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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.
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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