Benchmark Final 031405

Anne Allnutt

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• Publié par: Shoeb
• Nombre de lectures: 23
• Langue: English

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Creating Value through Strategic Acquisitions
If you’re planning to acquire another company, it’s essential to take time to assess the
impact of the deal on your succession and estate plans.

By James J. Kirlin Jr. and Stephen R. Raymond

If you are like most owners of privately held and family businesses, the value of your
company represents about 80% to 90% of your overall net worth. Properly planning for
the growth of the business -- including acquisitions -- is critical not only for the long-term
success of the company but also to optimize your personal wealth. Your company’s
strategic plan should be carefully integrated with your business transition and wealth
transfer planning.

Yet many business owners haven’t bothered to do any planning. In a 2004 study we
prepared for a national industry group, fewer than 20% of the private business owners
who responded had a written strategic plan, and more than 60% had no formal
succession plan at all. Many business owners are too caught up in day-to-day
operations to drill down and explore all their needs.

Family businesses today face two major challenges. First, many industries are
consolidating. Margins have been compressed, overhead costs have increased and the
competitive marketplace is volatile.

Second, there are new tax laws that affect succession and wealth transfer planning. The
Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs Growth Tax
Relief Reconciliation Act of 2003 have ushered in many changes and will probably spur
more tax law legislation in the future.

While changes in the economy and tax laws have raised a number of difficult planning
questions, they also provide significant opportunities for the well-prepared family
business owner.

Assess your objectives
If you’re considering an acquisition, begin by analyzing its impact on your business and
succession goals. Sometimes in preparing a plan, your advisers and the planning team
may focus only on “the numbers” and the tax and legal aspects of the acquisition.
Technical issues are critical, but personal, family and other non-financial considerations
are also important to assess. Ask yourself, “What’s really important at this stage of my
life?” Balance your life goals with your wealth goals. Take time to address your hopes,
fears and needs.

The strategic plan must be supported by a clear set of objectives that reflect your
business mission and your family mission. For example, do you intend to eventually
keep or sell the business? Your perspectives on that question may give you an idea on
how to approach an estate planning or business succession strategy for the prospective
acquisition. Why acquire a business?
Why commit to building an acquisition strategy? An era of low interest rates, reasonable
valuation multiples, low capital gains tax rate, industry consolidations and ample capital
resources is a great time to acquire a business. As trillions of dollars are inherited over
the next 30 years, many heirs will be looking to sell their families’ firms, creating logical
synergies for family business owners seeking an acquisition.

Because acquisitions are generally low-risk and easy to finance, they offer a shortcut to
growth for middle-market companies. The acquired company can provide access to new
markets and offer synergies (1 + 1 = 3) that will enable your company to be potentially
more profitable, more valuable and better able to compete in the future.

Strategic planning perspective
Where are you vulnerable? Before you embark on an acquisition plan, you must
understand the potential challenges you will encounter in the process. Obstacles
include compensation issues and costs of the acquisition as well as potential culture
clashes with new employees.

Compensation and culture: It’s essential to stabilize your key executive team. Review
your executive compensation and incentive plans, including employment agreements.
What are you doing to retain, attract and reward key managers? Your executive
compensation plan may be very different from the plan of the target company.
Differences in expectations of the new executives and your current management group
may result in added costs and disruption to the business. Some may decide to leave at
a critical time. Also, Section 409A of the Internal Revenue Code mandates new rules for
all forms of non-qualified plans. These regulations can affect employment and salary
continuation agreements.

Costs and capital resources: Where will you obtain the capital to fund the acquisition
and the ongoing needs of the business? Depending on the deal, legal, accounting and
even lender’s fees can create unexpected costs. For example, in addition to auditing
fees and legal costs, if a deal requires complex funding arrangements, lenders may
pass along legal costs. You must have an adequate “war chest” and properly assess
the costs you may incur in the acquisition process.

Management team: Are your managers capable of taking on added responsibilities?
Are your children active in the business? If you intend to transfer the business to them,
can they handle the responsibilities? If they are not ready, will you need to consider
incentive compensation programs to attract, retain or reward executive talent? Will the
new management team be committed to staying? The incentive to stay can be vitally
important, especially if the next generation is not quite ready to take over the reins of
the company.


Team of advisers: Your advisory team should include a board of directors, family
members, key managers and selected consultants. Choose a strategic advisor/facilitator
to guide the planning process and coordinate the team activities. More important, you
need support to maintain your focus on the day-to-day operations of the business.

Target identification: What has happened elsewhere in the industry? It’s very
important to assess companies’ motivations for selling as well as the types and sizes of
other transactions that have occurred. What kind of intelligence resources do you have
available to give you critical information about the target?

Deal structure: Structure can often prove to be the difference between closing a deal
and going home empty-handed. Well-prepared buyers get a head start by studying the
implications of the various structuring alternatives, for both the company and the target,
early in the process. Structure, though a key component of any M&A transaction, should
not drive the parties to effect a transaction. Transactions should be based on compelling
commercial and economic factors.

The deal should be structured not only to result in a successful acquisition transaction
but also to reduce the taxable estate, freeze future appreciation and provide for capital
and liquidity needs.

Valuation: We often tell clients that an acquisition involves three different valuations:
the IRS valuation; what the seller thinks the deal is worth; and the true value, based on
a set of assessment metrics. The most important factors to examine are the strategic
benefit for your company and the target company’s earnings and cash flow. Don’t
overlook the value of the management team and the potential synergies the target can
offer your company.

In terms of transition planning, the valuation considerations are different. It may be
beneficial to have your company valued before an anticipated acquisition for gifting
purposes. These issues must be carefully evaluated in terms of your wealth planning.

Taxation assessment: The buyer’s advantage is often the seller’s disadvantage. An
acquisition is an after-tax expense. The timing and payment terms must be carefully
worked out to meet anticipated cash flow needs and other capital expenses.

Corporate structure: Consider how the corporate structure will fit with your exit
strategy and your succession- and estate-planning objectives. For example, an acquired
C corporation can be merged into an S corporation or a limited liability company
(entities that offer significant tax benefits to family businesses). If you decide to sell your
company in the future, you will benefit from a lower capital gains tax owing to the higher
basis in the stock. There are important business succession implications, as well.

Due diligence: Some have said due diligence is the most important part of the process.
We recently were consulted by one business owner who acquired about ten retail
operations from a public company. In his due diligence, he overlooked the fact that the target company’s pay scale was much higher than his company’s. This caused a major
problem when he tried to adjust the new executive team’s pay after the transaction.

Employment contracts and salary continuation agreements are other items often
overlooked in a pre-transaction plan. When properly structured, they can help enhance
the net to the seller and can be more tax-efficient for the buyer. The contracts can go a
long way toward stabilizing your key executive talent. Legal and accounting fees and
lender’s agreements also must be carefully reviewed to assess costs and potential
liabilities for the buyer.