It was just last year that the Senate Finance Committee conducted a few hearings about the controversial tax treatment of “carried interest.”  The website, Investopedia.com, provides us with the following definition for the term, carried interest:

“A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds.  This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund’s performance.”

Given the recent election results and ongoing debate about executive compensation in the midst of the current financial crisis, it should not be a surprise that the tax treatment of income associated with carried interests could be changed as early as 2009.

Under current federal tax law, the character of the income to the carried interest is the same as the income earned by the fund.  Therefore, if most of the profits of the fund consist of Read more »

Popularity: 10% [?]

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Down economic cycles can offer excellent buying opportunities for well positioned companies but they may create funding challenges to getting a deal closed.  When credit is easy and senior debt lenders are liberal with leverage and terms, most buyers don’t need additional help in funding their deals.  In a down economy, it’s quite a different matter and mezzanine financing may be the solution.

Mezzanine financing is also known as subordinated debt and is junior to the security interest of senior debt while ahead of equity stakeholder rights.  Many of the features of a mezzanine loan are similar to a bank loan.  There will be provisions for interest payments, an origination fee, amortization terms, covenants, potential liens, default definition and remedies, and other items.  Additionally, mezzanine investors craft warrants into their structures to compensate for their risk as junior lenders.  Warrants provide the right to purchase equity at a later date.  Don’t worry, mezzanine investors don’t want to own your company so they will include “put” options, which when exercised, require the borrower’s company to buy-back the stock at a pre-determined price often tied to a valuation formula based on a multiple of the company’s earnings.  In short, it’s an in and out transaction designed to augment their return. Read more »

Popularity: 17% [?]

On February 20, 2008, the United States Supreme Court issued a momentous decision in Riegel v. Medtronic.  This decision represents a major victory for the medical device industry since it provided that medical devices, which are approved under the Food and Drug Administration’s pre-market approval (“PMA”) process, cannot be subject to a products liability or other personal injury claim under state law. 

The Riegel case was decided based on certain language contained within the Medical Device Amendments of 1976 (“MDA”), which preempt state law claims for damages when a medical device has undergone the PMA process.  While this case does provide relief to manufacturers with respect to those medical devices that did receive pre-market approval from the Food and Drug Administration, it is important to note that medical devices which only meet the “section 510(k) process” (a section of the MDA describing the review process) do not get relief from state law injury claims.  This particular issue has already been decided by the U. S. Supreme Court in the 1996 case of Medtronic v. Lohr, and therefore, distinguishes Lohr from the Riegel case.

So what economic effect might the Riegel case have on medical device manufacturers?  Like so many other questions, this will depend on several factors, including the type of medical devices being manufactured and sold.  Read more »

Popularity: 37% [?]

As Investment Bankers, we are often asked, “What kills most deals?” This is an especially critical concern in uncertain economic times like those we are in now. Unequivocally, our answer, regardless of the economic situation, is always the same, “Time is not your friend in deals; it is the ultimate deal killer.”

When we reflect upon our deals that did not get done, or those that died between Letter of Intent and Closing, regardless of the specific reason, time killed all of these deals in some why or another.

Once a seller of a business makes his/her decision to sell the business, time does not move fast enough. Sellers imagine the worst: customers or employees learning of the sale; declining revenues; problems with the business; all these events happening the longer a deal takes to get done. Some of these fears are justified, others are not. Read more »

Popularity: 42% [?]

CEOs and CFOs of middle market companies regularly make important decisions to engage a variety of Professional Service Organizations (PSO) to perform necessary corporate, transactional and financial planning tasks.  Yet, the engagement decision to hire a particular investment bank, wealth management advisor or consulting firm, is often made without examining whether the new PSO has an existing working relationship with the referring PSO already providing services to the company.   

Asking for a referral from an existing professional service provider is the common way that most CEOs and CFOs begin their search for another service provider with a distinct specialization.   However, if the referral discussion focuses on a particular PSO firm’s isolated attributes, this does not necessarily correlate with the prospective PSO firm being a “good fit” within the context of all the PSOs serving the company. 

