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
How will the new tax changes impact my business?
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.]
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.
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.
Introducing M & A Leader Ryan Wagner
Introducing M & A Leader Ryan Wagner
CHRISTIAN: Hey everybody this is Christian Baldwin with Black Diamond Mergers and Acquisitions, hope y’all are doing well out there today. I am excited to be joined by Ryan Wagner. Ryan is the newest addition to our team, and he is going to work in the Kanas City market for us. We are super excited and honored to have Ryan be a part of Black Diamond. I just wanted to take a couple minutes this morning to introduce Ryan to you. And let you know that he’s got a great track record with lots of good experience doing buy side and sell side transactions. And we couldn’t be more excited to have him has a part of our team.
Ryan, why don’t you tell us a little bit about your background and what you are looking most forward to now being a part of the Black Diamond team.
RYAN: Yeah, thanks Christian. So, you know, I grew up in Wichita, spent about ten years in Kansas City doing M and A work prior to moving to New York for a few years. I’m now back in Kansas City.
I started off in the buy-side, doing acquisitions of utility scale, large scale, power generation projects. Anything from natural gas fired, wind, solar, some oil, some coal. Then moved to the sell side where I worked in investment banking in New York for the infrastructure group of P.J. Solomon where we advised clients on selling their businesses, selling their large-scale infrastructure projects, their large-scale power generation projects. And after that, I worked for a couple of start up companies who were looking to secure funding for projects related to the energy space. One was looking to have solution to introduce additional compressed air into gas turbines, another was a solar development in the southeastern United States. I always had my eye on getting back to Kansas City, so I’m excited to be joining the Black Diamond team because I spent a good amount of my adult life in Kansas City. I’m excited to help the smaller businesses with the process of buying and selling their business, a world that I’ve lived in for a long time. I’m excited to help my hometown businesses with that process.
CHRISTIAN: That’s great. Tell us a little bit more about your financial experience. I know you spent some time as an acting CFO for a number of different ventures. What are some things that a business owner, from your perspective, really needs to plan for when they’re looking at the financial aspect of their company?
RYAN: I would say just thinking about what is going to prep them best for a sale. We look at all kinds of businesses and being straightforward with the challenges, as well as marketing your successes, is important. When you’re selling a business, all is going to come to the surface. So, what I’ve seen a lot of times, businesses try to mask some of their deficiencies instead of trying to address them and figure out how to make those better moving forward. So, I say with any deficiencies in the business, address them, don’t be afraid of them, because with the diligence process, which all buyers go through, those things are going to come to the forefront. So, while businesses often have good success, which is why an exit event is even possible, it’s important to understand and address any deficiencies because a buyer is going to ask about those and dig into those, so I think that’s important. I’ve always taken the stance of being as upfront as possible because it’s going to come to light eventually.
CHRISTIAN: That’s great. Again, we are super excited to have you as a part of our team and thank you for joining us, we are honored to have you aboard. We are looking forward to helping more and more families get through this process. Those of you that are out there listening or watching, if there’s anything we can do for your family, your business, please don’t hesitate to reach out to us. We are here to help in any way possible that we can. Y’all stay safe and warm out there. Take care. Thanks.
