Congress Passes American Taxpayer Relief Act of 2012

During the early morning hours of Tuesday January 1, 2013, the Senate passed a bill that had been heralded and, in some quarters, groused about throughout the preceding day. By a vote of 89 to 8, the chamber approved the American Taxpayer Relief Act, H.R. 8, which embodied an agreement that had been hammered out on Sunday and Monday between Vice President Joe Biden and Senate Minority Leader Sen. Mitch McConnell, R-Ky. The House of Representatives approved the bill by a vote of 257-167 late on Tuesday evening, after plans to amend the bill to include spending cuts were abandoned. The bill now goes to President Barack Obama for his signature.

With some modifications targeting the wealthiest Americans with higher taxes, the act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, P.L. 107-16 (EGTRRA), and Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It also permanently takes care of Congress’s perennial job of “patching” the alternative minimum tax (AMT). It temporarily extends many other tax provisions that had lapsed at midnight on Dec. 31 and others that had expired a year earlier. Among the tax items not addressed by the act was the temporary lower 4.2% rate for employees’ portion of the Social Security payroll tax, which was not extended and has reverted to 6.2%.

For more information on how the act impacts businesses and individuals:

Expiration of $5.12 Million Gift Tax Exemption Presents Unique Gifting Opportunity

As a result of the tax cuts enacted under former President George W. Bush and extended under President Barack Obama, the estate and gift tax currently is set at a maximum rate of 35% with a $5.12 million exemption amount.  But unless Congress takes action, the maximum estate and gift tax rate will revert to 55% and the exemption amount to $1 million, effective January 1, 2013.

It is uncertain what, if anything, Congress will do.  But given the impending “fiscal cliff” and substantial pressures to increase taxes, particularly on those with high net worth, there would appear to be a significant possibility that the estate and gift tax environment will become less favorable after the end of 2012.

As a result, there could be a one-time opportunity to make substantial gifts without incurring gift tax.  Since the gift and estate taxes are unified, an individual currently can make gifts up to $5.12 million (and a married couple up to $10.24 million) without incurring gift tax.  These amounts are set to reduce to $1 million for an individual and $2 million for a couple, effective January 1, 2013.

Exit Strategies appraises operating companies and asset holding companies for gifting, estate tax, and other purposes. You must establish fair market value of gifted assets as of the date of gift, and an independent valuation by a qualified business appraiser is often your best defense against an IRS challenge. For fractional interests, we quantify appropriate discounts for lack of control and marketability. Our quality valuation reports comply with USPAP and IRS business valuation standards, and we are prepared to defend our work in the unlikely event of an IRS audit.

If you think you might benefit from making sizeable gifts before year-end, contact your CPA and/or tax attorney right away, while there still is time to formulate and implement an appropriate strategy. Time is running out.

October 25th Seminar: Maximizing the Value of Your Business

In this fast-paced workshop, business owners learn …

  • Valuation basics
  • Factors that increase enterprise value and marketability
  • Steps to developing your exit strategy
  • Steps in a proven M&A selling process
  • Current market conditions and trends
  • Tax implications and impending changes
  • Answers to many common questions that owners have

This is essential information for private business owners who wish to sell in the next 1-5 years.  It is not too early to plan the successful exit you deserve.

When:            Thursday, October 25th, 4:00 to 6:30 pm

Where:           Petaluma, California

Presenters:    Al Statz and Bob Altieri of Exit Strategies, and David Fisher CPA

More Information: Call 707-778-2040 or Email for availability and further information.

For confidentiality, we limit attendance to one business owner per business type and pre-register all participants.

