fileJWBT754-bind JWBT754-Miller Printer: Courier Westford June 28, 2012 8:44 Trim: 6in × 9in Index 309 of the initial owner, 121 inside initiated, 82–83

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Index

AAAA. See accumulated adjustment

account (AAA)absolute dollar participation,

195accelerated retirement benefits,

110, 119–20accumulated adjustment account

(AAA), 93acquisition

debt, 111, 134of equity in company, 111obligations, 168

adequate consideration, 44–45advantages

employee cooperatives buyouts,268–70

family and management buyouts,246–47

management and ESOPs andtrust buyout, 160–63

non-sponsored managementbuyouts, 104–5

100% ESOP and trust buyout,192–95

parallel company buyouts,236–37

smallest company buyouts,283–84

sponsored buyouts, 146–47sponsored management buyout,

128advisors, selecting, 84

advisory members, 76advisory team, 81–82A&E. See engineering and

architectural firms (A&E)after tax

dollars, 37, 106–8, 118, 290after-tax

cash, 165living costs, 288

aggressive earn-out, 295agreement binding on successors

and assigns, 88AICPA. See American Institute of

Certified Public Accountants(AICPA)

allocation of sales proceeds, 60American Institute of Certified

Public Accountants (AICPA),229

Statement of Position 93-6Employers’ Accounting forEmployee Stock OwnershipPlans (SOP 93-6), 171, 202

amortization, 92–102, 286recovery, 297

anti-abuseprovisions, 212regulations, 213

anti-trust provisions (Scorporations), 187–88

appraiser, independent, 170aptitude testing, 74arm’s-length basis, 47

307

COPYRIG

HTED M

ATERIAL

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308 INDEX

articles of incorporation, 48, 88,115

assetcompany, 117loss, 52method to valuation, 59–60purchase, 87purchase agreement, 87–88sales, 93, 95, 99, 101values, verified, 60

attorneys, 69–70, 89attributes of ownership, 47

Bbaby boom generation, retirement

of, 1–2, 65–66bad debt, 1bank financing, 82bankruptcy protection, 23bargain rate, 90behavioral science, 73–75benefits, 89bill of sale, 88binding arbitration, 89board members, 76Board of Accountancy regulations,

230Board of Directors, 37, 196, 199,

209–10, 213Boards of Accountancy, 224bonding, 235BPM. See Burr Pilger Mayer Public

Accounting and Consulting(BPM)

Burr Pilger Mayer PublicAccounting and Consulting(BPM), 228–29

Bush Tax Cuts, 2, 257–58, 261business

acquisition, 40assets, 32brokers, 285

owners, 103, 109–11valuation environment, 47valuations, 43, 54, 216, 225

Business Reference Guide: TheEssential Guide to PricingBusinesses and Franchises(West), 59, 285–86

“buy and hold,” 186buyer commitment, 106buyer resources, 87buyer’s allocation, 296buyer’s market, 3buyer viewpoint, 111–12

employee cooperatives buyouts,272

engineering and architecturefirms, 219–20



management consulting firms,231




public accounting firms, 226–27sponsored buyouts, 151–53sponsored management buyout,

133–37“buy-in” program, 13buyout(s). See also family and

management buyouts; insidebuyouts vs. sale to outsider;non-sponsored managementbuyouts; parallel companybuyouts; professional firmbuyouts; smallest companybuyouts; sponsored buyouts

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Index 309

of the initial owner, 121inside initiated, 82–83scalable, 166strategy, 82, 161, 163

bylaws, 115

Ccandidate buyers, 35, 47capital equipment, 207capital gain

about, 91–97, 99, 101taxes, 92–94, 96–97, 101, 296tax rates, 120, 167, 193

capitalizationof earnings, 53of earnings method, 53–54rate, 53

capital structure, 156–57, 194career coaching, 74carried interest, 130carried interest fee, 157cash

and cash equivalents, 98at closing, 41compensation, 109, 287equivalents, 39flow to equity, 55outlays, 297

catastrophic event, 221, 289cautions







smallest company buyouts,284–85

sponsored buyouts, 147–48C corporation

dividends, 92management and ESOPs and

trust buyout, 161, 165, 167,181, 183–89

stock sale, 96certificates of deposit, 99certified public accountants

(CPAs), 11, 70–71, 82, 108,113, 202

CFAs. See chartered financialanalysts (CFAs)

CFO. See chief financial officer(CFO)

CFR Part 2510 RegulationRelating to the Definition ofAdequate Consideration,Notice of ProposedRulemaking (Regulation), 197

