% of businesses have no plan to minimize capital gain and or estate

taxes • Most Americans spend more time planning for vacations and holidays

than planning for the smooth transition of their business


Do you know exactly how much money it is going to take for you to be able to retire comfortably,

and to remain comfortably retired?

The Number One Question That Most Business Owners Don’t Know the Answer to:


There Are Only 4 Places Your Money Can Go

Typically 50-75% of a business owner’s net

worth is in their business assets. The balance is in

their personal real estate &

financial investments

Working collaboratively

with your Trusted Advisors will help you to decide where

your hard earned assets

end up!


Macro – Manager

“Coach”

M&A Advisor Valuation

Expert CPA

Attorney

Bank Loan Officer Wealth

Advisor

Family Office

Tax Planner

Client

It Takes a Cohesive Team Approach

No one Professional has all the

answers


Typical Business Owner Concerns

• How long do I keep working?

• What is my business really worth?

• When is the right time to leave my business?

• Is there someone in place to run my Company?

• Will the proceeds from the sale fund my lifestyle or retirement?

• Are my children and family interested in or capable of running my company or should I consider a transfer of my business to Employees, Partners, a 3rd party?


Private Equity Groups: • Management is their #1 focus. • Many to choose from. • Ability to do a majority recapitalization. • May not always be the highest priced buyer. • Sophisticated negotiators. • Will take an active interest in ownership. • May take minority positions.

Typical Buyer Profiles


Financial: • Predominantly passive partner. • Seeking return on investment. • No interest in managing or operating business. • Management particularly important.



Strategic Buyers: • Typically highest priced buyer. • Oftentimes will only purchase 100% ownership. • May be seeking competitive information

without an intent to buy. • Will look for efficiencies in operations post

transaction. • Ongoing senior management may not be

critical.



• Overall coordination of the professional team

• Negotiate value to obtain highest price.

• Gain exposure to wider net of potential buyers.

• Allow management to focus on business.

• Benefit from experience of a seasoned professional.

• Avoid pitfalls of negotiation process.

• Leverage qualified buyers via controlled sales process

• Maintain confidentiality in the marketplace.

Why Hire an M&A Advisor?


Mental Readiness

Low

High

High

Financial Readiness

Well off but chooses to work

• Management

buyout • Gift • ESOP

Stay and grow

• Private equity group recap

• ESOP • Grow business • Increase savings

Get me out at highest price

• Sell business for

highest price

Rich and ready to go

• Gift • Charity • ESOP • Sell

What is Your Financial and Mental Readiness State


Benchmarking Your Company to Your Industry Peers


CoreValue® software is a patent-pending web app that looks

‘under the hood’ of a business and

quantifies how all the parts and gears in the business engine are

performing

Benchmarking Your Company to Your Industry Peers


Exit Planning

Louis J. Camarella, Jr, CPA/ABV/CFF, ASA, Partner, StoneBridge Business Partners & EFPR Group, LLP, M&A

and Business Valuation Practice Group

[email protected] (585) 340-5160

StoneBridge Business Partners and EFPR Group

280 Kenneth Drive, Suite 100, Rochester, NY 14623


Exit Planning

Goals are as unique as each of us

• Business • Family • Community • Health • Faith


Exit Planning

Set the record straight…..

• Estate planning is NOT exit planning • Retirement Planning is NOT sale of the business • Ownership is NOT management

Exit planning is about creating options and flexibility for business transition that align with the owner’s goals and dreams that extend beyond the business


Exit Planning

• The question is not whether transition of ownership in a private company will be required; the question is when.

