Earn-out provisions require careful planning This article examines the challenges surrounding earnout provisions, particularly when the subject entity has a short history, but high growth potential, such as in untested technology. Carefully constructed earnout contingencies may help alleviate disagreements between the transaction parties and avoid valuation disparities in the process. ...

Gaining a competitive advantage for the mid- and small-market businesses In response to McKinsey & Company’s published article, “M&A as Competitive Advantage,” Bart Basi and Marcus Renwick explore the usage of M&A as part of a larger strategy, rather than a stand-alone deal. Special focus is given to the benefits relating to mid-market and small, closely held businesses, where the bulk of M& ...

Avoiding problems with an SMLLC This article reviews the benefits of considering the use of F-reorganization in mergers and acquisitions in addition to the more familiar disregarded entities (DEs) or single member limited liability company (SMLLC). F-reorganization can be used to overcome specific challenges, particularly as they relate to an SMLLC. ...

Agreements that work for both death and lifetime transfers Buy/sell agreements are absolutely critical to succession planning, but are too often neglected. Even when they are set up, they are generally structured to be funded by life insurance proceeds, in the event of death, rather than company cash flow. John H. Brown explains why this can be a big mistake and how certified valuation analysts (CVAs) are i ...

The American Institute of Certified Public Accountants (AICPA) reports that in less than five years, 75 percent of all CPAs will be at or very near retirement age. Naturally, there’s an undercurrent of panic in the profession. Small and midsize firm owners are reluctant to sell to large operations, not to mention the pain of watching what they’ve spent a lifetime to create simply disappear. There’s also the ...

Understanding this critical element in a buy-sell agreement Traditionally, business appraisers retained for buy-sell agreements are bound to perform their services within the specific value structure of the contract. When the valuation process is involved in such agreements, it’s essential for estate planners to understand the defining valuation elements involved, particularly the level of value. ...

Garner v. Knoll, Inc.—the mathematics of a hypothetical liquidation analysis A preference payment is subject to recovery by the debtor’s estate. Having to return a “preference payment” may come as a surprise. In this case, the issue before the court is whether a creditor received far more than what it would have received under a Chapter 7 liquidation. The case illustrates the mathematics used in conducting ...

Wave of boomers fuel business acquisition market This article examines the upswing in the business acquisition market as holdouts from 2009 and 2010 are freed up, as well as the increasing number of baby boomers looking to move into the next phase of life. ...

Does failing to review anti-trust risk enormous penalties for being anti-competitive? M&A professionals need to take anti-trust considerations into their due diligence planning. As international manufacturing relationships continue to increase in the U.S., there is an ever-growing number of international authorities and nations ready and willing to contest your agreement. ...

A proactive approach pays off for selling shareholders A business valuation analyst has the training, valuation skills, and experience to provide meaningful feedback to owners seeking to exit their businesses. When and how to conduct the pre-sale valuation is crucial to maximizing profit potential. This article will provide insight into using your valuation skills to help prepare a business for sale. ...

Understanding EBITDA applications is crucial to accurate buyout values. This analysis examines EBIDTA as an overused metric that does not represent real economic profit.  According to the author, eight subtractions are required to consistently and accurately determine true profit values.   ...

There Has Been a Drop in Deal Volume, per GF Data. But Here’s Why it Hasn’t Affected Prevalent Values. Bob Wegbreit offers data confirming what private equity buyers and financial professionals have sensed since the beginning of the year—that the explosion in deal activity heading into the end of 2012 carried no momentum into 2013. Still: while deal volume has declined, valuations haven’t. Find out more. ...

Earnout Variables Often Account for 15 to 25 percent of Purchase Price in many Middle Market Acquisitions. Here are Tips for Structuring Them Carefully Earnouts typically appear in a large number of middle-market deals, usually accounting for 15 to 25 percent of the total purchase price.  While an earnout can to be an elegant solution to “close the gap” between seller and buyer, the fact is earnouts are com ...

The Thought of Every Employee Working Together with a Shared Vision of Business Success is a Dream Situation for Companies.  Here's How to Make it Happen.  Gary Davie Friday at Management Today weighs in on how in 2012 the U.K. government (Management Today is UK-based) announced its support for employee ownership, recognizing its ability to promote long-term thinking and growth.  Since then, a number of leg ...

Buyers and Sellers Have Different Relative Negotiation Advantages, and the Letter of Intent in an Engagement Helps Define Terms. Here’s How. While perhaps not the longest or most expensive document among those found in the in the M&A process, the letter of intent (LOI) may well be the most important, particularly to the seller. The LOI sets the tone for the transaction and serves as the road map for the ...

Both Buyers and Sellers Should Follow a Careful Process to Realize a Successful Transaction. Here are Some Tips A successful business sale will ideally leave both the buyer and seller feeling the transaction was a success. Charles Andrews recaps questions that he asks sellers before accepting an engagement as a transaction advisor and lists ten steps defining a business sale process most likely to satisfy b ...

Buyers and Sellers Need to Negotiate Delivery Targets for Working Capital and Agree on a Fair Market Value for Fixed Assets. Valuation principles generally hold that the value of a business is largely a function of return on invested capital and growth, writes Ron Stacey, since these are the primary drivers of free cash flow. But how does this cash flow relate to the asset and liability values on the balanc ...

It's Not Municipal Securities, Consumer Credit, or Commercial Paper:  It's the $17 Trillion Trade Receivables Market   Walter Kurtz at Business Insider writes that it turns out that the biggest financing market is not in corporate bonds or even mortgages. It's trade receivables. According to the Receivables Exchange, $11 trillion of trade receivables is originated by small and mid-size businesses and anothe ...

Increased Transparency, More Automation, and More Access to Capital   Rod Ebrahimi, a columnist for the Entrepreneurs section of Forbes, writes that "Thousands of miles away from Wall Street, some David-sized companies in Silicon Valley are cultivating new trends that will change people’s relationship with money." ...

Consider Three Types of Private Preferred Stock Transactions, Each with Varying Degrees of Relevance to an Indication of Fair Value: Simple, Strategic, and Tranched Preferred Financing Last year, the AICPA issued guidance on evaluating private transactions with regards to their relevance in estimating the Fair Value of other securities within an enterprise via the back-solve method. The McLean Valuation Ser ...