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Capital Ideas for Middle Market Businesses

Welcome to this issue of Capital Ideas, our newsletter dedicated to business selling, business buying and financial resources for mid-market companies.


Bidding Farewell to Tax Cuts in 2011

Looming capital gains changes may affect when you should sell your business.

By David DuWaldt, Managing Director
Los Angeles, Corporate Finance Associates

business exit planning and taxesThey say that in life, only two things are certain…death and taxes. Indeed, taxes are a certainty in our lives, but the rate at which we pay our taxes is ever changing. On December 31, 2010 the tax cuts we enjoyed under the Bush Administration are set to expire and we will be facing one of the steepest tax hikes in US History.

Historical Perspective

To fully understand the impact of tax changes arriving in 2011, it is instructive to look back at the history of income taxation in the United States, including the tax treatment of capital gains. Although there was an income tax first imposed during the American Civil War and later in the late 1890s, taxation on income in the United States was permanently activated in the year 1913 with the passage of the Sixteenth Amendment to the Constitution

For simplicity’s sake this discussion applies to the individual income tax only. From 1913 to 1921, all capital gains were taxed in the same manner as ordinary income, which started with a maximum rate of 7%. It certainly did not take long for income tax rates to increase. In 1916, the top tax bracket was 15%, jumping to 67% in 1917, 77% in 1918 and by 1921 dropping back down to 73%. After tax legislation was passed in 1921, gain from the sale of assets held for at least two years was taxed at a rate of 12.5%, thereby creating a lower tax rate on long-term capital gains... Read more »


Selling Your Business—The Soft Side of Due Diligence

Avoid the Pitfalls that Cause Acquisitions to Fail

By Marc Borrelli, Managing Director
Atlanta Office, Corporate Finance Associates

selling your business Middle-market M&A market has returned, albeit cautiously, and volume is increasing. Strategic acquirers are returning to purchase needed technologies, markets or skills to meet their growth objectives. Private Equity Groups are still looking for both platform companies and add-ons acquisitions. However, the irrational exuberance has gone.

  • From the acquirer’s side, today’s deals demand solid results and an objective analysis of a target company’s track record, business plan and management team.

  • From the seller’s side, there is often increased demand for the seller to take stock in the acquiring company, accept an earn-out, or roll some of their proceeds into the acquiring company. In these cases, the seller needs to do thorough due diligence on the buyer, especially the soft side of the businesses.

If you are a seller taking equity in the acquirer, accepting an earn-out, a note, or reinvesting some of the proceeds into the acquiring company, your future is tied to the success of the transaction. If the transaction destroys shareholder value you may lose much of your wealth. Therefore due diligence on the acquirer’s business and a thorough understanding of these softer issues is essential to minimize any loss of wealth.

Five Key Aspects of the Soft Side of Due Diligence

A company’s soft side isn’t soft at all. These are the hard-to-quantify aspects of a company that can make or break an acquisition success. Your investment banker will help you identify and ask the buyer the right questions and pursue the answers so you will fully understand the potential risks.... Read more »



Feature Acquisition

tombstone

Situation:Tracer ES&T believed it was imperative to identify a synergistic suitor that would acquire their stock versus their assets. This was a challenge as Tracer is an environmental sciences firm and potential liability was a concern to interested buyers. Tracer’s management was sensitive to the ramifications to their employees, well-known brand and responsibility to existing clients. The primary obstacle was the somewhat conservative, non-acquisitive nature of potential synergistic suitors.

Solution: CFA San Diego helped overcome this issue by seeking “optimal” synergistic buyers and ultimately identified that with SCS Engineers. As an ESOP, SCS has a mandated growth through acquisition objective and Tracer fit nicely into their diversification and business development strategy. Tom Rappolt, Tracer’s CEO stated “We enjoyed the prospect of finding multiple buyers and offers which enabled strength in our negotiation. CFA took an active role in final due diligence phases and authoring workable merger documents that found the balance for us as well as the buyers.”

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