PRESENTED BY BLACK DIAMOND MERGERS & ACQUISITIONS
How will the new tax changes impact my business?
Good day everyone. I’m Ryan Wagner with Black Diamond Mergers & Acquisitions here in Kansas City. Today’s video addresses a topic that a lot of business owners have asked about, and that is the proposed tax changes from the new administration and how it could impact your business. The goal of the video is not to provide you with tax advice, but rather to discuss some considerations you need to take into account when you think about a potential exit.
The Biden administration has proposed some fairly significant tax changes, mostly targeting wealthy individuals and large corporations. Under the proposal, the top income tax rate would rise to nearly 40%, but the main change that affects small business is the proposed change to capital gains taxes.
What are capital gains taxes? Capital gains taxes are taxes on the growth in value of investments and are incurred when a sale occurs. Simple example: I buy a company (or a stock) for $100 and sell it 10 years later for $200. My profit on the sale is $100. However, I also have a taxable gain of $100 that would be taxed at the applicable tax rate. This taxable gain is referred to as a “capital gain” and the current tax rates for capital gains can be up to 20% depending on your tax bracket. Capital gains taxes are significantly less than income tax.
Under the proposed tax changes, for income in excess of $1 million, the new capital gains tax rate would be nearly 40%. Now, most Americans do not earn more than $1 million per year. However, the “capital gain” associated with the sale of a business would count as income under the new proposed rule and any gain in excess of $1 million could be subject to the higher rates.
One other significant consideration is the death of a business owner that passes along to family members. Under the old rules, family members could enjoy a “step-up” in basis upon death. This means that if a business was purchased for $100 and is now worth $200 upon death of the business owner, the family member will not be taxed on the $100 gain but would have a tax basis as if they bought the business for $200. In this scenario, if they sold 10 years later for $300, their capital gain would only be $100 instead of $200 as would be the case if the gain was calculated on the original purchase price of $100. The new proposed tax changes would eliminate this and would not allow for a “step-up” in tax basis and would create a taxable event upon death.
Now, what does this all mean for my business? Should I sell now and try to avoid these higher taxes? The answer, as usual, is “it depends”. Taxes are an important consideration in all walks of life, but should not be the sole factor in determining whether or not to sell your business. There are other strategies and offsets at a business owner’s disposal that could help alleviate a tax burden upon a sale. Plus, you would hate to forego significant growth prospects in a business just to save on taxes. However, if you have made up your mind to exit your business, we urge you to consider talking with your tax advisor to see what considerations you should think about with respect to these tax law changes. This could potentially be a one-time event and you want to make sure you are taking home all you can. We work with a number of CPAs that can help advise you on your options and potential impacts with respect to taxes. Part of our job as an M&A advisor is to make sure you have the best advice possible given your unique situation.
Thank you for listening in to this month’s video. As always, if you are thinking of buying or selling a business and need some guidance through the process, don’t hesitate to reach out to us. We look forward to talking with you soon.
Understanding Net Working Capital
Understanding Net Working capital
M&A Leader Ryan Wagner breaks down the basics of net working capital and net working capital adjustments when it comes to transaction closings. Check out this short video to learn more!
Hello everyone. Hope you all are having a great day. My name is Ryan Wagner, M&A Leader for Black Diamond Mergers & Acquisitions in Kansas City.
In this month’s video, I wanted to address a topic that many are unfamiliar with when it comes to buying and selling a business, but can have negative consequences if not handled properly. That is the concept of net working capital or a net working capital adjustment at closing.
First, we have to start with a basic understanding of what net working capital is, and how it affects the business. Net working capital, most simply, is the difference between the current assets and current liabilities as found on the company’s financial statements.
Current assets are items like accounts receivable, inventory, prepaid expenses, etc. Sometimes this calculation can include cash but we will talk more about that in a minute.
Current liabilities are items like accounts payable, accrued expenses, etc.
Overall, this metric is a measure of a company’s liquidity and operational efficiency with respect to short-term financial health. A positive number indicates a company’s ability to fund operations and potentially invest in growth or pay out dividends to its shareholders.
