Is Now A Good Time To Sell Your Company?

While any Covid impact on recent business performance will have to be addressed, buyers are still looking for growth through acquisition, private equity funds with plenty of “dry powder” continue to aggressively seek out quality companies to buy, and transactions are getting done. Chris Kramer looks at the big picture and three options for business owners.

If you are like many of our clients, recent events have caused you to think even more acutely about what the future holds.  If you own a business, those thoughts naturally turn to questions around future direction, strategy, and potential exit.

Clients often ask me “Is now a good time to sell my Company?”  My response is always the same, “The best time to sell your company is when you are ready.”  That said, if you have been thinking about selling, the current climate, despite Covid, remains one of the best climates in recent history to maximize the value you have built through a sale.

While Covid, PPP forgiveness, shutdowns and general uncertainty have not made things any easier, buyers continue to seek growth through acquisition and transactions are getting done.  That means your company is likely to be an attractive candidate to the right buyer, especially given the relative shortage of high quality, private companies available for purchase.

PRIVATE EQUITY BUYERS WITH MONEY TO SPEND

While private equity funds have been very active over the last 5 years as evidenced by the graph, the amount of “dry powder,” or committed capital seeking out acquisitions, remains at an all-time high.  This means that private equity funds continue to aggressively seek out companies to buy.  As their model generally involves a “buy and build” strategy, many funds are looking for add-on acquisitions to augment existing companies in their portfolios that they have purchased in the last 5 years.  At the same time, most funds continue to seek out “platform” acquisitions, or foundational target companies around which they try to build through follow on acquisitions.

YearTotal Enterprise Value (TEV)TEV / RevenueTEV / EBITDATransactions
2015$42.51.56.7246
201650.31.56.7242
201753.91.57.2267
201848.41.77.2288
201950.71.57.1300
202059.81.47.4114
Source – GF Data ®   

Fueling the activity level, as well as valuation multiples, is the continued low interest rate lending environment, coupled with aggressive underwriting.  Basically, this means that banks are loaning more money at lower rates than at any time in history, which enables PE groups to pay higher prices for the companies they acquire.  When rates are low, and liquidity is present in the market, asset values generally rise, as evidenced by multiples paid by private equity (i.e. higher valuations), rising real estate prices, and record highs being achieved in the public markets.

PUBLIC COMPANIES – FAVORABLE TO MARKET CONDITIONS FOR BUYERS RIGHT NOW

When a sale to a private equity fund is not the right fit, public companies often provide a great alternative.  Here too, the market conditions are incredibly favorable to sellers at the moment.  Whether public or private, companies continue to struggle to find new markets, new products, and other forms of organic growth.  However, the pressure to growth is even more acute for public companies than those acquired by PE firms.  At the same time, the stock prices of many public companies are either at all time highs, or at least at historically high levels.  This continued need for growth, coupled with stock prices that facilitate relatively less expensive capital, enables public companies to buy private companies at historically high valuations.

ESOPS MINIMIZE TAXES, PRESERVE CORPORATE CULTURE

Finally, for those owners who are concerned about preserving corporate culture, minimizing tax, and/or enabling their employees to create wealth of their own, and Employee Stock Ownership Plan, or ESOP, remains a great alternative in some cases.  We are seeing ESOP transactions that rival third party sales in terms of valuation multiples and net proceeds to sellers, with less risk of transactions stalling or failing, less intrusive due diligence, and less exposure of proprietary information to a potential competitor. 

While the market conditions are favorable, due diligence in the era of Covid can be especially rigorous.  The ability to isolate and explain the impact of the pandemic is critical to maintaining an agreed upon valuation through closing.  At the same time, the ability to show recovery, or sustainability going forward, is often the crucial factor in getting a transaction closed.   Buyers will generally pay you based on the past, but only to the extent that the future outlook is positive.  If you have experienced a downturn and expect to return to or exceed your pre-Covid performance, it is vital that you are able to articulate your vision for how you will do this, and provide support for your assumptions where possible.