Different Types of Bank Wires
Different Types of Bank Wires
Christian Baldwin here with Black Diamond Mergers & Acquisitions. Hope everyone is doing well out there. Today I want to cover a topic that sometimes we tend to overlook and it’s the various types of bank wires. In particular, I want to point out today a direct wire and an ACH as this recently came up in a transaction that we were working on and it got me thinking that a lot of people don’t really know the difference and it’s just a little fun fact that we should always remember there’s a difference between a regular bank wire or direct wire and what’s called an ACH or Automated Clearing House wire and they can really add a delay if you use an ACH versus a direct wire in a closing transaction. It can potentially cause a delay of anywhere from one to three days. So let’s take a look at the differences on those. OK. So what we’re going to do is we’re going to have two different banks. OK. Bank A and Bank B and in our example here we’re going to put our Federal Reserve at the top. Ok. So we have the Fed. And then two different banks and we have let’s say we have one bank account at Bank A and we have one bank account at Bank B. Well the this could be like an escrow account or something like that. It doesn’t really matter the type of account for this example; but the point of the objective is to move money from this account at Bank A to this account at Bank B. Now if we do a direct wire. Basically what we are telling through the routing number of this bank (every bank has its own routing number) and in the bank account we’re telling – we’re giving instructions to one bank to send money directly to the other. So it’s fairly straightforward but this would be an example of a direct wire. Ok. Hey please send money from this account in this bank to this account in this bank. And it goes from this bank to this bank one at a time on a direct basis. So the inbound wire department from bank B for sending from A to B would receive an amount from bank A at any point in time during the day and then they would look to see what account it goes in they would apply the funds. Typically this could happen within an hour or so. It’s pretty fast as long as you meet the bank wire deadline for that particular day. OK now ACH is different. All right. So ACH is where banks use what’s called a batch processing. OK. So. Bank A says OK we’re going to take all of our ACH wires and we’re going to send them in a batch process (ACH to the Federal Reserve overnight.) This usually happens overnight. So and they’ll do this multiple times a day sometimes it’s with you know maybe like four hour increments or something. And so they batch this all of these ACH wires they get sent to the Federal Reserve. Then the Federal Reserve overnight they look at them and they say “OK all of the banks that are out there in the world that had ACH’s destined for bank B we re-sort them.” So then they package them up and they take them all from different banks and they say “OK Bank B, here’s yours. Here are all your ACH wires that came in overnight and then bank B looks at them and has the unpackage them and say OK what account do they go in?” And so you’re injecting you know at least another day delay by using ACH wire.
So why is this important? Well this is important because when you’re closing a transaction, obviously timing is very critical, right? So if your buyer says we’re going to send a direct wire to escrow, you should always ask the question “what kind of wire are you planning to send? Is it a direct wire or is it ACH?” For timing sake, make sure it’s a direct wire. That’s just a fun fact. Hope everyone’s doing well. If there’s anything we can do for you, please don’t hesitate to reach out and let us know.
Lessons Learned in 2020
Lessons Learned in 2020
Managing Director, Christian Baldwin, reflects on lessons learned in 2020.
Business Leadership in Flight
Business Leadership in Flight
Managing Director Christian Baldwin explains the parallels between leading a business and flying an airplane and how small changes can have huge impacts.
Hi there, Christian Baldwin with Black Diamond Mergers and Acquisitions. I want to talk to you today just for a couple of minutes about leadership lessons in business and how they actually relate to flying an airplane. One of my friends is a pilot instructor and I had the opportunity to go in the air with him on Sunday afternoon. And he let me take the controls while we’re in the air for a few minutes. I was really amazed how a little bit of touch on the steering column or on the rudder pedals had a great impact on the direction of the of the aircraft. Just a very slight turn could really make you go 10, 20, 30 degrees one way or the other. And if you didn’t pull up on the steering column, then the whole nose of the airplane would tend to decline. So, there’s a lot of things that have to go together that thankfully our pilots are trained on and that’s what makes for a safe flight. But in regards to business, I was thinking about this as we were going and there are a lot of similarities. I wanted to just point out a few of them today, because as we talk to business owners all the time, some of these things are really important when it comes to operating a business. The first is a small control can create big change.
If you’re at the top of your organization and you issue a mandate or make a statement, sometimes just one statement can create lasting change on your organization. So, every word that we think and every word that we say has really got to be intentional. Sometimes it should be what should we not say? And this is true for any organization of any size. Sometimes when someone that works for you ask a question how you respond can have lasting change on not just your business but their entire life. So, we need to be really careful about that. As I was flying with my friend, I thought a lot about that. I thought, you know, just a little change here in the steering column could get us totally off course. Or if we’re doing it the right way and we’re making slight adjustments as we go, then obviously we’re going to reach our destination safely.
