Seminar Best Year To Buy Sell (Ver2 Final)

January 26, 2012

Why 2012 is the Best
Year to Buy or Sell a
Business
MODERATOR:
Thomas J. Meyer, Wells Fargo

PANELISTS:
Eric E. Dunn, Focus Capital Advisors, Inc.
Terence P. Kennedy, Meltzer, Purtill & Stelle LLC
Thomas A. Thomas, FGMK, LLC

THE CASE FOR SELLING NOW
1. Current Tax Incentives, Pending Sunsets and Higher Tax
Proposals = Tax Uncertainty
 Current tax situation is marked by uncertainty on many fronts.
 Election year with polar opposite views on the role and scope of the
federal government and tax policy
 Record budget deficits and borrowing at all levels of government
 Favorable Bush tax cuts remain in effect through December 31,
2012
 Without further legislation the Sunsetting of the Bush tax cuts will
result in higher taxes on many different tax fronts (income tax,
capital gain & estate)
 Republicans will not be able to change these provisions
without 60 votes in the Senate.
 2013 will begin some of the additional tax provisions of
ObamaCare
2


3


 Estate Tax exemptions will Sunset after 2012
 In 2012 estate tax exemption is $5,120,000 per
person with the remaining estate being taxed at a
rate of 35%
 Effective January 1, 2013 exemption is reduced
to $1,000,000 with a top estate tax rate of 55%

4


 Record budget deficits.
 Lack of political will by either party to make meaningful
cuts in spending at any level of government.
 Continuing search for “revenue enhancements.”
 All of these items certainly contribute to a well founded
uncertainty regarding the future of the tax code, but it
appears likely that all levels of government will be
looking for ways to raise taxes on wealthier Americans.
 Proposal will include ideas like the Millionaires Tax aka
the Warren Buffet Rule.
 All of this will effect Sellers’ net proceeds after 2012.

5


 Sell-side Transaction Tax Planning Issues
 Any structure that delays the receipt of sale proceeds will be
subject to the risk of tax code changes
 Seller Notes
 Escrows
 Earn-outs and contingent arrangements
 Sellers can elect to recognize all of the sales proceeds as
taxable income in the year of the sale. This could result in too
much tax being paid if all of the proceeds are not received &/or
earned.

6

Example of the tax effect on net proceeds

Assumptions:
Sale of the assets of Old School Manufacturing Inc (S-corp) for $20,000,000 net of tax basis.
As a result of the purchase price allocation, the net proceeds are attributed to the following items:

Ordinary income $ 3,000,000 Depreciation recapture, Non-compete, consulting
Capital Gains 17,000,000 Goodwill and intangibles

$ 20,000,000

2012 2013
Proceeds Tax Rate Tax Proceeds Tax Rate Tax

Ordinary Income $ 3,000,000 35% $ 1,050,000 $ 3,000,000 39.6% $ 1,188,000

Capital Gains 17,000,000 15% 2,550,000 17,000,000 20% 3,400,000

Tax under current legislation $ 3,600,000 $ 4,588,000

Potential additional 2013 taxes

Health Care Act - Surtax on investment income - only applicable to passive investments 3.8% 760,000
Proposed Millionaires Tax (based on net income over $1,000,000) 5.6% 1,064,000

Estate Planning
Net proceeds that could be moved out of the Seller's estate
under current legislation (assume married joint) $ 10,240,000 $ 2,000,000
7


The Bottom Line
2012 2013

Net Proceeds $ 20,000,000 $ 20,000,000

Tax
Ordinary Income Tax (1,050,000) (1,188,000)
Capital Gains (2,550,000) (3,400,000)
Health Care Act Surtax - (760,000)
Millionaire Tax - (1,064,000)
Estate tax (2,156,000) (6,373,400)

Net After Tax $ 14,244,000 $ 7,214,600

8


2. Increased Regulation and Other Headwinds.
 Regulation is not going away and the Democrats might
win again in 2012.
 Obama and Democrats promise increased regulation
(e.g. financial, OSHA, environmental could become
targets).
 Obama appointed pro-regulation recess appointments
to kick off 2012 to the National Labor Relations Board
and the Consumer Financial Protection Bureau.
 Once the regulations on the Dodd Frank Act are
finalized, the costs for businesses and the banks that
fund them will increase.
9

 Four out of 10 small employers (between one and 25
employees) say regulatory and legal problems are
impeding the growth of their business, 82 percent of
them said the obstacles stemmed from government
regulations.
 Only 36 percent identified a specific regulation or set of
regulations that was responsible for their problems.
 About 61 percent of U.S. companies believe they will
face at least as much litigation in 2012 as they did in
2011. A third of U.S. companies say they will face more
litigation in 2012, up from about 31 percent a year ago,
according to the annual Litigation Trends Survey.

