MBBI Latest News

The Basics of a Business Purchase Agreement

Mon, 21 Dec 2020 13:48:24 GMT

Written by Live Oak Bank

During the sale of a business, both the seller and buyer must follow a certain legal process. After signing a letter of intent and completing due diligence, a business purchase agreement marks the official start to the legally binding transaction of a business. This agreement requires the buyer to purchase the business according to the terms and price outlined in the agreement. These documents can be lengthy and full of legalese, which is why an experienced attorney should create the purchase agreement.

Purchase agreements are complex but typically have several standard sections. The biggest takeaway on purchase agreements is this: while it’s ideal to let an attorney handle the terms and conditions it’s not a bad idea to have a general understanding of each section, as we’ve outlined below. Both parties should understand what they’re signing, so leverage your professional team to help you translate some of the legal jargon and technical language.

To read the full article please visit:

https://www.liveoakbank.com/small-business-resources/the-basics-of-a-business-purchase-agreement/

Batten Down the Hatches, The Perfect Storm Hard-Market Is Approaching...

Tue, 09 Jun 2020 15:14:45 GMT

Companies Will Find Shelter with Group Captives

An Eye to the Horizon

The insurance industry is facing a variety of forces which catastrophically threaten its fundamental mechanics and the financial strength upon which our economy is dependent. Insurance companies comprise of some of the largest, and most valuable companies in the market. These critical financial institutions maintain the health and wellbeing our nations businesses, employees, families, and overall economy. Due to the impacts of the COVID-19 pandemic, their role is quickly being brought to center stage in our country’s socio-political conversation. The intent of Business Interruption coverage is the primary precipitating factor.

Lawsuits are being filed against insurers regarding the intent of Business Interruption coverage, and associated denied claims. Simultaneously, legislators are attempting to compel insurers to retroactively pay claims where coverage may not exist, was not intended to exist, and premiums were not actuarily contemplated to offset the risk.

Consider that small businesses alone are losing between $255 billion and $431 billion of monthly income as a result of the pandemic, against $6 billion in total monthly premiums for commercial property insurance, according to the American Property Casualty Insurance Association.

It is believed if some individual lawsuits award the plaintiff, precedents would be set, and trigger a wave of class action. In some form, this would necessitate government intervention and subsequent bailouts of the insurance industry. Despite the insurance industry maintaining an $800 billion surplus to cover all U.S. home, auto, and business insurance claims, it would not sustain the industry against the onslaught of class action suits or legislative intervention.

Understanding the Influences

With Insurance companies beholden to their shareholders, they look to generate and maintain profits in the following primary ways:

Collecting more premium than the sum of claims paid out and their general business costs; The Combined Ratio
Investment income from the invested premium and surplus funds

Irrespective of the legal issues threatening the industry, in an unforeseen manner, businesses are sweepingly reducing sales and payroll figures applied to the rates which generate their premiums, thus significantly reducing forecasted revenues of insurers. Further, the new, unforeseen, and uncertain economic headwinds facing our economy will reduce the forecasted investment income they also depend upon for profitability. This alone can be reason for insurers to look for rate increases. However, if these factors are coupled with potentially unfavorable legal and government action which will jeopardize their significant surplus funds, and flip the scales of their combined ratios, the insurance industry would crater under the magnitude of the opposing forces.

A Benchmark

With some distinct differences, the current commercial insurance environment is not too dissimilar to post 9/11 circumstances: catastrophic actuarily unjustified losses, legislative action, economic pullback and uncertainty. A significant primary difference being the losses then were concentrated to specific areas and insured groups, rather than blanketed across effectively every commercial policyholder in the country. With that in mind, reference the chart below which outlines the rate changes over the past two decades.

The large spike, post 9/11, identifies the hardest insurance market in nearly half a century. If insurance could even be obtained by a companies seeking a policies during that time, rate increases approached +30% on average across the marketplace. With the current situation facing more dire and catastrophic influences, the industry is primed to experience a perfect storm of factors which lead into a hard market unlike ever before.

The Captive Solution

The value proposition of the captive insurance industry is inherently distinct from their counterparts in the retail insurance industry. The primary difference being the only shareholders, or members, of any captive insurance company are also the owners of the businesses insured by the captive. Another way of stating this, captives are 100% owned by the member group of businesses it insures. This insular group of captive member companies satisfy their insurance requirements, yet at the end of the year receive 100% of the captive’s underwriting profits, returned to them as a dividend.

Unlike retail insurers, who do not distribute profits to the companies they insure, captive insurance companies retain the profits for the shareholders for whom they are beholden. When those profits are threatened, the primary mitigation is through rate increases. As evidenced by the factors expressed earlier, retail policy holders are facing the threat of hard market rate increases of a magnitude which is difficult to fully grasp at this time. On the contrary, the shareholders of a captive insurance company are sheltered from those forces, they do not have the incentive to pass along premium and rate increases to enhance profits, only for those profits to be distributed back as a dividend after the policy term.

With its more scrutinous underwriting practices and distinct ownership structure, the group captive insurance industry is an inherently sustainable model in comparison to the retail insurance industry. More than 5,000 middle market American companies have left the traditional market in favor of group captive solutions, yielding a $3.4B business lines marketplace. AM Best reports, between 2014 and 2018, captives added $3.1 billion to their year-end surplus and paid $1.6 billion in stockholder dividends and $1.9 billion in policyholder dividends. Therefore, $6.6 billion during this period remained with the captives or was paid back to their policyholders and stockholders instead of going to the commercial market.

The predictability, control, and safety found in the captive market can be shelter from the hard market forces we face in the years ahead. If you are interested in further exploration of group captives, ensure you are aligning with experts experienced in captive placements. The Risk Assurance Advisors at J.Krug are here to assist you along that journey.

Joe Emerich
J. Krug
Risk Assurance Advisors
One Pierce Place - 1250W
Itasca, Illinois 60413
Phone: 847-818-7510
jemerich@jkrug.com

Covid-19 Impact on Lower Middle Market Acquisitions

Sun, 17 May 2020 18:59:42 GMT

Will the merger and acquisition markets be helped or hindered by the current environment? The answer is yes - and it is dependent on two major variables: the economics of the business sector and the mindset of business owners. Deals in sectors such as hospitality and brick and mortar retail will be renegotiated, postponed or crater altogether. Sectors such as software and medical products and services will generally continue on the course already set.

Active sellers in affected sectors will have a choice to delay or carry on. Those who keep moving their deal options forward will do so because the impact on their business is modest or absent or because their balance sheet is not strong enough to weather a recession. Those who delay the sale of their business may do so because they have a strong balance sheet or on the assumption that the pricing will be more robust in a year other than 2020.

Market dynamics have been disrupted and business owners must react to the specific impact the pandemic is having on their sector. Some owners will not have the necessary motivation to battle through what may be a prolonged recovery. Distressed investors will re-emerge in what has, up to this point, been a sellers market for a decade. Private equity firms will rethink their portfolio and adjust their acquisition targeting. All investors looking at new sectors should consider the value of broad outreach vehicles such as direct mail for the early discovery of businesses which are now approachable for the first time.

Contributing author: Ralph Dieckmann, Integre Partners
dieckmann@integrepartners.com

PREPARING YOUR TEAMS TO RETURN TO WORK

Sadie Beauchamp — Tue, 12 May 2020 22:23:39 GMT

MBBI of Wisconsin Sponsor - Sikich shares an article from Pattie Wagner, Managing Director, HRCS team. Pattie has years of experience working in a variety of industrial, high-tech, consumer, and financial settings. She has also assisted both for-profit and not-for-profit organizations at the global, multi-national, and local levels. Among her many talents, Pattie excels at providing her clients with leadership development, program management, organizational design, and more. She is Prosci/ADKAR Change Management, DiSC and Hogan Leadership Certified and is a Six Sigma Black Belt.

In the coming days and weeks, states will begin to initiate their COVID-19 reopening plans, bringing millions of employees, customers and vendors back into the workplace. While each state is responsible for establishing and communicating its own guidelines, we anticipate a number of important challenges and concerns that all employers will need to grapple with. Read more.

Sikich LLP
Cheryl Aschenbrener
cheryl.aschenbrener@sikich.com
262-754-9400
13400 Bishops Lane, Suite 300
Brookfield, WI 53005

Guidance for Employers Returning to Work; COVID Infections as Worker’s Compensation Injuries, and More.

Wed, 06 May 2020 16:51:51 GMT

Founded in 1995, CCM is a full-service, business law firm that represents management, business owners, and aspiring entrepreneurs. Our attorneys bring their same entrepreneurial spirit to representing their clients and leverage strong subject-matter expertise into delivering efficient high-quality services.

Many of our clients are operating in a limited fashion pursuant to one of the many exemptions set forth in Governor Pritzker’s stay at home order. More employers will open up or expand their existing operations in the near future. The EEOC recently issued practical guidance to employers who are resuming operations.

The most relevant guidance from the EEOC is set forth below:

Q. During the pandemic, may employers ask employees specific questions about any illness the employee is experiencing?

A. Yes. During the pandemic, employers can ask employees if they are experiencing COVID-19 symptoms like fever, chills, shortness of breath, or sore throat. Employers should maintain this information in a confidential medical file. The file should be safe, secure, and accessible to HR professionals and supervisors on a need to know basis only.

Q. During the pandemic, may employers take employees’ body temperatures.

A. Yes. During the pandemic, employers may take employees’ body temperatures, but employers should be competent in the fashion that they measure temperatures, and employers should remember that some people with COVID-19 do not have a fever.

Q. May a temporary staffing agency that places an employee in an employer’s workplace notify the employer if it learns the employee has COVID-19?

A. Yes. The employer, in turn, should determine who the temporary employee had contact with.

Q. What kind of reasonable accommodations might an employer be required to grant a disabled (high risk for complications) employee if working from home is not feasible?

A. Accommodations for those who request reduced contact with others due to a disability may include changes to the work environment such as designating one-way aisles; using plexiglass, tables, or other barriers to ensure minimum distances between customers and coworkers.

COVID Infections and the Rebuttable Presumption that They Occurred at Work

On April 13, 2020, the Illinois Workers’ Compensation Commission passed an Emergency Amendment to their rules of evidence which provides that, whenever an employee claiming workers’ compensation coverage is a COVID-19 “First Responder or Front-Line Worker,” and the employee’s incapacity resulted from exposure to the COVID-19 virus during the COVID-19 state of emergency, there will be a rebuttable presumption that the condition was caused at work.

Further, the rule includes all employees employed by businesses that were deemed “essential businesses” by Governor Pritzker’s Stay at Home Order.

The amended evidentiary rule means that an employee working in any of the essential businesses who becomes ill with COVID-19 during the “state of emergency” will be likely to recover workers’ compensation benefits.

A variety of employer trade groups are opposed to this emergency rule. There are two important points to remember, however. First, Illinois’ worker’s compensation system is a legal bar to injuries that occur at the workplace. Presumably, if an employee suffers a COVID infection at work that is covered by the

worker’s compensation system, she will not be able to sue her employer under traditional theories of negligence.

Second, the Illinois Department of Insurance issued a letter on April 17th saying that COVID-19 worker’s compensation claims, during the pandemic, will be excluded from Illinois employers experience modification.