Small Business Acquisition Financing: What Lenders Want

In ten years of selling private businesses, financial leverage has consistently been one of the key success factors in expanding the pool of buyers and closing deals. Fortunately for business owners, the SBA loan guaranty program is an excellent funding source for deals up to $5MM. And, lenders are lending now. A lender analyzes both the buyer (borrower) and the business being purchased.  Here are 10 things lenders look for when evaluating a loan request for a small business sale/acquisition:

1. Down Payment.  Lenders want a buyer to inject 15%-25% of the total project in cash, depending on several factors including whether real estate is included in the sale. Common down payment sources are retained earnings, savings, retirement plan funds and gifts from family members. Your cash injection cannot be borrowed.

2. Creditworthiness.  Lenders investigate a buyer’s credit at the outset of the approval process. A bankruptcy, foreclosure or judgment usually nullifies their chances, no matter how good other criteria look. Remove blemishes from your credit history before you apply.

3. Track Record.  Individual buyers must have experience in the type of business and/or industry they are buying into. Lenders look for management experience, and they prefer to see prior business ownership. Tailor your resume to highlight your management and applicable industry experience.

4. Cash Flow is King.  Business cash flows must service the loan and provide adequate income for the owners. Lenders analyze the historical tax returns of the business—allowing reasonable adjustments for owner perquisites and non-recurring costs. The quality of financial records comes into play here. Your business plan also comes into play. Synergistic benefits, increases in working capital and capital expenditure needs are considered in the cash flow calculation.

5. Collateral.  Buyers with real property to pledge as collateral may compensate for weaknesses in debt service coverage, business assets, experience, credit, or liquidity. Generally, if you have equity in real property, the SBA requires that it be used to secure your business acquisition loan.

6. Positive Trend.  Nothing scares lenders more than negative sales and earnings trends in a business or its industry. Conversely, a pronounced positive trend is a thing of beauty to a lender. They often look back several years to see how the business performed through past economic cycles.

7. Business Plan.  Buyers have to submit a basic business plan for the business they are acquiring. Lenders want to see an intimate understanding of the business and industry. In most cases a plan calling for modest growth and incremental change is your safest bet.

8. Continuity.  Commitments by existing managers, key personnel, suppliers and customers to continue with the new owner represents reduced risk to a lender.

9. Seller Training.  Lenders want to see a well thought-out management transition plan. The training/transition period can be anywhere from 1-12 months, depending on circumstances. Be sure you negotiate this point up front and clearly spell it out in the purchase agreement.

10. Seller Financing.  When a seller finances even 10-15% of a deal, subordinated to the bank note, it shows the lender that the seller is confident in the business under the buyer’s leadership. This deal point is commonly imposed by lenders.

Finally, for loans over $350,000, or whenever a buyer and seller have a close (non-arm’s length) relationship, SBA lenders require a fair market value appraisal from an accredited business appraiser to validate the borrower’s purchase price. The deal can’t exceed the appraised value. Sellers are advised to prepare months or years in advance, to increase their odds of cashing out when they are ready to exit. Ask yourself, does my business qualify?

•   •   •

Al Statz, CBA, CBI, is President of Exit Strategies Group, Inc., a business brokerage, merger, acquisition and valuation firm serving owners of closely-held businesses in Northern California. He can be reached at 707-778-2040 or

The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which covers the North Bay area of San Francisco – from the Golden Gate bridge north, including Marin and the wine country of Sonoma and Napa counties.

October 27th “Maximize the Value of Your Business” Seminar Announced

Exit Strategies announces the next in its series of executive briefings for business owners. At this candid, fast-paced workshop, business owners will learn …

  1. Valuation basics & 20 ways to build enterprise value
  2. Preparing a successful exit strategy
  3. Market conditions and trends
  4. Tax advantages of selling in the next 15 months
  5. Steps in a successful M&A sale process
  6. Answers to common questions

When:    Thursday, October 27th, 5:00 to 7:30 pm

Where:   Petaluma, California

Cost:      Free of charge to private business owners

Presenters:   Al Statz, President, Exit Strategies Group, Inc., and David Fisher CPA

Registration Required:  Call 707-778-2040, or Email Space is limited. We will confirm attendance.

