Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Corporate Finance’ Category

Another New Normal?

By Jim Gerberman | Mar 30, 2020

I have the privilege of being part of a group of business owners and leaders who meet routinely to help each other with issues and challenges related to pursuing their business and personal purpose. At a recent monthly meeting, one of our team presented each of our members with shirts that he had discovered during a trip to Hawaii. He shared the “Red Dirt Shirt” story as an example of a resilient business owner that had found success from a catastrophic event.

On September 11, 1992, the Hawaiian island of Kauai was devastated by Hurricane Iniki. According to their company website:  “Among the businesses affected was our small screen print shop. All of our white shirts waiting to be printed were drenched with water and stained with Red Dirt blown in from the storm. Instead of throwing out the shirts, we decided to dry them as they were. The T shirts, stained with the ultra iron rich Red Dirt soil and printed with Hawaiian based themes became a hit with locals and visitors alike.”  Today, the Red Dirt Shirts company has seven locations in Hawaii, Arizona and Utah and produces and sells more than 100,000 shirts per month.

Rather ironically, on the same day that our team received these shirts, an article in The New York Times reported that “China Identifies New Virus Causing Pneumonialike Illness”. Three days later, on 11 January, Chinese state media reported the first known death from an illness caused by this coronavirus.

A relevant question for each of us:  “Is there a Red Dirt Shirt story for you and your business in this time of unprecedented uncertainty?”  And:  “How might one identify and pursue such opportunities?”

I really like the suggestions recently shared by Mark Cuban:

  • Experiment with new ideas. Since you have holes in your schedule, it’s a great time to experiment with new lines of business and see what sticks. He also recommended brainstorming not only with your peers, but also with your competitors. They are all in the same boat. Try to figure out the best way to reignite the industry.
  • Really get to know your employees. Take the time to understand the individual circumstances of your employees and their families.
  • Clean up parts of the business you’ve been neglecting or haven’t had time for. Control what you can control. Rather than focusing on how bad it is, focus on how you can use this time to connect with your future customers.

A final thought from an article shared by a friend: “Crises teach us that CEOs aren’t expected to be as right as they are expected to be engaged”.

Stay safe. Stay healthy. Stay engaged.

This Week’s NEW NORMAL in M&A

By Dan Vermeire | Mar 24, 2020

What a difference a week or two can make! The world has gone to war against the Coronavirus, the DOW is down by a third, and most of the population is sheltering at home.

What does this mean to the M&A market? The answer is… it depends.

This crisis is unique. The financial crisis of 2008/09 nearly killed the banking industry. Banks were essentially closed – couldn’t or wouldn’t lend into deals. Most buyers were very shy and without the support of the banks, they had to work with limited capital. Naturally, times were very lean in M&A.

In this crisis, the banks are still open and interest rates are lower than ever. Most buyers are still flush with cash and want to put it to work. For the most part, the buy-side is still strong.

But for sellers and businesses in general, you need to look on a case-by-case basis. Some sectors are terrible. With the Saudi/Russia/US oil war, the O&G sector is not very attractive for buyers. Airlines, cruise lines, hotels and restaurants, and anything directly servicing them are very difficult targets now and for the foreseeable future. Many won’t survive.

However, some sectors are stronger because of the Coronavirus. IT Services is very strong, if their customer base isn’t tied to one of the sectors mentioned above. Healthcare continues to be strong. And most food companies are strong, especially ones in the “good for you” products. Many other sectors are strong too.

With some sectors being unattractive, the buyers’ universe of good targets has just gotten smaller. That means that companies in the strong sectors have become more interesting.

Keep in mind that many companies are scrambling to adjust to the new conditions and revamp their strategic plans. Many have travel restrictions and other logistical challenges. All to say that it is more difficult to engage and make progress on M&A deals. But, not impossible. With the right combination of buyer and seller, deals are continuing to move forward.

Welcome to the Land of OZ

By David DuWaldt | Oct 22, 2019

Now that I got your attention, no, this is not a mystical journey down the yellow brick road to Emerald City. This is about investments into Opportunity Zones (“OZs”). The Tax Cuts and Jobs Act of 2017 added Subchapter Z to the Internal Revenue Code, which provides certain tax benefits for making such investments. OZs are defined as economically distressed communities where new investments may be eligible for preferential tax treatment. The tax related incentive for making investments into OZs come in the form of a deferral of tax on recognized capital gains, including a partial reduction in such gains based on the holding period of the investment.