Employer Takeaway

Illinois employers will be going back to work. Employers should be planning the discrete actions they will take to keep their employees safe. When the inevitable COVID-19 infection arises, employers should be prepared to calmly and responsibly communicate the necessary facts to affected personnel and engage in whatever efforts are necessary to maintain a safe workspace.

Ross I. Molho
Clingen Callow & McLean, LLC
2300 Cabot Drive, Suite 500
Lisle, Illinois 60532
www.ccmlawyer.com
(630) 871-2614

The author, publisher, and distributor of this CCM Alert is not rendering legal or other professional advice or opinions on specific facts or matters. Under applicable rules of professional conduct, this communication may constitute Attorney Advertising.

Punching Out! Stress Testing Deals

Mon, 04 May 2020 12:55:15 GMT

Contributing Author: Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.

Most M&A transactions fall apart several times before closing, even during normal times. When a major crisis occurs, whether internal or external, a deal can truly be stress tested.

We hope everyone is healthy during the current corona virus pandemic. During this time of lockdowns, almost all deals have at least caught a cold. Even if the deal is solid, both buyers and sellers are scrambling to handle business and personal issues, so it is natural for the deal to be put on the back burner. Both sides’ advisors will also be busy with internal and external issues, so their response time will most likely slow down. One of the worst things for deals is uncertainty, and until the parties are able to have more visibility it may be difficult to set a clear timeline.

Here are some tips we have used (and are currently using) to keep deals rolling:

Keep communicating: set a time to talk once or twice weekly. If you hit the ‘pause’ button, set a date a few weeks in advance to re-connect.

Make realistic changes to the deal schedule. Pushing too hard or delaying too much will make it worse.

Make it clear early if either side needs to pause, change the deal, or walk away: although it might hurt the deal to do so, to cover up your strategy or to ‘go dark’ will lead to lost trust.

Keep working: don’t take eyes off the business. The worst thing that can happen is that the business suffers more than it should because the owner and/or the executive team is spending too much time on the deal. Be sure to also take care of yourself, your family, and others that need you.

Lean on advisory team for advice: most of the owner’s advisors have seen a variety of crises. Each crisis and deal are a little different, but some of the available tactics are the same.

Disclose any issues early and clearly: keeping any secrets will not help. Disclosing things early will help build trust, and the other side might be able to provide solutions. Report both bad, good, and neutral news as soon as possible.

Keep executive team, partners, stakeholders informed: they may assume the deal is dead, or going fine, so you don’t want to surprise them. They may have good ideas or at least be a good sounding board.

Sellers must perform augmented due diligence on buyers: Although most of the due diligence is usually done by the buyer on the information provided by the seller, in times of distress the seller must make sure the buyer can complete the deal.

Company videos, video conferencing, data rooms: A lot of work can be done remotely, and the trend even on normal deals is for more remote working. Nothing can truly replace a face-to-face meeting, but just because we cannot meet does not mean that the work on the deal has to stop.

Don’t forget about outside factors: Banks, CPAs, government regulators (antitrust, CFIUS, etc.), landlords, other consent providers may take longer, so anticipate these delays and contact these parties as soon as possible.

Be careful about reps and warranties, earnouts, and other aspects of the deal. Both parties must agree to the extent that the company has been affected by the crisis. The seller might assume that the buyer understands that the business has suffered, but that needs to be reflected in the agreements so that there are no misunderstandings later.

Keep an eye on the big picture: Do not get too focused on problems, look for opportunities. Be sure to pull back a few times a day to think about the overall picture, including your personal life and family. Try to be a positive influence on the company, customers, employees, and the partners in the deal. Many aspects of the crisis will involve coordinating individual efforts, but as a leader, you must focus on the big picture. Be wary of negative thinking, which can snowball and effect your team and the other party.

In times of crisis, leadership is critical, both for the deal and the business. If both sides of the deal are committed to the deal and to making progress during tough time, the deal can still go forward (at least to some extent). Although things will certainly be delayed, it is important to keep your eyes on the goal with the belief that some day things will get better.

Tom Kastner
President, GP Ventures
1320 Tower Road
Schaumburg, Illinois 60173
Phone: 847-431-3993
TomK@gp-ventures.com

Think Like A Ski Jumper

Wed, 29 Apr 2020 12:30:00 GMT

Contributing Author: John B. Weber, Vice President, Water Street Advisors, LLC. a boutique Merger and Acquisition firm serving businesses in the Midwest. John provides turn key sell side services for business owners looking to exit their companies. He is located in Naperville, Illinois, and brings many years of expertise to his clients as a former commercial banker, board member, and former Executive Director of a non-profit public/private partnership that assisted minority owned businesses in accessing capital.

During this time, we start by first extending our hopes that you and your family, employees, associates, and friends have remained healthy, safe, and secure during this most tumultuous time.

We also hope that you have adapted to working from home. Some, like myself and my partners at Water Street Advisors do this every day. Whether you are a veteran at it or just finding your way, the change of pace offers a time of catching up, prioritizing, and contemplation. Those of us in the Mergers & Acquisition industry are trained to stay abreast of breaking news affecting the economy. The last few weeks have been a veritable sea swell of information from well-meaning experts offering amazing opportunities for learning and enrichment to chart a course through this crisis. We have seen the assistance of leaders from all branches of Government, who refreshingly have come together to try to offer solutions.

Whether you believe that this will be a “U” or “V” shaped downturn in the economy, at some point we must start focusing on getting back to normal, whatever the ‘new’ normal will be. I have never snow skied, so I have no idea what it would be like to perform a ski jump. But, I have jumped some things (on either a bike or a sled when I was a much more flexible kid), and there is a point that you can sense when to push downward against gravity just before you are about to become airborne. Thinking positively, perhaps we can successfully launch once we sense we are near being airborne again. Some things to consider:

If you are in the process of accessing the funding made available under the CARE Act, or if you are in the process of selling your business, it will be important during this time to keep detailed records of expenses incurred and revenues not realized as a result of the Covid-19 virus actions. This information will be important to have to document the reasons/uses for the loan proceeds, and reasons why this was a complete anomaly in your business.
While it may not be as robust of a Seller’s market as it was prior to this March, there will still be a large amount of cash looking for investments when things begin to return to normal. Remember, this is not a replay of 2008 – banks are much stronger financially and the US Government has just pumped trillions of dollars into the economy.
If you want to sell your business but have been waiting for the perfect time, when things rebound it may be a very good time to revisit a sale. Consider that buyers will be more willing to accept explainable poor performance during this time especially if the business bounces back quickly when the economy picks up again.
Get your house in order. This is a great time to make sure that your corporate records are correct, that you have a succession plan in place, that you have a funded buy-sell agreement, and that you have talked through your plans with your family. Those things that you did not have time for when you were busy - now is a good time to tackle them.
Need advice or advisors to help you with the items in that last bullet point? We are ready to listen and help. Being ready to go to market when the clouds clear will put you ahead of what could be a big crowd.

The Water Street Advisors Team

Leanne Foster, Director, CPA lfoster@waterstreetadvisors.com 262.210.6637

John Kielich, Principal, CPA jkielich@waterstreetadvisors.com 414.899.0565

John Weber, Vice President jweber@waterstreetadvisors.com 630.201.0348

Alan Hill, Consultant ahill@waterstreetadvisors.com 262.344.4284

Gary Les, CEO Services gles@waterstreetadvisors.com 414.243.3885

Gary Steinhart, CEO Services gsteinhart@waterstreetadvisors.com 414.333.6878

John B. Weber
Water Street Advisors
270 E Highland Ave
Milwaukee, WI 53202
Phone: 630-201-0348
JWeber@WaterStreetAdvisors.com

Congress Passes Additional PPP Funding: SBA Issues Additional Guidance

Mon, 27 Apr 2020 12:48:44 GMT

On April 23, 2020, the House of Representatives passed the Paycheck Protection Program and Health Care Enhancement Act and sent the bill to President Trump, who is expected to sign it today. The bill provides an additional $310 billion of funding for the PPP Loan program. The initial funding of $349 billion was exhausted on April 16. With timing that likely was not a coincidence, the SBA issued additional guidance in connection with PPP loans in the form of Frequently Asked Questions, found here. Many of the questions reiterated prior guidance, including reminders about the SBA affiliation rules. Last but not least, Q&A number 31 addressed whether large companies could access PPP Loans:

Question: Do businesses owned by large companies with adequate sources of liquidity to support the business’s ongoing operations qualify for a PPP Loan?

Answer: In addition to reviewing applicable affiliation rules to determine eligibility, all borrowers must assess their economic need for a PPP loan under the standard established by the CARES Act and the PPP regulations at the time of the loan application. Although the CARES Act suspends the ordinary requirement that borrowers must be unable to obtain credit elsewhere (as defined in section 3(h) of the Small Business Act), borrowers still must certify in good faith that their PPP loan request is necessary. Specifically, before submitting a PPP application, all borrowers should carefully review the required certification that “[c]current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification. Lenders may rely on a borrower’s certification regarding the necessity of the loan request.

Any borrower that applied for a PPP loan prior to the issuance of this guidance and repays the loan in full by May 7, 2020 will be deemed by SBA to have made the required certification in good faith.

This SBA guidance clearly targets those public companies that previously obtained PPP loans, including large, publicly-owned restaurant chains like Shake Shack and Ruth’s Chris Steakhouse. Shake Shack previously announced that it was returning $10 million in proceeds from a PPP loan in connection with raising capital through a sale of its Class A common stock.

This additional SBA guidance places borrowers, particularly those that are privately held, in an interesting dilemma about whether their original good faith certifications are in doubt, what they can do to support their original certifications and, whether they must consider returning PPP Loan funds to their PPP lenders prior to May 7, 2020.

If you have questions about the PPP Loans, please contact CCM.

Kenneth W. Clingen
Clingen Callow & McLean, LLC
2300 Cabot Drive, Suite 500
Lisle, Illinois 60532
630-871-2608
clingen@ccmlawyer.com

Business Interruption Insurance Claims, Lawsuits & Potential Bailouts – Know Your Options

Fri, 24 Apr 2020 16:37:49 GMT

Kelleher & Buckley, LLC offers their clients a wide range of legal services including corporate representation, estate planning & administration, litigation services and tax wealth & structuring. Since 1997, they have been dedicated to protecting individuals, families and businesses alike.

Tremendous losses are being suffered by businesses during this COVID-19 pandemic. Many businesses have already begun to file Business Interruption Insurance (BII) claims with their commercial insurance carriers, and some have even filed lawsuits against carriers denying coverage. Moreover, some states have introduced pro-business legislation intended to override policy exclusions for communicable diseases and mandate that insurance companies pay out claims.

The claims, litigation and pro-business legislation are expected to increase, placing extreme economic hardship on the commercial insurance industry. This trend could lead to federal and/or state government intervention in the form of bailouts and cost-sharing stopgaps. A potential wave of class action lawsuits could also be on the horizon. Are you ready for the possibilities?

Business owners should immediately consider having their commercial insurance policies reviewed by an attorney to evaluate any BII coverage. With or without communicable disease or similar policy exclusions, BII coverage may present opportunities to recoup actual or expected lost profits during these unprecedented times.

