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Buyouts: Success for Owners, Management, PEGs, ESOPs and Mergers and Acquisitions, + Website

ISBN: 978-1-118-22909-5
327 pages
September 2012
Buyouts: Success for Owners, Management, PEGs, ESOPs and Mergers and Acquisitions, + Website (1118229096) cover image
The definitive guide to best practices for mastering techniques of the insider-led transition planning

A must have book for business owners, key employees, and their advisors who need to be aware of the full spectrum of succession options, Buyouts provides objectives, advice, steps, and a host of examples on the full spectrum of insider-led buyouts. A road map for CPAs, it presents the parameters for many of the major industry segments, techniques for managing risk, providing retention and performance incentives for key personnel and insights into getting deals financed.

  • Features advice and examples of insider led buyouts
  • Essential guidance on succession options for business owners, key employees, and their advisors
  • The 411 on selling your company for a fair price, maintaining control over the process, and realizing lifelong goals

Transition planning is becoming a hot business topic as millions of business owners head into retirement. The fact is that only a limited number of privately held companies will be successfully sold to third parties. A road map for CPAs, Buyouts presents the parameters for many of the major industry segments, techniques for managing risk, providing retention and performance incentives for key personnel, as well as insights into getting deals financed.

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Acknowledgments xvii

INTRODUCTION

The New Reality for Business Owners in 2012 1

The Middle Market 2

Not Another Mergers and Acquisitions Book 3

Chapter Organization 4

CHAPTER 1 Buyout Examples 7

Case Study—SRC Holdings, Corporation 7

Starting at Ground Zero 9

The Great Game of Business 9

Looking into the Future 10

Case Study—SSG Financial Services 11

Impact of the Plan 12

Intangible Benefits 12

Looking into the Future 13

Case Study—Quality Assembly and Logistics, LLC 14

Success Factors 15

Case Study—Jumbo Heater & Manufacturing Company, Inc. 16

Tensions and Failure 17

Lessons Learned 18

Summary 19

CHAPTER 2 The Economy 21

Brief Overview of the Current Recession 21

Crises Following Wall Street 23

Prospects for the Immediate Future 2012 and 2013 24

Near Term Regulatory Environment—Tax Increases 25

Additional Regulations Coming 26

The Longer View 26

Global Perspective 27

Summary 27

CHAPTER 3 Finance 29

Community Banks 30

Impact of Pending Dodd-Frank Act 31

Secured Loans 32

Regional and National Money Center Banks 32

Mezzanine Funds 33

Private Equity 34

Small Business Administration and Government Sources 35

Seller Notes 36

Summary 37

CHAPTER 4 Valuations 39

Purpose of the Valuation 40

Determining the Transaction Consideration 41

Price and Terms Briefly Examined 41

Standard of Value for Transactions 42

Fair Market Value 43

Adequate Consideration (Employee Stock Ownership Plan and Trust Specific) 44

Investment Value 45

Fair Value 45

“Emotional Value”—What a Buyer and Seller Perceive 46

Types of Buyers and Sellers 46

Attributes of Ownership—Control and Minority Positions 47

Control Position (Enterprise Value) 47

Lack of Marketability 49

Additional Adjustments to Valuation 50

Three Valuation Approaches: Income, Market, Asset 50

Income Approach 50

Market Approach 54

Asset Approach 59

Summary 61

CHAPTER 5 Industries and Businesses 63

Technology and Software 64

Communications 65

Energy 65

Commodity Goods—Retail Food and Agriculture 65

Healthcare 65

Manufacturing 66

Construction 66

Main Street Businesses 66

Discretionary Products and Services Industries 67

Professional Services 67

Summary 67

CHAPTER 6 Professional Advisors 69

Attorneys 69

Certified Public Accountant 70

Financial Advisors 71

Case Study: The Maher Group 71

Investment Bankers 72

Case Study: The McLean Group 73

Behavioral Science 73

Case Study: Humber Mundie & McClary 74

Key Employees 75

Board Members or Advisory Members 76

Family 76

Summary 77

CHAPTER 7 Documents and Due Diligence 79

Due Diligence for the Seller 79

Have an Exit Plan—Know Your Options 80

Review Legal Requirements 81

Identify Advisory Team 81

Optimize Value 81

Put the House in Organizational Order 82

Address Key Employees 83

Due Diligence for the Buyer 83

Key Employee Leadership 84

Selection of Advisors 84

Structuring the Transaction 84

Financial Considerations 85

Tax Planning 86

Review Legal Issues 86

Common Documents and Key Covenants 86

Term Sheet 86

