January 26, 2012                     Why 2012 is the Best                     Year to Buy or Sell a                       ...
THE CASE FOR SELLING NOW1.   Current Tax Incentives, Pending Sunsets and Higher Tax     Proposals = Tax Uncertainty      ...
THE CASE FOR SELLING NOW                           3
THE CASE FOR SELLING NOW   Estate Tax exemptions will Sunset after 2012     In 2012 estate tax exemption is $5,120,000 p...
THE CASE FOR SELLING NOW   Record budget deficits.   Lack of political will by either party to make meaningful    cuts i...
THE CASE FOR SELLING NOW   Sell-side Transaction Tax Planning Issues       Any structure that delays the receipt of sale...
THE CASE FOR SELLING NOWExample of the tax effect on net proceedsAssumptions:Sale of the assets of Old School Manufacturin...
THE CASE FOR SELLING NOW                             The Bottom Line                                            2012      ...
THE CASE FOR SELLING NOW2. Increased Regulation and Other Headwinds.   Regulation is not going away and the Democrats mig...
THE CASE FOR SELLING NOW  Four out of 10 small employers (between one and 25   employees) say regulatory and legal proble...
THE CASE FOR SELLING NOW3.    Business Uncertainty      In a recent study conducted by the U.S. Chamber of       Commerce...
THE CASE FOR SELLING NOW  Working Classification. The misclassification of   workers is an issue that promises to receive...
THE CASE FOR SELLING NOW  Immigration. The U.S. Government is strengthening   efforts to crack down further on the employ...
THE CASE FOR SELLING NOW  Security and Privacy. In 2012, businesses will continue   to be challenged by security consider...
THE CASE FOR SELLING NOW4. Health Benefit Costs   Company costs are increasing;   Even if employees share costs, they wi...
THE CASE FOR SELLING NOW6. Unavailability of Capital For Owners      For small companies, the credit crisis has frightene...
THE CASE FOR SELLING NOW8. Buyers are Ready and Capable   According to a recent study by Ernst & Young, 36% of    compani...
THE CASE FOR SELLING NOW10. Private Equity Needs to Buy      Private Equity Firms are feeling pressure to deploy capital;...
THE CASE FOR SELLING NOWTop 3 Industries for PE  Deals in 2011   Business Products and    Services (526 deals)   Consume...
THE CASE FOR BUYING NOW1. Tax Incentives     Section 179 depreciation can be used in an asset      purchase transactions ...
THE CASE FOR BUYING NOW2. Better Returns Than Sitting on Cash     Companies have built up greatest cash reserves in histo...
THE CASE FOR BUYING NOW5. Capital to Buy is Available and Cheap   SBA lending is at the highest level it has been in year...
THE CASE FOR BUYING NOW6. Midmarket Companies Need to Exit     A challenging economic environment;     Harder to compete...
THE CASE FOR BUYING NOW9.    Need for Growth      Over the last few years growth has slowed, in some        industries ne...
SPEAKER BIOGRAPHYTHOMAS MEYER, Vice President and District Sales ManagerWells Fargo & CompanyAs Vice President and Distric...
SPEAKER BIOGRAPHYERIC E. DUNN, Managing Director, Focus Capital Advisors, Inc.Eric joined Focus Capital as an Associate in...
SPEAKER BIOGRAPHYTERENCE P. KENNEDY, Member, Meltzer, Purtill & Stelle LLCTerence P. Kennedy has been a member of the law ...
SPEAKER BIOGRAPHYTOM THOMAS, CPA, FGMK LLCTom Thomas joined FGMK LLC in October 2005 as a Partner. Formerly, hewas a Partn...