Kelleher & Buckley, LLC can help you assess your options regarding any one or more of filing a claim, filing a lawsuit and/or preparing you to participate in any possible future bailouts and class action lawsuits.

Please contact Andrew J. Kelleher (akelleher@kelleherbuckley.com), Robert Krug (rkrug@kelleherbuckley.com) or Samuel Weyers (sweyers@kelleherbuckley.com) at 847-382-9130 for a FREE initial consultation.

Andrew J. Kelleher
Kelleher & Buckley, LLC
102 S Wynstone Park Drive
North Barrington, IL 60010
847-382-9130
akelleher@kelleherbuckley.com

Update - PPP Loans

Thu, 23 Apr 2020 16:46:44 GMT

Contributing Authors: Gene Barinholtz, CPA, Paul Wilkin, CPA, Lauren Clawson, CPA, Mitch Knopoff, CPA.
KRD - Kutchins, Robbins & Diamond, Ltd. is a CPA firm that offers a full range of client services: outsourced accounting, audit and assurance, tax strategy and preparation, business valuations and financial planning advisory services. Their team of 80 members has been serving clients in Chicago, the surrounding areas and nationwide for over 30 years.

Over the past two weeks, the SBA has approved and guaranteed over 1 million PPP loans to small businesses. Much attention and clarification was focused on determining eligibility for the loans and calculating the appropriate loan amount. Now that loans have moved to the funding stage, it makes sense to review the parameters for use of the loan proceeds and the loan forgiveness provisions. The information contained in this document is current as of April 20, 2020. The CARES Act says the SBA has until 30 days after enactment, or April 27, 2020, to issue final guidance regarding loan forgiveness, although many banks are telling customers the date will be April 30, 2020.

Can I Still Apply for a PPP Loan?

The Paycheck Protection Program is authorized to run through June 30, 2020. Small businesses are supposed to be able to apply up to that date.
The initial appropriation in the CARES Act was $349 billion. As of this update, loan approvals under the program have reached that limit, and the SBA is no longer accepting loan applications from the approved lenders until additional appropriations are made to the program.
The federal government has indicated a willingness to appropriate an additional $250 billion for the program. It is likely that funding for this program will be extended this coming week. However, at this time, it is unknown when that appropriation will happen. If you did not receive a PPP loan from the initial funding we urge you to be proactive with your bank to ensure they have your application and documentation ready when additional funds are appropriated.

Is the Program As Confusing As People Make It Sound?

Yes – but don’t worry, we are going to unpack all the details below. First, there are a few key terms that everyone who has either received or wants to apply for a PPP loan need to understand.

Key Definitions

Payroll Costs

Payments to U.S. legal residents for:
- GROSS salaries, wages, commissions, tips, vacation pay, family or medical or sick leave pay, separation pay and bonuses;
- Group healthcare benefits including insurance premiums (employer’s share only);
- Retirement benefits (employer’s share only);
- State and local taxes assessed on employee compensation (generally these are state unemployment taxes);
- Self-employment income of partners in a partnership;
- Owner Compensation Replacement for a sole proprietor or independent contractor, also known as net earnings from self-employment.
Compensation, such as gross salaries, wages, net earnings from self-employment and partner self-employment income, is capped at $100,000 on an annualized basis for any individual, prorated for the eight-week period. This works out to 8/52 times $100,000, or $15,385 per person.
Payroll costs do not include any amounts used to claim the Emergency Paid Sick Leave Credit or the Emergency Family and Medical Leave Credit.
For a sole proprietor or independent contractor, healthcare insurance premiums and retirement benefits are not included.

Full-Time Employees and Full-Time Equivalents (FTE)

The definitions are the same as they were for determining Obamacare era penalties.
Full-time employee: an employee who is employed on average at least 30 hours per week or 130 hours per month.
Full-time equivalent employee (FTE): a combination of employees, each of whom individually is not a full-time employee because they are not employed on average at least 30 hours per week, but who, in combination, are counted as the equivalent of a full-time employee.
- For example, two employees, each of whom works 15 hours per week, are the equivalent of one full-time employee.
To determine total FTEs, take the aggregate hours worked by non-full-time employees in a month and divide by 130, then add that result to the number of full-time employees.

So I Received a Loan - What Can I Use the Money For?

During the eight weeks immediately following the initial loan disbursement, PPP loans can be used to pay:

Payroll costs;
- We recommend that any payments to partners made from the loan funds should be classified as guaranteed payments, so that there is no question that they constitute self-employment income to the partner.
- We recommend that actual checks are written to partners in a partnership and that self-employed individuals write themselves checks over the 8 week period to prove payroll. It is likely that a “book entry” will not qualify as sufficient documentation.
Group healthcare continuation costs for employees on paid sick, family or medical leave.
Mortgage interest on loans incurred prior to February 15, 2020.
- Includes real or personal property.
- Property must be used in the business.
- Includes loans for vehicles and other equipment used in the business.
Rent or leases in existence prior to February 15, 2020. This appears to include non-facility leases such as machinery and equipment leases and copier leases.
Utility payments for services begun prior to February 15, 2020, which includes:
- Gas, electric and water;
- Telephone and internet;
- Fuel for business vehicles.
Interest on any other debt obligations incurred prior to February 15, 2020. Keep in mind that loan proceeds used for this purpose will not be forgiven.
Refinance an Economic Injury Disaster Loan made between 1/30/20-4/3/20.
At least 75% of the loan proceeds MUST be used for payroll costs. Stated another way, no more than 25% of the loan proceeds can be used for mortgage interest, rent and utilities and interest on any other debt obligations
No prepayments are allowed on these costs.
These costs must be incurred and paid during the 8 week period. Therefore arrearages are not eligible expenses.
Sole proprietors and independent contractors can only claim mortgage interest and utilities for their home office space if these are deductions taken on their Schedule C filings (Form 8829)

Will My Loan Be Forgiven?

PPP loans will be forgiven to the extent that the proceeds are used to pay the above expenses during the eight weeks following the date of the loan, with the exception of interest on debt obligations other than mortgages.
Borrowers will have to submit an application for forgiveness and related documentation such as payroll tax returns, cancelled checks, payment receipts and account transcripts, to their lender, who will be required to calculate the amount forgiven within 60 days. If you don’t apply for loan forgiveness, you won’t get it. Forgiveness is a proactive process and not automatic.
Reductions to the amount of loan forgiveness:
- The amount forgiven is reduced based on the failure to maintain the average number of FTEs during the covered period (the 8 week period) when compared to a base period that the borrower gets to choose. (See below for the exception to this.) The choices are:
- - February 15, 2019, to June 30, 2019, or
  - January 1, 2020, to February 29, 2020.
- The amount forgiven is reduced to the extent compensation for any individual making less than $100,000 per year is reduced by more than 25% when measured against the most recent full quarter that individual was employed.
- If you have reduced your FTE’s between 2/15/20 and 4/26/20 as compared to your FTE’s on 2/15/20 there is no reduction in the amount forgiven if there is restoration of full-time employment and salary levels by June 30, 2020.
- - You can re-hire or replace individuals to get back to the needed FTE headcount.
  - You must increase the compensation of the same individuals who took pay cuts back to pre-pay cut levels.
- Payments for non-payroll costs in excess of 25% of the loan will not be forgiven.
- Grants received under the EIDL program will reduce the amount forgiven to the extent of the grant amount.
- Amounts used for interest on debt other than mortgage obligations will not be forgiven.
- Any amounts used for any expenses not listed above will not be forgiven.

Forgiven PPP loans will NOT constitute taxable cancellation of indebtedness income for federal income tax purposes.

How Do I Prove What I Spent the Money On?

We recommend you open a separate bank account for the loan funds.
- Keep clear records of all checks written from the account – date, payee, purpose.
- Keep receipts for items such as fuel for business autos and other utility payments.
- Keep detailed records of payroll payments.
- - If you have a separate payroll account into which you normally transfer funds for payroll from a general checking account, transfer only the exact amount of the pay needed on the pay date from the separate loan funds account, so that you have a clear trail of the payroll costs paid.
  - If you use a payroll service, the transfers should match the cash requirements reports they provide.
  - Payment of the employer portion of FICA and Medicare taxes is not a permissible use of the funds. If you have a separate source of cash, you should transfer the funds to cover those federal taxes to the payroll account from the cash not in the loan funds account.
- Keep detailed records of changes in your workforce.
- You may be able to set up and run special reports from your accounting software for the 8-week period.
- Submit copies of all records along with bank statements to your lender.
- It is possible that the forgiveness process will involve an audit verification. It is unclear at this time what is involved in an audit verification.

If A Portion Is Not Forgiven - What Are the Terms?

The interest rate will be 1% per annum.
The term is two years.
No payments of principal or interest for six months – interest still accrues during this deferment.
No personal guarantees needed.
No collateral required.
No SBA or bank fees.

The documentation requirements for loan forgiveness are going to be extensive, and some of the calculations may be complex. This is not a time when you want to attempt to go it alone, only to find out that your lender refuses to forgive a significant amount of your loan because you don’t have proper documentation, or you didn’t understand the spending requirements. KRD has the expertise, the processes and the procedures to guide you through the PPP loan maze. Rely on KRD to help you get the maximum forgiveness on your loan. Call us today to discuss your specific situation.

Robert Eisenstadt
Kutchins, Robbins & Diamond, Ltd.
1101 Perimeter Drive, #760
Schaumburg, IL 60173
(847) 278-4422
reisenstadt@krdcpas.com

Trouble with Contractual Obligations and Payments?

Thu, 16 Apr 2020 17:38:05 GMT

Many businesses are not fulfilling contractual obligations, such as paying bills or supplying goods and services, due to COVID-19. Governmental restrictions and supply chain disruptions may be impacting the ability to perform and/or pay. In certain circumstances, non-performance and/or non-payment may be excusable under a force majeure clause or other legal doctrines.

What is force majeure?

Force majeure is defined as unforeseeable circumstances that prevent fulfillment of a contract, such as natural disasters, government interventions and “acts of God.” A force majeure clause may cover potential inability to fulfill contractual duties due to events outside of the business’s control.

Is COVID-19 considered a force majeure event?

It is not always clear what constitutes force majeure. Agreements and business relationships will need to be reviewed on a case-by-case basis to determine if a force majeure clause exists and if the pandemic could be considered a valid excuse not to perform or pay.

Do other legal doctrines excuse performance due to COVID-19?

The doctrines of frustration of purpose and impossibility of performance, as well as certain provisions of the Uniform Commercial Code, may also excuse temporary or permanent inability to perform contractual obligations.

What steps should I be taking now?

Businesses should think about consulting with an attorney and consider the following:

What happens if you cannot fulfill a contractual obligation or pay?
What should you do if you receive a letter indicating nonpayment or nonperformance regarding a contract or business dealing?
What can you do to improve or preserve your business relationships in these situations?
What can you do to improve or preserve your legal position in these situations?
What evidence should you seek from a contracting party claiming force majeure or another legal doctrine excusing performance?
Can you terminate contracts and refuse payment due to coronavirus?
Are there any notice requirements before taking action?
What are your potential damages or liability exposure?
What happens if a lawsuit needs to be filed?