Now, why did I make a special mention of cash? Technically, cash is a current asset, however, it is typically not included in the formula for net working capital when it comes to M&A transactions because this is not part of the operations of the business (buying and selling). A cash balance on the balance sheet could indicate a build up of cash for a future investment, or cash used as savings for unexpected bumps in the road.
Ok, so why are we talking about this when it comes to buying or selling a business? Most transactions that occur have some mechanism to adjust the price following closing to more accurately reflect the value of the business on the closing date. What does this mean in practice? Let’s say right before closing, a company incurs a large, unexpected expense and has to order a replacement piece of equipment or pay a service provider. This expense is booked as an account payable on the balance sheet and would be the responsibility of the buyer to pay after closing. Since this was likely not a foreseen expense, the buyer would feel like they are getting less value for the business. “Not what I paid for”. This also works to protect the seller. Let’s say before closing they closed a huge sale with a customer that they weren’t expecting but have yet to receive payment. This would go on the balance sheet as accounts receivable and would produce a large windfall for the buyer post-closing. Again, since this was not likely contemplated when the buyer agreed to purchase the business, the seller would like to reap the benefits of this sale.
Now how do we protect both a buyer and seller from these fluctuations? This is accounted for in what is called a “net working capital adjustment” and usually takes place after closing. Let’s take a quick step back. When a buyer is evaluating a business, often times it will try and normalize the operations and earnings of a business by taking out any abnormal increases (or decreases) to a company’s operations. These normalized economics are what a buyer uses to determine its valuation. I’m simplifying a bit and not all buyers operate this way but generally speaking this is the case. The same can be said for working capital. Step one is to determine what a “normal” level or working capital is going to be. This can be done by taking the trailing 12 month average, an average of the last 2 years, or something different (like if a business has substantially changed in recent months). This normal level is called the “target” and is
included in the PSA. This “target” level is determined before closing and usually when negotiating the PSA. At or near closing, the seller provides an estimate for what the net working capital level will be on the date of closing. The reason this is only an estimate is because it is very difficult to accurately predict what the true working capital was until all accounts are settled. Often this is well beyond the closing date. For this reason, after closing (30-60 days) the true net working capital is calculated and the amount of the adjustment is determined. This adjustment is based on the difference between the “true net working capital” and the “target net working capital.”
[Go to example on white board.]
Tips For Your Exit Strategy
Tips For Your Exit Strategy
Managing Director Christian Baldwin discusses some tips for finding the right buyer for your business. Check out this short video to learn more!
Good morning, Christian Baldwin here with Black Diamond Mergers & Acquisitions. Today I want to revisit the basics and this video is primarily for the business owner that is not really sure when the right time is start thinking about an exit strategy. Or even really how to go about the process of how to find someone to take over their business and maintain the legacy that they’ve created. There are a lot of different details that have to be thought through and really if it’s a company that you’ve owned for a long time, and you’ve built it up, it’s almost like a family member in and of itself. So, there’s an emotional side to it because you want to make sure whoever takes your business over treats your customers and employees just how you would treat them. And you want to make sure that you leave the business in good hands.
There are a number of different ways that you can go about it. You can think about selling it to a family member or maybe to your employees through a stock purchase plan or what’s called an ESOP. Or you can go to the market and look for a strategic buyer, or maybe a financial buyer. A strategic buyer is one where it’s going to be possibly a little bit larger company or someone that’s already in the industry that wants to grow by acquisition. Financial partner could be a private equity group or family office, someone that’s looking more for a return on their investment to add to their portfolio, and then make a good return on their exit down the road at some point in the future.
Now you don’t have to sell all of your business, all on day one, all at the same time. So, this is a common misconception for the business owner that’s not familiar with M&A activity. You can sell part of your business today. You can retain some stock in it, or membership units, whatever the case may be. And you can have a what’s called, second bite of the apple, if you will, where you’ve retained maybe some form of ownership and when the company is sold after you, you can cash out again in the end. And in the interim, you might choose to be involved from an advisor capacity, or not involved at all. It’s really up to you and your objectives as a current owner as to how much your involvement might be after you sell. Now you can sell all at once, but you don’t have to. But there’s some tax advantages, maybe, for going one way or the other, that you may want to consult with your deal team about.