Charles Machine Works, Inc.,255–56

chartered financial analysts (CFAs),72

chartered retirement planningcounselors (CRPC), 72

Chatsworth Products, Inc., 208–9chief financial officer (CFO), 75,

136, 226chief operating officer, 75children’s education, 137club memberships, 137collaborative culture, 82comingling

activities, 284of costs, 285

commercialborrower, 32financing, 29lending, 33

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310 INDEX

commercial (Continued )loan appetite, 31loan rates, 167note, 36unsecured lenders, 296

commodity items, 66common goals, 167communications industry, 65Community Banks, 30–33, 35–36community of stakeholders, 193Community Property states,

106company

credit card, 133debt guarantee, 121obligations, 121purse strings, 295

compensation, 42, 89consultant, 251surveys, 220

competitors, 300–301complimentary services, 227composite samplers, 207computer consulting, 173–75,

204–6confidentiality, 104–5, 109

agreement, 87conflict resolution, 74consolidated financial statements,

70construction industry, 66consulting

agreements, 39, 42, 86, 88, 90,100, 119, 263, 290

arrangements, 85firms, 216–17psychologists to industry, 217

contingentcovenants, 39liabilities, 42, 86, 132payments, 39, 87, 295, 297–98

controlposition, 47–49position analysis, 54

controller, 75, 226controlling shareholder, 90control premium, 204Cooperative Home Care

Associates, 275–77copyrights, 94corporate

guarantee, 89officer, 213purchasing, 232resolutions, 88

corporation asset sale, 95–96co-shareholders, 289cost of capital, 53CPAs. See certified public

accountants (CPAs)credit

applications, 33collateralized, 33downgrade, 24

cross buy-sell agreement, 289cross purchase agreements, 123CRPC. See chartered retirement

planning counselors (CRPC)culture of ownership, 207

Dday after the sale of the business,

298–99DCF. See discounted cash flow

(DCF)deal breaker, 294death of family member, 80debt

amortization, 36leveraging, 15obligations, 112, 114, 241principal payments, 37

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Index 311

principal repayment, 89ratings, 33

deductible expenses, 92, 102de-facto earn out, 231deferred compensation, 85–86, 89,

100, 108, 110, 119–20,262–63

deferred compensation agreement,111

Department of Labor (DOL), 44,165, 190, 197

depreciation, 100–102depreciation recapture on assets,

94depressed value, 24developmental assessments, 74disclosure regarding litigation,

86discounted cash flow (DCF),

51–54, 85discretionary

bonuses, 220items, 52products, 67

disqualified persons, 188diversification of finances,

160dividend paying capacity, 43dividend payment, 92documents to be delivered at

closing, 88Dodd-Frank Wall Street Reform

and Consumer Protection Act(Dodd-Frank Act), 26

DOL. See Department of Labor(DOL)

“dot.com” meltdown, 64, 209due diligence

for the buyer, 83–86process, 133for the seller, 79–83

Eearnings before interest, taxes,

depreciation, and amortization(EBITDA), 51, 56–58, 131

earnings before interest and taxes(EBIT), 51, 131

earnings capacity of the company,43

earn-out(s), 39, 87, 97, 290, 298aggressive, 295provision, 41

EBIT. See earnings before interestand taxes (EBIT)

EBITDA. See earnings beforeinterest, taxes, depreciation,and amortization (EBITDA)

Economic Growth Tax Recoveryand Reconciliation Act(EGTRRA), 25, 187, 257

effective tax rate, 118, 121EGTRRA. See Economic Growth

Tax Recovery andReconciliation Act (EGTRRA)

emotional attachment, 303emotional value, 46employee cooperatives, 4–5employee cooperatives buyouts

advantages, 268–70buyer viewpoint, 272cautions, 270–71Cooperative Home Care

Associates, 275–77employee cooperatives, 277employee cooperative transaction

considerations, 278–79ESOP, comparison with, 279–81IRC Section 1042, 271, 275,

277–78multi-stakeholder cooperatives,

279professional advisors, 272–73

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312 INDEX

employee cooperatives buyouts(Continued )

risk environment, 273–74S corporation, 277–79Select Machine, Inc., 274–75seller viewpoint, 271–72technical matters, 277–81valuations, 271

employee placement firms, 217employee productivity, 193Employee Retirement Income