GETTING THE ONE RIGHT RESULT

Selling your company can be a daunting undertaking, and requires preparation, strategy, and execution.  With over 30 years of experience in helping business owners with ownership transition, Acuity Advisors is uniquely qualified to help guide you through this process.  While there are many possible outcomes to a transaction, there is generally one right result.  Acuity Advisors helps you achieve it.


Gifting and Estate Planning: Is It Time to Act?

Michael Perez, Director

The presidential election is upon us, and estate and gift tax exemptions are unprecedentedly high. But how will tax exemptions change after November? Understanding your worth is important to preserving your assets for your heirs.

It’s no secret that the outcome of the presidential election will have a direct impact on the future tax burden of individuals and families. Taxpayers should consider using their 2020 $11.58 million gift and estate tax exemption.

The gift and estate tax exemption is the amount that each individual may use to transfer property either during their lifetime or at their death without incurring a 40% tax under current federal law. This amount is scheduled to sunset at the end of 2025 with a reversion to $5 million indexed for inflation. Genuine concern exists that the current window of opportunity to effectuate a wealth transfer may eliminate sooner depending on the outcome of the presidential election.

The Tax Cuts and Jobs Act was effective prospectively to the beginning of 2018. It is, however, not outside the realm of possibility, that any future federal tax legislation passed in 2021 could be retroactive to January 1, 2021. Vice President Biden has called for “returning the estate tax to 2009 levels,” which implies the top rate would increase to 45%, and the gift and estate tax exemption would be $3.5 million per taxpayer. Biden also indicated that he would repeal the step-up in basis, which occurs when an appreciated asset is passed to heirs. Election-related concerns coupled with the economic downturn and increasing deficits caused by the COVID-19 pandemic could make increases in the estate tax an attractive option for enhancing revenue regardless of who wins the election.

The outcome of the election and extent of the downturn is unknowable, and the risk of a second wave of infection casts doubt on the recovery. The net effect of this uncertainty has resulted in higher risk premiums for impacted businesses leading to lower asset values.

In such an environment, now may be an optimal time to consider estate planning strategies. Transfers of interests held in entities require concise execution, and valuation support from a credible and independent valuation firm is critical. To minimize IRS scrutiny for valuations care needs to be taken to ensure that the valuation analysis is supportable, based on well-reasoned assumptions, and consistent with all of the existing revenue rulings and tax court cases available to the valuation profession.

SEG professionals are practiced in determining discounts for lack of marketability, control, and built-in-gains in complex ownership and legal structures. Our valuation experts are knowledgeable about the most recent applicable tax court cases, legislation, and related revenue rulings. We consider all relevant rulings specifically applying to estate planning and the application of minority interest discounts to assets owned by family members.

At SEG, we work with estate planning attorneys, business owners, taxpayers, and their advisors to value and document the transition of ownership. If you are interested in learning more about how an experienced valuation advisor can help you navigate these important and complex issues, we would love to hear from you. Contact Chris Kramer at ckramer@segco.com | (714) 380-3300 or Michael Perez at mperez@segco.com | (714) 380-3304

ASC 805 Valuations

A Guide to ASC 805 Valuations

In the world of business and accounting, ASC 805 valuation does not need an introduction. This code is talked about by just about every appraiser—and rightly so. If you are confused about what this means for you and your purchases, it is time to stop worrying. 

Here are the most straightforward answers to the most common queries about ASC 805 valuations. These explanations will help you out throughout your accounting procedure:

What Are ASC 805 Valuations?

To understand ASC 805 valuation and other codifications, you need first to understand what PPA is. Purchase Price Allocation (PPA) is a process wherein an entity purchases a new company. The purchaser is referred to as the acquirer. Likewise, the company that is purchased is known as the target. Now, per PPA, the purchasing price for this new company is set based on the accumulated worth of all the target’s assets and liabilities

Additionally, these transactions are not independent deals. Rather, the Financial Accounting Standards Board (FASB) overlooks these purchases. There are numerous rules set by the FASB that are implemented in such transactions. The FASB currently sets all accounting standards under one code, ASC 805. This rule applies to all transactions in which one company acquires one or more new companies. 