This is essential information for private business owners who intend to sell in the next 3-5 years.  It is never too early to plan ahead to achieve the successful exit that you, your family and partners deserve, and avoid unnecessary surprises.

•    •    •

Exit Strategies’ executive briefings are free or nearly free workshops on essential topics for private business owners. These topics originate from years spent guiding clients through successful exits, mergers and acquisitions. The sessions are presented by our knowledgeable staff and subject matter experts within our professional network, in a private, small group setting. For confidentiality, we strictly limit attendance to one business owner per business type and pre-register all participants.

Famed Investor: References to EBITDA make us shudder …

… does management think the tooth fairy pays for capital expenditures?

Article Published December 6, 2010 — North Bay Business Journal

This title is a quote from Warren Buffett’s letter to shareholders in Berkshire Hathaway’s 2000 annual report. EBITDA (earnings before interest, taxes, depreciation and amortization) is a good financial metric to use in analyzing, comparing and valuing companies, but, as business owners and investors, we need to understand its limitations.

EBITDA is one of several measures of economic benefit to which a multiple can be applied to estimate value for a company. A multiple is the inverse of a capitalization or ‘cap’ rate. When used properly, multiples are applied to an investor’s forward looking cash flows and adjusted for risk.

EBITDA is a popular proxy for Cash Flow because we can easily calculate it from the P&L — no balance sheet required. However, EBITDA ignores capital investment, working capital changes, taxes, borrowing, debt repayment and financing costs, which all affect a company’s cash flow and ability to pay dividends to its owners. The focus of this article is the “D” in EBITDA, or Depreciation, which results from owning capital assets.

Depreciation Matters

Don’t let anyone tell you depreciation doesn’t matter because it is a non-cash item. I have yet to sell or appraise a company that owns fixed assets that never need replacement. Not only do capital assets deteriorate, they are also subject to functional obsolescence caused by technology advancements (faster, cheaper, better) and sometimes new environmental regulations.

Here’s how Warren Buffet put it in his 2002 letter to shareholders, “Trumpeting EBITDA is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a “non-cash” charge. That’s nonsense. In truth, depreciation is a particularly unattractive expense because the cash outlay it represents is paid up front, before the asset acquired has delivered any benefits to the business. Imagine, if you will, that at the beginning of this year a company paid all of its employees for the next ten years of their service (in the way they would lay out cash for a fixed asset to be useful for ten years). In the following nine years, compensation would be a “non-cash” expense – a reduction of a prepaid compensation asset established this year. Would anyone care to argue that the recording of the expense in years two through ten would be simply a bookkeeping formality?”

Let’s imagine we’re in the drilling business, looking to grow through acquisition, and there are two companies in equally desirable markets available to us. Both companies operate the same number and type of drill rigs. Both generate $5 million in sales and $1 million EBITDA annually. Same EBITDA, same value, right? It’s a trick question. Company A’s rigs are 4 years old on average, while B’s rigs average 13 years old. We estimate that B will need $300,000 more in annual capital outlays to maintain its fleet and revenues going forward. Even though EBITDA is the same, Company A will generate substantially higher cash flows for us, and is more valuable to us.

Now say there’s a Company C available. It also shows $1 million EBITDA and is equivalent to A and B in all other respects except that it sub-contracts drilling to several independent operators. It owns no rigs and has no capital expenditures or depreciation. (Since there are no assets to depreciate or replace, EBITDA is a better approximation of free cash flow.) From a cash flow perspective, C tops A and B.

In general, projected cash flow should be our metric for evaluating companies. Cash flow assumes adequate reinvestment in the business, as opposed to the unsustainable reinvestment shortfall represented by EBITDA.

EBITDA is a good starting point for sale, merger and acquisition discussions. Just don’t rely on it for making a major decision; unless you would buy a car knowing only the model and year, or propose marriage on the first date. There are more EBITDA hazards to avoid, but the depreciation trap is a key one. When one of Warren Buffet protégés comes calling, we’ll be ready.