10

3. Business Uncertainty
 In a recent study conducted by the U.S. Chamber of
Commerce, small business owners stated their
biggest challenges are:
 Economic Uncertainty – 49%;
 The National Debt – 47%;
 HEALTH CARE – 39%;
 Over Regulation – 36%;
 Taxes – 28%.
Next to the state of the economy and the debt, the
most specific fear for small business comprises the
impeding health care regulations which are proving to
be difficult to decipher and threaten profitability.
11

 Working Classification. The misclassification of
workers is an issue that promises to receive more
scrutiny in 2012. In late 2011, the U.S. Department of
Labor agreed to work with the IRS, as well as several
states, to share information and coordinate
enforcement to ensure that employees receive
protections they are entitled to under federal and state
law. Legislation in several states to increase fines for
worker misclassification may also impact employers in
2012.
 Deficit Reduction. Many of the ideas on the table
center on personal and business tax reform and the
closing of current tax “loopholes.”
12


 Immigration. The U.S. Government is strengthening
efforts to crack down further on the employment of
illegal immigrants through rigorous worksite
enforcement and paperwork inspections of companies
of all sizes. In 2012, state laws will require more
private sector employers to register and utilize the
federal E-verify system for employee verification.
Congressional immigration reform proposals, which
may include further federal employment verification
obligations, are also possible in 2012.

13

 Security and Privacy. In 2012, businesses will continue
to be challenged by security considerations adding to the
cost of doing business. Onerous privacy and security
breach regulations enacted in many states make this an
even more important consideration for business.
 Unemployment Insurance Implications. Congress is
contemplating the reinstatement of the federal
unemployment surtax, which would result in virtually all
businesses seeing higher unemployment insurance
taxes. State taxes could rise as federal loans are repaid.
Many states are also contemplating additional or more
extensive employer reporting requirements in an effort to
decrease unemployment insurance fraud.
14


4. Health Benefit Costs
 Company costs are increasing;
 Even if employees share costs, they will be angry
which could affect productivity.
5. Labor Costs
 Labor is on the march. A Big supporter of Obama and
Democrats. They have been energized by recent
actions against them. Will be pushing for pro-labor,
anti-business laws and regulations.

15

6. Unavailability of Capital For Owners
 For small companies, the credit crisis has frightened
banks and some are refusing to roll over lines of credit
or are increasing the cost of capital;
 Owners will need to invest more of their personal capital in
order to grow the business. Selling all or a portion of equity is
the best option for growth some cases.
 With Fed flooding the market with cash, interest rates
are bound to rise.
7. Cash is Available to Buy
 Capital is cheap for Buyers;
 Strategic buyers have more cash on corporate
balance sheets than ever before.
16

8. Buyers are Ready and Capable
 According to a recent study by Ernst & Young, 36% of
companies plan to pursue an acquisition this year.
 Companies need and desire growth. Some
companies cut back on research and development
during the lean years of recession. Buying may be
better than building.
9. Individual Buyers Are Back
 Displaced executives who are potential buyers are
being flushed out of corporate American businesses.
 Buyer’s cash reserves and retirement accounts have
rebounded since their decline in the 2008-2010 years.
17

10. Private Equity Needs to Buy
 Private Equity Firms are feeling pressure to deploy capital;
Overhang of $450 Billion; 60% funds raised in 2007 -2008
 The deadline is coming to investor return money.
 PE Recapitalization will allow owners to sell now at attractive
multiples and historic tax rates while still keeping ownership for
future upside earnings. This model is available for more SMB
companies than ever before
 Dow Jones reported that 2010 PE fund raising dropped 16%
and another 4% in 2011. Partners are leaving large firms and
starting smaller funds. These new smaller PE firms are looking
for smaller deals.
 Many firms have loosened their floors for minimum EBITDA
requirements in an effort to increase deal flow.

