seminar best year to buy sell (ver2 final)

Why 2012 is the Best Year to Buy or Sell a

Business

MODERATOR:

Thomas J. Meyer, Wells Fargo PANELISTS:

Eric E. Dunn, Focus Capital Advisors, Inc.

Terence P. Kennedy, Meltzer, Purtill & Stelle LLC

Thomas A. Thomas, FGMK, LLC

January 26, 2012

2 2

THE CASE FOR SELLING NOW

1. Current Tax Incentives, Pending Sunsets and Higher Tax

Proposals = Tax Uncertainty

Current tax situation is marked by uncertainty on many fronts.

Election year with polar opposite views on the role and scope of the

federal government and tax policy

Record budget deficits and borrowing at all levels of government

Favorable Bush tax cuts remain in effect through December 31,

2012

Without further legislation the Sunsetting of the Bush tax cuts will

result in higher taxes on many different tax fronts (income tax,

capital gain & estate)

Republicans will not be able to change these provisions

without 60 votes in the Senate.

2013 will begin some of the additional tax provisions of

ObamaCare

3


4


Estate Tax exemptions will Sunset after 2012

In 2012 estate tax exemption is $5,120,000 per

person with the remaining estate being taxed at a

rate of 35%

Effective January 1, 2013 exemption is reduced

to $1,000,000 with a top estate tax rate of 55%

4

5


Record budget deficits.

Lack of political will by either party to make meaningful

cuts in spending at any level of government.

Continuing search for “revenue enhancements.”

All of these items certainly contribute to a well founded

uncertainty regarding the future of the tax code, but it

appears likely that all levels of government will be

looking for ways to raise taxes on wealthier Americans.

Proposal will include ideas like the Millionaires Tax aka

the Warren Buffet Rule.

All of this will effect Sellers’ net proceeds after 2012.

5

6


Sell-side Transaction Tax Planning Issues

Any structure that delays the receipt of sale proceeds will be

subject to the risk of tax code changes

Seller Notes

Escrows

Earn-outs and contingent arrangements

Sellers can elect to recognize all of the sales proceeds as

taxable income in the year of the sale. This could result in too

much tax being paid if all of the proceeds are not received &/or

earned.

6

7


7

Example of the tax effect on net proceeds

Assumptions:

Sale of the assets of Old School Manufacturing Inc (S-corp) for $20,000,000 net of tax basis.

As a result of the purchase price allocation, the net proceeds are attributed to the following items:

Ordinary income $ 3,000,000 Depreciation recapture, Non-compete, consulting

Capital Gains 17,000,000 Goodwill and intangibles

$ 20,000,000

2012 2013

Proceeds Tax Rate Tax Proceeds Tax Rate Tax

Ordinary Income $ 3,000,000 35% $ 1,050,000 $ 3,000,000 39.6% $ 1,188,000

Capital Gains 17,000,000 15% 2,550,000 17,000,000 20% 3,400,000

Tax under current legislation $ 3,600,000 $ 4,588,000

Potential additional 2013 taxes

Health Care Act - Surtax on investment income - only applicable to passive investments 3.8% 760,000

Proposed Millionaires Tax (based on net income over $1,000,000) 5.6% 1,064,000

Estate Planning

Net proceeds that could be moved out of the Seller's estate

under current legislation (assume married joint) $ 10,240,000 $ 2,000,000

8


8

The Bottom Line

2012 2013

Net Proceeds $ 20,000,000 $ 20,000,000

Tax

Ordinary Income Tax (1,050,000) (1,188,000)

Capital Gains (2,550,000) (3,400,000)

Health Care Act Surtax - (760,000)

Millionaire Tax - (1,064,000)

Estate tax (2,156,000) (6,373,400)

Net After Tax $ 14,244,000 $ 7,214,600

9


2. Increased Regulation and Other Headwinds.

Regulation is not going away and the Democrats might

win again in 2012.

Obama and Democrats promise increased regulation

(e.g. financial, OSHA, environmental could become

targets).

Obama appointed pro-regulation recess appointments

to kick off 2012 to the National Labor Relations Board

and the Consumer Financial Protection Bureau.

Once the regulations on the Dodd Frank Act are

finalized, the costs for businesses and the banks that

fund them will increase.

10


Four out of 10 small employers (between one and 25

employees) say regulatory and legal problems are

impeding the growth of their business, 82 percent of

them said the obstacles stemmed from government

regulations.