Security Act (ERISA), 119,163, 201, 279

centric regulations, 223compliance, 281fiduciary rules, 181Section 404(a), 182Section 406(a)(1), 182Section 409(a), 182Sections 401 to 408, 181, 210

employees, strategies tocompensate, 264

employee seniority, 269employee stakeholders, 9Employee Stock Ownership Plans

(ESOPs), 35, 85, 100acquisition debt, 175anti-abuse provisions, 212comparison between C and S

corporation, 189employee cooperatives buyouts,

279–81funding methods and

contribution limits, 183–84,210–11

installing, 40management and ESOPs and

trust buyout, 160–61, 165,181, 190

related acquisition debt, 198repurchase obligation, 164–65,

187, 212

S corporation, 191–92, 194, 214selling stock to, 161as a shareholder, 162–63SRC Holdings Corporation

(SRC), 9–11standard of value for, 44stock value per share, 190traditional uses of, 160–61transaction, 174and trust, selling stock to,

193–94and trust and other shareholders,

188, 190and trust and qualifying stock,

181and trust attributes, 168–69Trust committee, 181and trustee, 181–82Trustee fiduciary responsibilities,

182and trust literate counsel, 170and trust tax issues and

incentives, 184–85, 211–12and trust trustee, 200–201, 210valuations, 165, 170

Employee Stock Ownership PlanTrustee, 279–80

management and ESOPs andtrust buyout, 162–63, 168–70,172, 181–82, 188, 190

100% ESOP and trust buyout,196, 199, 201, 210, 213

Employee Stock Ownership Trust,181

employee termination, 89employment

agreements, 42, 85–86, 88–89,100

agreement to the seller, 111contracts, 75, 86, 90, 115, 174

engineering and architectural firms(A&E), 215–21, 223, 225

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Index 313

engineering and architecturefirms

buyer viewpoint, 219–20financing, 224industry guidance, 221professional firm buyouts,

218–24risk environment, 221–22seller viewpoint, 218shareholder agreements, 224technical matters, 223–24transition options, 218–19

enterprise value, 47–49environmental review, 81environmental studies, 86envy ratio, 134–35quity

actual vs. phantom, 264–65to book value, 55investment, 9, 89positions, 224to sales, 55

ERDA. See Engineering Researchand Design Associates (ERDA)

ERISA. See Employee RetirementIncome Security Act (ERISA)

escrowaccounts, 39agreement, 88withholding amount, 297

ESOPs. See Employee StockOwnership Plans (ESOPs)

estate planning vehicles, 252estate tax(es), 43, 165

determination, 40, 44family and management buyouts,

247, 249, 258, 260–61,263–64

returns, 42executive bonuses, 52executive retirement plan,

supplemental, 262–63

exitoptions, 81plan, 80strategies, 35

extended payout option, 168

Ffacilities, 116–17fair market value (FMV)

about, 43–44, 58ESOP and, 169, 193family and management buyouts,

249–50, 258, 261–63management and ESOPs and

trust buyout, 160, 165–66,169, 173, 176, 188

non-sponsored managementbuyouts, 106

100% ESOP and trust buyout,193, 196–97, 204

Treasury Reg. § 20.2031-1(b), 43fair value, 45–46family, 76–77

company ownership, 4company succession, 248member conflicts, 247members, 47, 113–14tax issues, 100

family and management buyoutsadvantages, 246–47buyer viewpoint, 251–53cautions, 248–49competitive, remaining, 249consulting agreement, 263deferred compensation and

supplemental executiveretirement plan, 262–63

diversification, lack of, 254–55employees, strategies to

compensate, 264equity, actual vs. phantom,

264–65

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314 INDEX

family and management buyouts(Continued )

estate taxes, 247, 249, 258,260–61, 263–64

experience, practical, 252–53family members, strategies to

provide income to founding,260–61

FMV and, 249–50, 258, 261–63founding generation, 248, 250,

254, 259, 261–62, 266gift and estate taxes post

December 31, 2012, 260gift taxes, 246, 249, 257–61long-term horizon, 247–48private annuities, 261–62professional advisors, 253psychological considerations,

256–57risk environment, 254–56S corporation, 259, 265self cancelling installment note,

262seller viewpoint, 250–51successor family members,

247–48, 251–52, 257tax efficiency, gift taxes and

purchases of stock, 257tax efficient succession strategies,

260taxes, historical perspective on,

257–58tax law update (2010), 245–46Tax Reform Act, 258–60technical matters, 256–65trusts and trust agreements,

263–64valuation, 249–50valuations involving non-family

investors, 250FASB. See Financial Accounting

Standards Board (FASB)

faster cost recovery assets, 99Federal Deposit Insurance

Corporation (FDIC), 30Federal personal income tax rate,

25Federal Reserve, 29female professionals, 225FIDC. See Federal Deposit

Insurance Corporation(FDIC)

fiduciary obligations, 163, 169,181

fiduciary standards, 169FIFO. See First In First Out (FIFO)financial

advisors, 71–72, 113buyer, 43, 46–47condition of the company, 43incentives, 89industry blood bath