Kelleher & Buckley, LLC can help you review key contracts and business relationships to address force majeure or other related issues, assist with insurance provider notification and identify any potential for litigation. If your company believes its performance has been or will experience business disruption due to the outbreak, please contact Andrew J. Kelleher or David P. Buckley at (847) 382-9130.

Andrew J. Kelleher
Kelleher & Buckley, LLC
102 S Wynstone Park Drive
North Barrington, IL 60010
847-382-9130
akelleher@kelleherbuckley.com

Securing Your Remote Workforce

Wed, 15 Apr 2020 20:17:22 GMT

Securing Your Remote Workforce

Contributing Authors: Jonathan Harris, Grant Menard and Jake Gregorich are part of the Equilibrium, an Ntiva company, team. A technology firm that strikes the perfect balance between strategic IT project work and IT support work, they are designed to help companies that are aggressively growing through acquisitions achieve their technology goals.

Due to the remote work paradigm we find ourselves in, technology is the central force driving businesses forward. However, as our reliance on technology increases, cyber-attacks, ransomware, and other data security threats are at an all-time high. For our clients, this requires us to manage and support comprehensive tools and resources that drive efficiencies and collaboration in an environment that is more secure and protected than ever before. These are just a few of the growing technological challenges that have emerged, ultimately effecting the way we do our daily work.

To further prove this point, below is a snapshot of the increase in cyberattacks for the month of March, highlighting the massive spike in bad actors trying to take advantage of the remote workers.

MBBI members are continuing to service their clients and keep business moving forward during these uncertain times, regardless of the type of support provided. Therefore, it is important for us to implement the technical requirements and performance considerations for reliable, safe, remote computing. As the IT group supporting many MBBI members, we’ve developed a list of resources for business requirements and best practices designed to address this challenge. We are in this together.

Typical Requirements (Hyperlinks):

So where do we go from here?

Budgets are tight, leaders are being pulled in multiple directions, and the business environment is challenging, so Equilibrium, An Ntiva Company, is doing our part by offering MBBI members a no cost IT Security Cold Audit and a free live, collaborative Cybersecurity Awareness Training Course. Please reach out if you would like to schedule a cold audit or private virtual class for your organization or your partners.

Equilibrium, an Ntiva company, is a technology firm that strikes the perfect balance between strategic IT project work and IT support work to help mid-market sized businesses achieve their technology goals. Our core services include - IT Strategy, Managed Services, Mergers & Acquisition IT Consulting, Disaster Recovery, IT Security, Infrastructure Services, Cloud Solutions, and ERP/CRM/LOB Software Selections.

With experience in assessing IT for M&A deals (before or after Day 1), designing technology solutions, project planning, budgeting, implementing, documenting and supporting systems and network infrastructure, EQ has just what you need to quickly realize the benefits of merger integrations or divestitures. Please visit https://www.ntiva.com/covid-19-business-resources for a comprehensive catalog of highly valuable strategies to engage during this time. This will help us all get past the challenge presented by COVID-19.

Stay safe and be well.

Contributors:

Jonathan Harris Grant Menard Jake Gregorich
jharris@eqinc.com gmenard@eqinc.com jgregorich@eqinc.com
773-639-3715 414-659-2665 630-962-9288

Punching Out! What is a Quality of Earnings Report?

Fri, 03 Apr 2020 17:00:00 GMT

Contributing Author: Tom Kastner, President, GP Ventures

Tom is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.

For the past several years, Quality of Earnings Reports, also called ‘Q of E’ Reports, have become more popular in M&A deals. Whether the seller’s financials are audited, reviewed, compiled, in QuickBooks, or on the back of a napkin, a Q of E report helps buyers become more comfortable with the seller’s numbers and identifies risks in the business. Until recently, these reports were mostly completed for larger deals, but lately they have been performed for companies at $10 million in revenue or below. The reports are for a specific M&A deal, performed by a third-party accounting firm, and usually take a few weeks (2-4 during off-season, 4-8 during tax season) to complete.

Q of E reports are almost standard for all public and private-equity buyers for deals above a certain size. This is to provide a third-party analysis and review of the seller’s financials and the structure of the deal. Third parties are independent and have no stake in the game, so they are generally unbiased and not influenced by any pressure to do a deal. Public company boards of directors and private equity investors typically insist on getting these reports, not only for their independent analysis, but to provide another prospective on the deal that the buyers may have missed (in other words, ‘CYA’).

The Q of E provides analysis into the ‘quality’ of earnings, that is, how sustainable are revenues and earnings, and how realistic are the seller’s projections. Depending on the scope of the report and the buyer’s concerns, the Q of E team can look into a wide range of topics. For example, if the seller’s customers are mostly well-financed blue-chip companies, revenues are based on long-term contracts or repeating programs, and revenues have climbed steadily, those earnings would be generally ‘high quality’. However, if customers are mostly smaller companies, orders are lumpy or spotty, there are a lot of one-time orders, suppliers are small and overseas, the equipment was purchased in the 80’s, and revenues have been up and down, the Q of E team would probably rank those earnings as lower quality.

The Q of E report also looks at the quality of assets, various accounting policies, the quality of the supply chain, financial controls, the level of the management team/financial reporting, IT systems, and a wide variety of other factors. The scope of the report depends on the concerns of the buyer and the complexity of the business. The costs also depend on those factors and can range from around $25K for a limited report to up to $100K for a complex report for businesses in the $10-100 million range.

In recent years, sellers have become more proactive and have requested Q of E reports on themselves. This is a bit like getting a home inspection completed before selling a house or getting the mechanic to check out your car before you sell it online. Getting a sell-side Q of E report gives buyers confidence early on, uncovers issues, makes the process quicker, and is a strong signal that the seller is serious (and wants a serious value for the company). Sell-side Q of E reports are becoming standard, so not having it puts the company behind other sellers. If something negative comes up, you can hit the ‘pause’ button and fix it before going to market, or at least disclose it in advance and avoid any surprises. Sellers who are thinking of going to market in a few years could get a report done now, then have plenty of time to correct any issues. A re-fresh of the report when the company is ready to go to market should be easier and less expensive than the original report.

As an owner or executive of a company, you have worked there for years, so you understand the business well and have accepted all (or at least most) of the risks of the business and industry. Owners can get blinded by familiarity, and they all think their babies are beautiful. Buyers may come from a slightly different part of the industry and may organize their business differently. Private equity or other investors may not know the industry well. A Q of E report can give the owners and executives a perspective of the business that they otherwise would not receive.

Who pays for the Q of E report? If it is a sell-side Q of E report, the seller pays, but it typically pays off in higher valuations and a smoother deal. If the buyer asks for it, the buyer typically pays. However, some buyers may say that the seller has avoided paying audit fees for years, so the seller should at least pay half. For companies under $10 million in value with relatively simple organizations, a Q of E report may be overkill, but it is recommended for larger companies with more complex organizations. If the buyer requests the Q of E, it is almost always after a Letter of Intent is signed and the parties have entered into an exclusive due diligence period.

The main differences between a financial audit or review and a Q of E report are that audits check to see if the financials conform to GAAP and they are backward-looking. Q of E reports take into account add-backs, a variety of risks, and also cover forward-looking projections.

A great Q of E report can help support a higher valuation, better terms (more cash at closing, less earnout), a smoother negotiation and due diligence process, and better reps and warranties terms (or lower Reps and warranties insurance premiums). It can help the buyer with their financing efforts and help them get approval from their board of directors or investment committee. A Q of E report does not replace buyers’ due diligence, but it can be a very important independent tool for understanding the business.

Why Can’t You Sell Your Business on eBay?

Fri, 03 Apr 2020 14:29:28 GMT

Contributing Author: Tom Kastner, President, GP Ventures

Wouldn’t it be a lot easier if we could buy and sell companies online? Owners could avoid a lot of trouble and fees, as well as get deals done quicker. Imagine going to a 55-year high school anniversary, and finally deciding to retire. The next day, simply put the business up for sale on eBay, collect the cash a few days later, and never worry about the business again. Unfortunately, it’s just not that easy. Here are some reasons why a business cannot be sold online, and how owners can make the sale process go more smoothly.

Businesses are Complex: A business is more complex than a beanie baby collection or a pair of shoes. Even a small business is vastly more complex than any product you find online. They are hard to understand and hard to explain correctly. Owners tend to overstate their value, and buyers tend to tear them down. Buyers’ eyes start to glaze over if the owner has a 15-minute no-break answer to ‘How’s business?’. Try to understand your business well enough to break it down into a simple explanation, including what is special about the business.

People are Complex: The value of a business is usually mostly in the people, and people are more complex than a used flat screen TV. Both buyers and sellers have agendas, as does management and the employees. Most people involved in deals seem to make the deals more complex than they need to be: we can’t help it. At some point, both sides need to make it easy to get a deal done.

People Embellish (Lie): People lie all the time, whether it’s a white lie, an embellishment, or out and out fraud. We at least tend to push the envelope on the truth, but if we overdo it, the other side will lose trust. If it happens on eBay, the seller’s rating will go down, but in the real world a buyer will walk away. Stick to the truth, and while a seller can emphasize the positive aspects of the deal, you have to be careful not to overdo it.

Culture: Culture is a very important aspect of a business, but it is often ignored. The value of a business can be in the culture, or the culture could be a toxic negative. It is very hard for owners to understand and explain their culture, and they might be wrong about it. Buyers often say that they do not want to change anything, then they change everything after an acquisition. Take the time to understand the important aspects of your company’s culture and break it down into 5-10 important items.

Multi-Step Deals: Acquiring a business takes a lot of steps, no matter how simple the business is. Each step gives both sides the chance to rethink the deal, or to find better options. If you’re buying a gift card for your nephew, you might waffle a little before settling for an Applebee’s card. Business buyers tend to consult with a variety of advisors, and there could be over 100 interactions between buyer and seller before a deal is completed. It is important to keep communicating, stick to a schedule, and resolve issues quickly in order to keep a deal going.

Changes: The sale of a business takes time, so things change during the process. The overall economy can change, competitors may change, customers change, people leave, and buyers themselves get acquired. If we could freeze a business in time, that would make things easier. The best way to deal with change is to expect change, and if something comes up, disclose it quickly and fairly to the other party.

Lack of Preparation: Owners are often woefully unprepared to sell their business, both personally and professionally. Even if you could list the business online, many owners would take it down afterwards because they realized that they do not know what to do in retirement. If the perfect buyer walked in the front door with a suitcase full of cash, almost no owners would be prepared to disclose the data needed to give the buyer enough comfort to go through with the deal.

How to Make it Easier: Although the sale of a business will never be as easy as selling used gym equipment, there are a number of ways to make it easier. First, the owner needs to be prepared mentally and have their personal finances and planning in order. The owner should also talk with their advisors in the legal, accounting, and M&A fields in order to get the business ready. Try to find the skeletons and fix them if possible. Be sure to really understand the valuations in the market. Owners should also talk with key stakeholders, such as partners (spouses/kids) and key employees, to make sure everyone is on the same page. The sale will never be as easy as getting rid of your Aunt Betty’s antique silver set, but through proper personal and business preparation you can help to make the process smoother.