Only 36 percent identified a specific regulation or set of

regulations that was responsible for their problems.

About 61 percent of U.S. companies believe they will

face at least as much litigation in 2012 as they did in

2011. A third of U.S. companies say they will face more

litigation in 2012, up from about 31 percent a year ago,

according to the annual Litigation Trends Survey.

11


3. Business Uncertainty

In a recent study conducted by the U.S. Chamber of

Commerce, small business owners stated their

biggest challenges are:

Economic Uncertainty – 49%;

The National Debt – 47%;

HEALTH CARE – 39%;

Over Regulation – 36%;

Taxes – 28%.

Next to the state of the economy and the debt, the

most specific fear for small business comprises the

impeding health care regulations which are proving to

be difficult to decipher and threaten profitability.

12


Working Classification. The misclassification of

workers is an issue that promises to receive more

scrutiny in 2012. In late 2011, the U.S. Department of

Labor agreed to work with the IRS, as well as several

states, to share information and coordinate

enforcement to ensure that employees receive

protections they are entitled to under federal and state

law. Legislation in several states to increase fines for

worker misclassification may also impact employers in

2012.

Deficit Reduction. Many of the ideas on the table

center on personal and business tax reform and the

closing of current tax “loopholes.”

13


Immigration. The U.S. Government is strengthening

efforts to crack down further on the employment of

illegal immigrants through rigorous worksite

enforcement and paperwork inspections of companies

of all sizes. In 2012, state laws will require more

private sector employers to register and utilize the

federal E-verify system for employee verification.

Congressional immigration reform proposals, which

may include further federal employment verification

obligations, are also possible in 2012.

14


Security and Privacy. In 2012, businesses will continue

to be challenged by security considerations adding to the

cost of doing business. Onerous privacy and security

breach regulations enacted in many states make this an

even more important consideration for business.

Unemployment Insurance Implications. Congress is

contemplating the reinstatement of the federal

unemployment surtax, which would result in virtually all

businesses seeing higher unemployment insurance

taxes. State taxes could rise as federal loans are repaid.

Many states are also contemplating additional or more

extensive employer reporting requirements in an effort to

decrease unemployment insurance fraud.

15


4. Health Benefit Costs

Company costs are increasing;

Even if employees share costs, they will be angry

which could affect productivity.

5. Labor Costs

Labor is on the march. A Big supporter of Obama and

Democrats. They have been energized by recent

actions against them. Will be pushing for pro-labor,

anti-business laws and regulations.

16 16


6. Unavailability of Capital For Owners

For small companies, the credit crisis has frightened

banks and some are refusing to roll over lines of credit

or are increasing the cost of capital;

Owners will need to invest more of their personal capital in

order to grow the business. Selling all or a portion of equity is

the best option for growth some cases.

With Fed flooding the market with cash, interest rates

are bound to rise.

7. Cash is Available to Buy

Capital is cheap for Buyers;

Strategic buyers have more cash on corporate

balance sheets than ever before.

17


8. Buyers are Ready and Capable

According to a recent study by Ernst & Young, 36% of

companies plan to pursue an acquisition this year.

Companies need and desire growth. Some

companies cut back on research and development

during the lean years of recession. Buying may be

better than building.

9. Individual Buyers Are Back

Displaced executives who are potential buyers are

being flushed out of corporate American businesses.

Buyer’s cash reserves and retirement accounts have

rebounded since their decline in the 2008-2010 years.

18 18


10. Private Equity Needs to Buy Private Equity Firms are feeling pressure to deploy capital;

Overhang of $450 Billion; 60% funds raised in 2007 -2008

The deadline is coming to investor return money.

PE Recapitalization will allow owners to sell now at attractive

multiples and historic tax rates while still keeping ownership for

future upside earnings. This model is available for more SMB

companies than ever before

Dow Jones reported that 2010 PE fund raising dropped 16%

and another 4% in 2011. Partners are leaving large firms and

starting smaller funds. These new smaller PE firms are looking

for smaller deals.

Many firms have loosened their floors for minimum EBITDA

requirements in an effort to increase deal flow.