(2008–2010), 29meltdown of Wall Street (2008),

1, 22, 29pain of buyer, 85resources, determine, 116statements, 82, 163, 216

Financial Accounting StandardsBoard (FASB), 45

Financial Industry RegulatoryAuthority (FINRA), 73

financing documents, 89FINRA. See Financial Industry

Regulatory Authority(FINRA)

First Bank Financial Centre,Wisconsin, 31

First In First Out (FIFO), 52fixed assets, 286FMV. See fair market value (FMV)FMV. Rev. Rul. 59-60, 43food processors, 65forced sale, 45

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Index 315

founding generation, 246, 248,250, 254, 259, 261–62, 266

401(k) plan, safe harbor, 122, 171,183–84, 208, 211

franchises, 66, 216Frank-Dodd Act, 31free cash flow, 51free market capitalistic economy,

22future cash flows, 85–86future returns method, 51

GGAAP. See Generally Accepted

Accounting Principles (GAAP)gain on equipment, 94“gaming” the system, 221Generally Accepted Accounting

Principles (GAAP), 45, 70,171

general market of buyouts, 36general provisions, 88Generation Growth Capital,

14–15gift and estate taxes post December

31, 2012, 260gifting, 39, 42, 44

limit, 246to next generation, 246strategies, 100

gift taxes, 43, 165family and management buyouts,

246, 249, 257–61gift tax legislation, 4global economy, 27goodwill, 44, 94, 96, 99, 124,

235governing state law, 88Great Game of Business, Inc., 10The Great Game of Business

(Stack and Burlingham),9–10

Guideline Company Method,54–55

guideline transaction method,56–58

Hhallmarks of the profession,

228healthcare, 65–66healthcare costs, 25hedge on the risk, 222history of the enterprise, 43HM&M. See Humber Mundie &

McClary (HM&M)hold-back

of proceeds, 41of sale proceeds, 58

home mortgages, 217, 287hostile tax environment, 290house in organizational order,

82–83human relation skills, 74human resource management, 74human resource projects, 74Humber Mundie & McClary

(HM&M), 74–75hypothetical

buyer, 43, 45–46, 58seller, 43, 46

IIBBA. See International Business

Brokers Association (IBBA)incentive payments, 89incentive stock options, 135income tax rate, 290individual retirement accounts

(IRAs), 208individual tax returns, 92inheritance taxes, 43initial public offering (IPO), 35,

142, 264

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316 INDEX

inside buyouts vs. sale to outsiderasset or stock sale, 296–97competitors, 300–301contingency payments, 297–98day after the sale of the business,

298–99investment bankers and

intermediaries, 299–300negotiating strength, relative,

293–94private equity firm, 302skin in the game, 295–96strategic buyer, 300suppliers and key customers,

301–2third party buyers, common,

300–302uncertainties of closing or not

closing, 299what are you really getting?,

297where is the money?, 294–96

installmentnote, self cancelling, 262sale election, 97sale opt out election, 98

insurance protection, 113intangible assets, 94intangible value, 44interest expense, 37Internal Revenue Code (IRC)

Section 197, 94, 99, 296Section 338, 101Section 368, 92Section 401(a), 181Section 404, 183–84Section 409(n)(3)(a), 186Section 409(p)(4), 188Section 414(q), 184Section 415, 183–84Section 415(c)(1), 184

Section 1042, 161, 167, 185–87,189, 194, 271, 275, 277–78

Section 1060, 98, 120, 124Section 4975(e)(7), 181

Internal Revenue Service (IRS)Form 8594, 98–99, 296Revenue Ruling 59-60, 43

International Business BrokersAssociation (IBBA), 286

international business community,27

investmentbankers, 72–73, 137, 144banking, 1, 39, 70banks, 22value, 45

investor group, 166IPO. See initial public offering

(IPO)IRAs. See individual retirement

accounts (IRAs)IRC. See Internal Revenue Code

(IRC)IRS. See Internal Revenue Service

(IRS)

JJGTRRA. See Jobs and Growth

Tax Relief Reconciliation Act(JGTRRA)

Jobs and Growth Tax ReliefReconciliation Act (JGTRRA),257

Jumbo Heating and ManufacturingCompany, 16–18

Kkey employee leadership, 84key employees, 2, 75–76, 83, 89,

289key person adjustment, 50

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Index 317

Llack of marketability, 49Last In First Out (LIFO), 52law firms, 215“law of selective memory,”