• Objectives of planning for transition of ownership in a private company:

Provide correct owner(s) with a well deserved return on their previous investments of both time and money

Enable a smooth transition to successor, including perhaps a continuing role for current owner; minimize family squabbles

Maximize the probability that the business the owner built will continue as an going concern, and that loyal employees will continue to have jobs

Minimize the impact of taxes


Exit Planning

High Level Alternatives

Generational Succession

Transfer ownership to younger family members

Employee/”Inside” Sale Sell Company to employee or group of employees

Staged Sale to Outside Party

Sale of portion of Company in first transaction with subsequent sale of remainder

Single Transaction Outside Sale

Usually a strategic sale to Company already in similar business

Wind Down Business/Liquidation

Owner closes business in a orderly liquidation


Exit Planning

• Maximize Value • Manage Risk • Provide Options to Owners • Equals Peace of Mind • Effective preparation will increase certainty to

close while maximizing the options to owners

What are the Goals of Executing the Sale of a Company


Planning Team

Professionals Expertise

M&A Advisor Strategy/Execution

Lawyer Legal Advice /Estate

CPA/Tax Expert

Financials, books and records/Tax strategy /Estate

Financial Advisor Financial requirements/Planning

Insurance Professional

Risk management/Estate


Exit Planning

• No planning • Do it Yourself • Owner has valuation expectations that are not

market reality • Owner’s goals are not clearly understood prior

to engaging with serious potential buyers • Due Diligence “surprises” late in the process

affect price or buyers interest in completing the transaction

Why do good companies fail to find the right alternative?


CLIENT CLIENT

PHASE I Preliminary

Evaluation of Owner’s Personal

Wealth, Estate, and Succession

Plan (30 days)

PHASE I Preliminary

Evaluation of Owner’s Personal

Wealth, Estate, and Succession

Plan (30 days) PHASE II

Company Assessment to

Prepare for Sale (30-60 days)

PHASE II Company

Assessment to Prepare for Sale

(30-60 days)

PHASE III Review Sale Alternatives

(30 days)

PHASE III Review Sale Alternatives

(30 days)

PHASE IV Option #1:

Sale Process M&A Advisor (6-9 months)

PHASE IV Option #1:

Sale Process M&A Advisor (6-9 months)

PHASE IV Option #2: Sale Process

CPA/Attorney (4-6 months)

PHASE IV Option #2: Sale Process

CPA/Attorney (4-6 months)

PHASE V Implement

Personal Wealth & Estate Plan (30-90 days)

PHASE V Implement

Personal Wealth & Estate Plan (30-90 days)

Overview of Business Succession & Exit Planning

33


Phase I

Preliminary Evaluation of Owner’s Personal Wealth, Estate, & Succession Plan (30 days)

• Identify owner’s exit goals

• Discuss owner’s financial condition and plan

• Review estate plan

• Determine plan for succession and exit strategy

• Review with your team of advisors


Phase I

• I assume you have a succession plan and buy/sell

agreement in place, don’t you? • When was the last time you updated your Exit Plan, buy-

sell the agreement and the value of your business? • When you updated your business value this year, did you

feel it was fair? • Your strategies for increasing the company’s value have

given you a number of exit opportunities, haven’t they?

Questions for the Business owner:


Phase II

Company Assessment & Prepare for Sale (30-60 days)

• Enhance quality of financial statements to audit or review • Gather pertinent company data • Preliminary business review and analysis • Conduct historical and prospective • financial analysis • Determine appropriate adjustments to earnings (EBITDA) • Research industry and customer markets • Identify value drivers and mitigate • potential risks • Review for potential due diligence issues • Develop preliminary range of value • Estimate after-tax net proceeds to owner


Phase III

Review Sale Alternatives (30 days)

• Sale Alternatives: Sale by owner Sale by business broker Sale by middle-market M&A Advisor Sale via CPA/Attorney contacts

• Discuss pros and cons of each alternative • Make introductions to M&A advisor/attorneys • Review proposals and decide on course of action • Evaluate estimated selling costs and after-tax net proceeds

to owner under each alternative


Phase IV – Option #1

Sale Process - M&A Advisor (6-9 months)

• Conduct initial due diligence and estimate strategic range of value

• Develop marketing materials and build electronic data room • Approach qualified buyers; obtain indications of interest • Receive and negotiate final • Letters of Intent • Negotiate and sign definitive agreements • Update estimated after-tax net proceeds to owner • Assist with any post-closing issues