•    •    •

Al Statz is President of Exit Strategies Group, Inc., a business brokerage, mergers, acquisitions and valuation firm serving closely-held businesses in Northern California. He can be reached confidentially at 707-778-2040 or

The  North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which covers the North Bay area of San Francisco – from the Golden Gate bridge north, including Marin County and the wine country of Sonoma and Napa Counties.

Five Phases of the Business Sale Process

Article originally published on August 21, 2010 — North Bay Business Journal

Remember the story about the chicken and pig that walk past a diner advertising “bacon and eggs” for breakfast? The chicken enthusiastically endorses the menu. The pig replies, “For you it’s all in a day’s work. For me it’s total commitment!”

Most company owners already understand that selling a business on their terms requires commitment to a cohesive process. Others try and fail to sell, and learn the hard way that selling is more complex and fraught with pitfalls than they realized. A systematic business sale process improves your price, terms and probability of sale, and reduces your time, stress and financial risk. Here is a brief outline:

Phase 1. Evaluation & Planning

Commit to having the business objectively evaluated by a valuation expert. A reliable opinion requires significant due diligence, research and analysis of financials, assets, markets, relationships, contracts, systems, and more. The expert acts in concert with your legal and financial advisors to provide essential answers that allow you make the best decisions. This phase is critical to deciding the right time to sell — whether today or 1-5 years from now.

You’ll have answers regarding:
1. Most probable selling price
2. Likely deal structures
3. Target buyers
4. Marketability and potential obstacles
5. Strengths and weaknesses, value drivers and detractors
6. Financial gaps, wealth preservation and maximizing after-tax yield
7. Specific ways to build value, short and long term

Phase 2. Marketing Preparation

When the time is right to sell, commit to presenting your business to prospective buyers convincingly, in writing, with supportable facts. Since confused minds always say “no”, a thorough deal book allows buyers to grasp your business opportunity, affirm their interest and make strong offers. A “blind” summary will be extracted for initial contact with target buyers. While your M&A Advisor produces the book and develops a list of buyers with strong potential synergies, you’ll wrap up recommended business preparations that enhance value, marketability and transferability.

Phase 3. Confidential, Strategic Marketing

A direct marketing campaign is aimed at target buyers, using multiple communication methods. A net is cast deep and/or wide to produce buyers, based on for your business type and circumstances. Deal books are released to candidates that demonstrate financial ability and sign a confidentiality agreement. Your Advisor schedules site visits for a short list of finalists, where you get to know each other and ask in-depth questions.

Phase 4. Negotiations & Deal Structuring

Now comes the interesting part, and this is not a one-size-fits all process. Every transaction is unique. Your Advisor endeavors to obtain multiple offers, possibly through a controlled auction process, discusses their pros and cons with you and helps you select the lead horse. The Advisor guides you through negotiations, in concert with your tax and legal advisors. Experience is critical.

Phase 5. Due Diligence & Closing

With the deal points are settled, buyer and seller due diligence commence, while financing and third-party consents are arranged, and definitive agreements and closing documents are prepared. This is where phases 1 and 2 pay off. In today’s business environment, expect a financial audit, and expect the buyer’s experts to investigate government compliance, environmental issues, insurance claims, key relationships, contracts, equipment, intellectual property rights, and more. Your Advisor coordinates work flow and keeps the deal on track.
Selling a business is often a business owner’s largest financial transaction. To realize the reward you deserve for your years of hard work and sacrifice, be prepared, commit to a cohesive selling process and engage professionals that allow you to focus on business performance at a time when it matters most.

•    •    •

Al Statz is President of Exit Strategies Group, Inc., a business brokerage and valuation firm based in Sonoma County. He can be reached at 707-781-8580 or

The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which covers the North Bay area of San Francisco – from the Golden Gate bridge north, including Marin and the wine country of Sonoma and Napa counties.