Before & After the Deal - Aronson LLC · 2020-02-10 · “Before & After the Deal: What Middle Market CFOs and Controllers Need to Know” is being offered as a two-part webinar

Before & After the DealWhat Middle Market CFOs & Controllers Need to Know

www.aronsonllc.com/blogs

Part 1: Before the Deal

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Housekeeping

• The recording of the webinar along with a copy of the slides will be sent to you within the next few business days

• For any technical inquiries, please use the “support” tab on the lower right hand side of the interface

• “Before & After the Deal: What Middle Market CFOs and Controllers Need to Know” is being offered as a two-part webinar series. We appreciate you attending Part 1 (Before the Deal)

• We will send you an email when Part 2 (After the Deal) is open for registration

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Agenda

Introduction ………… Slides 3-9Deal Terms & Letter of Intent ………… Slides 10-15Buy-Side Financial Due Diligence ………… Slides 16-21Buy-Side Tax Due Diligence ………… Slides 22-27Recap / Q & A ………… Slide 28










About Aronson LLC

Aronson LLC provides a comprehensive platform of assurance, tax, and consulting solutions to today’s most active industry sectors and successful individuals. For more than 50 years, we have purposefully expanded our service offerings and deepened our industry specialties to better serve the needs of our clients, people, and community. From startup to exit, we help our clients maximize opportunity, minimize risk, and unlock their full potential.










Bill is a CPA with 20 years of assurance and financial advisory services experience serving clients in the government contracting, technology, construction and real estate, and professional services industries. Bill assists clients with complex valuation projects, financial disputes, accounting investigations, and financial/accounting due diligence.

Bill is a graduate of James Madison University, where he received a bachelor’s degree in business administration, with majors in accounting and operations management. In addition to being a CPA, he holds the Certified Valuation Analyst (CVA), Accredited in Business Valuation (ABV), Certified in Financial Forensics (CFF), and Certified Fraud Examiner (CFE) designations.

Partner, Financial Advisory Services

301.231.6299

[email protected]

William C. Foote, CPA, CVA, ABV, CFF, CFE










Mario is the partner-in-charge of Aronson's Tax Services practice. He has more than 25 years of experience in the accounting profession, providing comprehensive tax services and advice to a diverse cross-section of clients.

Prior to joining Aronson, Mario worked for several large national and regional accounting firms, where he held a variety of tax practice leadership positions and served clients primarily in the real estate, government contracting, and private equity industries. He also has extensive experience in mergers and acquisitions. In addition, he serves as an Adjunct Professor at American University’s Kogod School of Business in the Graduate Tax Program.

Mario graduated from Northeastern University in 1989 before receiving his juris doctorate from Suffolk University Law School in 1995 and a master of laws degree in taxation from the Boston University School of Law in 2000. He is a CPA in Maryland, Virginia and Massachusetts and a member of the Bars of the District of Columbia, Commonwealth of Massachusetts, U.S. Tax Court, and the U.S. Federal Court - District of Massachusetts.

Partner, Tax Services

301.222.8210

[email protected]

Mario J. DeLuca, CPA, JD, LLM










Deal Volume for Selected Industries: Nationwide

2568

91

119

194

0

100

200

300

400

500

Jun13 Sep13 Dec13 Mar14 Jun14 Sep14 Dec14 Mar15 Jun15 Sep15 Dec15 Mar16A&D C&E IT Services Software Internet SW & Services

Source: S&P Capital IQ, private company M&A transactions announced in each quarter










Deal Volume for Selected Industries: Mid-Atlantic

34

15

8

12

0

10

20

30

40

50

Jun13 Sep13 Dec13 Mar14 Jun14 Sep14 Dec14 Mar15 Jun15 Sep15 Dec15 Mar16A&D C&E IT Services Software Internet SW & Services

Source: S&P Capital IQ, private company M&A transactions announced in each quarter










Closing

Definitive Agreement

Negotiations & Draft Purchase Agreement

Due Diligence

Letter of Intent

Indication of Interest

Dispute Resolution

Subsequent Accounting

Business Combination Accounting

Tax Filings

Integration

Closing

Transaction Timeline

Pre-Acquisition Post-Acquisition










Polling Question #1










Deal Terms & Letter of Intent










Moving Parts

• Valuation considerations• Tax considerations / transaction structure• Purchase price adjustments

– Contingent consideration– Working capital

• Financing options (cash, bank loans, seller financing)• Escrows (amount, time period)• People (management team transition, employment agreements)• Due diligence process / timeline• Intended closing date










Valuation Considerations

• Valuation of the target --- is it science or art?• Target risk profile• Approaches to valuation• Income Approach --- key inputs/steps

– Identify stream of economic benefits– Estimate an appropriate discount rate that takes into account the risk

profile– Consider residual cash flows / long-term sustainable growth rate

• Market Approach --- key inputs/steps– Select comparable companies/transactions– Calculate valuation multiples– Apply observed multiples to valuation subject after considering

appropriate adjustments










Tax Considerations / Transaction Structure

• Asset purchase/sale• Stock sale/purchase• IRS Section 338(h)(10)• “F re-org”• Seller financing / installment sale• Tax treatment of earn-outs• Tax treatment of consulting agreements, non-compete agreements• Goodwill amortization