To illustrate the tax benefits, let’s assume the following fact pattern: On August 31, 2019, shares of stock of a C corporation were sold for $10 million by a stockholder and the tax basis which the stockholder had in the stock was $5 million. Within 180 days from the date of the stock sale, the stockholder can invest the gain portion ($5 million) into a Qualified Opportunity Fund (“QOF”), which is an entity that invests into OZs, and defer the payment of tax on the capital gains. In addition, if the investment in the QOF is held more than 5 years, the tax basis in the investment increases by 10% of the deferred gain ($500 thousand in this example) and, if the investment is held for more than 7 years, the tax basis in the investment increases by an additional 5% of the deferred gain ($250 thousand in this example). In 2026, the tax on the remaining deferred capital gain is reported on the tax return (i.e., tax on capital gain of $4.25 million in this example) even if the investment in the QOF is not sold. If the stockholder continues to stay in the investment, for at least 10 years in total, gain from a sale of the investment in the QOF is not taxable.

For any significant tax strategy, it is important to pay close attention to the details in order to avoid some disqualifying event or issue with the fact pattern. Here are some of the requirements connected with OZs:

  • The qualifying gain that is intended to be deferred must be capital gain, not ordinary income. The capital gain requirement does include Section 1231 gain.
  • The qualifying gain that is intended to be deferred cannot be the result of a sale to a related party.
  • The type of taxpayers that qualify for this tax treatment is quite broad to include not only individuals but also corporations, partnerships, trusts, estates, real estate investment trusts, and regulated investment companies.
  • As alluded to in the example above, starting from the date of sale that gives rise to the gain to be deferred, an investment into a QOF must be completed within 180 days.
  • The QOF must hold at least 90% of its assets in qualified opportunity zone business property. The type of property that meets this requirement includes both tangible personal property and real property.
  • As for business structure, the QOF can be a C corporation, an S corporation or a partnership.
  • If the QOF invests in a business operation, at least 50% of the gross receipts must be derived from the active conduct of a trade or business in OZs.
  • Such active businesses cannot include a golf course, a country club, a racetrack or similar facility used for gambling, a liquor store, a hot tub facility, a massage parlor, or a suntan facility.
  • The investment in the QOF must be sold before January 1, 2048 to receive the gain exclusion tax treatment.

Before making an investment into a QOF, it is wise to seek the advice of a competent tax professional.

Risk Assessment – Timing the Sale

By Dan Halvorson | Sep 27, 2019

In the first portion of my career I was trained as a grain/commodities trader.  It took years of experience to master the assessment of risk and the subsequent decision of timing – when to buy, sell, or do nothing while awaiting a better opportunity.  A multitude of factors were analyzed to enable these decisions – fundamentals such as supply & demand, macroeconomics, and current markets; technical analysis; as well as human perception/emotion as it related to the markets being traded.

A trader has three choices as to positions – long (owning at current market in anticipation of prices rising), even (neutral position holding dry powder for next market signal), or short (selling current market, betting on a price decline).  There is, of course, inherent risk in either a long or short position but in order to make money trading, one or the other must eventually be taken as being even over the long term has no profit potential.

Interestingly, in my experience, being short was often the most profitable position.  Why?  Because human nature isn’t comfortable selling something that it doesn’t own.  Human emotion favors the long position of ownership and anticipating/knowing/hoping that values go up.  Importantly, it also seeks to sell at the top of the market.  There is a fear of selling too soon and then seeing prices continue to rise.  This, unfortunately, often leads to selling too late – missing the top and trying to get out in a rapidly declining market. As I mentioned previously, it took years of trading experience to learn to minimize the effects of human nature/emotion on the timing of trading decisions; to cover a short before the bottom or sell out a long before the market topped. This was key to maximizing trading profitability. In the words of Bernard Baruch – “I made my money by selling too soon.”

The owners of a private company are obviously in an inherent long position through owning their company.  However, while they are nurturing the growth and profitability and enjoy running the company, I feel they are in effect – even.  From a transaction standpoint – they can do nothing. If they wish to grow through acquisition though, they are adding to their long position.