Phase IV – Option #2

Sale Process - CPA/Attorney(4-6 months)

• Contact a limited set of potential buyers, primarily private equity funds & family offices

• Distribute company information • Obtain indications of interest • Facilitate management presentations and negotiations • Receive and negotiate final Letter of Intent • Manage the overall due diligence process for the seller • Structure and negotiate the transaction and definitive

agreements • Update estimated after-tax net proceeds to owner • Assist with any post-closing issues


M&A MARKET OVERVIEW

Timing the M&A Cycle to Maximize the Value of a Sale

0

1000

2000

3000

4000

5000

6000

7000

8000

100,000

150,000

200,000

250,000

300,000

350,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015P

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Imp

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($ in

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U.S. Middle Market M&A Activity

Implied Enterprise Values ($ in Millions) Number of transactions

Source: S&P Capital IQ; includes deals < $500M


Processes for Mergers & Acquisitions An Organized Sell Side Approach

• A complete understanding of the Seller’s goals and objectives is imperative

• A market-based approach to business valuation sets realistic and achievable expectations

• A structured and organized sales process maximizes success

• Select the appropriate selling methodology for the situation Negotiated sale vs. controlled auction Broad-based auction vs. limited targeted auction Strategic buyers vs. financial buyers, etc.

• Advise board of directors through every phase of the process


M&A Advisor’s Sell-Side Process

PHASE I Valuation Analysis & Initial Due Diligence

PHASE II Develop

Marketing Materials

PHASE III Qualified Buyers

PHASE IV Deal Structuring &

Negotiations

PHASE V Closing &

Post Closing

• Initial review for potential due diligence issues • Information gathering • Valuation analysis

• Develop an investment thesis and buyer list • Create marketing materials (teaser, offering memorandum, etc.) • Build electronic data room

• Qualify buyers • Approach buyers with targeted message • Execute confidentiality agreements • Distribute marketing materials • Receive indications of interest from potential buyers

• Site visits • Management presentations • Provide data room access • Buyer due diligence • Obtain revised bids, if necessary

• Receive and negotiate final bids • Confirmatory due diligence • Sign definitive agreements • Close transaction • Post closing support


Buyer/ Seller Wants

Seller Buyer

• Income Tax Minimization • Sufficient ROI

• Minimize Interruption • Potential for Growth

• Small Escrow • Liability Protection

• Credit Worthy Buyer/ Certainty of Closing

• Future Tax Write Offs

• Limitations on Future Liability


Key Areas of Focus for Accounting and Financial

M&A Due Diligence

• Quality of Earnings Analysis

• Income Statement Review • Revenues

• Gross Profit

• Operating Expenses

• Income Taxes

• Other Income/Expense

• Balance Sheet Review • Accounts Receivable

• Inventory

• Fixed Assets

• Other Assets

• Accounts Payable & Accruals

• Debt

• Tax Liabilities

• Other Liabilities

• Accounting Systems and Procedures

• Internal Accounting Procedures

• Internal Financial Statements

• Outside Accounting Services

• Tax Ramifications of Transaction Structure

• Related Party Transactions

• Information Technology Review

• Contract Review

• Employment Matters

• Insurances

• Litigation

• Other Contingent Liabilities


Deal Structures & Tax Ramifications

• Asset Sale

– Purchase Price Allocation(IRS Code Section 1060 is binding on Buyer and Seller (Form 8594)

• 338(h)(10) Election – Seller=S Corp/Buyer=C Corp

• Stock Sale

• Gifts

• ESOPs

• Stock Options

• Reorganizations & Mergers


Deal Structures & Tax Ramifications

• Other Considerations

– Consulting Agreement

– Non-Compete Agreement

– Personal Goodwill

– Earn-out Provision

– Installment Sales

• Competing Financial Objectives

– Seller – to maximize their after tax proceeds

– Buyer – to maximize and/or accelerate tax deductions associated with payments to seller