The second thing is he pointed this out as it was a very windy Sunday afternoon. He said, “you have to plan for the wind.” So, from takeoff, looking at the direction of the wind and getting the weather report. Obviously in business, we have to do that, too, right? Business leaders have to constantly prepare for changes. This strategy is known as the strategy of flexibility, which means that if something happens or if I get thrown a curveball, I want to be able to adjust quickly to that and recover so that we continue to remain profitable and create the right culture for our for our teams. There’s headwinds, things that come against us and there’s tailwinds when things are good. And you seem to be just being pushed by forces that are in your favor. So, we need to be monitoring those and trying to do our best to see what’s out there, much like a pilot would do. The third thing is let’s plan always to land safely. That sounds like a good idea, right? We want to make sure we’ve done our flight plan, we know what we’re doing, we know where we’re going to land, and when we’re going to land. We have contingencies for every step of the way. If something fails in flight, what does a pilot do? Well, they’re trained to have alternate landing options, depending on where they are and how high they are in the air. These are things I had no idea that that they are thankfully trained on. How does that relate to business? Well, as I thought this through growing slowly, right? Don’t make an investment that’s going to kill your business, right? Try to make intentional investments as you grow so that your culture is well defined and that obviously you want to exit safely and plan safely all along the way from where you are now to your future. Hopefully that’s a little bit of an analogy from business leadership and flight training. I hope you guys are doing really well. If there’s anything we can do to help you have a successful end of your year, please let us know we’re here to help in any way possible. Thanks.
Value Creation Before M & A
Value Creation Before M & A
Every great idea starts in the mind of an entrepreneur. So, whether that’s a small idea or a big idea it’s going to start there. The entrepreneur, he, or she, has this wonderful idea and how much is a great idea worth? Does anyone want to take a guess? Zero? Zero. That’s exactly right. A great idea is worth nothing. All right. It’s all about the execution of that idea. Once you have a great idea, and there’s a million great ideas that are out there, you have to take the next step. If you are a true entrepreneur, right? So, you have to be not just a dreamer, but you’ve got to be a doer and you have to take this idea and ask yourself, “Okay, is there a real opportunity here? What does this idea solve? What problem am I going to solve?” Whether it’s a product or service. Then once you figure that out you have to really think about the market. Is there an existing market for this idea? What does that look like and do I need any resources to bring this product or service or this business to life. Do I need people? Do I need machinery? Do I need a building? What is that going to look like? Once you figure all that out then you have to go back and ask yourself, “Am I passionate about this? Can I devote 120%? Am I all in? Is this going to intersect my talent and my interest so that my desire will fuel it? Your professor Omar is probably one of the best examples I can think of that. I mean he is passionate about his business. He knows exactly where he wants to be. He’s got the fire to get it done right. I mean if he didn’t care anything about food, he wouldn’t be that energized to do it every single day, right? So once you get all of that kind of line down you have to start putting it on paper. You have to then go, “All right. How am I going to get this into a business plan? What’s that really going to look like?” And this is where you start really writing down what the problem is, how you’re going to solve it, what’s the market, and all the research. How many different people are already out there doing this? If any at all and how you plan to compete with them. The financing component of this is really important.
Now, do you need an angel investor to come along with you and help get the business off the ground? Do you need a venture capital company to maybe help fund part of this and what does that process look like? How about family friends? Are they going to be able to loan you some money if that’s what you need to get this off the ground? Or you can be able to do it all on your own and just start from scratch and grow slowly. There’s no one right answer for any particular idea or business opportunity. There could be a bunch of different ways you would want to strike that and do that. After you do that, you’re going to want to put a name on it. What are you going to name it? How are you maybe going to brand it, that sort of thing. There’s a few very tactical things that you have to do. You have to go out and draft an operating agreement. You can hire an attorney to do these things for you. Or you could look online and come up with one or reach out to somebody that maybe has an example. So, you’re operating agreement is going to tell the members of your company whether it’s just you as a single member or multiple members or shareholders how you’re going to operate amongst each other for with the business. Then you’re going to create your legal entity. You go to the secretary of state’s website. If you’re going to have an Arkansas entity, you’re going to get the Arkansas Secretary of State’s website. You can create an LLC or a corporation right there with all the steps. It’s not too hard or you again you can hire an attorney to do that. Once you have that done, they’re going to give me what’s called Articles of Organization if it’s an LLC or Articles of Incorporation if it’s a corporation. You take that and then your next step is to go to the IRS website. You apply for what’s called the Employer Identification Number. Then you get your EIN and that’s what you need to open a bank account if you’re a company. It’s almost like a Social Security number for an individual. The EIN is really the number that goes with the company that tells the government that you’ve opened this account at a bank. Once you have your bank account now know you’re ready to go start selling your product or service and you’re operating your business. Then over time, you can build that value and hopefully one day somebody will pay for that value. These are the basic steps that you need to create a new company and then you can build this value over time and hopefully sell it one day or trade or whatever you want to do.