The effectiveness of the PSO vetting process (the so-called “beauty contest”) can be improved by inquiring whether the referring firm (e.g., an accounting firm) regularly conducts business with the referred firm (e.g., an investment bank).  If a formal Strategic Alliance is found to exist between the PSO firms, then established methods and processes help ensure that the PSOs provide complimentary resources, expertise and advice, in order to deliver collaborative solutions to the client company.   Read more »

Popularity: 41% [?]

A lot successful business owners are reeling from the combined effects of the expanding credit crunch and economic slowdown we are currently experiencing.  Many owners who had “been thinking” about selling their companies and creating long-term financial security and more free time for themselves now feel trapped and  unable to pursue their dream.

As a middle market investment banker and exit strategy advisor, I have recently observed an overriding temptation in business owners to simply ride out the current storm and wait for the next wave of M&A activity—the next valuation peak—and then return to their thoughts to selling their business.  The problem is, if they wait until the next wave comes, it will be too late to maximize their opportunity, and they risk missing it altogether (again!).

My advice to middle market business owners is this: don’t just wait for the next wave to arrive. Expect it and Read more »

Popularity: 56% [?]

Recently, Fortune Small Business magazine conducted a survey of owners of privately-held, small & mid-sized businesses in the USA. Two questions were asked:

• How critical to your business’ survival is succession planning?
• Have you done anything about formalizing a succession plan?

The results were extremely interesting. More than 95% of the respondents said a succession plan was critical to the long-term survival of their business, but a staggering 85% had not done anything to formalize their succession plans.

This survey reinforces information we learned first-hand several years ago when Read more »

Popularity: 60% [?]

“I will sell if I receive the right offer, but I don’t want to market the business!”

Despite its obvious flaws, the above statement reflects the position taken by a surprising number of business owners. In fairness, marketing your business is time consuming and may jeopardize a hard-earned market position if “word gets out”, so the position is understandable. It just doesn’t make a lot of sense!

The “strategy” is flawed because it results in a reactive positioning, yielding all control to the buyer. It suffers from two serious deficiencies: Read more »

Popularity: 56% [?]

Corporate Buyers Should Answer 5 Key Questions When Preparing a List of Acquisition Criteria

Corporate buyers appreciate that acquiring another company is an effective way of achieving growth, which can compliment organic growth. However, before proceeding with any acquisition process, research in the area of Pre-Acquisition Best Practices has shown that 5 key questions should be considered by acquirers.

By answering these fundamental questions, a corporate buyer is then more readily able to detail a List of Acquisition Criteria. In turn, the List of Acquisition Criteria shapes the buy-side mandate given to an investment bank, which will then proceed to systematically contact both sellers that are actively for sale, as well as the much larger group of off-market target sellers.

• Acquisition Purpose. First, what is the purpose, motivation or intent that causes an acquirer to undertake buying another firm? Acquisitions are often employed by acquirers to achieve economies of scale, to expand existing product/service lines, or to penetrate additional markets. These goals are a reflection of the broader corporate strategy for how you want to grow your company. Read more »

  Popularity: 78% [?]

Many taxpayers have heard about or even utilized the 60-day Individual Retirement Account rollover rule at one time or another.  Did you know there is a 60-day rollover rule in connection with the sale of qualified small business stock (”QSB stock”)?  Essentially, within a 60-day period and if other requirements are met (e.g., the stock was held for at least 6 months), the taxpayer can purchase other QSB stock in order to defer all or part of the gain associated with a QSB stock sale.   

In 1997, as part of the Taxpayer Relief Act of 1997, a new section 1045 was added to the Internal Revenue Code that provides for the rollover of gain from the sale of QSB stock.  In the following year, the IRS Restructuring and Reform Act of 1998 provided some amendments to section 1045 including the expansion of the gain rollover treatment to additional taxpayers, other than corporations.

Read more »

Popularity: 100% [?]