Source: Pitch Book Data, Inc.; Cambridge Associates
18


Top 3 Industries for PE
Deals in 2011
 Business Products and
Services (526 deals)
 Consumer Products and
Services (371)
 Information Technology
(207)

19

THE CASE FOR BUYING NOW
1. Tax Incentives
 Section 179 depreciation can be used in an asset
purchase transactions to deduct $125,000 in year one
costs for both new and used equipment. Phases out
as total capital equipment purchases for the year
exceed $500,000. Goodwill and intangibles acquired
are not included in the computation of the threshold.
 Bonus depreciation can be used to deduct 50% of the
cost of new equipment purchased in 2012. There is
no limit to the deduction. Bonus depreciation has
limited usefulness for business acquisitions, but
would be useful for required cap ex post closing.
Bonus depreciation sunsets at December 31, 2012.
20

2. Better Returns Than Sitting on Cash
 Companies have built up greatest cash reserves in history
with favorable financing, great opportunity to grow.
3. Buying is Better Than Building
 Companies cut back on research and development during
the recession. Most often buying is the better alternative to
building to fill those gaps.
4. Demographics Might Compel Selling.
 Seller’s have been waiting for a return to pre-2007 levels.
They now understand that those levels were once in a life
time opportunities. But they can still get fair and
reasonable value. Some fatigue is setting in and, given the
desire of baby boomers to retire, we might see more
attractive deals. 21


5. Capital to Buy is Available and Cheap
 SBA lending is at the highest level it has been in years.
 Buyers can put down as little as 15 or 25% down and
use a $5.0mm SBA 7a loan to buy an existing business.
 SBA Rates are low and can be fixed for the next 10
years, average fixed rate for buying a business is at
7.0%.
 Sellers are also more flexible in providing seller
financing to share the finance risk of the buyer and the
primary lender. Typical seller financing is from 10-25%
of the total project.

22


6. Midmarket Companies Need to Exit
 A challenging economic environment;
 Harder to compete;
 Without a large platform, it’s hard to do economies of scale.
7. Private Equity Companies Need to Exit
 PE firms currently own over 5,900 U.S. companies,
including about 4,200 due for an exit in the near future,
having been held for three or more years
8. Seller’s Have Right Sized
 Companies have slimmed down and become more
efficient. Returns and productivity have improved.

23

9. Need for Growth
 Over the last few years growth has slowed, in some
industries new potential clients have become extremely
difficult to find resulting in fierce competition to retain
customers. Buying now allows businesses to:
 Increase market share and revenues
 Acquire talented managers in their industry
 Increase and diversify their customer base
 Add additional products and services
 Attain synergies and improve their own profitability

24

SPEAKER BIOGRAPHY
THOMAS MEYER, Vice President and District Sales Manager
Wells Fargo & Company
As Vice President and District Sales Manager of Wells Fargo’s SBA
Small Business Lending Group, Tom is responsible for SBA Lending in
Illinois. He has been lending to small businesses for over 12 years
and has funded over $250,000,000 in loans to small business owners.
Given the depth and breadth of SBA loans Tom has successfully closed, he has the skills and
knowledge to structure a transaction that is more likely to be approved and in a shorter time
frame than the traditional SBA guaranteed loan.
The SBA loan program can be used for acquiring an existing business, refinancing or
acquiring commercial real estate or equipment and for expanding an existing business. Tom
specializes in business acquisition financing for all types of transactions from a Partner Buy-
Out, to a Manager acquiring the Business or an Outside Individual purchasing an existing
company.
Tom holds an MBA and a Bachelor’s Degree in Business Management from Olivet Nazarene
University and an Associate’s Degree in Aviation Flight from Southern Illinois University. For
the last 10 years he has been and is currently an Adjunct Professor for Olivet’s School of
Graduate and Continuing Studies facilitating courses in Marketing Management,
Management and Leadership, Personal and Professional Development, Oral and Written
Communication and Business Plans. He is currently a member of MBBI, Midwest Business
Brokers and Intermediaries.

Wells Fargo, SBA Lending, 1300 S. Grove Ave., Ste. 100, Barrington, Illinois 60010
(847) 381-5959; Email: tjmeyer@wellsfargo.com 25

SPEAKER BIOGRAPHY
ERIC E. DUNN, Managing Director, Focus Capital Advisors, Inc.