Due Diligence to Increase the Value of Your Company
Due Diligence to Increase the Value of Your Company
What's Your Company Worth?
What’s Your Company Worth?
Black Diamond’s Managing Director, Christian Baldwin, explains how to determine the price
you can expect to receive from selling your business.
Hi Christian Baldwin here with Black Diamond Mergers and Acquisitions on the bank of the Boise River in Boise, Idaho this morning. I wanted to talk a little bit about “what’s your company worth”. We get that question all the time at Black Diamond because people want to know what they can expect to get if they sell their company for all the effort, hard work, and equity that they have invested over time. There are a couple different ways that you can go about valuing the business. One is more of the certified approach for trust or estate planning purposes. You might hire what is called a Certified Valuation Appraiser, otherwise known as a CVA. The CVA is a credential that some have in order to value businesses. This is an approach that you would use if you were going to need a bank appraisal, for example, on a business. A CVA will look at it and they will give you an idea of what the company’s worth; but it oftentimes does not take into account market conditions or “what are the most likely willing and able buyers in a given economic setting going to offer to purchase your company”. So, when some people say, “what’s my business worth?” if there’s not a bank reason for it or an estate planning purpose for it, most of the time they are really asking us “what do you think I can sell my business for?”. So, under that exercise we look at it three different ways. First of all, we are going to look at your balance sheet and look at the asset value of the company. The next thing we are going to do is called a Discount Cash Flow Analysis and these approaches are similar to what a CVA would do in their first two steps. The third thing that we do is the market analysis. It is important for a business owner to really understand what else is happening in their industry, what are other companies selling for that are a similar size and similar location, and other factors that may be similar to them. If you have a business that is in the healthcare sector, for example, or construction or whatever the case is – you want to know what the other businesses are selling for in those markets. That is where we spend a significant amount of the research, trying to figure out comparables that are similar in industry. Once you get your profitability, there is a whole mechanism and formula to do that and you can do it over the course of 12 months, 24 months, 36 months, last 12 months specifically instead of calendar year, or whatever the metrics are most suitable for that analysis, you take that and then you apply an industry multiple to that. They can range, of course, anywhere from three to ten or more depending on the size, industry, and scope of the of the business and what they do. Once you get those three metrics, again, that’s the asset value, the discount cash flow, and the transactional base, you can apply a blend or percentage to come to a range of expected valuation or expected offers from the buying market. Those are your main differences in terms of “what’s my business worth”. I wanted to just briefly recap those this morning. We hope you are doing well. If there is anything we can do for you at Black Diamond M & A, please let us know. Take care; see you next time!
Everything You Need to Know About Buying A Business
Everything You Need to Know About Buying A Business
During this recorded webinar you will learn valuable insights on the process of finding, financing, and acquiring a business.
Presented by Christian Baldwin, Managing Director.
Insurance - Important Part of the Deal Process
Hi, Christian Baldwin here again with Black Diamond Mergers and Acquisitions. Today I want to talk about insurance. Insurance, of course, is always important when we are working with a client to buy a business; but now it seems like it is even more important than it was before. We need more time on the deal process to make sure that the right insurance is acquired and for the best premium. It is because of Covid, unfortunately. Insurance carriers right now are having a hard time assessing potential future risk based on the environment that we are living in and it is impacting all different industries and all different kinds of insurance. For example, recently a transaction that we were working on required premium insurance (from the lender’s perspective) and that was not because of the specific deal we were working on necessarily. It was because more of a general question exists in the marketplace. That question is “What is the future default rate likely to be for American businesses moving forward if they were to fail based on, again, the Covid environment that we are now faced with?” I think this will hopefully be more of a short-term situation and once we find a vaccine and things level out over time it, in theory, would return back to normal. I know, supposedly, Congress is working on this with the insurance industry itself; but in the meantime, where does that leave you if you are going to buy a business? Well, you need to add an insurance expert to your deal team earlier on in the process than you might normally. So, this looks like probably at the start of due diligence an insurance person that you trust adding them to your team alongside your M & A advisor, your attorney, and your accountant to do first of all a thorough review of the existing policies. Those can be workers’ compensation, health care, general liability, property, and all the insurance policies that the business currently has. Depending on whether you are doing an asset or stock transaction there are some nuances when it comes to insurance but let’s say you’re doing an asset transaction. You are going to have to get new policies issued. There are some negotiations that are going to take place between your buying team and the insurance companies to make sure you have the right coverage. Previously, this was not that big of a deal because an existing business who had a good modifier, for example, on workers’ comp that was recognized. Now, the underwriting process with the carriers is going to take longer. You probably need four to six weeks to make sure that you can allow proper time to do this work and to make sure you are getting the right coverage for the right price. We have seen it in a number of deals recently and we are not insurance experts here at Black Diamond, but we do work with a number of them across the country. If you need a recommendation, we are happy to provide that. We hope everybody is well and safe out there. If there is anything we can do for you whether you’re looking to sell or buy a business, please reach out and let us know. Thanks, until next time!