New Year's Greeting

Wed, 01 Jan 2020 15:57:33 GMT

Contributing Author: Raymond J. Horn III is a Partner with Meltzer, Purtill & Stelle LLC and President of MBBI

Meltzer, Purtill & Stelle LLC a law firm with offices in Schaumburg and Chicago. Ray concentrates his practice of law in the areas of mergers and acquisitions, contract negotiation, drafting and review, owner strategic planning through buy-sell agreements, business fractures, and secured lending. Ray is President and a member of the Board of Directors of MBBI. Ray can be reached by phone at (847) 330-2430, and by email at RHorn@MPSLaw.com.

New Year's Greeting

First, and foremost, a very Happy New Year to each of you. I hope you enjoyed a wonderful holiday season and a very successful 2019.Looking back on 2019, MBBI experienced another very successful year, hosting numerous engaging and diverse events throughout the year. We started off the year on a very high note with our January annual conference focusing on M&A trends in the craft beverage industry, including an excellent presentation and tasting with more than 150 attendees. Following a highly successful and record-setting golf outing in 2018, we again reset the bar with 240 golfers, over 275 for dinner, as well as contributing more than $10,000 to Child’s Voice. Among other events, MBBI members and guests attended an informative presentation on the state of the banking industry in May, connected with The Enclave Association in September, enjoyed a successful Cubs’ event in September, expanded their knowledge of ethical matters in M&A transactions in October, and then enjoyed another Bears’/Packers’ game (this time at Lambeau Field) in December (with a result this time favoring our colleagues in Wisconsin). Also in December, our Wisconsin Chapter again knocked it out of the park with a very successful 9th Annual Private Equity Connection, with attendance of over 350. We have continued to build connections through marketing and website initiatives and have worked diligently to engage with members to ensure they are receiving a valuable return on their investment of time, talent and resources in MBBI.

In looking ahead for 2020, I am very confident MBBI will continue to build on 2019 successes (just as we did so in 2019). I want to encourage you to stay involved and attend as many events as possible, starting with our Annual Conference on January 23, focusing on the current economic impact manufacturing makes in Illinois and featuring a partnership with the Illinois Manufacturers’ Association. If you have not already registered, please do so as soon as you can so you do not miss this exciting event. We have many more events planned for 2020, including our Golf Outing in July, and I encourage you to visit our website at MBBI.org for information and details on registration.

As is true with every organization, value received by members is directly tied to member engagement in the organization. As you have heard me say more than once, I again want to strongly encourage all MBBI members to become (or stay) involved in MBBI. MBBI is better with your guidance and input and, if I dare say it, I believe its members are better from that engagement with MBBI. From personal experience, I can state without reservation that MBBI is well worth an investment of one’s time, talent and resources.

Looking forward to seeing you at an upcoming event. All the best for a very happy and successful 2020.

Raymond J. Horn III
MBBI President - 2020

Raymond J. Horn III is a Partner with Meltzer, Purtill & Stelle LLC and President of MBBI

Transportation and Logistics M&A

Mon, 04 Nov 2019 16:17:55 GMT

Contributing Author: Greg Lafin, Managing Director, BKD Capital Advisors.

Greg is the head of BKD Capital Advisors, LLC’s Chicago office which supports the Midwest Region for BKD encompassing 9 office locations and has provided merger and acquisition advisory services to small and mid-sized businesses for more than 25 years. He has extensive experience in providing investment banking services for transaction values up to $300 Million Dollars to include seller services, acquisition searches, due diligence, financial structuring and modeling, negotiation support and profit improvement advisory support. Gregory serves various industries, including health care, manufacturers and distributors, trucking and logistics, business services and technology firms. Greg can be reached at: (P) 630-282-9569 (EM) glafin@bkd.com.

Transportation and Logistics M&A

Overall, mergers and acquisitions activity within the trucking, transportation and logistics market has been flat or slightly declining in 2019. That trend is expected to continue through the balance of the year for a number of reasons.

While e-commerce and condensed consumer delivery expectations are fueling growth, tariffs are slowing import traffic and adversely impacting volumes. Industry wide, downward pricing pressure continues. Meanwhile, driver shortages are still a top issue and firms using independent contractors remain under heavy scrutiny.

Another challenge comes in the form of fuel expense, which continues to rise due to commodity price stabilization and higher taxes, thus pressuring profit margins. At the same time, technology investments continue to rise, particularly in the areas of driver safety and compliance, fleet management and migrations to customer-centric cloud platforms.

The trend toward adopting green initiatives continues to add cost to fleet additions as many firms try to incorporate alternative-fuel vehicles to enhance efficiencies and satisfy customer requests and demands. Finally, industry consolidation continues as smaller firms, outside of certain specialty niches, are challenged to compete and invest.

Recommendations for Investors Whether it’s preferable for a logistics or transportation company to be asset-heavy or asset-light depends on the nature of the sale. Both of these platforms are needed to move freight. Asset-heavy transactions are valued approximately one-third less from an adjusted EBITDA multiple perspective; however, they do offer significant downside protection given the liquidation value of the fleet assets. Asset-light transactions are viewed more favorably because the significant annual investment in fleet assets is eliminated. Relationships and niches typically drive the premium in asset-light transactions, making retention of key employees and customers a critical factor.

For sellers, it’s wise to market companies with sell-side due diligence in hand because often it leads to enhanced value. The potential financial and compliance surprises during diligence are usually removed, which helps improve initial valuations, increases the certainty of closing value and can speed time to close. Key areas of focus continue to be state and local taxation, employee versus independent contractor reporting, revenue recognition, and capital lease and operational lease accounting standards, along with overall financial integrity.

Overall, the broad M&A landscape continues to be a seller’s market with near record-high valuations. The trucking, transportation and logistics market will continue to consolidate, offering PE and growth-minded companies an opportunity to build some exciting, accretive enterprises. This industry continues to change and disrupt the norms of the past with technological advancements, including autonomous fleets using artificial intelligence and drone delivery. Innovative and operationally intensive companies will emerge as winners in this future state. Companies will continue to outsource delivery, warehousing and more, thus focusing on their core competencies, opening the door for more—and new—customer acquisition opportunities within the industry.

Greg Lafin is managing director of BKD Capital Advisors. This article is for
general information purposes only and is not to be considered as legal advice. Consult your BKD adviser or legal counsel .

Succession Planning to Retain S Corporation Status

Mon, 12 Aug 2019 15:06:50 GMT

Contributing Author: Vasili (Vas) Russis chairs the Tax & Wealth Structuring practice group at Kelleher & Buckley, LLC law firm.

Vas concentrates his practice on the representation of closely held businesses and high net worth individuals, mainly in the areas of tax structuring and planning, estate planning and administration, business structuring and planning, asset protection, IRS disputes, real estate and commercial litigation. Vas can be reached at: (P) 847-382-9130 (EM) vrussis@kelleherbuckley.com

Succession Planning to Retain S Corporation Status

Under the current tax law, S corporations are the most commonly used entity for operating businesses (other than for holding real estate). Generally, the rules for S corporation ownership allow for individuals (or their living trusts) to hold shares in an S corporation. Proper ownership of shares allows for S corporation status, which avoids the unwanted scenario of “double taxation” that is found with C corporations. Many business owners choose not to have the results associated with C corporation “double taxation”.

However, when an S corporation shareholder dies, depending on how that shareholder’s estate plan is structured, there can be a loss of S corporation status, and the corporation can be brought back into the C corporation structure, if prior planning is not properly addressed. Often a shareholder will plan to have shares in an S corporation held in a separate trust after his or her death; however, that trust needs to be properly structured in order to continue with the entity’s S corporation status.

In addition to trust planning, there are various mechanisms that can be used to preserve S corporation status upon a shareholder’s death. First, if shares are left to an individual, such a transfer will not cause a loss of S corporation status, provided other S corporation requirements continue to be met. For the most part, individuals are considered as eligible S corporation shareholders. Further, a buy-sell agreement, if properly drafted, can provide for a transfer of shares on a shareholder’s death to an individual or to such individual’s living trust. Both such parties are eligible shareholders and can continue the entity’s tax benefits found with S corporation status.

Although trust planning is generally preferable for estate planning purposes, shares left to a trust may create a situation where S corporation status could be lost. Two types of trusts – known as a Qualified Subchapter S Trust (“QSST”) and an Electing Small Business Trust (“ESBT”) – can be used to preserve an S corporation election after a shareholder’s death.

To qualify as a QSST, a trust’s terms must provide that during the life of the current income beneficiary, the trust will have only one income beneficiary and under the terms of the trust, all of the trust's accounting income must be, or is required to be, distributed to the income beneficiary at least annually. This will cause the trust’s income to be taxed at the beneficiary’s income tax rate, which may be as high as 37% (the current highest marginal rate of income tax on ordinary income). The trustee of the trust must distribute trust accounting income directly to the beneficiary or, if a minor is the beneficiary, to a custodial account for the benefit of the minor. In addition, the trust's terms must require that any distribution of assets above the trust’s income can be made only to the current income beneficiary. The QSST must provide that the current income beneficiary's interest terminates at the earlier of (a) the current beneficiary's death or (b) the termination of the trust. If the trust terminates during the current income beneficiary's life, the trust's assets must be distributed to the current income beneficiary; at death, the trust’s assets are distributed to the beneficiary’s estate.

Unlike QSSTs, ESBTs may have multiple beneficiaries. Further, trust income does not have to be distributed annually, and can be accumulated inside the trust or distributed among the multiple beneficiaries. However, with the flexibility an ESBT brings over a QSST, the tax treatment of an ESBT is not as simple as that of a QSST. An ESBT can be divided into two portions: an “S corporation portion” consisting of the S corporation stock, and a “non-S portion” consisting of all other non-S corporation stock property. One shortcoming of an ESBT is that its S corporation portion is subject to an almost “flat rate” of tax, that being the highest marginal rate of income tax on ordinary income (again, currently 37%) without the benefit of utilizing lower, marginal rates. Further, because the trust pays tax on all the S corporation income from the “S corporation portion”, no matter if income has been distributed to the beneficiaries or not, the Section 199A QBI deduction related to the “S corporation portion” of the trust will reduce the S corporation portion’s income and such deduction will stay with the trust and not be allocated to the beneficiaries.

To qualify for QSST or ESBT treatment, each trust needs to make elections. Although procedural, this step is important as making the election timely can save time, money and stress involved with making a late election if making a timely election is missed.

The issues involving use of a QSST or ESBT for future planning come up when a business owner is involved in estate planning. Although more refined estate plans contain provisions to modify a trust to allow for QSST or ESBT treatment, a business owner should review whether the QSST or ESBT structure makes sense for ownership after the business owner’s death to avoid issues where added costs and potential for losing S corporation status for an entity could come forward. Tax costs, accumulation of income and continuance of S corporation status need to be weighed to make a proper decision on how business ownership may be structured for the future.