Confidentiality Agreement 87

Letter of Intent 87

Stock or Asset Purchase Agreement 87

Loan Agreement and Notes (Bank and Seller Financing) 89

Employment, Non-Solicitation, Incentive, and Retention Agreements 89

Leases—Real Estate and Other Assets 90

Summary 90

CHAPTER 8 Short Course on Taxes 91

Tax Issues for the Seller 91

C Corporations and S Corporations 92

Asset Sales and Stock Sales 93

Transaction Terms to the Seller 97

Tax Issues for the Buyer 98

Reporting an Asset Sale—IRS Form 8594 98

Stock Sales 99

Transaction Terms to the Buyer 100

Summary 101

CHAPTER 9 Buyouts—Non-Sponsored Management 103

Advantages 104

Cautions 105

Seller Assistance 105

Buyer Commitment 106

Transaction Size 106

Valuation Insights 107

Valuation Assistance 107

Practical Considerations 108

Viewpoint of the Seller 109

Have a Plan to Exit the Business 110

Time Is an Ally 110

Viewpoint of the Buyer 111

Management Leadership 111

Professional Advisors 112

Legal Counsel 112

Financial Advisors 113

Family Members 113

Risk Environment 114

Financing the Transaction 114

Technical Matters 115

Records and Financial Reporting 115

Determine Financial Resources 116

Facilities 116

Valuation 117

Structuring the Transaction—Stock Sale 118

Structuring the Transaction—Asset Sale 120

Successor Management 121

Summary 125

CHAPTER 10 Buyouts—Sponsored Management 127

Advantages 128

Financial Assistance 129

Carried Interest and Management Fees 130

Valuation 131

Viewpoint of the Seller 132

Non-Recourse Issues 132

Total Transaction Consideration 133

Viewpoint of the Buyer 133

Interests of the Private Equity Group 133

Envy Ratio 134

Interests of the Management 135

Mutual Commitments 136

Professional Advisors 137

Risk Environment 138

Reasonable Expectations 138

Technical Matters 142

Tax and Legal Structure of the Company 142

Private Equity Group Funding 143

Professional Support 143

Summary 144

CHAPTER 11 Buyouts—Sponsored 145

Advantages 146

Cautions 147

Valuation 148

Auction Environment 149

Viewpoint of the Seller 150

Viewpoint of the Buyer 151

Professional Advisors 153

Risk Environment 153

Today’s Reality 154

Technical Matters 156

Capital Structure 156

Carried Interest and Management Fees 157

Summary 157

CHAPTER 12 Buyouts—Management and Employee Stock Ownership Plans and Trust 159

Advantages 160

Traditional Uses of an Employee Stock Ownership Plan and Trust 160

Selling Stock to the Employee Stock Ownership Plan and Trust 161

Purchase of Stock with Pre-Tax or After-Tax Dollars 162

Employee Stock Ownership Plan and Trust as a Shareholder 162

Cautions 163

Repurchase Obligation 164

Valuation Insights 165

Viewpoint of the Seller 166

Selling to the Associates that Made the Company Successful 166

Financing Considerations 167

Viewpoint of the Buyer 168

Employee Stock Ownership Plan and Trust Attributes 168

Professional Advisors 169

Employee Stock Ownership Plan and Trust Trustee 169

Employee Stock Ownership Plan and Trust–Literate Counsel 170

Independent Appraiser 170

Other Advisors 171

Risk Environment 171

Standards for Likely Success 172

Technical Matters 180

Employee Stock Ownership Plan and Trust and Qualifying Stock 181

Employee Stock Ownership Plan and Trust Trustee 181

Funding Methods and Contribution Limits 183

Multiple Qualified Benefit Plans 184

Employee Stock Ownership Plan and Trust Tax Issues and Incentives 184

IRC Section 1042 Tax-Free Rollover 185

Repurchase Obligation 187

Anti-Abuse Provisions—S Corporations 187

Other Shareholders and the Employee Stock Ownership Plan and Trust 188

Summary 190

CHAPTER 13 Buyouts—100% Employee Stock Ownership Plan and Trust 191

Advantages 192

Traditional Uses of an Employee Stock Ownership Plan and Trust 193

Selling Stock to the Employee Stock Ownership Plan and Trust 193

S Corporation Attributes 194

Cautions 195

Corporate Governance 196

Acquisition Debt Analysis 196

Valuation Insights 197

Paying for Control 197

Viewpoint of the Seller 198

Financial Assistance 198

Viewpoint of the Buyer 199

Senior Management Issues 199

Employee Stock Ownership Plan and Trust Trustee 200

Professional Advisors 201

Acquisition Debt Considerations 202

Risk Environment 202

Case Study—Sentry Equipment, Inc. 206

Case Study—Chatsworth Products, Inc. 208

Technical Matters 210

Employee Stock Ownership Plan and Trust Trustee 210

Funding Methods and Contribution Limits 210

Multiple Qualified Benefit Plans 211

Employee Stock Ownership Plan and Trust Tax Issues and Incentives 211

Repurchase Obligation 212

Anti-Abuse Provisions—S Corporations 212

Corporate Governance in the 100% Employee Stock Ownership Plan and Trust Company 213