108leadership assessments, 74leadership exercises, 74lease rate, 90leases, 88, 90legal

counsel, 112–13documents, 115issues, 86lending rate, 30requirements, 81

lending limit, 36Letter of Intent (LOI), 87leveraged buyout, 16licensing, 215life expectancy, 288lifestyle selection, 284, 286LIFO. See Last In First Out

(LIFO)Limited Liability Company (LLC),

92, 116, 125, 143, 188, 288liquidate the company, 81liquidation sale, 45liquidity, 49, 105litigation

outstanding, 81between shareholders, 40support, 216

living conditions, 27LLC. See Limited Liability

Company (LLC)loan

agreements, 88–89loss default exposure, 36officer, 89

local taxes, 92

“lock-up” clause, 87LOI. See Letter of Intent (LOI)long-term sustainable growth, 53

MThe Maher Group, 71–72main street business, 66–67management

agreement, 39buyout, 4, 103–6, 109, 114–15,

122, 125consultants, 4fees, 130, 157leadership, 111–12proposal, 8team, 103–8, 111, 119–21

management and ESOPs and trustbuyout

advantages, 160–63anti-trust provisions (S

corporations), 187–88benefit plans, multiple qualified,

184buyer viewpoint, 168–69cautions, 163–65C corporation, 161, 165, 167,

181, 183–89ESOP, repurchase obligation,

164–65, 187ESOP, selling stock to, 161ESOP, traditional uses of,

160–61ESOP and trust and other

shareholders, 188, 190ESOP and trust and qualifying

stock, 181ESOP and trust attributes,

168–69ESOP and trustee, 181–82ESOP and trust literate counsel,

170

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318 INDEX

management and ESOPs and trustbuyout (Continued )

ESOP and trust tax issues andincentives, 184–85

ESOP as a shareholder, 162–63ESOP funding methods and

contribution limits, 183–84ESOPs, 160–61, 165, 181,

190ESOPs, comparison between C

and S corporation, 189ESOP Trustee, 162–63, 168–70,

172, 181–82, 188, 190financing considerations, 167IRC Section 1042, 161, 167,

185–87, 189IRC Section 1042 tax free

rollover, 185–86professional advisers, 169–71Qualified Replacement Property

(QRP), 161, 186, 189risk environment, 171–73S corporation, 161, 163, 165,

171, 173, 181, 183–85,187–90

seller viewpoint, 166–67stock purchase with pre-tax or

after-tax dollars, 162technical matters, 180–90valuation insights, 165–66

management consulting firmsbuyer viewpoint, 231professional firm buyouts,

230–32risk environment, 232seller viewpoint, 230–31technical matters, 232valuation, 231–32

manufacturing sector, 66marginal dollar of funding, 30marginal income tax rates,

105

marital property state, 81market

approach to valuation, 54–55discount rate, 122prices of comparable companies,

44rate, 90

marketing manager, 75Market Value of Invested Capital

(MVIC), 48to book value, 56to EBIT, 56to sales, 56

Martell Construction, Inc.,139–40

The McLean Group (TMG), 73MDI. See Molded Dimensions, Inc.

(MDI)mediation, 89Medicaid, 100medical coverage, 133medical practices, 215Mergers & Acquisition: An

Insider’s Guide to thePurchase and Sale of MiddleMarket Business Interests(Roberts), 73

mezzaninebank, 34debt, 34, 157financing, 167funds, 33–34lender, 33–34package, 34

middle marketcharacteristics of, 2–3

middle market companiescredit, collateralized, 33defined, 3

Middle Market InvestmentBanking Association, 3, 73

middle market transactions, 128

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Index 319

minorityblocks of stock, 50, 118, 120equity stake, 132interests, 118

Molded Dimensions, Inc. (MDI),177–78

Money Center Banks. See Regionaland National Money CenterBanks (Money Center Banks)

mortality event, 287mortgage, 90MSA. See MSA Professional

Services, Inc. (MSA)MSA Professional Services, Inc.