The Correct Way to Use Your Quality of Earnings Report

Mon, 01 Jul 2019 19:27:55 GMT

Contributing Author: Cheryl Aschenbrener, CPA, is the Sikich Partner-in-Charge of the Private Equity Industry Group

Specific to the Milwaukee office, she leads as Director of Business Development and the Manufacturing & Distribution practice. She has over 20 years of experience specializing in assurance services and provides business advisory services in areas such as operations improvement, strategic planning and mergers and acquisitions. She is actively involved in structuring and due diligence work for portfolio company acquisitions for strategic buyers and private equity funds, and various value-added planning for private equity funds. Cheryl can be reached at: (P) (262) 754-9400 (EM) Cheryl.Aschenbrener@Sikich.com

LEARN WHY YOU MAY BE USING A QUALITY OF EARNINGS REPORT INCORRECTLY

A company’s financial history tells a story. One that unveils its day-to-day operations through numbers: what is annual revenue? What is the company’s profit? How does it perform compared to its competitors? However, like any story, a company’s financial history can be easily manipulated into different tales depending on who you hear it from.

Investing Answers finds that a Quality of Earnings (Q of E) Report tells an objective account: “A company that is genuinely doing well will show increases in sales and steady changes in expenses rather than rely on accounting changes to artificially pump things up. Regardless, the temptation to rely on accounting methods to improve earnings is widespread and is especially strong for companies that have cyclical sales and profits.”

A complex report to gather, the Q of E Report provides a detailed analysis of all significant components of a company’s revenue and expenses. Unlike an audit or review, the Q of E Report focuses on the ongoing normalized operations of the company; this insight helps assess the sustainability and accuracy of historical earnings and the achievability of future projections.

HOW TO USE A QUALITY OF EARNINGS REPORT

The goal of a Quality of Earnings Report is to present facts and analysis to help the end user gather conclusions. It is NOT an audit or review.

It features everything a buyer needs to know about a company to determine if it’s a worthy investment, and everything a seller needs to accurately (and honestly) present their company’s historical earnings and achievability of future projections. According to Seeking Alpha, a Q of E Report, “won’t tell you if the company is undervalued, if it’s experiencing growth, if its cash flow is strong or if it has too much debt. It will tell you whether you can trust the earnings presented by the company if the earnings are the result of a fundamental advantage that will persist over time or if they are temporary or possibly the result of manipulation.”

WHY GET A QUALITY OF EARNINGS REPORT?

Aside from the insight it gives you into a company’s earnings quality (stock, sales, steady changes in expenses), a Q of E Report can be utilized in many ways, including:

Merger & Acquisition Transactions
Sell-side and buy-side due diligence
Final purchase price negotiations
By a seller to highlight financial strengths and provide an independent and objective analysis of the company 5. By private equity firms

HOW TO USE A Q OF E REPORT TO YOUR ADVANTAGE

Companies may use a Q of E Report to compare its performance against another or determine whether it is making a sound investment. This report serves as a “professional financial analysis” that identifies any inaccuracies or trends which can help inform a business strategy moving forward. In addition to an audit or a review, a Q of E report that is assembled appropriately from a GAAP perspective and analytical perspective will tell you the most honest truth about a company.

For more information on Quality of Earnings or to set up a review, please contact our team.

It’s a Seller’s Market for Private Companies

Sat, 01 Jun 2019 19:44:18 GMT

Contributing Author: Scott M. Bushkie, Managing Partner, Founder, Cornerstone Business Services

Scott Bushkie is the founder and president of Cornerstone Business Services. With more than 20 years in the M&A industry, Scott is a recognized leader in the field, providing exit strategies, sell- and buy-side transitions, along with valuation services in the lower middle market Scott can be reached at: (P) 920.436.9890 (EM) SBushkie@Cornerstone-Business.com

“Lower middle market too hot to touch,” “M&A flies high,” “M&A activity speaks to confidence of CEOs.” These are the kind of headlines that have been dominating my news feeds lately. I’m sure you’ve seen something similar popping up in your own industry news sources.

It’s not an exaggeration. In my 20 years in the industry, this is one of, if not the best, markets I’ve seen. So why is this a seller’s market right now, particularly in the lower middle market?

Multiple factors are coming into play. First, there are substantially more buyers than quality sellers in the marketplace. It’s the old adage of supply and demand from Econ 101. Buyers are fighting over a few deals.

The number of private buyers, meaning individuals and private equity buyers, has grown over the last few years, jumping from 53.4 percent of buyers in 2014 to 64.5 percent in 2017, according to Bloomberg Law data. Beyond the increase in competition, private buyers are more likely to depend on the seller for transition support or long-term consulting. That means they have an extra incentive to ensure the seller feels like they got a fair deal.

Second, there are records amount of money out there. Private equity firms have raised more money in the last three years than any other time in history.

These firms live and die on their ability to provide investor returns, so in a way, they’ve created their own competitive problem. They’re all out on the hunt for good deals and good opportunities they can turn into investor profits.

On top of that, corporations are flush with cash. Non-financial companies’ liquid assets reached $2.4 trillion last year. Everyone horded cash through the recession, and now they want to put those funds to work.

And while the labor shortage is hampering organic growth plans, it’s helping stimulate M&A. In May, the unemployment rate fell to an 18-year low of 3.8 percent. New hires are harder to find, and those you can get come at a higher cost. That means companies are looking at acquisition as a way to grow.

Tying back to available capital, we still have strong, ongoing interest from the lending market. Banks are getting aggressive in their business lending strategies again.

Federal Reserve data shows that commercial and industrial loans increased 3.4% in April vs. the year-earlier level. While that may seem like modest growth, the Treasury Department spring risk assessment noted that strong competition for quality loans has led to evidence of eased underwriting.

And while interest rates are climbing, they remain at record lows. Money is still cheap. Back in the late 90s, the prime interest rate was at 8.5 percent and there were a lot of deals getting done. With prime today at 4.5 percent, we still have a lot of room for increases before we hit historic norms.

Meanwhile, business confidence remains high. According to the Business Roundtable’s June economic outlook survey, economic confidence among the nation’s top CEOs was at its third highest level in the index’s 16-year history. Economic confidence was at 111.1 points, remaining above the historic average of 81.2 for the sixth straight quarter.

High business confidence typically translates into increased investments and M&A activity as business leaders are confident in their ability to meet debt service and deliver return on investment targets.

With confidence and money at their peak, competition is hot for available deals. That’s driving more buyers down into the lower middle market.

Strategic buyers and private equity firms who once focused on middle market deals are now looking downstream. Whereas acquisition benchmarks once focused on EBITDA of $5 million and above, buyers are working harder and buying smaller companies.

In summary, the lower middle market is a seller’s market. High competition is making it harder for buyers to win deals that hit their investment benchmarks. But it’s easier for sellers to exit their business on their own terms. People are selling because the market is right, not because they have to sell.

Leveraging Technology | A Frequently Overlooked Opportunity to Increase Business Value

Wed, 01 May 2019 19:07:53 GMT

Contributing Author: Glen Hampton is the Founder and President of Equilibrium IT Solutions

Glen Hampton has spent his career not only creating the most innovative IT solutions for businesses and organizations, but also launching and managing a number of successful corporations. Glen is a member of the MBBI Board of Directors. Glen can be reached at: (P) 773.639.3680 (EM) GHampton@EQinc.com

Many of our MBBI members are not only in the business of increasing business value for their own respective businesses, but also for others. Determining and optimizing business value is a key driver of success for organizations in the process of a merger or acquisition.

A frequently overlooked consideration in determining value is the efficiency and optimization of Information Technology (IT).

For many non-technology professionals, IT can be mysterious, or perceived as a low level (non-strategic) aspect of the business. Furthermore, IT could be merely regarded as a cost center, and a lower priority in the valuation process.

Information Technology is vital to both helping grow top line business revenue and driving bottom line profitability. Technology streamlines operations and increases staff productivity across the organization, while minimizing risk to the business. IT is an essential tool to maximize EBITDA, and therefore able to increase an M&A multiple.

Maximizing the impact of IT requires expert planning. With the advent of cloud computing, information systems are growing more complex and managing IT infrastructure is harder. IT teams are busy reacting to system issues or user support requests, instead of focusing on the important tasks that build real business value. The amount of time, money and expertise required just to keep pace with new technology trends is getting out of control. As a consultancy, we often use the following questions to start a dialogue as a foundation for a solution. Business assessments should include exploring the current state in order to plan for an optimal future state:

Is the team spending more time putting out IT-related fires instead of working on important business initiatives?
Do users experience downtime and loss of productivity?
Is there data loss or dealing with security breaches and phishing attempts?
Is IT over budget…again?
Are lines of business (LOB e.g. ERP, CRM) information systems running optimally?
Is there a need to get more done in less time?
Is there a feeling the IT team is not right sized for the organization?
Does the internal IT team have the time or expertise to make merger, acquisition, or divestiture projects successful?

Beware of Cultural Issues in M&A Deals

Fri, 01 Mar 2019 21:07:27 GMT

Contributing Author: Tom Kastner is the president of GP Ventures

an M&A advisory firm focused on the tech and electronics sectors. With offices in Chicago and Tokyo, GP Ventures has a wide international network and provides a range of investment banking services. Tom is a member of the MBBI Board of Directors.

Company culture is hard to define and manage, but it is a critical factor in making an M&A deal successful. It is also often ignored or misunderstood during and after due diligence because culture is a “soft” science instead of a “hard” subject like finances, legal contracts, IP, or accounts receivable, among other things, which makes culture a difficult factor to deal with.

Indeed, culture is a “soft” subject that is difficult to define. Many business owners can look at a piece of equipment and understand if it is old, new, well-maintained, or ready for the scrap heap. Meanwhile, many business owners may say something like, “We treat employees like family,” but what does that really mean? Many families are dysfunctional. We all have a crazy uncle or aunt, and in-laws are usually weird.

Cultural factors often derail deals before they even get started. Usually, one or both parties say that there was not a good fit culturally. However, more than often, that is due to a personality clash between the owner and buyer, not due to culture. Deals sometimes die during due diligence because of cultural factors; however, that is fairly rare. Typically, culture is number 23 on the top-25 priority list, and the parties stopped paying attention after number 15.

Worse of all, culture can cause deals to fail after closing. For the buyer, that can be disastrous. For a seller, if any of the proceeds of the sale are deferred for after closing (and very few private deals are 100% cash), it’s financially important that the acquisition be successful. Some general examples of how cultural factors derail deals after closing include:

Buyers think they can professionalize companies that have a family culture, but a laid-back culture can be truly ingrained in the company
Owners think they have one culture, but the culture below top management may be different, and buyers do not get to talk with employees below top management usually, so they do not find out about the true culture of the company until it’s too late
Buyers put an executive in charge who has never run that type of business, does not care what the culture has been, and makes changes without any feedback from employees
Buyers ignore the company they acquired for months or years, causing all of the highly motivated employees to leave

Culture can be determined by a boss’s style or dictated from the top. It can be different from group to group. For example, the sales department is usually different from engineering, quality, production, shipping, etc.

Many buyers say they are not going to change anything, but then what’s the point of doing the deal if the buyer is not going to improve the business? If a buyer is looking to change the culture, they should be open about it with both management and employees. Some employees may leave, but the ones that stay will be more in-line with the company’s new focus. However, don’t blow out everything related to the acquired company’s culture, as there must be a few things that were working right.

Most smaller companies start with an entrepreneurial culture, but then become a place where employees are just trying to keep their jobs. Most public or PE-backed companies are more results-driven, which often clashes with a small, mom-and-pop family-business culture.