“Benefits of Internships for Small Businesses”
Good morning! Christian Baldwin here with Black Diamond Mergers and Acquisitions. Today I want to talk to you about internships. It’s the first week of June and a couple of weeks ago most of our colleges had graduations. There are a lot of great students that just graduated but they have nowhere to go short-term because either they’re going to go to grad school in the fall or possibly they’re really seeking long-term employment but the problem is they haven’t been able to get a face-to-face interview given the pandemic; and most companies have been on somewhat of a hiring freeze short-term. So, this presents a challenge to them and also a great opportunity for small businesses across our country because there’s a great talent pool of individuals that either recently graduated or perhaps are between their junior and senior year and they’re going to be thinking about what are they going to do when they get out of school in 2021. Well, this is a good opportunity for you if you own a business to take advantage of some of this because you might find that you need some help in marketing or technology or finance, whatever the case may be, accounting even. There are some great students that would love to pitch in and help you out. We were fortunate to take advantage of this opportunity. We had a young man reach out to us through LinkedIn, actually, and request a summer internship. He’s going to go to law school in the fall and he said, “Look, I’ve got the summer on my hands. I would love to learn from you guys and be able to help out.” So, we actually set this up remotely. He doesn’t have to come into our office. A couple of things that you might take into consideration if you do decide to create an intern program. You can create an internship program for one. It doesn’t have to be a large-scale thing. You can just try it out and see how it goes. Make sure they report to one person and filter all the assignments through one person so he or she doesn’t get overwhelmed and they have somebody that they know they can go to with questions. Make sure it has a certain start and stop date because it’s not really fair one way or the other and it’s hard to hold someone accountable if they don’t know when the employment or the internship actually ends. Make sure that you’ve got everything set up correctly from the get-go. Now, if you use a remote situation and sometimes, right now with the social distancing rules and things like that you may have in your workplace, a remote situation could be best. That’s what we’re doing right now mainly because this gentleman lives out of state and it works for us; but you have to make sure that you don’t lose any skills or talent in translation. You want to make sure that you can provide the right rules for him to make sure that he’s not just giving the work output that you require but also that we’re giving him something that he’s going to be able to use for the rest of his career as he takes off on that launching pad. I wanted to just mention that because I think it’s a great opportunity for short-term productivity for companies that are out there that maybe aren’t sure if they want to hire for a specific position right now but they still need help getting work done. So, I would encourage you to look at either students that are still in school or recent college graduates that are sort of in limbo for the next few months. If there’s anything we can do for you, please let us know and I hope everybody is doing well!
“What to do with PPP Loans if You are about to Close a Deal?”
Managing Director, Christian Baldwin, discusses what business owners can do about their Paycheck Protection Program Loan if they are in the middle of selling their business. A topic new to mergers and acquisitions!