(MSA), 222–23multi-stakeholder cooperatives,

279MVIC. See Market Value of

Invested Capital (MVIC)

NNasdaq stock market, 64National Center for Employee

Ownership (NCEO), 171,203, 219

NCEO. See National Center forEmployee Ownership (NCEO)

negotiating in good faith, 104negotiating strength, 293, 295net income (NI), 51, 56net of amortization, 94net tax, 93net worth, non-operating, 270NI. See net income (NI)niche capabilities, 217niche companies, 67non-binding notes, 86non-competition agreement, 12,

42, 111non-employee owned companies,

173non-ESOP S corporations, 195

non-licensed employees, 216non-operating

assets, 82income and expenses, 286net worth, 270

non-qualifiedretirement benefits, 119stock options, 135stock purchase program, 11

non-recourse transaction, 132non-recurring

costs, 52income and expenses, 286

non-solicitation agreements, 97,111, 115

non-sponsored managementbuyouts

advantages, 104–5buyer commitment, 106buyer viewpoint, 111–12cautions, 105–7exit plan, 110management leadership, 111–12practical considerations, 108–9professional advisors, 112–14risk environment, 114–15seller assistance, 105–6seller viewpoint, 109–11technical matters, 115–21time as an ally, 110–11transaction size, 106–7valuation, 107–8valuation assistance, 107–8

non-voting stock, 11normalized financial results,

51–52notice information, 88

OOconomowoc Residential

Programs, Inc., 178–80(OEMs)

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320 INDEX

100% ESOP and trust buyoutacquisition debt analysis, 196–97acquisition debt considerations,

202advantages, 192–95buyer viewpoint, 198–201cautions, 195–97control, paying for, 197–98corporate governance, 196,

213–14ESOP, anti-abuse provisions, 212ESOP, funding methods and

contribution limits, 210–11ESOP, repurchase obligation,

212ESOP and trust, selling stock to,

193–94ESOP and trust tax issues and

incentives, 211–12ESOP and trust trustee, 200–201,

210financial assistance, 198–99phantom stock, 200professional advisors, 201–2qualified benefit plans, multiple,

211risk environment, 202–4S corporation, 191–200, 202,

204, 208–14S corporation attributes, 194–95seller viewpoint, 198–99senior management issues,

199–200stock appreciation rights, 200technical matters, 210–14traditional uses of ESOP and

trust, 193valuation, 197–98

operating company, 284, 290–91organizational

assistance, 70change professionals, 217planning, 74

original equipment manufacturers(OEMs), 14

overall tax rates, 97owner running expenses through

business, 82ownership

of assets, 86attributes of, 47culture, 173interest, 112positions, 217rules, 224transfer, 40

Pparallel companies, 4parallel company buyouts

advantages, 236–37buyer viewpoint, 239–40cautions, 237–38professional advisors, 240risk environment, 241S corporation, 238, 242seller viewpoint, 239technical matters, 244valuation, 238–39

passive income, 90, 290Patient Protection and Affordable

Care Act, 2Patient Protection and Affordable

Care Act (PPACA), 258patriarchs, 247patronage

dividends, 269participation, 270rebates, 269

payroll taxes, 290P/E. See Price to Earnings Ratio

(P/E)PEGs. See private equity groups

(PEGs)penalties for non-compliance, 214performance payments, 41

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Index 321

personalassets, 32, 99, 128, 168assets of managers, 103costs, 82financial security, 132guarantees, 36, 39–40, 89, 168health crisis, 80

phantomequity plan, 11stock, 89, 135, 188, 200

philosophy of participation, 270plan to exit the business, 110PPACA. See Patient Protection and

Affordable Care Act (PPACA)predictive testing, 74preemptive covenants, 36Preferred Stock, 15pre-tax

benefits, 288cash flow, 195dollars, 193, 203income, 51, 56

price, 39–41price of leadership, 112Price to Earnings Ratio (P/E), 55priming the results, 221private annuities, 261–62Private Companies Practice Section

(PCPS), 229private equity, 34–35private equity firms, 2, 4, 64,

295–96, 302private equity groups (PEGs)

about, 4, 34–35, 100non-sponsored management

buyout, 103sponsored buyouts, 146–57sponsored management buyout,

127–39, 142–44product warranty exposure, 42professional

franchise, 225license, 100

service company, 122–23, 204–6service firms, 4, 217–18services company, 173–75support, 143–44

professional advisors, 4employee cooperatives buyouts,

272–73family and management buyouts,

253management and ESOPs and

trust buyout, 169–71non-sponsored management

buyouts, 112–14100% ESOP and trust buyout,

201–2parallel company buyouts, 240smallest company buyouts, 288sponsored buyouts, 153sponsored management buyout,

137–38professional firm buyouts

engineering, public accountingand management consultingfirms, 215–17


management consulting firms,230–32

professional service firms, generalobservations for, 217–18

public accounting firms, 224–30professional services, 67profit sharing, 171, 184proforma cash flow closing

schedule, 98prorated income taxes, 92psychological assessment, 75psychological considerations,