Once an exit is contemplated, whether it be 1, 2, or 5 years out, the owners’ position is definitively long; and the risk assessment and decision on timing of the sale/transaction become vitally important.  In other words, it’s time to have a trader mindset. Planning and preparing the company for maximum value is necessary, the same as upgrading and possibly staging a home for sale.  Assessing risk factors is also key – what is the impact on value/saleablility if the company loses a large customer?  Or incurs unforeseen product liability? – opioid pharmaceuticals and glyphosate (Roundup) are recent examples.  Or a high performing member of the management team leaves?  Can the recent growth curve be sustained?

It is difficult for owners to make the decision to sell when the company is doing very well.  Human nature is optimistic and there is a natural tendency to hold on for ‘just a few more years’ or conversely to ‘get back to where we were’ if there has been a recent dip in profitability.  Recognizing the potential impact of emotions on this decision is very important. A good M&A advisor will be invaluable in working with the owners to rationally assess risk and the timing of a sales transaction with the goal of selling their long into a strong, rising market – before the top.

Swiss SMEs Are Increasingly Sold Abroad – A Blessing or a Curse?

By Andrés Zweig | Sep 24, 2019


Currently there is a discussion going on in Switzerland, which shows the sellout of Swiss listed companies as very disadvantageous for Switzerland. Examples such as Kuoni, Clariant, Syngenta and others are cited. In this context it is criticized that after the takeover these companies typically do not become more competitive companies, no better employers and no higher Swiss taxpayers. It is therefore argued that this development is therefore detrimental and harmful to Switzerland. We are not competent to assess this development at the corporate level but have asked ourselves whether this sell-off will also take place in the SME environment in which we mainly operate and whether this is a “curse or blessing for Switzerland”.

Even though we cannot obtain comprehensive statistics, it seems that cross-border transactions in the SME sector on the sell side have been steadily increasing over the last 25 years and therefore more and more SMEs are being sold to foreigners. The statistics of our almost 30 years of M&A practice show that over 50% of sell mandates, especially succession arrangements, are now sold to foreigners.

Is this sell-out of SMEs abroad a “curse or blessing for Switzerland?

Reasons Why Foreign Investors Want to Buy Swiss SMEs

Switzerland continues to be one of the most competitive business and economic areas in the world. The arguments why foreigners continue to regard Switzerland as an attractive environment are well known:

• Stable political and economic conditions

• Liberal labor market

• Stable currency, hedge for foreign weakening currencies

• Attractive tax system

• High level of education and a strong education system

• Intensive R&D / Innovation activities

• Significant Life Science / ICT / Fintech, etc. hubs

• Multilingual marketplace

• Leading test market for Europe

All these are good reasons why an entrepreneurial investment in Switzerland makes sense for foreigners and is attractive. Some time ago, Switzerland also gained additional weight as an interesting “intermediary” and trading platform in connection with the customs discussions.

Reasons Why Swiss Investors Want to Buy Swiss SMEs

Of course, there are also good reasons why domestic transactions take place here, but they seem to have less a strategic than an operational background:

• Acquisition of market shares

• Market adjustments/shakeouts

• Cost optimization by exploiting synergies

• Purchase of innovations / new business models (e.g. digitization)

• Safeguarding jobs in Switzerland

For strategic reasons, within the framework of growth strategies or the optimization of the existing value chain, M&A strategies tend to lead Swiss SMEs into foreign markets instead of the home market.

For Swiss SMEs, the attractive arguments for foreigners are also a competitive advantage, which they prefer to exploit abroad.


It is not surprising that the number of cross-border transactions among SMEs is increasing. On the one hand, Swiss SMEs tend to seek target companies abroad within the framework of growth and M&A strategies, and on the other hand, foreigners try to exploit the advantages of Switzerland described above through acquisitions.

If Swiss SMEs are up for sale, offers are typically obtained from Swiss and foreign buyers. If we receive Swiss offers at all, we notice that the foreign offers are often more attractive and practically always ensure that the existing locations, jobs and infrastructures are maintained in the long term.

We expect this trend to continue. In our view, this will not be to the detriment of Switzerland.

Since these transactions by these foreigners are very deliberate and often of a strategic nature, we assume that the investments in Switzerland will be sustainable for the benefit of SMEs, employees and ultimately the tax authorities. The added value remains in the country even if the property is possibly held abroad – from this point of view this is a blessing.