Hi Christian Baldwin here with Black Diamond Mergers and Acquisitions. Hope you guys are doing well out there today. I wanted to just touch briefly on something that has come up in three different deals recently and that’s something we’ve never seen before, so I wanted to give you some insight on it. It is the PPP loans that are out there and what to do with them if you’re in the middle of a transaction. Now all of a sudden, you’ve got a buyer that’s buying a company and the seller just received PPP funds. This is of course the Paycheck Protection Program that was issued by the federal government through the Treasury as a response to the Coronavirus. It’s a great opportunity for small businesses to receive this funding. The thought is that if you use it for payroll, rent, and utilities, all of it or most of it would be a forgivable loan. So, it’s a great avenue for a business owner to take advantage of. The question that we’re going to address right now: what do you do if you’re selling a company that now has a PPP Loan that you just got? Well here a couple of things to note. If it’s an asset transaction it probably won’t have any impact at all because the selling entity whether it’s an LLC or a corporation or whatever it is, they would have received the funds and the buyer in an asset transaction normally isn’t inheriting those liabilities, even if it’s short-term (unless you made some sort of exclusion in the deal for the buyer to acquire cash or some percentage of the cash on the balance sheet). If it’s an asset transaction, it’s probably not even going to come into play because the sellers receive the cash and they have the liability whether it’s forgiven or not – it still remains with them in an asset transaction. Now, let’s talk about a stock transaction: it’s a little bit different because let’s say that the seller just got a PPP loan and now their cash on their balance sheet has increased short-term for the eight-week period where you have to keep track of your expenses. That loan is currently a liability. It is not automatically forgiven the day that you receive the cash. So, if you’re closing a deal in between day one and at the end of the eight-week period you’ve got to think about this. For the sellers, the assets increased and there should be a liability on their balance sheet that matches it. If you transition the company in the middle of those two months and it’s a stock deal, then presumably the buyer would inherit both the cash and the liability. It would be their responsibility post-close to make sure, and the seller is probably going to have to help with this process, but to make sure that as much of that loan could be forgiven as possible. Once it’s forgiven then what you can do is take it off the balance sheet from a liabilities standpoint and convert it to miscellaneous income. It ends up being a wash when it’s forgiven but in the meantime it’s technically, in order for it to match on the balance sheet, you have to have the cash increase and the liabilities that match it. Something we’ve never seen before because it didn’t exist a few weeks ago but in the last few weeks we’ve seen it three times and everybody is asking “How do we handle this?”, “What do we do with it?” and that sort of thing. So hopefully there’s a few tips that can help you if that’s something that may come into play for a transaction. Hope you guys are staying well out there, and again, if there is anything, we can do for you let us know! Until next time.
“Impact of Coronavirus on M & A Activities”
Christian Baldwin, Managing Director, covers the impact of coronavirus on mergers & acquisitions activities and the opportunities available in the market.
Hope everybody’s doing well and staying safe today. Like many of you, I am working from home today. I was originally going to do this monthly video during our March Madness Watch Party last week which was going to be for friends and clients, and we were all excited about that. Then that got canceled. Then I was going to do this video on the ski slopes of Colorado but, as you can tell, I’m not there either. This week is actually spring break for our kids and that’s been canceled. The world’s a little bit different than it was a month ago but, nevertheless, we’re still moving forward and we’re working on the things that we were working on previously. I thought I would cover two things today just to let you guys know a little bit about the questions that I’m being asked. The first is what sort of impact has this Coronavirus had on deal flow that we see in the private sector; and then the second question that I’m getting a lot these days is what opportunities do I see because of the virus that are either current or, you know, short-term or long-term. I’ll cover both of those topics quickly. Our deal flow really has maintained its normal pace. However, deals that are either under contract, in due diligence, or ‘Letter of Intent’ phase all of those have been pushed two to four weeks right now because of two primary reasons. One, uncertainty in the market itself; but then secondly, some of the ancillary services that are required to get deals closed they just can’t travel. They have travel restrictions and things like that that have been in place for ten to fourteen days, that sort of thing. Those are a couple of reasons why things have slowed down but I still expect them all to get done. It’s just going to take a little bit more time than necessary or than normal, I guess. Secondly, what opportunities do I see? There are some really good short-term opportunities right now because good businesses need bridge loans or Mezzanine Loans to cover payroll and short-term obligations that they have. These are good businesses that have been impacted so their revenues are down short-term, but they will most certainly bounce back. These businesses are calling our office wanting to know if we can connect them and introduce them to private lenders. If you want to make a good return on a loan to a good business, they’re paying 10% to 15% interest on those types of loans. Please reach out to us. We can connect you with them and see if that’s something you might be interested in. Those good business owners are really the backbone of the United States economy. They’re weighing all their options. From the government options they’re trying to figure out to local banking options but private lenders, as well, is another thing they’re considering. That’s a short-term opportunity that’s out there for sure. Long-term I think there’s going to be some other opportunities in the next 90 days that come as a result of this. In general, sellers are going to be more motivated, buyers are going to be more cautious, but the smart buyers are going to take advantage of good opportunities. Right now, we’re seeing very industry specific things, such as hospitality, seeing a little bit of a decline in interest currently but technology is seeing a huge increase. Still a lot to learn as far as what’s going on economically. I do feel like things are going to bounce back rather quickly, honestly. Everything should get back on track, hopefully. Remember just focus on what you can control, keep your head down, and do the best you can. We will get through it like we always do. Let us know if we can help you in any way.