Summary 214

CHAPTER 14 Buyouts—Professional Firms 215

Architectural and Engineering, Public Accounting, and Management

Consulting Firms 215

General Observations for Professional Service Firms 217

Architectural and Engineering Firms 218

Viewpoint of the Seller 218

Viewpoint of the Buyer 219

Valuation Insights 220

Risk Environment 221

Technical Matters 223

Public Accounting Firms 224

Viewpoint of the Seller 224

Viewpoint of the Buyer 226

Valuation Insights 227

Risk Environment 227

Technical Matters 229

Management Consulting Firms 230

Viewpoint of the Seller 230

Viewpoint of the Buyer 231

Valuation Insights 231

Risk Environment 232

Technical Matters 232

Summary 233

CHAPTER 15 Buyouts Using Parallel Companies 235

Advantages 236

Cautions 237

Valuation Insights 238

Viewpoint of the Seller 239

Viewpoint of the Buyer 239

Professional Advisors 240

Risk Environment 241

Technical Matters 244

Summary 244

CHAPTER 16 Buyouts with Family and Management 245

2010 Tax Law Update 245

Advantages 246

Long-Term Horizon 247

Cautions 248

Remaining Competitive 249

Valuation Insights 249

Valuations Involving Non-Family Investors 250

Viewpoint of the Seller (Founding Generation) 250

Behavioral Issues 251

Viewpoint of the Buyer (Next Generation) 251

Practical Experience 252

Professional Advisors 253

Risk Environment 254

Lack of Diversification 254

Technical Matters 256

Psychological Considerations 256

Tax Efficiency—Gift Taxes and Purchases of Stock 257

Historical Perspective on Taxes 257

Tax Reform Act—A Financial Benefit to Families 258

Gift and Estate Taxes Following December 31, 2012 260

Tax-Efficient Succession Strategies 260

Strategies to Provide Income to the Founding Family Members 260

Strategies to Compensate Key Employees 264

Summary 265

CHAPTER 17 Buyouts with Employee Cooperatives 267

Advantages 268

Cautions 270

Valuations 271

Viewpoint of the Seller 271

Viewpoint of the Buyer 272

Professional Advisors 272

Risk Environment 273

Case Study—Select Machine, Inc. 274

Case Study—Cooperative Home Care Associates 275

Technical Matters 277

Employee Cooperatives 277

Tax Deferral with IRC Section 1042 277

Employee Cooperative Transaction Considerations 278

Multi-Stakeholder Cooperatives 279

Comparison with Employee Stock Ownership Plans and Trust 279

Summary 281

CHAPTER 18 Buyouts of the Smallest Companies 283

Advantages 283

Cautions 284

Limited Transition Options 284

Valuation 285

Industry Rules of Thumb 285

Viewpoint of the Seller 286

Realistic Outlook 287

Viewpoint of the Buyer 287

Professional Advisors 288

Risk Environment 288

Technical Matters 289

Financing the Transaction 289

Facilities 290

Summary 291

CHAPTER 19 Inside Buyouts Compared with Sale to Outsider 293

Relative Negotiating Strength 293

Where’s the Money? 294

Seller “Skin in the Game” 295

Asset or Stock Sale 296

What Are You Really Getting? 297

Contingency Payments 298

The Day After 298

Time Uncertain—Getting to the Close 299

Investment Bankers and Intermediaries 299

Common Third-Party Buyers 300

Strategic Buyer 300

Competitors 300

Suppliers and Key Customers 301

Private Equity Firm 302

Summary 302

About the Website 305

Index 307

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SCOTT MILLER, CPA, ABV, CVA, PFS, CMAP, is President of Enterprise Services, Inc. (ESI), a nationally recognized firm in ESOP consulting and valuations, with over 500 clients. An entrepreneur with an extensive history of senior-level industry experience and significant equity ownership in his employers, Miller has authored four professional publications for AICPA on mergers and acquisitions, buying and selling business, ESOPs, and valuing ESOPs. Since founding ESI, Miller has worked with hundreds of businesses throughout the country on strategic transition planning and closing transactions.

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September 04, 2012
Buyouts: Success for Owners, Management, PEGs, ESOPs and Mergers and Acquisitions, + Website

A must have book for business owners, key employees, and their advisors who need to be aware of the full spectrum of succession options, Buyouts provides objectives, advice, steps, and a host of examples on the full spectrum of insider-led buyouts. A road map for CPAs, it presents the parameters for many of the major industry segments, techniques for managing risk, providing retention and performance incentives for key personnel and insights into getting deals financed.

  • Features advice and examples of insider led buyouts
  • Essential guidance on succession options for business owners, key employees, and their advisors
  • The 411 on selling your company for a fair price, maintaining control over the process, and realizing lifelong goals

Transition planning is becoming a hot business topic as millions of business owners head into retirement. The fact is that only a limited number of privately held companies will be successfully sold to third parties. A road map for CPAs, Buyouts presents the parameters for many of the major industry segments, techniques for managing risk, providing retention and performance incentives for key personnel, as well as insights into getting deals financed.

See More
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