Culture does not equal benefits or compensation packages. A ping pong table and free cold brew coffee may be reflective of a company’s culture, but it is more than that. Culture is how a company reacts to change, how employees react to each other, how information is communicated, how knowledge is generated and shared, and how customers, vendors, and stakeholders are treated. Depending on which study you look at, there are between four and fifty types of company cultures. Add foreign cultures, different generations, and multiple locations to the mix, and the variations are endless.

When considering the sale or acquisition of a company, be sure to consider culture and identify the top four to five issues that are relative and important. For a seller, prepare in advance of a sale to identify the company’s culture, and work to fix anything that is fixable (you will be paying yourself through a higher valuation). It is better to take on cultural issues early in the process rather than try to fix things later that you did not know were broken.

New Year's Greeting

Mon, 07 Jan 2019 20:34:46 GMT

Contributing Author: Ray Horn is a Member with Meltzer, Purtill & Stelle LLC and President of MBBI

MBBI Members: First, and foremost, a very Happy New Year to each of you

Looking back on 2018, MBBI experienced a very successful year on many levels. MBBI hosted numerous engaging and diverse events throughout 2018, with highlights including a well-attended annual conference in January, our most successful golf outing ever, with over 160 golfing and over 180 for dinner as well as $16,000 donated to Child’s Voice, a very engaging presentation by Lieutenant General Kenneth Hunzeker, resulting in donations to the Wounded Warrior Project, Wisconsin’s 8th Annual Private Equity Connection with over 300 attendees, and an exhilarating (at least for many of the attendees) Bear’s/Packers game in December. Throughout 2018, the engagement of Board Members and members in general provided extraordinary support and assistance and propelled MBBI to an exciting year.

In looking ahead for 2019, I am very confident MBBI is poised to build upon our 2018 successes. I am very appreciative of our dedicated and talented Board of Directors and Committees for 2019 who are already working diligently for an eventful 2019. Right out of the gates, look for our Annual Conference – M&A Trends in the Beverage Industry, on January 24th. If you have not already registered, please do so as soon as you can so you do not miss this exciting event. In March, we are planning an event at The Hatchery, intended as a starting point for MBBI to work more closely with other associations. In 2019, we are also planning to engage more actively with our key sponsors and, of course, you should expect another fantastic golf outing and Private Equity Connection.

As is true with every organization, value to members is a direct product of member engagement in the organization. Building upon my November message, I want to strongly encourage all MBBI members to become more involved in whatever way possible. MBBI is continuing to build strong and empowered Committees and we need your ideas and input. Without question, there is a place, and a need, for you and your talents, with the added benefit of an excellent opportunity to network with some truly outstanding individuals. With that involvement, I am very confident that you will experience a return many times the value of your membership and sponsorship dollars.

Looking forward to seeing you at an upcoming event. All the best for a very happy and successful 2019.

Raymond J. Horn III MBBI President – 2019

Download

Uncovering Hidden Value With Insurance

Sat, 01 Dec 2018 16:55:01 GMT

Contributing Author: Joe Emerich Director Commercial Lines Division J. Krug

The J.Krug company is Risk Assurance Advisors and has been partnering with entrepreneurs, business owners, and executives to ensure they are identifying risk, and leveraging it as a rewarding part of their strategic, organizational, and financial plans. The company sees opportunities everywhere, by connecting a ROI within three key areas: Corporate Risk, Human Capital, and Executive Benefits. Joe is a member of the MBBI Board of Directors; Secretary; and serves on the Association Relations, Sponsorship, and Strategic Planning Committees. You can reach Joe at jemerich@jkrug.com or 847.818.7510.

Spotlighting two case studies the following addresses two underutilized methods where Buyers stand to differentiate from their peers and uncover hidden value from their insurance programs.

A Sophisticated Approach Offers Financial Reward for Buyers A best-in-class approach for any buyer would be partnering with a Risk Assurance Advisor early in due diligence to facilitate an independent underwriting process. Building your deal team with a sophisticated advisor can enhance due diligence without creating additional burden to the process. The results unearth risks typically undiscovered in traditional due diligence, while also empowering the buyer’s team to manage and negotiate around the identified risks and tailor a program in line with the buyers risk appetite. Ultimately the buyer receives a turnkey solution available to execute prior to closing, typically at a significantly reduced cost.

Case Study No. 1 A buyer looking to acquire a portfolio of retail operating companies engaged J.Krug Risk Assurance Advisors to assist in due-diligence

Normally a buyer’s team is looking for no more than a certification of the seller’s insurance program and the primary limits of the insurance policies they purchase. This low bar approach typically leaves many stones unturned, and potential value left on the table. We enabled the buyer’s intermediaries to request a proper set of documents and questions at the onset of the deal which enabled us to work independently during the due diligence process. This more thorough information request, working in concert with our underwriters, enabled us to complete a more comprehensive review of the risks the enterprise faced and design a solution in line with the seller’s risk appetite.

After review of the operations and current insurance program the following was discovered:

Fragmented and/or redundant risk transfer structure Insufficient Limits Self-insured risk exposures Above average market rates

By obtaining a complete set of information at early in the deal, it allowed our team to act diligently and turn around a benefit for the buyer to evaluate and potentially execute prior to closing. This benefit achieved the following: more efficient structure, expanded coverage, increased limits, overall spend reduction by 53%.

Conclusion | Case Study No. 1 In many instances Buyers come to the table looking to grow and protect their investment in a much different manner than the means used by the entrepreneurial seller. Similarly, the seller structures their risk transfer program in a way that would be in-congruent to the buyer’s investment philosophy. Yet, despite this fundamental opposition, it is common for the buyer to inherit the seller’s program with little change, if any. In our case study J.Krug Risk Assurance Advisors helped improve and protect the buyer’s potential return on investment. We successfully unearthed risks typically undiscovered in traditional due diligence and provided the buyer a turnkey solution available to execute prior to closing at a significantly reduced cost.

Now let’s transition and address:

A Midwest Trend: Underutilized Leverage An approach seen more popularly at costal Private Equity firms, yet unexercised in mid-west firms and Family Offices alike is to leverage the insurance spend across the portfolio. As acquisitions continue to expand the portfolio, it’s often an overlooked strategy to take advantage of the leverage available through aggregating the insurance spend across the portfolio with one or few carriers.

Case Study No. 2 Here we address a private equity firm with eight portfolio companies. They take an opportunistic approach and remain industry agnostic but prefer manufacturing and process oriented businesses with $1mm-$10mm EBITDA. They focus on buyouts or recapitalizations of entrepreneur or generational family-led business, or management co-investment opportunities. They take a long term hold position in those companies to help execute long-term growth strategies, while partnering with the current management team, allowing them to retain control. In discussion with one of the firm’s managing directors we addressed how each of their portfolio companies maintained autonomy with their insurance programs. This approach encourages a fragmented structure with each company being insured with multiple insurance companies across the various policy lines they purchased. Additionally, depending on the policy, each company had multiple renewal dates throughout the year. Further, each companies’ approach to managing their risk varied greatly and was not always in line with best practices. This philosophy leaves unrealized value waiting to be seized.

In aggregate the total insurance spend across the portfolio was approaching millions of dollars. The following were identified as strategic opportunities which would afford the firm significant leverage in the insurance marketplace.

Consolidating the spend across the portfolio with a select carrier(s)
Align all policy renewal dates
Unify each companies risk management philosophy

In Conclusion | Case Study No. 2 By partnering with an experienced Risk Assurance Advisor to help exercise this underutilized leverage a firm stands to achieve the following results:

Significantly reduced aggregate spend
Cost stabilization
Increased carrier competition
Promote more favorable claim outcomes
Reduced risk exposure
Alignment of risk management philosophies for increased ROI
Promote an additional ease of doing business for their operators

Boo! Scary Surprises Can Ruin Sale

Mon, 01 Oct 2018 16:05:25 GMT

Contributing Author: Scott Bushkie, CBI, M&AMI is the Founder and President of Cornerstone Business Services

With more than 20 years in the M&A industry, Scott is a recognized leader in the field, providing exit strategies, sell- and buy-side transitions, along with valuation services in the lower middle market. Scott is the founder and past chair of the Wisconsin chapter of Midwest Business Brokers & Intermediaries (MBBI) association and also the past chair of the International Business Broker Association (IBBA), the largest association for business brokers and M&A professionals worldwide. In 2014, Scott became the youngest person ever awarded the IBBA prestigious fellow designation. Scott can be reached at 920.436.9890 or sbushkie@cornerstone-business.com.

There’s a body of research out there on how surprises affect the brain. Apparently, a good surprise is better than something good you expected. The dopamine levels in your brain spike higher when you get a pleasant surprise versus something good you knew was coming. Surprises intensify our emotions, for better or worse. In the same way we get more delight over a positive surprise, we also feel greater anger and discontent when we’re surprised by something negative.

It’s a phenomenon I’ve experienced many times in my 20+ years of selling businesses. That’s why the early part of a sale, when the buyer is energized and excited, is the best time to reveal weaknesses in your business. As I like to say, “Go ugly early.” At this stage, buyers are more likely to shrug off flaws. They see your candor as a sign of credibility, and they have an easier time framing your current weakness as their future growth opportunity.

But when a buyer uncovers something negative during the due diligence process, their reaction is markedly different. They lose trust in the seller and suspicions heighten. They wonder, “What else don’t we know about?” I’ve seen individual buyers latch on to a sense of anger and betrayal after uncovering a skeleton in the seller’s closet. Invariably, they walk away from the deal. With corporate buyers and private equity groups, emotions are more tempered, but we’ll see a notable reduction in the purchase price.

As a seller, you have more leverage when you reveal issues early. At the initial consideration stage, buyers who have a real concern over a particular issue will self-select out of the process. Others will build your weakness into their overall valuation.

Those are both good things because it keeps control in your hands. You choose who to move forward with while you still have multiple buyers at the negotiating table.

So, when selling your business, it’s critically important to avoid surprises. But that means more than being up front about known issues. It means uncovering weaknesses that you yourself were unaware of.

Increasingly, and particularly for sellers expecting an eight-figure check, we’re recommending a pre-due diligence process. That means engaging outside professionals to get a quality of earnings report and a thorough inspection of your other business practices, such as HR, digital security, environmental, etc. You want to ensure your business adheres to all regulations and industry best practices.

We’re working with a large client right now who will probably spend upwards of $80,000 on pre-due diligence. I fully expect this preparation process will increase the value of their business by a couple of million dollars. Pre-due diligence is an investment to be sure. But when it comes to selling your business, surprises actually are much costlier.

“You only get one chance to sell your business. I take great pride in using my 20+ years of M&A experience to create positive lifechanging events for the business owners I serve. My goal is to give each client the coveted gift of both time and money.”

Beware of Customer Concentration Risk

Sat, 01 Sep 2018 20:26:42 GMT

Contributing Author: Tom Kastner is the president of GP Ventures

an M&A advisory services firm focused on the tech and electronics industries. Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC. a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures. Tom is a Member of the MBBI Board of Directors. You can reach Tom by phone at 847.431.3993 or by email at tomk@gp-ventures.com

Based on my experience, one of the biggest risks in M&A is customer concentration risk. As a business owner, it is hard to avoid: if a customer is giving you orders, you generally take them! The next thing you know, your customer has 90% of your sales, and now they own you. We see it a lot in a wide range of industries.