“Business Owners, Who Will buy Your Business"
Our Managing Director, Christian Baldwin, shares the different types of buyers available in the market today.
Hi, Christian Baldwin here with Black Diamond Mergers and Acquisitions. This week we’re actually on the road traveling to see a client and then going out to a mergers and acquisitions conference in Scottsdale. And really the majority of the attendees that are going to be at this conference are private equity groups. And it got me thinking: what types of buyers are in the market today for privately held companies? If you own a company in the United States, what does your buyer look like? If you begin to think about how you might exit one day and transition out of your business. Well, of course, you can go to an individual buyer and there are lots of those that are out there. You might even consider selling to an employee or a group of employees and that can be done with a private transaction or through an ESOP. Or you can go to the market and look at other types of buyers and break those down into two main categories: One, you might hear the term strategic buyer, which really is a fancy way of saying a larger company. So it could be a company that’s a competitor of yours or it can be somebody that you don’t really compete with, but maybe somebody that has an ancillary product or service that would really make a good target so that they can start to sell your product to their existing customer base. Those are some of the strategic buyers that you might find in the market. And then you have another group of buyers called financial buyers. Financial buyers can vary in different types and ranges and sizes, and we’ll talk about two of them here. One would be a family office or a group that’s managed by a team of sophisticated financial advisors to manage the money of a family or a group of families. That’s one group that might make a good investment and the other would be private equity groups. And since we’re going to meet with a bunch of them later this week just to get on their radar and vice versa to see what sort of deals that they want to look for and what deals we have to offer them. Private equity groups can be a good option for a company that wants to exit. And depending on the size and industry, they’ll typically want to hold that investment for five to seven years and then look to either add it onto an existing portfolio or platform of companies and then flip it out down the road. Or they might want to have a more of a long-term hold on it. What’s most important, usually, is the management of the company. And so, they might really want to retain you as the seller for an extended period of time, if not a manager that can really manage the company and help it grow post-close. So, when you consider all the different options that you have in the market, if you’re thinking about selling now or down the road, those are a few things to consider. If there’s anything we can do to help you as you consider your exit strategy and transition in how you take your company and hand it off to the next team or investor or whatever the case may be, please reach out to us. We’re happy to help and educate you any way we can.
“Bullets, Balloons, & Bear Hugs”
Managing Director, Christian Baldwin, covers some mergers and acquisitions terminology.
