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.


How to Manage and Maximize the Real Value of Earnouts

By Terry Fick, Managing Director
Dallas Office
Corporate Finance Associates

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While earnouts can be an excellent tool to bridge the value gap and maximize an owner’s take home value, the concept does not ring well with most owners…unless they and their advisor know how to use the tool.

In order to know when and how to use the tool we should first look at how and when NOT to employ this strategy. Don’t use an earnout:

  1. As part of the core value of a company that is based on current and past earnings.
  2. To help a weak buyer “finance” your company.
  3. In general, if you will not keep running the company during the earnout period.

Read more »


Consider ESOP Tax Benefits to Maximize a Business Sale

 

By Mark Klopfenstein, Managing Director
Atlanta Office
Corporate Finance Associates

Many business owners stand to benefit greatly from special tax benefits available exclusively in ESOP transactions. The CFA professionals can help business owners understand and evaluate how these opportunities might apply to a specific client situation. We can objectively quantify the anticipated results of various sale alternatives, including a traditional asset sale, a traditional stock sale, and a partial or complete sale to an ESOP. We can also assist owners in considering all relevant intangible factors. Our role is to assist clients in choosing and executing the best transaction for their unique goals and circumstances.

Capital Gain Tax Planning Opportunities Exclusive to ESOP Transactions

Unlike a traditional asset sale or stock sale, the ESOP alternative enables statutory capital gain tax savings opportunities. Under the provisions of section 1042 of the Internal Revenue Code, sellers of C corporation stock can defer (in many cases permanently) their capital gain taxes. With the increase in federal tax rates applicable to capital gains from 15% to 23.8% effective January 1, 2013, this provision has taken on increased importance in sale planning. Generally, the gain is deferred to the extent the sale proceeds continue to be re-invested in stocks and bonds of U.S. issuers and when at least 30% of the company’s stock is owned by the ESOP immediately after the transaction. Other requirements apply as well, but many owners will qualify for this benefit. The investment strategy can include long-dated notes from blue chip issuers that meet the requirements and can usually be combined with estate tax planning to allow for a permanent benefit. Nearly all states follow the federal provision as well.

Read more »


Feature Acquisition

Situation: The owner of Art's Electric had spent a lifetime building a first class industrial electrical contracting business and was ready to take steps toward a new phase of his life… retirement. He engaged CFA Kentucky to find the perfect buyer for his company, one that would carry on with the same care and concern he had for both his employees and his clients. However, there was one caveat-he was not interested in selling the business to a Kentucky based competitor.


Solution: After significant efforts marketing the business to both strategic and financial buyers, CFA Kentucky suggested one other entity as a viable buyer. By structuring the sale of Art’s Electric to its employees via an Employee Stock Option Plan, all of the sellers concerns were met. He sold the company to an entity he knew and trusted, did so in a tax advantaged manner and continues working with the company as a manager and board member as he transitioned into retirement. For Art's Electric, an ESOP was the perfect buyer.

 

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