When you sell there’s usually three forms of consideration that are the main types, one of course is cash. I want to sell my business for $20 million and just write me a check and I’m going to go on my merry way. The second form of consideration is an owner’s note. Owner financing, or partial owner financing, can be attractive if you get a good rate on it and it’s collateralized correctly just as if you were the bank doing part of the deal. Some business owners don’t really want to do that up front, but honestly, the more they know about how these instruments work, and if it’s done correctly, then it can be a very good thing and you can end up making more money on the interest income that you would otherwise. There can be some tax advantages there as well. The third form of consideration is what’s called an earn out. That basically says, “hey I’m going to pay you, as the current owner, a portion of the sales price, if and only if, the business meets certain financial metrics in the future.” These have to be really clearly defined. Our opinion of them is you want them to be measured as close to the top line as possible, i.e., gross revenue. They have to be documented so that you can easily audit them post-close. There’s some nuance there, but they can work well, and they can bridge the gap in terms of negotiation.
No matter what, if you’re a business owner and you’re thinking about having those types of conversations and trying to figure out how to go about finding the right buyer and getting the maximum value out of your business, you want to make sure you have a good advising team. Which includes a mergers and acquisitions advisor, of course your accountant, who’s familiar with your business, and a deal attorney. So, if you need help in any of those areas and you need a good M&A advisor, that’s what we’re here to do and help. And we look forward to having those conversations with many more business owners in the future.
Thanks a lot everybody. Take care.
Finance and Leadership in March Madness
Finance and Leadership in March Madness
Hey everybody, Christian Baldwin with Black Diamond Mergers & Acquisitions. It’s March and I couldn’t be more excited for March Madness since we didn’t get to see it at all last year. It’s really one of the best sporting events of the year and this year there’s a lot of hype since everything is going to be held in Indianapolis. All the teams are getting ready to get set. Our team asked me to do a little video on March Madness since everyone’s excited about the tournament. I thought, “What are we going to talk about?” So, I did a little research on the finance and financial impact of the tournament itself and I wanted to bring some of those points here today so you can think about them and maybe go back and do some more research if you’re interested. And then also leadership and how that is involved in a big tournament like this and how that my play into our work environments.
I’ll give credit to Tim Parker for some of these facts and figures that I’m going to share. He has a really good article out on Investopedia if you guys want to check it out. You can get some additional details about what we’re going to present here.
The tournament is big business of course, and in 2019 the NCAA reported they collected about $933 million in revenue that is really from ticket sales and sponsorships and all of things that come together to make the tournament go. They claim they keep about 4%, or $37 million, for their own operating expenses and the other 96% that is generated is divvied back out to the conferences. So, the way it works is if your team advances one game, they get a unit credit. The unit credits are $250-300,000 per victory in the tournament. Every conference that has teams participating, they’re earning credits every time they win. At the end of the tournament, they reconcile all those and say “okay, well how many victories did the SEC have versus the ACC?” and the NCAA divvies out proceeds accordingly from the basketball fund, if you will. Then it’s up to the individual conferences to divvy up those funds to their member institutions. So that’s kind of how the money flows there.
On the contract side, with the TV rights, in 2010 the NCAA signed a contract with CBS and Turner Broadcasting for $10.8 billion. Then they renewed it in 2016 for another $8.8 billion, which carried that contract into 2032. So there’s obviously a lot of money and there’s a lot of eyeballs that watch this tournament and people get really excited every year for it. It’s a great spring event.
In 2019, there was about 149 million brackets filled out online, and about $8.5 billion in total wages that were gambled on the tournament itself. So, no matter where you are, no matter what your school is or affiliation, it’s always a great event.
I was fortunate to go the ’95 Final Four in Seattle. And in 1994 when Arkansas won, we have a basketball here that was signed by the team, and they’re looking good this year too. A lot of great things, lot of good teams, lot of great people involved.