Christian Baldwin here with Black Diamond Mergers and Acquisitions. The other day I had this conversation with this guy, and it was kind of funny. I thought, you know what, sometimes in finance or mergers and acquisitions you need a translation to understand what’s actually being said. He says to me, “Hey, man, looks like you’ve got a really great “Big Ugly” on your hands. Do you have any offers on it?” I said, “Yes, actually we currently have four offers on it.” He said, “Well you can let the sellers know that I’m the “Big Daddy Godfather” here ready to give them a great big “Bear Hug”. All I need is a little more dry powder and maybe some seller financing. I’m thinking five annual bullets and a balloon. Then we can get the deal done.” So what is actually is he talking about? First of all he says, “Hey we’ve got a really nice “Big Ugly” on our hands.” What does that mean? Well, a “Big Ugly” is slang for a nice older company that has some value in it. That’s pretty easy. We have a nice older company that’s got a lot of value. Then he says that he is the “Big Daddy Godfather”. What does that mean? Well he’s basically kind of bragging and he’s saying that he is going to make an offer that is a really great one that the management team is going to absolutely love. He says that he wants to give him a great big “Bear Hug”. Well a great big “Bear Hug” in M & A is slang for offering more than the shares are worth. If the shares are worth $10 million, he’s going to come in at some amount higher than that because he loves this company and it’s got a lot of inherent value and he’s going to overpay for it essentially. He’s saying, “I’m going to get in an offer here that’s going to be better than anybody else’s, it’s going to have a lot of value in it and plus it’s going to be worth more than the actual value of the company.” Then he says, well, he just needs a little more “dry powder”. I always laugh when I hear that because basically what that means is “I don’t have any money – really”. So dry powder is a term that’s used for money or capital and it’s a really fancy way of saying money. Dry powder. If I need more “dry powder” I’m really telling you that I really don’t have any money. He’s saying that he wants to make this great offer on this great company, but he doesn’t have any money. Therefore, he’s going to ask the sellers to do a huge carry back on it and he wants five bullet payments with a balloon at the end. Just a hypothetical example here on that part of the conversation. If you had a principal loan of $5 million dollars, half a million dollar bullet payments at the end of every year, 5% annual rate, your bullet payments will be half a million a year and your leftover payment at the end of that five year term would be $2.5 million dollars. That’s your balloon. Your balloon is whatever is left at maturity. Your bullet payments are one time, usually annual payments, along the way before you get to maturity. Anyway, pretty funny conversation, I thought, here’s a guy that really wants to buy a great company but he has no money and he’s going to ask the sellers to carry back most of it not all of it. I hope you’re staying well. If there’s anything we can do to help you, please let us know!
“Capital for Growth”
Our Managing Director, Christian Baldwin, shares the different capital options available in the market today.
Today I’m in the office and I thought we’d talk about something that is a little bit basic to mergers and acquisitions, but it’s a question we get pretty often believe it or not. And it has to do with, if you own a company, what are some of your options for getting capital for growth before you want to exit? We’re going to talk about two of those options today. Let’s take an example of a company, we’re going to call it “ABC, LLC”, and inside of this company we have two owners. Okay, we’ve got an owner. We’ll call her Jane. Jane owns 60%, and she has a business partner, Bob. He owns 40%. So if their plan is to go get some money for a growth program so that they can increase the value of their company long-term, one of the things they can do is they can look at valuing their company today and then going and finding a third partner that will invest with them in their company. So just some terminology, our ownership or equity in our LLC here is really termed a “membership unit” or “membership units”. If we were dealing with a corporation then this would be equivalent to “shares” or “shareholders”. Let’s say that they want to go get $2 million for their growth program. Their need is going to be $2 million. They come together and say, “Okay, look, let’s each give 10% of our membership units to someone else.” Then someone else comes in and they bring the $2 million for the growth program. Then Jane would go from 60% to 50%. Bob, his ownership would drop to 30%. Then they’ve got a new person that will end up with the other 20%. So, for 20% I’m investing $2 million into this private LLC. Then they go through their plan. Hopefully the business grows and it’s worth more money. Then they can sell it at a higher valuation when they’re ready to exit, all three of them. That’s option one. The second option is a more traditional route. If Jane and Bob get together and they say, “Look, we really don’t want to give up 10% each because we think that the company can be worth a whole lot more down the road,” then our second option is going to be more of a pure debt instrument or, you know, really a loan. Of course, you can go to the commercial bank and if you have enough assets on your balance sheet and your cash flow is strong enough then a bank will give you a loan for that and you would work the traditional banking mechanism and you don’t give up any membership units for that. The second option compared to a commercial bank loan is going to be a Mezz Loan. A Mezz Loan can be a good tool for business owners short-term because even though you might pay a higher interest rate sometimes, we’ll see deals that are going to be anywhere in the 11% to 15% rate. It can be interest only for a short period of time. For interest only you can get this capital that you need to grow the company and then you can pay it off when you’ve met certain objectives and you’re not giving up any equity. The trade-off is a little bit higher interest rate, but you keep your ownership and then when you’re ready to exit you’ll have more of that share back in your own pocket. A couple of options there just to throw out. If there’s anything we can do for you, please reach out and let us know.