ASC 805 valuation ensures that tangible, as well as intangible, assets, factor into the total purchase price, based on the fair value (or FV) of each of these assets. To clarify further, tangible assets typically consist of land, buildings, and other similar possessions. On the other hand, intangible assets are comprised of copyrights, website domains, customer lists, intellectual property, and similar resources.

It is rather complex and tricky to follow these rules yourself. If you need help understanding all of the technicalities, you can contact us. 

Business Combination Under GAAP

The business combination is, as its name suggests, a term for the combination of businesses. When an acquirer merges with or purchases another company, it is known as a business combination. However, since definitions under generally accepted accounting principles (GAAP) are different, whether or not a purchase is considered a business combination can vary.

GAAP defines a business as a group of assets which conducts activities that, in turn, generate an outcome that makes the group self-sustaining, while offering a return to investors, as well. A business must include three basic elements: inputs, processes, and outputs. Unless the company being purchased meets these requirements, the purchase of its assets and liabilities by an acquirer is merely a transaction, not a business combination.

Contingent Consideration

Contingent consideration is a type of payment that an acquirer has to pay to the former owner of the target company. This payment is dependent on the occurrence of certain future events. It is calculated based on various factors, including taxation, revenue, earnings, and more. 

Contingent consideration is documented at the time the target company is purchased. It is listed as an equity or liability as per its fair value. The acquirer pays the contingent consideration either in one lump sum or through a series of payments. This payment may be completed in cash or equity shares, depending on the preferences of the acquirer and the acquiree. 

What Is FAS 141?

FAS 141 is now known as ASC 805 valuation. The major difference between ASC 805 and FAS 141 has to do with contingencies. Under FAS 141, contingencies were dealt with later in agreements. Under ASC 805, calculation and a listing of the contingencies is completed on the date of acquisition. 

What Does ASC Stand For?

ASC stands for Accounting Standards Codification. It restructured existing FASB and GAAP accounting standards. As a result, ASC is a much more user-friendly approach that has made information more accessible and understandable for the public.

Calculating Fair Value of Consideration Transferred

To calculate the transferred consideration amount, fair values must be measured and compared. This calculation starts by summing up the fair values of the transferred liabilities and assets to the acquirer. Next, the fair value of the equity shares transferred from the acquirer to the acquiree is measured. The difference between these values is the fair value of transferred consideration. 

What Constitutes a Business Combination?

In a business combination, an acquirer gains control over another company, this is called a target. This is a purchase or merger done for the increase in size and growth. A business combination is only done if the target is a company that has inputs, processes, and outputs. Unless a business is producing outputs for the investors in terms of reduced costs or increased economic benefits, the purchase is not a business combination.

Accounting for Acquisition

Say an acquirer decided to purchase a target company’s assets. A business combination is clear, but how do you account for it? Well, it is actually pretty simple. The first step is to identify the business combination. The next step is determining the acquirer. 

If only some assets and liabilities were purchased, it can be confusing to tell whether the purchaser is technically the acquirer or the former owner. If there is a significant disparity between the fair values of the parties, the acquirer is the one with a higher fair value. In other cases, the group that makes payment or has a dominant role in the deal is considered the acquirer. Once these roles have been established, the transaction cost is measured. On the date of the acquisition, the cost of the business combination should also be measured. Lastly, it is important to account for goodwill. This process can be quite thorough and requires precise calculations, which is why it is best to hire the Strategies Equity Group and let the professionals handle it.

Deferred Consideration

The buyer pays a deferred consideration paid to the former owner of the assets over a set time period. This amount and time frame are decided during the acquisition. The payment can be done in the form of cash or as a transfer of shares.

Contingent Payments

Contingent payments are very similar to deferred consideration. A contingent payment is a payment that the buyer makes to the seller after the acquisition. However, instead of setting a time period, this payment depends on whether certain events transpire. Basically the deal has been finalized, but payment will only be issued after a specific occurrence takes place. This contingency can also simply refer to a certain level of performance for the business.

SFAS 412

SFAS stands for Statement of Financial Accounting Standards. SFAS 412 is one of 168 standards put forth by this category.  

