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In Case You Missed It... A Recap of our November 15, 2012 Seminar

"Pathways for Business Owners to Create, Build, and Realize Wealth"


Table of Contents

On Thursday morning, November 15th, a distinguished panel of legal, financial, and accounting specialists joined together to talk about strategies to build and preserve wealth during pivotal turning points in the life cycle of a business. The panel, moderated by BPU Investment CEO Paul Brahim, included Brian Golias, Member at Metz Lewis Brodman Must O’Keefe, LLC; John Lewis, Founding Member of Metz Lewis Brodman Must O’Keefe, LLC; Catherine Marchelletta, Partner at Louis Plung & Company, LLP; and Andrew Bianco, President of Strategic Advisors.

The panel discussion shed light on what happens at key points during a business’ life cycle, such as owner retirement, merging with another entity, or selling the business altogether. It’s an emotional process as much as a business transaction, and while the panelists all agreed that advance planning is key, there are many other considerations to think about as well.

Andy Bianco started off the discussion by outlining four ways a business owner can think about building wealth:

1. Partial Sale: Finding a strategic partner to expand into new markets through diverting assets, bringing in new talent, or selling a piece of the business
2. Recapitalization: A way of diversifying wealth through raising debt, and selling it back to the owner
3. Stock v. Asset Sale: Knowing and understanding the goals and objectives, the value of what’s being sold, and what’s involved in the preparation will determine which approach to take
4. Acquisition Strategy: Regular monitoring of the business’ value and of the market conditions will help the business owner decide when it’s appropriate to buy

How far out should a business owner start planning?
Brian Golias noted that a business owner starting to plan for his/her exit five years out from the desired date is not too early. Cathy Marchelletta provided an example to highlight the reality of this extended timeframe: a business owner would like to sell a real estate company, which is operating as a C-Corporation. If there is only about six months to do a deal, the owner has created an adverse tax situation, whereas if planning had begun well in advance, the owner could have gradually sold off interests and assets with more favorable tax treatments.

It is said that the best time to sell a company is at the intersection of salability and need. This means that when the business owner encounters a life change that necessitates the sale or transfer of a business (the need), the business itself is ready to sell without any major issues that would decrease its value (salability).

Once the process has begun, who should be on the team, what roles do they each play, and what value does each professional add?
Investment banker: Helps owner think about the alternative options, achieves consensus in the direction of the transaction, coordinates financing, and works with the other team members to make the transaction happen.
Accountant: Gets the company’s values and weaknesses on the table, conducts projections and cash flows with the banker to create future models. Assists the banker in the deal’s structure and how the financing will go.
Attorney: Helps business owners realize the effect a buyer’s scrutiny will inflict on the due diligence process, and prepares and organizes key documents, contracts, and records.
Others: Key management team, wealth managers, other stakeholders as appropriate for the goals and objectives of the deal.

It’s important to note that there is a parallel between personal financial planning and business planning. For an owner wishing to exit the business, he/she should take the time to assess personal financial goals, and how those goals may impact or influence the business transaction.

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The “Deal Room”
The panelists then went on to discuss the due diligence process, and viewing the business through the eyes of a buyer. John Lewis added that a “deal room” can be invaluable to clients preparing for a major transaction. Metz Lewis maintains a secure virtual data room to keep client records organized and safe for the due diligence process. Contents of the deal room, which are password-protected, might contain financial statements, tax returns, and contracts, and having everything in one place helps the client and the attorneys address gaps in information early on in the due diligence process.

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Options for Creating Liquidity
There are a few ways business owners can increase cash flow, such as a recapitalization, stock sale, asset sale, or extended earn-out.
Recapitalization: an option may be to take out a partner and grow the business by generating more money in the equity or finance markets.
Stock Sale: A complete liquidation of interests.  
Asset Sale: Selling individual assets and/or signing over contracts can create liabilities down the road if the owner isn’t careful.
Earn-Out: In cases where it may be appropriate to sell interests over a specified period of time, an extended earn-out  can have tax advantages, but raises vulnerabilities if the legal framework is too vague.