Finding Common Ground

• Cash at Closing

• Adjustment of Purchase Price to Accommodate Tax Situations

• Utilize Section 338(h)(10)

• Indemnifications for Purchasing Liabilities

• Earn-Out

• Escrow Terms

• Seller Financing


Phase V

Implement Personal Wealth & Estate Plan (30-60 days)

• Initial meeting with your personal estate and financial advisors to understand goals and objectives

• Review recommendations of advisors and tax implications

• Owner decision on plan

• Implementation and ongoing monitoring


Understanding Your Company’s Value

Kurt J. Litzelfelner, ASA, Director, StoneBridge Business Partners, M&A and Business Valuation Practice Group

[email protected]

(585) 340-5136

StoneBridge Business Partners and EFPR Group 280 Kenneth Drive, Suite 100, Rochester, NY 14623


Understanding Your Company’s Value

Business Succession & Exit Planning Leads to the Need for a Business Valuation:

• For Selling or Merging Your Business • Establishing or Updating a Buy/Sell Agreement • Estate Planning/Gifting Plans • Employee Stock Ownership Plans (“ESOPs”)

Other Reasons for a Business Valuation:

• Corporate Reorganizations /S-Corporation Election • Triggering Events in a Buy/Sell Agreement (e.g. death, disability,

employment termination) • Allocation of Purchase Price for Financial Reporting (FASB ASC 820

and 805) • Shareholder Disputes


Business Valuation Standards of Value

Value to Whom?

• Fair Market Value - Used for federal income, estate and gift tax purposes

• Investment (Strategic Value) – Includes impact of buyer synergies

• Fair Value (State Laws) – Used for shareholder disputes (i.e. minority oppression and dissenting shareholder actions)


$6,000,000

↑

Strategic, Investment or Acquisition

$5,000,000

↓

Control Stand-alone

$4,500,000

↓

Non-marketable Control (FMV Estate or Gift)

$3,000,000 Non-marketable Minority (FMV Estate or Gift)

Pre

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Dis

coun

t

D

isco

un

ts

20%

10%

33%

Business Valuation Levels of Value


• Rules of Thumb/Multiples: For “middle-market” businesses over $5 million in revenue,

multiples of EBITDA or EBIT are often quoted. For small single-owner businesses, Rules of Thumb based on

“Owners’ Discretionary Earnings” are often used.

• Income Approach Discounted Cash Flow Method Capitalization of Representative Cash Flow Method

• Market Approach

Merger & Acquisition Transactions of Comparable Companies Publicly-Traded Comparable Companies

• Asset-Based Approach

Adjusted Net Asset Value

Business Valuation Methodologies


• Excess/Non-Market Owner/Officer Compensation and

Perquisites

• Related Party Customers/Suppliers (e.g. facilities rent)

• Income/Expenses Related to Non-Operating Assets

• Non-recurring Revenues and/or Expenses

Valuation Earnings Adjustments


Working Capital

• Must determine a “normal” amount. Any excess or deficiency adds or subtracts from the operating value. Usually a purchase price adjustment mechanism is in a Purchase and Sale Agreement for excess/deficiency.

Non-Operating Assets • Marketable securities. • Investments in or loans to related parties. • Other assets, such as real estate, vehicles, aircraft, artwork,

etc. • Tax implications of removing these assets.

Other Valuation Considerations


Conceptually, There are Three Basic Rules:

1. Increase level of earnings (i.e. increase profitability/margins)

2. Increase growth rate of earnings. Also, increase length of

growth period (i.e. create new competitive advantages)

3. Lower risk of earnings (reduce cost of capital)

Strategies to Increase the Value of Your Business


• Prepare your statements in accordance with GAAP and engage an outside CPA firm to perform an audit or review.