The definition of customer concentration changes from buyer to buyer, some get nervous at greater than 20%, some at 25%. Some worry if the top 3 or 5 customers total more than 50% of sales. Or, the largest customer may be under 10%, but 80% of customers are in one particular sector, which creates sector risk (for example, the oil and gas industry).

In many cases, we have found that most financial buyers, such as private equity firms, will not touch deals that have concentration risk. That eliminates one of the most active parts of the M&A market at the moment. Also, many banks will not finance deals with customer concentration risk, which forces the buyer to put in more cash, which reduces ROI and valuation/terms.

However, strategic buyers may be interested in a business with high customer concentration but may put more of the deal into deferred payments. The seller loses control of the customer relationship after closing, which is risky (the buyer may change policies, pricing, etc. and lose the customer). A buyer may also want the owner to stay after closing for a longer period.

With a larger acquirer, a 50% customer for you might be a 5% customer for them, which represents less risk and less customer due diligence. A strategic buyer may really want to get a foot in the door in your major customer and may think that they can sell a lot more to them. Also, the large customer may be happy that the seller is being acquired by a larger company, which reduces the customer’s supplier risk.

The longer the customer has done business with the company, the more likely something bad is going to happen. This is a difficult pill for many owners to swallow. Unfortunately, most distressed companies we see had one large customer that evaporated or stopped paying. It is a risk that many owners are comfortable with, but buyers are usually nervous about.

Why are buyers and banks nervous about customer concentration risk?

One phone call and the business can evaporate overnight
Customer may use the sale of company as an opportunity to look for other suppliers, or change policies
Customer may themselves get acquired, have other sources or policies
Customer may be nervous about putting so much business into one supplier
Customer may have a relationship with the owner or another key person, such as a sales person. Once the owner is out of the picture, the relationship may change (or a key employee may take that customer to a competitor).
Customer may become distressed, start paying slowly or go bankrupt
Customer may move business overseas

We’ve been involved in deals on both the buy-side and sell-side that had up to 95% concentration. Deals can be completed in these circumstances, however, usually both valuation and terms suffer.

It can be a difficult and time-consuming process, but here are some steps a business can take to mitigate customer concentration risk:

Put resources into developing other customers. Incentivize the sales team to grow new business. If internal resources are not available, engage outside reps/distributors
Monitor the diversification efforts, make sure resources are not constantly pulled in to satisfy the top customer
Find ways to tie up customer: co-develop products, have customer invest in your business
Maintain gross margin discipline: no-bid projects that have low profitability
Be sure that the customer has multiple contact points in your company and is not reliant on one relationship
Get long-term contracts: if a customer’s expansion requires you to invest in equipment and/or more employees, try to get something in return such as cancellation policies or make-or-take provisions.
Diversify into other products, services. For example, a US PCB shop could look into handling overseas boards or turnkey assemblies. For electronics manufacturers, expand into new services for other customers, or into new geographical areas.
From an early stage in the company, set a limit on the amount of business represented by any one customer, and set floors on gross margins.

Again, I know, not easy, and none of the above solutions are great. By working to diversify the customer base, a business owner can make the company less risky, more valuable, and easier to acquire.

Even Buyers Get Value from the Broker

Wed, 01 Aug 2018 20:32:43 GMT

Contributing Author: John Honney Managing Director for Bootstrap Capital

in addition to overall firm management, John is responsible for sourcing new investment opportunities and leading the firm’s efforts regarding transactional due diligence, structuring and negotiations. He was previously the Director of Northern Trust’s Business Owner Consulting practice. John is a Member of the MBBI Board of Directors. You can reach John by phone at 312.735.7534 or by email at JHonney@Bootstrap-Capital.com

Small business buyers, and even many sellers, love to complain about brokers and investment bankers. During a contentious deal, we have heard some epic rants and may have even indulged from time to time ourselves. But the truth is that these advisors bring significant value to the deal process that benefits both buyers and sellers.

How do Brokers Add Value?

Accelerator

Brokers add credibility to business owners’ processes which causes buyers to act with a sense of urgency and the deals to move more quickly. Similarly, a broker’s involvement signals to buyers that owners are committed to selling their companies and that they have reasonable valuation (and other) expectations. Through these signals and by formalizing the sale process, brokers reduce the number of broken deals and make the deal processes more efficient.

Auctioneer

Brokers can bring many potential buyers into a process and have the resources to keep the process moving with several of them at a time, especially early in a process prior to the execution of a letter of intent. While buyers would prefer not to have to compete for deals, the resulting increase in price may be a fair trade-off for the deal process efficiencies brokers provide.

Diplomat

It may be counterintuitive that an aggressive broker can keep the peace. By leading the negotiations, however, a broker can preserve the seller’s role as “good cop” and protect the relationship between the buyer and seller, who frequently must work together following deals in the lower middle market.

Detective

The smaller the deal the more likely a seller’s advisor will be aware of, and may have relationships with, more potential buyers than the business owners previously knew. But even in larger deals, it is rare that an M&A advisor cannot materially expand the list of serious buyer candidates. It is their job to understand the acquisition strategies of as many buyers as possible. The good ones do this well and help both buyers and sellers find each other.

Recommendations

Despite our endless search for the unshopped deal, we do recommend that all business owners who intend to sell their companies should retain an M&A advisor or a broker. We reluctantly admit that, while the sellers reap the most benefit from a broker’s involvement, we buyers also benefit. It is important, though, that business owners run a fulsome evaluation process so that they identify and ultimately retain the advisor who is most qualified and experienced in selling businesses similar to theirs. An unqualified or inexperienced broker can destroy as much value as a good one can create.

Bootstrap Capital

If you are aware of business owners who would like to sell their companies, please consider introducing them to Bootstrap Capital. We are keenly in tune with the issues business leaders face when they decide to sell their companies, as well as many other nuances of transacting in the lower middle market. Bootstrap Capital is a patient counterparty and can be a constructive partner in helping sellers through the sale process. We also understand the roles that brokers play in sale process and appreciate each and every deal they bring to our attention.

Remembering Harvey T. Lyon

Wed, 01 Aug 2018 18:40:26 GMT

Harvey T. Lyon was born on August 20, 1927 to Bertha and Irving (Jack) Lyon. He attended Exeter Prep School and received his Ph.D. in Classics from Harvard. He served in the Merchant Marines in World War II. He began his career as an academic and found his way into many businesses; taking two public. He was a passionate cyclist, for his 60th birthday he rode his bike from San Diego to Florida and rode many times through Europe with his nephew Mike. He did his last triathlon at 85. He loved music – especially jazz, particularly Louis Armstrong and Duke Ellington. He was a voracious reader of literature, poetry and nonfiction, and published one book: Keats’ Well-Read Urn. Harvey was generous with his time to many not for profit organizations including Gamaliel, having received their 2017 Champion of Justice award. He also served as his class secretary for Exeter for HLARyVEoYn T. decades. He is survived by his wife Lynn Lyon, his four children Andrea Lyon (Arnold Glass), Rachel Lyon (Chris Brown), Erica Lyon (Mark Franklin) and Jonathan Lyon (Irma Martinez-Lyon) and five grandchildren, Samantha and William Glass, Jeremy Freedberg, Brianna Franklin, and Caroline Altez, and one great grandson, Phillip Glass as well as his stepchildren Tom Morrow and Alyssa Anaya and step granddaughter Ajaya Anaya. He is also survived by his beloved brother Elliot Lyon, his wife Miriam and their children Mike Lyon and Julie Cheifetz. His intellect, humor and insights will be missed. Charitable contributions in lieu of flowers should be made to https://gamaliel.org/. MBBI would like to recognize Harvey for his many years as an active member, and offer sincere condolences to Harvey’s loved ones.

Campaign for Clarity HR 477, The Small Business Mergers, Acquisitions, & More

Sun, 01 Jul 2018 18:45:18 GMT

Email your US Representative NOW!

On March 31st, the following national and international professional associations jointly sent a a letter to to the leadership of the House Financial Services Committee, urging prompt passage of HR 477, The Small Business Mergers, Acquisitions, Sales & Brokerage Simplification Act of 2017.

Alliance of M&A Advisors (AM&AA) Business Intermediaries Education Foundation (BIEF) International Business Brokers Association (IBBA) M&A Source (MAS)

Click here to read the complete text of their letter.

HR 477 Co-Sponsors now include:

Representative Bill Huizenga (R MI-2), Representative Brian Higgins (D NY-26),
Representative Bill Posey (R FL-8), Representative David Joyce (R OH-14),
Representative Kevin Brady (R TX-8), Representative Dennis Ross (R FL-15),
Representative Frank Lucas (R OK-3), Representative David Young (R IA-3)

Your US Representative urgently needs to hear from YOU that this bill is important to you, and to buyers and sellers of privately held businesses in your state.

Passage of this small but important bill will codify the regulatory relief envisioned in the SEC M&A Broker No Action Letter, and will harmonize federal law with coming changes in state securities laws.

It is strongly supported by the North American Securities Administrators Association (NASAA) which formally adopted its Model State Rule on September 29, 2015. NASAA’s Model State Rule, which closely parallels the language in HR 477, and is now in the process of being adopted state by state.

NO NEED TO LOOK UP YOUR REPRESENTATIVE’S NAME, ADDRESS, AND SALUTATION. NO NEED TO COMPOSE YOUR OWN LETTER. JUST CLICK HERE, AND ENTER YOUR ZIP CODE, NAME AND ADDRESS!

Email your US Representative NOW!

In closing, I would be remiss not to ask you to consider a meaningful financial contribution to the Campaign for Clarity. In the 10+ years since its inception, the Campaign has incurred legal and lobbying expenses of ~$900,000 and raised ~$500,000 from voluntary contributions from individuals and firms like yours who recognize this is a rice bowl issue for our entire profession, as well as for the owners of privately held businesses whom we assist.

The not-for-profit, Business Intermediaries Education Foundation (BIEF) has taken the lead role in raising funds for this and other issues that concern the entire profession. While cash, check and credit card contributions are greatly appreciated, you may be more comfortable contributing something now, and pledging to contribute more in the future, perhaps tied to your next big closing.

Click here for a BIEF Contribution Card Click here for a BIEF Pledge Card Click here of a list of BIEF Leadership Contributors

As ever, please don’t hesitate to call/contact meif you have any questions, or if we can ever be of any further assistance on this matter.

Mike Ertel, BSEE, MSIA, CBI, M&AMI, CM&AA
Co-Chair, Campaign for Clarity
Managing Director, Broker
Transworld M&A Advisors
400 Carillon Parkway, Suite 110
Saint Petersburg, FL 33716
888.864.6610 O
813.299.7862 C
mertel@transworldma.com

Securities transactions conducted through StillPoint Capital LLC, Tampa, FL. Member FINRA/SIPC

Email your US Representative NOW!

Attachments: HR477 Text

Business Brokers of Florida Letter HR 477 March 14 2017

Campaign for Clarity Update (PDF Version)

HR 477 Brief Summary January 17 2017

HR 477 Letter March 3 2017

Number of Businesses in US by State

Partial List of Supporting Organizations July 28 2016