The decision to pursue an asset-based or stock-based sale can be made by identifying the legal treatment and tax consequences of each option, and consult the investment banker for price setting. As the panelists mentioned before, advance planning is key. In the case of an asset sale, for example, if an entity is a C-Corp it can be extremely difficult to get assets out quickly without suffering major tax setbacks. With enough time, various techniques can be applied to the sale so that favorable tax treatments are possible, Cathy said. In either case, the accountant can model out various strategies to see what the differences would be.

When thinking about capital markets, there can be a huge tax difference in the net proceeds from a sale depending on the scenario used and the size of the business. Andy recommends a regular review of private holdings, similar to what public companies do. This allows the business owner to better understand the risks and considerations in the marketplace on an ongoing basis, and better assess the best time to sell.

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Deciding to Engage in a Transaction
Once the official decision has been made to pursue a sale or recapitalization, Brian suggested planning for a four- to six-month timeframe from start to finish. That timeframe begins with the Letter of Intent (LOI), and includes meeting with the professionals involved, coming to a mutual understanding of value, working out any issues identified in the LOI, and ultimately closing the deal. What can be helpful, Brian noted, is identifying possible pressure points that the LOI would bring up ahead of time, and working with the legal team to resolve them.

The Checklist
At the beginning of the process, clients would be given a checklist of pre-sale documents to assemble. There is overlap of checklists from the accountant, attorney, and investment banker. John noted that because each transaction is different, the requirements for each checklist will vary depending on the situation and the client, but may include items mentioned earlier, such as tax returns, projections, contracts, and other key documents.

It is at this point that the investment banker conducts pre-qualifications to identify potential buyers. An Indication of Interest – a one-page teaser with basic information and metrics about the company being sold – is given to potential buyers. From here, the potential buyers are narrowed down, and interested parties will receive a book with detailed information on the company, and will have to sign a non-disclosure agreement. Up to this point, the process is non-binding. When an interested buyer submits a formal Letter of Intent, the process formally begins, and sellers are likely to experience a high degree of scrutiny on their records and performance metrics.

Purchase Agreement
Once a mutual decision between the seller and the buyer has been made, a written disclosure known as a Purchase Agreement is drafted by the attorney. There should never be a standard purchase agreement, John noted, because each agreement should reflect language that is highly specific and protects the buyer and seller from possible future claims. An indemnification clause would limit the post-sale recourse a party could have, and should specify the timeframe by which any claims must be addressed. A purchase agreement may also detail known deficiencies that even though may have been addressed verbally, if not specified in the purchase agreement, could be room for legal action down the road.

To this point, Cathy noted that the end result may be very different from what was originally intended, as she and the other panelists have encountered deals where the purchase price was adjusted post-sale due to agreements that didn’t clearly identify terms and conditions.

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Words of Wisdom
The exit from a business is an emotional process, and can be overwhelming at times, John said. Working with a team you trust and who has your best interests in mind can not only help secure a better deal, but also help you work through the various issues that will come up. The ideal team will be one that allows the business owner to do what he or she does best: run the company. Brian’s advice to owners is to work closely with the team, and let the advisors worry about the details.

Cathy not only reiterated the importance of early planning, but also advised to take the time to clean up the balance sheet, and make sure all policies and practices are in place, such as ensuring a company is filing in all the states and jurisdictions in which it sells goods and services.

It is also a good practice to evaluate the goals of all stakeholders involved, not just those of the business owner, Andy said. There may be managers or other employees who will be affected by the sale, as well as personal motivations. Knowing which goals are the priorities will help shape the direction of the deal.

Each panelist is highly experienced in his or her respective field. For clarification or further questions on any of the content, please feel free to contact them directly:

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Accounting & Tax
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Banking & Finance
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Please Note: Any tax, legal, or financial advice contained in this communication or derived from the event on November 15, 2012 is meant for general, informational purposes only, and should not be construed as official counsel on any specific fact or circumstance. For questions on how this information may affect your personal situation, please contact us at 412-281-8771 or at This email address is being protected from spambots. You need JavaScript enabled to view it., and your inquiry will be promptly addressed by the appropriate channel.   

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