256–57public accounting firms, 4, 138,

216buyer viewpoint, 226–27demographic changes, 225

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322 INDEX

public accounting firms(Continued )

professional firm buyouts,224–30

risk environment, 227–28seller viewpoint, 224–25technical matters, 229–30transition to broader based

advisory firms, 225–26valuation, 227

public companies, 3public company trading

information, 55public operating companies, 92purchase agreement, 283, 286, 288purchase price, 91, 98–100, 102

QQRP. See Qualified Replacement

Property (QRP)Qualified Replacement Property

(QRP), 161, 186, 189qualifying payroll, 194Quality Assembly & Logistics,

LLC., 14–16quality control, 66quality service indices, 173

Rreal estate, 90

company, 90, 116–17development, 31

Regional and National MoneyCenter Banks (Money CenterBanks), 32–33

remedies to a late payment, 89rental agreements, 90rental income, 109rent escalator clauses, 90representations

of the buyer, 88of the seller, 88

repurchase obligation, 164–65,212, 214

residual assets, 99residual method of allocation, 99restricted stock, 188retail

enterprises, 287food sales, 25grocers, 65stores, 66

retained earnings, 97retaliatory behavior, 121retention bonus, 75retirement benefits

accelerated, 110, 119–20non-qualified, 119

retirement date, 71retiring principals, 219, 231return on investment (ROI),

129–30, 139, 143revenue thresholds,

pre-determined, 134risk analysis, 4risk environment





management consulting firms,232



parallel company buyouts, 241public accounting firms, 227–28smallest company buyouts,

288–89

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sponsored buyouts, 153–54sponsored management buyout,

138–40risk of falling behind, 294ROI. See return on investment

(ROI)

Ssafe harbor 401(k) plan, 122, 171,

183–84salary continuation, 86, 100, 108sale

of a business, 2of a capital asset, 93

Saltz, Shamis, and Goldfarb. SeeSGS Financial Services

sanity check, 221, 285SBA. See Small Business

Administration (SBA)SCIN. See Self Cancelling

Installment Note (SCIN)S corporations

about, 37, 92–97, 143, 163asset sale, 96–97employee cooperatives buyouts,

277–79ESOPs and, 191–92, 194, 214family and management buyouts,

259, 265management and ESOPs and

trust buyout, 161, 163, 165,171, 173, 181, 183–85,187–90

100% ESOP and trust buyout,191–200, 202, 204, 208–14

parallel company buyouts, 238,242

smallest company buyouts, 288stock sale, 97

SDCF. See seller’s discretionarycash flow (SDCF)

secured loans, 32

Securing the Future, SuccessionPlanning Basics (Reeb), 230

Securing the Future TakingSuccession Planning to theNext Level (PCPS), 230

Select Machine, Inc., 274–75Self Cancelling Installment Note

(SCIN), 262seller

debt, 37finance notes, 97financing, 37, 39, 41, 105, 113,

116–17notes, 36–37obligations, 296

seller assistance, 105–6seller’s discretionary cash flow

(SDCF), 286seller viewpoint


engineering and architecturefirms, 218



management consulting firms,230–31



parallel company buyouts, 239public accounting firms, 224–25smallest company buyouts,

286–87sponsored buyouts, 150–51sponsored management buyout,

132–33senior bank rate, 36senior level debt, 131

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324 INDEX

Sentry Equipment, Inc., 206–7service firms, 65–66service industries, 67severability clause, 88SGS Financial Services, 11–14Shared Capitalism at Work

Employee Ownership, Profitand Gain Sharing, andBroad-Based Stock Options(Krause et al.), 173

shareholderagreement, 13, 121board minutes and, 81disputes, 42schedule, 88single, 47–48

skin in the game, 97, 295–96Small Business Administration

(SBA), 29, 35–36smallest company buyouts

advantages, 283–84cautions, 284–85facilities, 290–91financing the transaction,

289–90outlook, realistic, 287professional advisors, 288risk environment, 288–89rules of thumb, industry, 285–86S corporation, 288seller viewpoint, 286–87technical matters, 289–91valuations, 285–86

sponsored buyoutsadvantages, 146–47buyer viewpoint, 151–53capital structure, 156–57carried interest fee, 157cautions, 147–48computer support services

company, 155–56

ESOPs, 155management fee, 157PEGs, 146–57professional advisors, 153risk environment, 153–54seller viewpoint, 150–51technical matters, 156–57valuation, 148–50

sponsored management buyout,128

advantages, 128asset sale, 120–21buyer viewpoint, 133–37carried interest and management

fees, 130envy ratio, 134–35financial assistance, 129–30management interests, 135–36mutual commitments, 136–37non-recourse issues, 132private equity funding, 143private equity group interests,