Nobody, as in the aforementioned corporate discussion, can prove that these Swiss SMEs held by foreigners had a more prosperous future under Swiss ownership than under foreign ownership.

The Basics of A Partial Company Sale

By David Hulett | Aug 15, 2019

Business owners often think about exit as an all-or-nothing event. Yet in many situations selling only some of your business can achieve many of your exit goals. Here’s how.

The Basics of A Partial Company Sale

Selling less than 100% of your company is called a private recapitalization, or recap for short. Private recaps occur where the buyer acquires anywhere from 10% to 90% of the target company. A critical question is whether the buyer acquires a controlling interest in the company, meaning more than 50% of the voting stock. Whether or not you sell more than 50% largely impacts who is in charge of the day-to-day operations of the company.

Potential buyers include private equity groups (PEGs), family offices, and other companies.

Advantages of Selling a Piece of Your Company

Business owners are often surprised by the powerful advantages that can come with a partial sale of their company.

One: Get Cash and Reduce Personal Risk

The number one benefit of a partial sale is it offers an opportunity to convert some of your ownership into cash and reduce risk. We are finding that many entrepreneurs want to de-risk their lives but they are not ready to quit altogether.

A partial sale can allow for an entrepreneur to “take chips off the table” and still run the company.

Two: Keep a Portion of the Company for a Later Sale

The second most attractive benefit of a private recap is you maintain some ownership in the company to sell the rest of your ownership at a later date, typically to your new partner.

Three: Stay Involved with the Business…Or Not

If you want to remain fully involved in the business’s leadership and management, you potentially can. If you wish to scale back your participation to a purely strategic or advisory role, such as serving on the board of directors that too is commonly done. This benefit allows you to pursue any degree of involvement—as long as your buyer agrees with and supports the plan. The most common scenario is selling a portion of the company but remaining involved with day-to-day leadership.

Four: Secure Different Outcomes for Different Owners

If you have business partners, a private recap can allow different owners to pursue and achieve separate and incompatible individual goals. A partial sale can accommodate these differing goals, whereas a full company sale could not.

Five: Create an Equity Path for Top Employees

Another advantage of the partial sale is the ability to create an equity sharing plan for top employees who currently lack ownership. Within a partial company sale, an equity pool can be created to incentivize top employees.

Six: Gain a Powerful Partner

With any partial sale, a new business partner enters the picture. This new partner can revolutionize your company’s future: providing capital for expansion or acquisitions, opening doors to new markets, introducing cutting-edge technology, or injecting industry-leading leadership and experience. More modest benefits can include operating cost reductions and efficiency gains if the partner brings larger economies of scale or greater market credentials.

Conclusion and Next Steps

Private recaps are not for every owner or every company. A partial sale may receive a lower valuation multiple than might be achieved with a full sale, especially if the buyer is only acquiring a minority position. However, this potential disadvantage can be offset with the opportunity to pocket some liquidity now and retain ownership for the full sale at a later date.

Next time you find yourself asking, “Should I sell my company?” consider rephrasing that question to read “How much of my company should I sell?” CFA can help you answer that question.

We Have No Debt

By Dan Vermeire | Apr 30, 2019

We Have No Debt. I hear this from some business owners, early in our first meeting.

It seems “Debt” has a bad reputation. As a family-owned business, “no debt” may sound like a stronger company. But, things are quite different when you consider a growth opportunity, or a transaction for the business. The fact is, debt should not be feared – it is fundamental in financial engineering – because it greatly increases the rate of return on the equity investments. Here’s what you should know about debt.

Different Types of Capital– a business should layer different types of investment in the capital stack, some layers are debt and some are equity. Why? Because each type has a different level of risk vs. return. So, to be most efficient, the company can be structured with the cheapest capital first, then the more expensive capital is used later. Of course, the company can only handle so much debt, and that is easily analyzed in the cash flow models. Here are the basic layers:

  • Senior debt, or “bank debt” is typically the cheapest, today around 5%. It is secured against assets and may involve a personal guarantee. It amortizes monthly, that is, you pay against the principal and interest monthly.
  • Sub-debt, or Mezzanine debt, is more flexible, but more expensive, today around 10-12% interest. Some Mezz debt may include warrants on stock as a sweetener. This type of debt is subordinate to any senior debt and is generally not secured by assets. The good news is that it is not paid monthly, and often, the interest is just rolled into the note – that means there is little or no strain on the monthly cash flow. This type of debt behaves very much like an equity investment in that it is paid when the business has the cash, typically when the business is bigger, in a future sale. The Mezz investor’s return is capped at the interest rate, and may be less than the equity return. But, the Mezz investor will get paid before any equity gets paid.
  • Preferred stock may be used and it behaves very much like Mezz debt. Typically there is an interest payment, which may be rolled into the stock, and it may have a feature to convert to common stock. Even though it has “stock” in its name, it behaves like debt.
  • Equity – last in the capital stack is equity, which is cash invested by the buyer. Today, most buyers expect 15-20% return on their equity investment, which is down significantly from prior years, because of the competitive nature of the M&A market. As you would expect, the equity does not have any returns, unless the company has paid off the debt and can declare a dividend, or in the case of a sale of the business. Equity can have an unlimited return – if the company sells for greater value, the equity holders reap the benefits. However, the equity investment is not secured and could be entirely at risk.

As you can see from the list above, only the senior debt is a burden to the company’s monthly cash flow. The rest can be viewed as different forms of “partner-investors” in the business. They win, to different degrees, as the business does well. And they can lose, to different degrees, if the business does poorly. Industry reports show that the average level of debt for transactions during 2018, on companies of $20M to $50M in valuation, was 3.9 times EBITDA. Most valuations are 6-8 times EBITDA, so you can see that some form of debt generally accounts for more than half of the capital stack.

The return for the different layers of capital can be illustrated this way. Think about a company that is valued at $30M, and is capitalized in 3 equal parts, $10M each of senior debt at 5%, Mezz debt at 10% and the rest in equity. Five years in the future, the business has paid the senior debt and sells for $36M, a modest 20% increase in value.
But how is that 20% return divided between each layer, per year? It would be: Senior 5%, Mezz 10%, and Equity about 40%. Which would you prefer?

Seller’s Options – in a business transaction, the seller also can participate in the new capital stack. In many deals, if the seller is not quite sure what he’ll do with all the proceeds, then he may consider the option to partially finance the transaction with a seller note, very similar to being a provider of Mezz debt. This may provide better returns than other investment options he is considering, post transaction.

Perhaps more importantly, the seller may choose to “rollover” some equity into the new capital stack. The rollover investment is done at the leveraged cost of equity, meaning after the debt is applied. In this case, the new debt is your friend, because you buy equity in the company at a discounted rate. For example, if the value of the company is $50M, that is what you would receive. If the buyers use $30M leverage, in a combination of senior and Mezz debt, then the new equity value is $20M. Then, you may choose to buy back in 30% of the equity, which would cost $6M at the leveraged rate, so your net proceeds would be $44M. Without any debt in the transaction, then 30% would cost $15M, and your net proceeds would be $35M, a difference of $9M to you.

In summary – don’t fear the name “debt”. Not all debt instruments are the same, and most don’t affect the monthly cash flow. How do you avoid any risk? By understanding the different types of debt and using them wisely, especially with a conservative cash flow model. Any good investment banker can work through the details with you.

Still Not Licensed to Deal

By Robert St. Germain | Aug 09, 2018

Several years ago this author penned an article titled “Licensed to Deal”, which discussed the federal and state requirements for intermediaries (i.e. business brokers, M&A advisors, investment bankers) to legally facilitate business sale/purchase transactions having a security (i.e. stock, promissory note, earn-out agreement) in their deal structures.

That article described in detail what licenses and registrations were required by intermediaries party to such transactions; why many intermediaries refuse to become licensed and registered (i.e. to avoid the costs to set up and maintain a registered broker-dealer in full compliance with the various applicable federal and state regulations); and the potential onerous consequences of utilizing the services of an unlicensed and unregistered intermediary (i.e. under the Sarbanes-Oxley Act, an aggrieved party to an illegal securities transaction exercising their right of rescission up to five years post-close and also initiating legal proceedings against the parties to the transaction).

Since the publication of the original article, many intermediaries continue to practice without the required licenses and registrations while putting their clients at risk as described above. However, they do so more boldly today claiming they are now protected by the M&A Brokers No Action Letter published by the SEC staff on Jan. 31, 2014.