Purchase Price Adjustments

• Contingent consideration– Financial trigger

• Revenue• EBITDA

– Nonfinancial trigger– Formula (simple, complex)– Measurement period

• Working capital– Definitions– Process for determining closing working capital

• Buyer perspective vs. seller perspective• Post-acquisition disputes










Polling Question #2










Buy-Side Financial Due Diligence










• Buy-side due diligence– Legal– Tax– Financial/accounting– Human resources– Technology– Market assessment

• Sell-side due diligence– Divestitures/carve-out

financials– Anticipatory diligence– Reverse due diligence

• Deal team/constituents:– Shareholders, executives,

board of directors– Finance/accounting, legal,

HR, contract administration departments

– Advisors (e.g., lawyers, accountants)

– Lenders• Information flow

– Virtual data room– Gatekeeping

Due Diligence










• Scope setting• In-house analysis vs. service

provider• Due diligence ≠ audit

engagement

• Diligence focus areas– Balance sheet analysis– Working capital– Quality of earnings– Customer/revenue analysis– Gross profit analysis– Operating expense analysis– Vendor analysis– Contracts review– Prospective financial

information– Workforce-related issues

Financial Due Diligence Overview










Quality of Earnings Analysis

• Objectives• Why EBITDA?• Historical period• Types of adjustments

– Management adjustments• Pro forma• Normalizing

– Due diligence adjustments• Normalizing• GAAP departures

• Impact of balance sheet adjustments

TTM FY14 FY15 Jun16

Reported revenue 14,400 17,900 19,400

Net income 850 1,140 1,270 Interest expense, net 100 80 90 Tax expenses 360 490 550 Depreciation & amortization 90 140 150 Reported EBITDA 1,400 1,850 2,060 EBITDA margin (%) 9.7 10.3 10.6

Management Adjustments:1 Terminated executive 200 220 110 2 Professional fees - 30 100 3 Discretionary expenses 20 20 30

Total 220 270 240 EBITDA-management adjusted 1,620 2,120 2,300 EBITDA margin (%) 11.3 11.8 11.9

Proposed Due Diligence Adjustments:4 Revenue cutoff (60) - 40 5 Terminated executive (200) (220) (110) 6 Bonus accrual - - (30)

Total (260) (220) (100) EBITDA-diligence adjusted 1,360 1,900 2,200 EBITDA margin % 9.4 10.6 11.3

($ in 000s)

Adjusted EBITDA Illustration










Working Capital Analysis

• Objectives• Purchase price typically

assumes adequate working capital

• Working capital target– Determined up front– Determined through diligence

• Analysis– Historical period– Data point frequency– Trends, highs/lows– Seasonality– Year-end adjustments

• Buyer vs. seller viewpoints– Definitions, policies

L18M L12M L6MCurrent assets -

Cash & cash equivalents 529 597 184 Accounts receivable, net 2,591 2,788 3,044 Other current assets 165 184 202

Total current assets 3,284 3,569 3,431 Current liabilities -

Notes payable 152 195 245 Accounts payable & acc'd exp. 1,078 1,127 1,121 Accrued payroll 339 374 421

Total current liabilities 1,570 1,695 1,787 Reported working capital 1,714 1,874 1,643

Debt-free cash-free analysisWorking capital 1,338 1,472 1,704 Working capital / revenue (%) 8.7 9.2 10.1

Days sales outstanding 62 64 66

Average($ in 000s)

Working Capital Illustration










Polling Question #3










Buy-Side Tax Due Diligence










General Tax Considerations

• Review proposed transaction structure stock sale• Review target current structure for tax purposes and ensure status

has been maintained• Evaluate whether any change in structure would be more tax

efficient or facilitative• Review three years (open tax years) of federal and state tax returns

– Including any amended returns – Review not just for errors, but for opportunities

• Tax consulting advice










Federal Tax Considerations

• Changes in accounting methods• Review tax notices • IRS examinations • Payroll taxes (personal liability)• Fixed assets (cost segregation study)• Book-to-tax differences• Reportable transactions










State Tax Considerations

• Nexus• Apportionment• State unemployment taxes• Wage withholding• Sales & use tax (personal liability)• Personal property tax• Tax notices• State examinations• Tax credits and incentives (e.g., R&D credits)










International Tax Considerations

• Review activity for international transactions (inbound or outbound)• Ensure proper reporting (e.g. FBARS, 5471’s, 5472’s)• Ensure proper withholding • Tax treaty compliance










Polling Question #4










Recap / Q & A










Thank you for attending!

Reminders: • The powerpoint slides and a recording of the

presentation will be emailed to you within the next few business days

• We will send you an email when Part 2 (After the Deal) is open for registration









Documents

Before & After the Deal - Aronson LLC · 2020-02-10 · “Before & After the Deal: What Middle Market CFOs and Controllers Need to Know” is being offered as a two-part webinar