133–34professional advisers, 137–38professional service company,

122–23professional support, 143–44risk environment, 138–40seller viewpoint, 132–33stock sale, 118–20successor management, 121tax and legal structure of

company, 142–43technical matters, 142–43total transaction consideration,

133valuation, 131

spousal consent, 81, 106spousal support, 105spouse, 77, 80Springfield ReManufacturing, 7–8

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Index 325

SRC. See SRC HoldingsCorporation (SRC)

SRC Holdings Corporation (SRC),8–11

stakeholder cooperatives, 273–74standard

of living, 109, 287of value for ESOPs, 44of value for transactions, 42–46

Standard and Poor’s, 24state taxes, 91–93, 96, 101stock

appreciation rights, 89, 111, 135,188, 265

and asset sale, 94–95options, 111ownership ledger, 115pricing, 170prior sales of, 44purchase agreement, 87–88redemption, 120–21redemption obligation, 10of retiring principals, 229sales, 92–94, 96–101, 123sales taxed as asset sales, 101of selling shareholders, 160

strategic buyer, 47, 300structuring the transaction

asset sale, 120–21stock sale, 118–20

successionoptions, 3planning, 74, 103–5, 110, 216,

224–25, 229–31plans, 84, 290strategies, tax efficient, 260

successorfamily members, 247–48,

251–52, 257management, 102, 105, 108,

113–17, 119, 121

management exit strategies, 121team, 244

survival of warranties andrepresentations, 88

Ttax

attributes, 90break on dividends, 25deductible dollars, 100, 229deductible principal payment, 37deferral advantage, 98efficiencies, 223environment, 91, 290exposure, 86increase legislation, 2increases, 25–26issues for buyer, 98–101issues for seller, 91–98law update (2010), 245–46legislation, 101planning, 70, 86, 244, 288preferred basis, 118preparation, 225, 227rate, effective, 118, 121related adjustments, 52

taxable gain burden, 97taxable income, 92Tax Reform Act (2010), 257–60Tax Relief, Unemployment

Insurance Reauthorizationand Job Creation Act, 25,101, 245–46

team building, 74technical matters




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326 INDEX

technical matters (Continued )management and ESOPs and

trust buyout, 180–90management consulting firms,

232non-sponsored management

buyouts, 115–21100% ESOP and trust buyout,

210–14parallel company buyouts, 244public accounting firms, 229–30smallest company buyouts,

289–91sponsored buyouts, 156–57sponsored management buyout,

142–43technology companies, 64technology industry, 64term sheet, 86–87terms of the transaction, 39, 58third-party

buyers, 2, 161, 300–302lender, 115

title to assets, 115TMG. See The McLean Group

(TMG)transaction

databases, 109financing, 114–15price, 41size, 106–7structuring, 84–85

transactional price, 41transition planning, 71, 216, 219,

223, 230, 287Treasury Reg. § 20.2031-1(b), 43trustee obligations, 163

Uunderlying “price,” 42unemployment rate, 23, 27

uninsured inventory, 52unknown liabilities, 42, 81unsecured debt, 11

Vvaluations

additional adjustments to, 50asset method, 59–60assignment, 40assistance, 107–8business, 43capitalization of earnings

method, 53–54of company, 117–18considerations, 4data, 49discounted cash flow (DCF),

51–54employee cooperatives buyouts,

271family and management buyouts,

249–50guideline transaction method,

56–58income approach method,

50–51insights, 107management and ESOPs and

trust buyout, 165–66management consulting firms,

231–32market approach to, 54–55methods, 40, 58non-sponsored management

buyouts, 107–8normalized financial results,

51–52100% ESOP and trust buyout,

197–98parallel company buyouts,

238–39

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process, 39public accounting firms, 227public company guidelines

method, 55–56purpose of, 40smallest company buyouts,

285–86sponsored management buyout,

131of stock, 118

value of the business, 46, 81,246

valuing a private company, 81voting stock, 223

Wwaiver of provisions, 88warranties, 88warrants, 188wealth advisory services, 216wealth management, 70, 225Web site, 305–6Woodman’s Food Market, Inc.,

175–77write-off obsolete assets, 115

Z“Z” value, 221Zweig White & Associates, 221

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Documents

fileJWBT754-bind JWBT754-Miller Printer: Courier Westford June 28, 2012 8:44 Trim: 6in × 9in Index 309 of the initial owner, 121 inside initiated, 82–83