Above Market Lease

Generally, there is a set market rate for leases. If a lease is finalized in accordance with ongoing market rates, it is said to be “on market.” On the other hand, if the lease rate is less than the market standard, it is referred to as “below market.” A lease that is greater than the established market rate is  “above market.”

GAAP and Its 4 Principles

Under GAAP, there are defined rules that every corporate financial and accounting transaction must follow. There are four basic principles of GAAP: objectivity, materiality, consistency, and prudence. Per these principles, all purchases should be objective, the true financial state of the business should be stated, a consistent standard should be followed, and reported facts should be authentic and genuine.

ASC 842

ASC 842 is also labeled ASU 2016-02. This is the latest lease accounting standard, as defined by the FASB. The previous standard that covered this area was ASC 840, which had issues regarding the rule for off-balance sheet operating leases. Under the ASC 842, all leases (with the exception of short-term leases) are capitalized on the balance sheets. Previously, there was no such obligation and operating leases only had to be reported in the footnotes of corporate financial statements. 

Goals of FASB ASC

The main intention for the introduction of ASC was to serve as a restructuring of existing rules and regulations. ASC is no different from FASB or GAAP, except that the way its system is codified has made it an easy system to research. Users of ASC can attain official information on over 90 topics, all of which are documented and categorized within it for easy access. With ASC, accounting standards are easier to implement since knowledge is more widespread.

Fair Value Consideration

The entire accounting system of FASB relies on the measurement of fair values. Fair value is defined as the price of any asset or liability that the seller will receive if the relative asset or liability were transferred to a market participant on that same day. 

How Do You Find the Fair Value of Noncontrolling Interest?

SFAS 412 (R) and SFAS 160 have defined how to account for noncontrolling interest or NCI. According to these codifications, the fair value of NCI is the same as the noncontrolling equity. Therefore, the fair value will be equal to the amount you would get if you were to sell this equity in the marketplace the same day. To properly calculate NCI, you must add fair adjustments to the calculated fair value. Then, the prorate income is added, and prorate shares are subtracted. This final total represents the fair value of the noncontrolling interest.

Fair Value Accounting

By now, you already know what fair value is. Fair value accounting uses the fair values of each specified assets or liabilities in its final measurements. In this accounting process, prevailing market values are used to estimate the number of assets and liabilities in a business combination. This is a step taken by FASB to yield standardized calculations.

Why Do You Need to Identify the Acquirer in a Business Combination?

Every business combination must identify which agent is acting as the acquirer. This is mandatory for accounting, per the standards set by FASB. Because the acquirer gains control over the assets and liabilities, identifying which party is acting in that role is important. In addition, fair value has to be calculated in accordance with what the acquirer accounts for.

Business Combination vs. Consolidation

In a business combination, two companies come together at the same level. One does not excel over the other, and there is no controlling or parent entity. Instead, both companies are under common control. The acquirer and the acquiree both have equity shares. 

On the contrary, business consolidation has one controlling entity. The other group loses power. The parent company is the major beneficiary. The company or companies that are acquired are recognized by the parent organization’s name. 

Advantages of Business Combination

Business combinations are highly beneficial. First, they cause an instant boost in the size of the company without any internal activities. Moreover, business combinations squash competitor threats and competition as far as the two companies in question are considered. Purchasing the goods in bulk reduces the overall cost, as well. This further leads to upscale production, reaping higher economic benefits. The capital of the business grows, while management costs are minimized. Business combinations are a step towards stability and success. In addition to all these advantages, business combinations also help maintain a stable price of producing goods. Since research opportunities dramatically increase with minimal cost, the chances of growth are multiplied even further.

Conclusion

Under FASB, there are many authorities to turn to for information on business and accounting, such as GAAP and SFAS. These codifications aim to standardize business mergers and acquisitions. Although ample material is out there, it can be hard to absorb it all before making deals. This is where our appraisers come in. We guarantee foolproof services that align with the standards set by the authorities. 

Why wait when you can rely on professionals to take care of your workload? Contact us today for your accounting solutions!