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Seminar Best Year To Buy Sell (Ver2 Final)

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Why 2012 is the Best Time to Buy or Sell a Business

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Seminar Best Year To Buy Sell (Ver2 Final)

  1. 1. January 26, 2012 Why 2012 is the Best Year to Buy or Sell a BusinessMODERATOR: Thomas J. Meyer, Wells FargoPANELISTS: Eric E. Dunn, Focus Capital Advisors, Inc. Terence P. Kennedy, Meltzer, Purtill & Stelle LLC Thomas A. Thomas, FGMK, LLC
  2. 2. THE CASE FOR SELLING NOW1. 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 2
  3. 3. THE CASE FOR SELLING NOW 3
  4. 4. THE CASE FOR SELLING NOW 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. 5. THE CASE FOR SELLING NOW 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. 6. THE CASE FOR SELLING NOW 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. THE CASE FOR SELLING NOWExample of the tax effect on net proceedsAssumptions: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, consultingCapital Gains 17,000,000 Goodwill and intangibles $ 20,000,000 2012 2013 Proceeds Tax Rate Tax Proceeds Tax Rate TaxOrdinary Income $ 3,000,000 35% $ 1,050,000 $ 3,000,000 39.6% $ 1,188,000Capital Gains 17,000,000 15% 2,550,000 17,000,000 20% 3,400,000Tax under current legislation $ 3,600,000 $ 4,588,000Potential 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% 1,064,000Estate Planning Net proceeds that could be moved out of the Sellers estate under current legislation (assume married joint) $ 10,240,000 $ 2,000,000 7
  8. 8. THE CASE FOR SELLING NOW 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 8
  9. 9. THE CASE FOR SELLING NOW2. 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. 9
  10. 10. THE CASE FOR SELLING NOW  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. 10
  11. 11. THE CASE FOR SELLING NOW3. 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. 11
  12. 12. THE CASE FOR SELLING NOW  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.” 12
  13. 13. THE CASE FOR SELLING NOW  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. 13
  14. 14. THE CASE FOR SELLING NOW  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. 14
  15. 15. THE CASE FOR SELLING NOW4. 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. 15
  16. 16. THE CASE FOR SELLING NOW6. 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. 16
  17. 17. THE CASE FOR SELLING NOW8. 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. 17
  18. 18. THE CASE FOR SELLING NOW10. 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 18
  19. 19. THE CASE FOR SELLING NOWTop 3 Industries for PE Deals in 2011 Business Products and Services (526 deals) Consumer Products and Services (371) Information Technology (207) 19
  20. 20. THE CASE FOR BUYING NOW1. 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. 20
  21. 21. THE CASE FOR BUYING NOW2. 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. 21
  22. 22. THE CASE FOR BUYING NOW5. 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. 22
  23. 23. THE CASE FOR BUYING NOW6. 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 years8. Seller’s Have Right Sized  Companies have slimmed down and become more efficient. Returns and productivity have improved. 23
  24. 24. THE CASE FOR BUYING NOW9. 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 24
  25. 25. SPEAKER BIOGRAPHYTHOMAS MEYER, Vice President and District Sales ManagerWells Fargo & CompanyAs Vice President and District Sales Manager of Wells Fargo’s SBASmall Business Lending Group, Tom is responsible for SBA Lending inIllinois. He has been lending to small businesses for over 12 yearsand 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 andknowledge to structure a transaction that is more likely to be approved and in a shorter timeframe than the traditional SBA guaranteed loan.The SBA loan program can be used for acquiring an existing business, refinancing oracquiring commercial real estate or equipment and for expanding an existing business. Tomspecializes 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 existingcompany.Tom holds an MBA and a Bachelor’s Degree in Business Management from Olivet NazareneUniversity and an Associate’s Degree in Aviation Flight from Southern Illinois University. Forthe last 10 years he has been and is currently an Adjunct Professor for Olivet’s School ofGraduate and Continuing Studies facilitating courses in Marketing Management,Management and Leadership, Personal and Professional Development, Oral and WrittenCommunication and Business Plans. He is currently a member of MBBI, Midwest BusinessBrokers and Intermediaries. Wells Fargo, SBA Lending, 1300 S. Grove Ave., Ste. 100, Barrington, Illinois 60010 (847) 381-5959; Email: tjmeyer@wellsfargo.com 25
