Exit and Growth Strategies for Middle Market Businesses

Archive for the ‘Corporate Finance’ Category

A Tax Issue Associated with PPP Loan Forgiveness

By David DuWaldt | Dec 01, 2020

In response to the U.S. economic challenges associated with the coronavirus pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted on March 27, 2020. Section 1102 of the CARES Act established the Paycheck Protection Program (PPP) whereby federal guaranteed loans were made to businesses with not more than 500 employees, as well as nonprofit organizations, veterans organizations, tribal concerns, and self-employed individuals.

Initially, the covered period of the PPP loan was for eight weeks beginning on the day the loan was funded; however, the covered period was later expanded to twenty-four weeks. Qualified expenditures made during the covered period can lead to loan forgiveness after the expiration of the covered period. Section 1106(i) of the CARES Act specifically provides that any forgiveness of the loan is excluded from gross income for income tax reporting. The CARES Act did not include any language with respect to the tax treatment of expenses paid from the PPP loan proceeds.

On April 30, the Internal Revenue Service released Notice 2020-32. Basically, the notice provides that, to the extent of the loan forgiveness, expenses paid from proceeds of the PPP loan are not deductible. The reason why the pertinent deductions are not allowed is due to the application of IRC Section 265, which essentially states that expenses allocable to tax-exempt income are not deductible.

The House of Representatives passed the Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) on May 15; however, the bill was not well received by the Senate. Included in the HEROES Act was language that allowed expenses paid from the proceeds of a PPP loan to be deducted even if the loan is forgiven. It is worth noting that in early May, the Senate introduced the Small Business Expense Protection Act of 2020, which includes a provision that expenses paid from proceeds of a PPP loan can be deducted even with loan forgiveness. That bill was not approved by the Senate. Based on the foregoing proposed legislation, it appears that Congress intended to allow the expenses paid from proceeds of forgiven loans to be deductible.

In early October, a revised version of the HEROES Act was passed by the House of Representatives, which again included the allowance of deductions paid from PPP loan proceeds even with loan forgiveness. On November 18, the Internal Revenue Service issued Revenue Ruling 2020-27 and then supplemented it with Revenue Procedure 2020-51. Again, the position of the IRS is that the pertinent expenses, to the extent of loan forgiveness, are not deductible.

Here is an illustration which highlights the tax reporting issue: Assume there is a C corporation taxpayer that has a tax year which ends on August 31. The corporation taxpayer took out the PPP loan in late June and the covered period based on 24 weeks has not expired at the end of August. The loan is still outstanding on August 31 and the corporation taxpayer has not yet filed the loan forgiveness application. The Federal income tax return is due by December 15. If the return is going to be filed timely by December 15, should the expenses paid with loan proceeds be deducted? This is a situation where it is probably best to extend the return and wait to see if a portion or the entire loan amount will be forgiven. However, enough tax needs to be paid with the extension to avoid an underpayment penalty plus interest when the return is filed. It seems prudent for the extension payment to be determined based on the assumption that the pertinent expenses will not be deductible due to anticipated PPP loan forgiveness.

There will probably be a substantial number of business-related taxpayers, with a calendar tax year, filing extensions in 2021 to see if legislation passes and clears up this tax deduction issue associated with PPP loan forgiveness.

First Half 2020 M&A Surprisingly Active

By Roy Graham | Aug 04, 2020

While there were significant regional differences, first half 2020 M&A transaction numbers are in and they are better than many would expect. Refinitiv™ reports there were 20,728 deals under US$500 million closed globally and 5,152 deals in that size range closed in the US. As the chart shows, the second quarter was lower than the first but also not by as much as many might have expected.

Refinitiv™ reported that worldwide M&A total value declined by 15% compared to the first half of 2019. In the US, the decline was only 6% in both total value and number of transactions. Other regions were hit harder with Europe off 26% in number of transactions and 31% in total value.

With so much COVID related disruption in the economy, how do we explain why activity has not declined more? Firstly, except for the energy sector, the COVID impact did not hit most sectors until the tail of Q1. Additionally, Q2 was not down to the extent many would have expected with 2,514 US closed deals reported in Q2 vs 2,638 reported in Q1.

Technology has proven to be highly resistant to COVID’s impact and was barely down at -3% compared to a year ago. The technology sector represented 17% of all deals to lead all sectors while real estate related M&A totaled 15% of first half deals. There are also some deals that are being driven by necessity though US government assistance programs have clearly helped to limit the number in the US, at least for now.

While some companies are electing to defer their plans to go to market, others are moving forward. Companies that are going to market are generally finding many interested but cautious buyers as buyer demand remains keen while the number of sellers has diminished. In fact, PwC reported a surge in enterprise multiples during Q2 as investors rushed to invest in technology, media and telecom companies.

As government assistance programs taper off, we expect to see more interest in non-control equity and debt investments from private equity sources. Many private equity sources are actively promoting their existing non-control interests and others are rolling out new programs in anticipation of companies that need to strengthen their balance sheets to address bank concerns.