Eric joined Focus Capital as an Associate in 2007, was promoted to
Associate Director in 2009 and promoted again to Managing Director
in December of 2010. Eric has an extensive background in Sales and Marketing, prior to
joining Focus Capital, he was Senior Vice President of Sales for a middle-market Consulting
firm providing IT services and Due Diligence services for M&A transactions. In this role Eric
was responsible for developing and implementing sales and marketing strategies for the
entire company. Prior to that, Eric was a co-founder of The Software Alliance, a software and
intellectual property transaction services firm, the firm was successfully sold to a mid-cap
technology provider.
Eric is a Certified Merger and Acquisition Advisor by Loyola University and the Alliance of
Merger and Acquisition Advisors. He holds a B.S. degree in Business with a Marketing
concentration from Southern Illinois University. Eric is a Board member of Midwest Business
Brokers and Intermediaries (MBBI) he also is a member of The Executives Club of Chicago
and the Alliance of Merger and Acquisition Advisors (AMAA). Eric is an active advocate for
The Alliance for Lupus Research.

Contact Eric: (630) 795-1495 ext. 214 – edunn@fcateam.com
26

SPEAKER BIOGRAPHY
TERENCE P. KENNEDY, Member, Meltzer, Purtill & Stelle LLC
Terence P. Kennedy has been a member of the law firm of Meltzer,
Purtill & Stelle LLC since 1996. Prior thereto, he was a partner at the
law firm of Keck, Mahin & Cate for five years.
Areas Of Practice: His practice is focused on mergers and acquisitions
and raising capital in the private markets. In addition, he acts as
general counsel to a number of closely-held businesses and handles
management buyouts, capital formations, loans and other commercial transactions. He also
assists closely-held businesses, including early stage companies, in identifying capital needs
and obtaining working capital and in general corporate matters.
Professional Associations and Memberships: Mr. Kennedy is a member of the Leading Lawyers
Network, and a director and secretary for the Midwest Business Brokers & Intermediaries
Association. He is also a member of the Schaumburg Business Association, the American Bar
Association and the Illinois Bar Association. In addition, he is a director of the Northwest
Suburban United Way. Mr. Kennedy has given numerous seminars throughout the state of
Illinois on mergers and acquisitions and raising private capital and is licensed to practice in
Illinois.
Education: Mr. Kennedy graduated from Fordham University School of Law in 1984. He was an
associate editor of the Urban Law Journal in 1983. He also received a Master of Fine Arts
degree from Virginia Commonwealth University in 1978 and a Bachelor of Arts degree from the
University of Notre Dame in 1975.
Meltzer, Purtill & Stelle LLC, 1515 East Woodfield Road, Second Floor, Schaumburg, Illinois
Direct Dial: (847) 330- 6044; Email: tkennedy@mpslaw.com 27

SPEAKER BIOGRAPHY
TOM THOMAS, CPA, FGMK LLC

Tom Thomas joined FGMK LLC in October 2005 as a Partner. Formerly, he
was a Partner at a boutique public accounting firm that specialized in M&A
advisory services and public company compliance.
Areas of Practice Tom serves as the primary client contact and engagement partner for a number of
FGMK’s audit and corporate consulting clients. In addition to his traditional audit and review engagements,
Tom’s practice focuses on all aspects of corporate finance, including mergers and acquisitions, private
equity and venture capital transactions, public and private securities offerings, and joint ventures. His
responsibilities include contract negotiations, financial structuring, corporate valuation, financial
projections, financial due diligence and post-closing adjustments. Tom advises private equity, corporate
and individual clients on M&A transactions in a broad range of industries and enterprise values. His
approach to M&A transactions and financial due diligence is geared to identifying opportunities and risks
with the goal of maximizing his client’s return on investment. Tom’s practice includes domestic and
international public companies, which he consults with regarding the proper application of generally
accepted accounting principles to complex non-routine transactions.
Industries Served Long Term Care Facilities, Health Care, Technology, Hospitality, Manufacturing,
Construction, Distribution, Professional Services and Oil and Gas Exploration and Production.
Education Tom graduated Magna Cum Laude from Winona State University in 1994 with a Bachelor of
Science degree in accounting and a minor in physics.
Memberships Midwest Business Brokers and Intermediaries – Former member of the board of directors
and treasurer; American Institute of Certified Public Accountants; Illinois CPA Society.
FGMK LLC, 2801 Lakeside Drive; 3rd Floor, Bannockburn, Illinois 60015, Direct dial: 847.444.8476
28
Email: tthomas@fgmk.net, Web site: www.fgmk.net

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