Source: Pitch Book Data, Inc.; Cambridge Associates

19


19

Top 3 Industries for PE

Deals in 2011

Business Products and

Services (526 deals)

Consumer Products and

Services (371)

Information Technology

(207)

20

THE CASE FOR BUYING NOW

1. Tax Incentives

Section 179 depreciation can be used in an asset

purchase transactions to deduct $125,000 in year one

costs for both new and used equipment. Phases out

as total capital equipment purchases for the year

exceed $500,000. Goodwill and intangibles acquired

are not included in the computation of the threshold.

Bonus depreciation can be used to deduct 50% of the

cost of new equipment purchased in 2012. There is

no limit to the deduction. Bonus depreciation has

limited usefulness for business acquisitions, but

would be useful for required cap ex post closing.

Bonus depreciation sunsets at December 31, 2012.

21


2. Better Returns Than Sitting on Cash

Companies have built up greatest cash reserves in history

with favorable financing, great opportunity to grow.

3. Buying is Better Than Building

Companies cut back on research and development during

the recession. Most often buying is the better alternative to

building to fill those gaps.

4. Demographics Might Compel Selling.

Seller’s have been waiting for a return to pre-2007 levels.

They now understand that those levels were once in a life

time opportunities. But they can still get fair and

reasonable value. Some fatigue is setting in and, given the

desire of baby boomers to retire, we might see more

attractive deals.

22


5. Capital to Buy is Available and Cheap

SBA lending is at the highest level it has been in years.

Buyers can put down as little as 15 or 25% down and

use a $5.0mm SBA 7a loan to buy an existing business.

SBA Rates are low and can be fixed for the next 10

years, average fixed rate for buying a business is at

7.0%.

Sellers are also more flexible in providing seller

financing to share the finance risk of the buyer and the

primary lender. Typical seller financing is from 10-25%

of the total project.

23


6. Midmarket Companies Need to Exit

A challenging economic environment;

Harder to compete;

Without a large platform, it’s hard to do economies of scale.

7. Private Equity Companies Need to Exit

PE firms currently own over 5,900 U.S. companies,

including about 4,200 due for an exit in the near future,

having been held for three or more years

8. Seller’s Have Right Sized

Companies have slimmed down and become more

efficient. Returns and productivity have improved.

24


9. Need for Growth

Over the last few years growth has slowed, in some

industries new potential clients have become extremely

difficult to find resulting in fierce competition to retain

customers. Buying now allows businesses to:

Increase market share and revenues

Acquire talented managers in their industry

Increase and diversify their customer base

Add additional products and services

Attain synergies and improve their own profitability

25

SPEAKER BIOGRAPHY THOMAS MEYER, Vice President and District Sales Manager

Wells Fargo & Company

As Vice President and District Sales Manager of Wells Fargo’s SBA

Small Business Lending Group, Tom is responsible for SBA Lending in

Illinois. He has been lending to small businesses for over 12 years

and has funded over $250,000,000 in loans to small business owners.

Given the depth and breadth of SBA loans Tom has successfully closed, he has the skills and

knowledge to structure a transaction that is more likely to be approved and in a shorter time

frame than the traditional SBA guaranteed loan.

The SBA loan program can be used for acquiring an existing business, refinancing or

acquiring commercial real estate or equipment and for expanding an existing business. Tom

specializes in business acquisition financing for all types of transactions from a Partner Buy-

Out, to a Manager acquiring the Business or an Outside Individual purchasing an existing

company.

Tom holds an MBA and a Bachelor’s Degree in Business Management from Olivet Nazarene

University and an Associate’s Degree in Aviation Flight from Southern Illinois University. For

the last 10 years he has been and is currently an Adjunct Professor for Olivet’s School of

Graduate and Continuing Studies facilitating courses in Marketing Management,

Management and Leadership, Personal and Professional Development, Oral and Written

Communication and Business Plans. He is currently a member of MBBI, Midwest Business

Brokers and Intermediaries.

Wells Fargo, SBA Lending, 1300 S. Grove Ave., Ste. 100, Barrington, Illinois 60010

(847) 381-5959; Email: [email protected]

26

SPEAKER BIOGRAPHY

ERIC E. DUNN, Managing Director, Focus Capital Advisors, Inc.

Eric joined Focus Capital as an Associate in 2007, was promoted to

Associate Director in 2009 and promoted again to Managing Director

in December of 2010. Eric has an extensive background in Sales and Marketing, prior to

joining Focus Capital, he was Senior Vice President of Sales for a middle-market Consulting

firm providing IT services and Due Diligence services for M&A transactions. In this role Eric

was responsible for developing and implementing sales and marketing strategies for the

entire company. Prior to that, Eric was a co-founder of The Software Alliance, a software and

intellectual property transaction services firm, the firm was successfully sold to a mid-cap

technology provider.