On the leadership side of basketball, it’s interesting, I was reading a book by Mark Goldstein called Just Listen and I highly recommend it. One of things Mark points out in terms of competitiveness is when you have superstars on a team, if they tend to be selfish, teams don’t really do that well collectively. But what gets superstars to work on teams that work together really well in a competitive environment is they have to lower they’re competitiveness among the individuals on the team and work collectively as a cohesive unit. That kind of resonates with business too because whether you’re a team of 2 or a team of 100, you’ve really got to lower your competitiveness amongst yourselves to elevate your competitiveness against what really matters, which is beating the other team.
Anyway, that’s some information regarding March Madness and how it flows financially and then some leadership examples as well. Go root for your teams, fill out those brackets, and have a great month.
A Brief Introduction
A Brief Introduction
Managing Director Christian Baldwin details the foundation and creation of Black Diamond Mergers & Acquisitions, LLC. Check out this short video to learn more!
Welcome to Black Diamond Mergers and Acquisitions. The purpose of this brief intro video is to connect and inspire others, whether you are a new member of our team, or a potential client checking us out to see what we are really about.
I started Black Diamond in 2013 because I actually was looking for a business to acquire. And boy was I really frustrated with the process. I thought to myself there’s got to be a better way to represent a business and help someone through a transaction whether you are trying to sell or buy a company. Through a little bit of research and some diligence, we came up with a plan for Black Diamond. And we’ve been fortunate to help many clients since that time when we first started and really have set ourselves on growing our culture and implementing it.
We stand for 5 things. They are accountability, hard work, integrity, family values, and excellence. In everything we do, we go back to these five core values to make sure that we are representing who we want to be as we lead deals. And in the process of leading a deal, we focus on three main things for our clients. That is being diligent and professional and creative problem solvers. One of the best examples that I can give for this is at one point in our early history we were working on an assisted living transaction. This was a great deal, and we were working with the buyer and seller near the finish line, and there had to be an inspection done on the actual building. So, the inspector goes out to the building and there was a new addition on one of the areas of the building and he came and said, “you know what, I think we need to refer this out to the structural engineer just to make sure the support beams are in the correct spots.” Well, on such short notice, we were edging up against closing. Where are you going to find a structural engineer? So, our team got together and went to some local architects in the area and asked for some referrals to some structural engineering companies. Most engineering companies couldn’t get to us for four to six weeks, so we had to really, again, kind of take charge and quarterback this deal and figure out who can help us out quicker than that. During that process we were fortunate to meet a gentleman by the name of Bill Hathaway. Bill was a great resource for us, and it turned out that he had really retired, but he still had his certification and state stamp, so he did some consulting on the side. We went to his house and his wife was gracious enough to let me in and told him the situation. He actually was familiar with the location we were talking about and he went with me to the property, and we were able to get under the property. He inspected the beams and piers and that sort of thing. He told me, “look I’m going to do some calculations and I’ll get back to you the next day.” So, he called me the next day and said “hey, this is what you need to do. You need to go to Home Depot and buy some 12-foot headers, rip them in half essentially, and re-brace some of these beams.” He told me exactly which ones to do to redistribute the load in this section of the facility.
Long story short, because of his expertise, the total cost of the solution was only $220. Previously, we weren’t sure if this was going to kill the whole transaction or if it was going to be some exorbitant amount to get this fixed. Point being is that’s a part of our culture, that’s what drives us everyday to try to get creative solutions to problems when you’re buying or selling a business. IT can be stressful enough as it is, but we want to make sure that at Black Diamond we are actually leading the deal. WE aren’t waiting on somebody else. We want to take charge and lead and be the quarterback of the transaction to make sure that all things are looked at and done as professionally as possible. No stone goes unturned to try to find that solution to whatever that challenge may be at that given moment in time.
So, we invite you to continue to explore us and find us what we’re all about. If there’s anything we can do to help you, please don’t hesitate to reach out and let us know. Afterall, it’s what we do. We really enjoy bringing buyers and sellers together to extend the legacy that was started by the business founder at some point in the past.
Thanks for watching this short video, and welcome aboard if you’re a new team member. If you’re checking us out to potentially have us help you, please don’t hesitate to reach out. We’d love to establish a great relationship with you as well. Thank you very much.
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