For more information contact your local Corporate Finance Associates investment banker. We will be pleased to discuss your questions without obligation.

Scenario Planning

By Andrew Baird | Jun 03, 2020

In January 2019, how many of us could have envisaged the type of difficulties which have hit our businesses in the last few months? Scenario planning helps you to review what you can control and what you cannot – Dick Cheney’s famous “Unknown unknowns”. It helps you to test and challenge the assumptions you make about the future shape of your business – even more important when there is a global pandemic!

A starting point is to try to define what you don’t know about the future and consider which issues would have the biggest impact on your business.

Go Back To The Basics

REVENUE – Customer numbers, what might affect supply, can you satisfy likely demand?
COSTS – How to price changes, impact of changes to credit terms.

Don’t make it too complicated – too many uncertainties will drive you mad!

Have Current Information

CASH FLOW – Accurate forecasts -both weekly and monthly are an essential tool.
SENSITIVITY ANALYSIS – Changing the key drivers in your cash flow forecast will show how the shape of your business could change.

Develop Your Scenarios

Don’t just plan for the worst – it’s good to know exactly how things could be if your assumptions are sound.
Is that “Ideal World” a serious possibility in the current environment?
If not – how might Covid-19 affect your assumptions? In that case, what do you need to do to achieve an acceptable outcome?

Best Case

What does that “Ideal World” look like? What needs to change and are those changes within your control (e.g. how to control customer numbers!)
Use your cash flow as a basis to change policies and procedures to support the “Ideal World”.
Never forget – it’s still going to be an unpredictable world, so conserve cash to be able to deal with a sudden reversal.

Medium Case

Planning what’s between the “Ideal World” and your worst case (so arguably what’s most likely to happen!)
If your business looks unlikely to survive a medium case, now is probably the time to seek some restructuring advice (and perhaps reconsider the components of your medium case scenario!)

Reconsider the basics – for example:

If you only have 75% capacity, can you break even?
Can you introduce other cost savings?
If not, then…

Worst Case

Less likely if you can recognise early, but you know what it looks like!
Where would be the point of no return? This probably depends on cash reserves, creditor and banking relationships, asset position, etc.
A wind-down reserves calculation is invaluable – what is the minimum cash required to pay all the businesses liabilities and avoid needing an expensive insolvency process.
If you have any concerns, insolvency advice is best taken early, before insolvency seems inevitable.

Scenario Planning is a valuable means of assessing your business and could be considered as important a part of regular review as examining the P&L and Balance Sheet.


By Kregg Kiel | May 04, 2020

Everyone wants an ending, a date on the calendar when all of this is “officially behind us”. However, that seems unlikely to occur in the foreseeable future. This crisis will resolve itself in fits and starts. What we will see is an M&A landscape that may be permanently changed. We’ll focus here on what will happen as the economy begins to re-awaken and what happens if we hit headwinds.

PE firms interested in acquisitions are already moving beyond the triage stage internally. At the outset of this crisis, firms were focused on the fiscal health of their portfolio companies, not acquisitions. That will change.

The internal laser focus on existing portfolio companies will lessen as PE firms stabilize the salvageable investments and cull those that are not. This will allow them to again turn their attention to deploying capital into acquisition targets – many of which have become more attractive due to the repricing of the market. Opportunities are likely to abound.

Some business owners who were considering selling their companies before COVID may hold off on exiting in order to avoid selling at a severe discount. Instead, they will focus on rethinking how they do business in a post-COVID world and implement those plans in hopes of increasing enterprise value. Alternatively, some sellers may choose to accelerate their plans to exit – especially those at risk in the Baby Boomer generation.

Debt is a key ingredient in most private equity transactions. Without lenders’ debt commitments, most deals have no chance of reaching the finish line. Banks are currently digging out from their government assistance workload which has demanded most of their attention over the past month. While this focus may change as we move into May, it is very unlikely that it will be business as usual anytime soon. Lenders are now very tentative given their inability to access economic risk and/or assign a value to potential transactions. They will also need to devote additional resources to distressed clients who begin to struggle with cash flow issues.

Public acquirers who can rely less on debt and more upon their own stock as currency for acquisitions may benefit the most during a debt tightening. Watch for public companies to become more aggressive in the post-COVID environment.

For all M&A participants, business development will still be essential in this new environment, however, it will be quite different. The basic ability to have face-to-face meetings has changed for the foreseeable future. Even if permitted, would you go out to lunch with a prospect next week? Even, if you are comfortable with face-to-face meetings, it makes good business sense to extend the courtesy of asking invitees if they are. There will be a varying level of discomfort with having face-to-face interactions for quite some time — until we have a vaccine.