• Upgrade internal financial reporting capabilities. Buyers will expect this as part of their due diligence

• Build a strong and deep management team

• Diversify your customer base

• Broaden supplier base

Internal Strategies to Increase the Value of Your Business


• Invest in capital improvements to improve manufacturing efficiencies and lower long-term costs

• Prune unprofitable business/product lines – focus on highest profit segments

• Find new markets/applications for your product/service

• Develop new proprietary product/service lines

• Create a solid strategic business plan

Internal Strategies to Increase the Value of Your Business, cont.


Consider a strategic acquisition:

• Diversification of products & services

• Expand geographic territory

• Increase market share and pricing by eliminating a

competitor

• Obtain proprietary technology

• Obtain a skilled workforce in place

Other Strategy to Increase the Value of Your Business


Legal Perspective on Exit Options and Transaction Structure and Key Agreements

William A. Hoy, Esq., Partner, Harter Secrest & Emery, LLP, Private Equity Practice Group

[email protected]

(585) 231-1259

Harter Secrest & Emery, LLP 1600 Bausch & Lomb Place, Rochester, NY 14604


M-One Advisors, LLC

Typical Lifecycle of a Deal

• Preliminary Negotiations/Confidentiality Agreement

• Letter of Intent

• Due Diligence

• Transaction Structure

• Definitive Agreement

• Closing

• Post Closing


• Letter of Intent (LOI) LOI is an agreement in principal between buyer and seller

which outlines the basic terms of the transaction.

Outlines material economic and structural terms to ensure a meeting of the minds prior to spending resources drafting agreements.

Should be non-binding unless the parties agree otherwise or inadvertently include contractually binding provisions.

Confidentiality provisions and “no-shop” clause should be made specifically binding provisions

Key Documents & Agreements: Letter of Intent


• Buyer’s due diligence investigation will determine whether the acquisition should be made and on what terms.

• A well-drafted confidentiality agreement is crucial.

• Buyer’s counsel typically prepares a document request list.

• For sellers and their counsel, the most important (and time consuming) aspect is assembling the due diligence materials.

• Being prepared for diligence as a seller is a significant benefit – finding the skeletons in the closet first and resolving issues of concern.

Due Diligence Investigation: Introduction


• Carefully consider timing and nature of communications with seller’s employees, customers and suppliers.

• Scope of Investigation

— Buyer – evaluates the industry, target, key employees, supplier and customers, competition

— Buyer’s counsel – reviews entity organization, capitalization, contracts and commitments, employment matters, assets, properties and liens, ERISA matters, litigation, insurance, environmental matters, intellectual property

— Buyer’s accountant – analyzes financial statements and tax matters, performs Quality of Earnings (QOE) analysis, audits post-closing balance sheet.

— Seller – considers the deal terms, transaction expenses and buyer’s corporate culture

Due Diligence Investigation: Key Roles & Responsibilities


• Three principal structures for a business acquisition:

— Asset Purchase

— Stock Purchase

— Merger

Transaction Structure: Tax and Legal Ramifications


Asset Purchase • Advantages

Limitation on liabilities for buyer Can cherry pick assets Basis step-up for buyer – buyer should pay more for step-up Seller can typically negotiate for smaller caps, larger baskets and

shorter survival

• Disadvantages “Double” tax if seller is a C-corporation Depreciation recapture Mechanically a more complex transaction May create added expense for sales tax Assignability of contracts, licenses and permits

Transaction Structure: Tax and Legal Ramifications (cont.)


Stock Purchase • Advantages

Quickest and simplest acquisition method

Seller’s entity preserved

May limit need to obtain contract consents

No statutory dissenter's rights

No sales tax

• Disadvantages May leave minority shareholders

Buyer takes all assets, liabilities and contracts of seller

Because Buyer takes all liabilities, higher caps, lower baskets, longer survival for seller

Generally, carry-over basis in assets (unless S-corp purchase with 338(h)(10) election)