Eric is a Certified Merger and Acquisition Advisor by Loyola University and the Alliance of

Merger and Acquisition Advisors. He holds a B.S. degree in Business with a Marketing

concentration from Southern Illinois University. Eric is a Board member of Midwest Business

Brokers and Intermediaries (MBBI) he also is a member of The Executives Club of Chicago

and the Alliance of Merger and Acquisition Advisors (AMAA). Eric is an active advocate for

The Alliance for Lupus Research.

Contact Eric: (630) 795-1495 ext. 214 – [email protected]

mailto:[email protected]

27

SPEAKER BIOGRAPHY TERENCE P. KENNEDY, Member, Meltzer, Purtill & Stelle LLC

Terence P. Kennedy has been a member of the law firm of Meltzer, Purtill & Stelle LLC since 1996. Prior thereto, he was a partner at the law firm of Keck, Mahin & Cate for five years.

Areas Of Practice: His practice is focused on mergers and acquisitions and raising capital in the private markets. In addition, he acts as general counsel to a number of closely-held businesses and handles management buyouts, capital formations, loans and other commercial transactions. He also assists closely-held businesses, including early stage companies, in identifying capital needs and obtaining working capital and in general corporate matters.

Professional Associations and Memberships: Mr. Kennedy is a member of the Leading Lawyers

Network, and a director and secretary for the Midwest Business Brokers & Intermediaries

Association. He is also a member of the Schaumburg Business Association, the American Bar

Association and the Illinois Bar Association. In addition, he is a director of the Northwest

Suburban United Way. Mr. Kennedy has given numerous seminars throughout the state of

Illinois on mergers and acquisitions and raising private capital and is licensed to practice in

Illinois.

Education: Mr. Kennedy graduated from Fordham University School of Law in 1984. He was an

associate editor of the Urban Law Journal in 1983. He also received a Master of Fine Arts

degree from Virginia Commonwealth University in 1978 and a Bachelor of Arts degree from the

University of Notre Dame in 1975.

Meltzer, Purtill & Stelle LLC, 1515 East Woodfield Road, Second Floor, Schaumburg, Illinois

Direct Dial: (847) 330- 6044; Email: [email protected]

28

SPEAKER BIOGRAPHY TOM THOMAS, CPA, FGMK LLC

Tom Thomas joined FGMK LLC in October 2005 as a Partner. Formerly, he

was a Partner at a boutique public accounting firm that specialized in M&A

advisory services and public company compliance.

Areas of Practice Tom serves as the primary client contact and engagement partner for a number of

FGMK’s audit and corporate consulting clients. In addition to his traditional audit and review engagements,

Tom’s practice focuses on all aspects of corporate finance, including mergers and acquisitions, private

equity and venture capital transactions, public and private securities offerings, and joint ventures. His

responsibilities include contract negotiations, financial structuring, corporate valuation, financial

projections, financial due diligence and post-closing adjustments. Tom advises private equity, corporate

and individual clients on M&A transactions in a broad range of industries and enterprise values. His

approach to M&A transactions and financial due diligence is geared to identifying opportunities and risks

with the goal of maximizing his client’s return on investment. Tom’s practice includes domestic and

international public companies, which he consults with regarding the proper application of generally

accepted accounting principles to complex non-routine transactions.

Industries Served Long Term Care Facilities, Health Care, Technology, Hospitality, Manufacturing,

Construction, Distribution, Professional Services and Oil and Gas Exploration and Production.

Education Tom graduated Magna Cum Laude from Winona State University in 1994 with a Bachelor of

Science degree in accounting and a minor in physics.

Memberships Midwest Business Brokers and Intermediaries – Former member of the board of directors

and treasurer; American Institute of Certified Public Accountants; Illinois CPA Society.

FGMK LLC, 2801 Lakeside Drive; 3rd Floor, Bannockburn, Illinois 60015, Direct dial: 847.444.8476

Email: [email protected], Web site: www.fgmk.net

mailto:[email protected]

http://www.fgmk.net/

seminar best year to buy sell (ver2 final)

Documents

tax effect

toomuch tax

estate tax rate

estate tax exemptions

net of tax basis

current tax incentives

higher tax proposals

proposed millionaires