The key to dealing with this new reality is to learn to excel in the virtual world. As much as we’ve learned to rely on virtual online meetings in the post-COVID world, most of those interactions have been with co-workers, business associations and other groups we are not actually selling to or negotiating with. Being able to successfully log into a meeting with sound and video actually working is no longer enough. The investment banking industry will need to grow comfortable with a slew of new practices. Getting transactions to closing (which very few have done during this crisis) will prove to be much more difficult. The need to read body language, make eye contact, and observe the myriad other non-verbal cues associated with interpersonal communications did not go away with the onset of the pandemic. They’ve merely been swept aside while we attempt to cope with the rapid developments that have occurred over the past two months. Be innovative in your use of remote technology. Having the ability to successfully leverage virtual tools for initial business development through the close of a deal is going to be what separates those who are successful from those who aren’t.

Many countries are beginning to cautiously roll back their stay at home rules. What happens if COVID spikes again just as the economy begins to regain its footing? This scenario has to be anticipated and planned for as a real possibility. Imagine that you had known in advance that the current crisis was going to happen. Now, assume a scenario where this “re-opening” of the economy fails at least once and think about what you would have done to prepare for it — because this time you can. Give serious thought to what will happen to the economy and how it will affect the climate for M&A transactions as well as your clients’ businesses. And, again, learn to excel in the virtual world. Developing a plan to address a potential economic relapse before it happens could be the difference between managing your way through another downturn and throwing in the towel. Be safe.

CFA is capable of providing assistance along the entire spectrum of M&A advisory services. We have over 60 managing directors in 30 offices (in the US and abroad) with broad expertise in a number of industry verticals. For more information, contact your closest CFA office.

Capital Markets and M&A | Under COVID-19

By Joe Sands | Apr 17, 2020


The unprecedented shut down of the US economy has jolted all industries and left only a few benefiting from the crisis such as select healthcare, food manufacturing, technology, ecommerce, grocery and mass drug stores.  The capital markets have been highly difficult from a logistical point of view with the ‘stay at home orders’ and firms having to restructure operations to serve clients and market participants unable to meet in person or visit the businesses.

The lack of transparency, liquidity, precedent or even the ability to predict when and in what form the economy will reopen makes the ability to value businesses and securities difficult to say the least, never mind assessing risk in a business or a transaction.  We are mindful that as fast as this crisis arose, it’s becoming more conceivable that a substantial, but not full reversal may occur in the near term over a couple of quarters. We are hopeful.


As rapid as the crisis hit, the US fiscal and monetary policy response has been equally rapid and unbelievably robust.  In addition to the government response, the responses from the medical & scientific communities and the private sector has been like nothing ever seen before.  The US government and the Federal Reserve provided in excess of $4 trillion of liquidity within weeks and before much of the damage, not months after the damage as in previous crises.  The public equity markets fell by an astounding 34% from their peak in only five weeks and bounced back in three weeks as a result of the fiscal and monetary policies and some encouraging signs of the virus subsiding or not even coming close to the disastrous scenarios previously forecast.


On a case by case basis, each client engagement is being evaluated based on the stage of the engagement, specific business issues, and industry dynamics.  As always, we are focusing on our clients’ best interests and focusing on presenting options and the benefits and risks of each option.  Our goal remains to maximize value, deal terms and the probability of closing in each of our engagements.  For most sell-side M&A and growth capital raise engagements, the general options being reviewed are (1) pause deal marketing until the capital markets settle down, (2) expand the depth of due diligence, (3) extend process timeline to allow for additional due diligence or expanding the marketing outreach, and (4) modify deal terms to reallocate risk sharing.  For buy-side M&A, additional efforts are implemented to the extent that more favorable valuations and targets may be available.  Experience and expertise are what is most important for clients to make informed decisions in these challenging times and that is our mission. Read more »

CFA | COVID-19 Financial Impact, Assessment and Strategy Tool

By Peter Moore | Apr 16, 2020

The Crisis in Business Context

While the health crisis is the threat the Coronavirus holds over each of us, the business consequences are financial and often felt before anyone’s health has been compromised by the virus. Our economy relies upon cash flowing from one person and organization to another, and another, and another and so on. This “cash flow” circulation throughout our entire economy, when  measured is the “velocity” of money. The faster it flows the more robust our economy becomes. Most of our business economic arrangements depend on the basic trust of each party to a transaction, no matter how small the sale or how large the contract. This trust is shaken right now because of the uncertainty of our businesses and our livelihoods. The Federal Government’s job with stimulus funding is an attempt to restore the trust that helps to keep our economy going. Let’s all try and do our part and keep the cash flow moving.   See: What Is Money Velocity and Why Does It Matter?

The worksheets on the following two pages provide a way of looking at your company’s situation through the lens of your financial statements – both balance sheet (your financial condition at a point in time) and your income statement (your financial performance over a period of time). Looking closely at each line item of your own unique financial statements provides an orderly way of considering what and where you may be able to positively impact your own financial circumstances. Can you reduce liability, collect on assets owed to you, reduce an expense, and eliminate some overhead? All of these you’ve probably already looked at somewhat, but as circumstances continue to change it might be helpful to look even more carefully by visiting this worksheet for your business and your home situation too. Read more »

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.