At first glance, it might appear that those unlicensed and unregistered intermediaries are now finally operating within the law and, in so doing, finally protecting the interests of their clients. Closer examination, however, tells a very different story.

First, no action letters represent the opinion of the staff of the SEC and are not rules promulgated by the SEC Commission itself. Therefore, these letters have absolutely no force of law.
Second, because SEC no action letters have no force of law, they can be and have been ignored by the courts.

The D.C. Circuit first broke ground by differentiating between SEC no action letters and actual SEC rulemaking in its Roosevelt v. E.I. du Pont de Nemours & Co. decision wherein it stated that the principle of judicial deference as described in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. did not apply to SEC no action letters.

That ground was further plowed by the Second Circuit, which found in both Amalgamated Clothing & Textile Workers Union v. SEC and NYCERS v. SEC that judicial deference for SEC no action letters was not warranted.

Examples of where SEC no action letters were actually ignored by the courts include Amalgamated Clothing & Textile Workers Union v. Wal-Mart Stores Inc. and NYCERS v. American Brands, Inc. both by the Federal District Court for the Southern District of New York, and Trinity Wall Street v. Wal-Mart Stores, Inc. by the Federal District Court for the District of Delaware.

Given the above, the requirement under both federal and state securities laws that anyone who “effects the transaction of securities” be a Registered Representative working in the context of a Registered Broker-Dealer and be regulated by an organization such as the Financial Industry Regulatory Authority (FINRA) continues to apply. Intermediaries not meeting those requirements are still not licensed to deal.

Business buyers and sellers would be wise to only engage the services of an intermediary who is also a Registered Representative (i.e. is sponsored by a Registered Broker-Dealer); has their required securities licenses (i.e. Series 79 plus the Series 63 that is separately required for interstate transactions); and, further, is registered in the state where their practice is located, the state where the seller is located, if different, and the state where the buyer is located, if different again. Proof of licensures and registrations is available at and at your state’s division of securities. Seek legal counsel first to ensure that you are selecting a legally qualified intermediary.

Tax Changes for M&A

By George Walden | May 30, 2018

It is that time of year, tax season is upon us and certainly on our minds. So how will the new 2017 Tax Reform Act affect M and A transactions?

I realize that taxes are not a subject that stimulates most people, but I’m certainly excited about what these changes mean for mergers and acquisitions. As you might guess, the most important change was the permanent reduction of the corporate tax rate from a graduated top rate of 35% to a flat, fixed rate of 21%. Additionally, the Alternative Minimum Tax was repealed.

These changes let companies control more of their earnings allowing them to potentially provide higher dividends to their shareholders, reinvest in capital assets and, of course, have available more money to purchase other companies.

Another important feature of the 27 Tax Reform Act is in many instances it diminishes the impact of double taxation on earnings and gains to shareholders. The act also extends the bonus depreciation rule to allow tax payers to deduct as much as 100% of the cost of most tangible assets such as machinery and equipment. This would allow the company to purchase new or used assets and fast track the write off. This does not apply to real estate and a couple of other asset categories.

For purchasers of companies, this means increased accelerated deductions. For sellers, exposure to increased depreciation recapture. The thought process is this type of deduction should cause an increase of asset transactions versus stock transaction for the buying market.


By George Walden | Apr 26, 2018

I’m going to talk about ESOP’s as a potential structure to be used by a business owner trying to sell his business. Why would you look at an ESOP, otherwise known as an employee stock ownership plan? Two major reasons.

One, legacy for your employees. Strategic and financial buyers often look to move businesses to make them more synergistic with other investments they have. If you form an ESOP, the company stays there, all those jobs stay there. All those people that helped you build that business, stayed there. Also there’s some empirical evidence that shows that employee owned companies do better and there’s fewer layoffs during recessions.

On a tax basis, the ESOP is a tax exempt entity. Therefore, no taxes are paid on the earnings that are generated through the company. This gives the company a significant advantage in terms of its cost of capital as it builds, as it builds its business going forward. Sellers can take advantage of certain other tax opportunities, such as a 1042 Exchange. So, from a ownership perspective, is something to really be considered. Particularly, if the business is a professional service business or has a specific contract with some vendor that they have to keep.