  26. 26. SPEAKER BIOGRAPHYERIC E. DUNN, Managing Director, Focus Capital Advisors, Inc.Eric joined Focus Capital as an Associate in 2007, was promoted toAssociate Director in 2009 and promoted again to Managing Directorin December of 2010. Eric has an extensive background in Sales and Marketing, prior tojoining Focus Capital, he was Senior Vice President of Sales for a middle-market Consultingfirm providing IT services and Due Diligence services for M&A transactions. In this role Ericwas responsible for developing and implementing sales and marketing strategies for theentire company. Prior to that, Eric was a co-founder of The Software Alliance, a software andintellectual property transaction services firm, the firm was successfully sold to a mid-captechnology provider.Eric is a Certified Merger and Acquisition Advisor by Loyola University and the Alliance ofMerger and Acquisition Advisors. He holds a B.S. degree in Business with a Marketingconcentration from Southern Illinois University. Eric is a Board member of Midwest BusinessBrokers and Intermediaries (MBBI) he also is a member of The Executives Club of Chicagoand the Alliance of Merger and Acquisition Advisors (AMAA). Eric is an active advocate forThe Alliance for Lupus Research. Contact Eric: (630) 795-1495 ext. 214 – edunn@fcateam.com 26
  27. 27. SPEAKER BIOGRAPHYTERENCE P. KENNEDY, Member, Meltzer, Purtill & Stelle LLCTerence P. Kennedy has been a member of the law firm of Meltzer,Purtill & Stelle LLC since 1996. Prior thereto, he was a partner at thelaw firm of Keck, Mahin & Cate for five years.Areas Of Practice: His practice is focused on mergers and acquisitionsand raising capital in the private markets. In addition, he acts asgeneral counsel to a number of closely-held businesses and handlesmanagement buyouts, capital formations, loans and other commercial transactions. He alsoassists closely-held businesses, including early stage companies, in identifying capital needsand obtaining working capital and in general corporate matters.Professional Associations and Memberships: Mr. Kennedy is a member of the Leading LawyersNetwork, and a director and secretary for the Midwest Business Brokers & IntermediariesAssociation. He is also a member of the Schaumburg Business Association, the American BarAssociation and the Illinois Bar Association. In addition, he is a director of the NorthwestSuburban United Way. Mr. Kennedy has given numerous seminars throughout the state ofIllinois on mergers and acquisitions and raising private capital and is licensed to practice inIllinois.Education: Mr. Kennedy graduated from Fordham University School of Law in 1984. He was anassociate editor of the Urban Law Journal in 1983. He also received a Master of Fine Artsdegree from Virginia Commonwealth University in 1978 and a Bachelor of Arts degree from theUniversity of Notre Dame in 1975. Meltzer, Purtill & Stelle LLC, 1515 East Woodfield Road, Second Floor, Schaumburg, Illinois Direct Dial: (847) 330- 6044; Email: tkennedy@mpslaw.com 27
  28. 28. SPEAKER BIOGRAPHYTOM THOMAS, CPA, FGMK LLCTom Thomas joined FGMK LLC in October 2005 as a Partner. Formerly, hewas a Partner at a boutique public accounting firm that specialized in M&Aadvisory services and public company compliance.Areas of Practice Tom serves as the primary client contact and engagement partner for a number ofFGMK’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, privateequity and venture capital transactions, public and private securities offerings, and joint ventures. Hisresponsibilities include contract negotiations, financial structuring, corporate valuation, financialprojections, financial due diligence and post-closing adjustments. Tom advises private equity, corporateand individual clients on M&A transactions in a broad range of industries and enterprise values. Hisapproach to M&A transactions and financial due diligence is geared to identifying opportunities and riskswith the goal of maximizing his client’s return on investment. Tom’s practice includes domestic andinternational public companies, which he consults with regarding the proper application of generallyaccepted 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 ofScience degree in accounting and a minor in physics.Memberships Midwest Business Brokers and Intermediaries – Former member of the board of directorsand 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 28 Email: tthomas@fgmk.net, Web site: www.fgmk.net

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