Merger • Advantages

Simpler than asset acquisition Can be tax-free to seller's shareholders if consideration is all (or almost all)

stock All shareholders bound by majority vote Hostile minority can be eliminated Generally, no need to obtain third party consents because the contracts

remain with the target company

• Disadvantages Dissenter's appraisal rights – but rarely exercise because expensive Approval may be required from shareholders of both companies Buyer takes all assets, liabilities, contracts of seller Because Buyer takes all liabilities, higher caps, lower baskets, longer survival

for seller Generally carry-over basis on merger if existing company survives merger



• Acquisition Agreement Outline — Purchase and Sale – deal structure, purchase price and

adjustments (working capital, earn outs, etc.), payment terms (cash, debt, equity) and closing mechanics

— Representations and Warranties (R&W) • R&W should disclose all material facts about the seller’s business

• Seller’s R&W – Due Incorporation, Due Authority, Capitalization, Consents and Approvals, Financial Statements, Title to Assets, Intellectual Property, Contracts, Insurance, Employee Benefit Plans, Taxes, Litigation, Regulatory Matters, Environmental Matters, Labor Relations, Real Property, Absence of Changes, Brokers, General Warranty

• Buyer’s R&W – Due Incorporation, Due Authority, Consents and Approvals Brokers

Key Documents & Agreements: Definitive Agreement


• Acquisition Agreement — Covenants

• Where signing and closing do not occur on the same day, covenants will ensure that the business is in the same condition at closing as it was at signing.

• Standard Covenants – Access, Preservation of Business, Exclusivity, Efforts, Supplemental Information, Preservation of Records, Employees and Benefits, Publicity, Tax Matters

• Non-compete and non-solicitation

Key Documents & Agreements: Definitive Agreement (cont.)


• Acquisition Agreement

— Indemnification

• Protects Buyer against misrepresentations or breaches by Seller

• Negotiated limitations on Seller’s indemnification:

Limiting the survival period

Several rather than joint and several

Caps and baskets

Offsets for tax benefits and insurance

Materiality and knowledge qualifiers

• Enforcement

Offset against Note

Escrow Arrangement

Third Party Claims Procedure



• Acquisition Agreement (cont.)

— Closing Conditions

• Bring down of representations and warranties to closing

• Performance of covenants in all material respects

• Receipt of identified, required third party consents

• No litigation prohibiting closing

• No Material Adverse Effect



• Schedules

— Information included in schedules serves as exception to representations and warranties

— Cures what would otherwise be a breach of the rep

— Schedules should be delivered early so that the parties may clean up lead time items.

— Buyer will use information on schedules to assess whether other deal protections are required for significant disclosed items

Key Documents & Agreements: Schedules and Exhibits


• Exhibits

— Exhibits are form documents agreed to by the parties at signing and executed at closing.

— These include:

— Promissory Notes, Security, Stock Pledge and Guaranty Agreements

— Escrow Agreements

— Employment and Consulting Agreements

— Stock Powers or Bills of Sale and Assignment and Assumption Agreements

— Shareholder Agreements

— Deeds, leases and mortgages

Key Documents & Agreements: Schedules and Exhibits (cont.)


• Additional documents to be executed in connection with the closing:

— Board and shareholder consents

— Lender consents

— Third party consents such as lease consents and contract consents

— HSR approval (if applicable)

Key Documents & Agreements: Other Ancillary Documents


Panel Discussion & Questions

• Moderator is Randal Simonetti, MA,MS, Director, EFPR Group, LLP & Ignition Consulting, LLC

• Thomas N. Agnello, Partner, Madison One and President and CEO, M- One Advisors, LLC

• Louis J. Camarella, Jr, CPA/ABV/CFF, ASA, Partner, StoneBridge Business Partners & EFPR Group, LLP, M&A and Business Valuation Practice Group

• Kurt J. Litzelfelner, ASA, Director, StoneBridge Business Partners, M&A and Business Valuation Practice Group

• William A. Hoy, Esq., Partner, Harter Secrest & Emery, LLP, Private Equity Practice Group


Succession & Exit Strategies for Your Operating Business

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Succession & Exit Strategies for Your Operating Business · 2015. 11. 19. · Strategy Planning,...

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