Welcome to Today’s Webinar:

Questions

Ground Rules

• Attendees are in listen-only mode• This webinar is being recorded for future on-demand playback• Your participation represents acknowledgement that we are recording• Tweet questions & comments to: #WMBOs

Windows Mac Tablet

PresentersBruce Fischer, MBA, CMCChairman - WelchGroup Consultingbfischer@w-group.comwww.w-group.comca.linkedin.com/in/bfischerTwitter: @welchgroup

Mike Blattman, MBAManager, Subordinate Financing - BDCMichael.Blattman@bdc.cawww.bdc.caca.linkedin.com/pub/mike-blattman/15/153/141Twitter: @BDC_News

Jim McConnery, CPA, CA, TEPPartner - Welch LLPjmcconnery@welchllp.comwww.welchllp.comwww.linkedin.com/pub/jim-mcconnery/24/761/4886Twitter: @welchllp

• Due diligence on business being acquired

• Process for a successful MBO

• Tax planning

• Types of financing

What we will cover today

• Assume you know nothing about the business• Do a full DD even if you “think” you know

everything about it• Treat the business like a NEW investment,

would you buy this business as a 3rd party?– Be even more critical than an outsider would be

• Ensure the business strategy / business plan can be executed without the previous owners

• Recognize the previous owner(s) knowledge and advice/guidance value in early stages of transition – use it

Due Diligence

• Undertake a full SWOT on the business taking into account the NEW management team

• Management thinks that as they were involved in the business, they know everything that will affect them - NOT

• Management feels as if they are already “running” the business without being at the helm – think again

• Is the current business direction the same as what the new team would be taking? If not – what are the implications?

Implications / Pitfalls

• Understand deal parameters & implications they may have on the operations (e.g. cash flow)

• Who & where is the “control” going to reside with• Decision making? By whom, votes?• Is there a BoD – what is role of previous owner• How is this MBO being financed?

Internally (earn out), VTB, externally and what are the implications

• New S/H agreement to reflect new ownership

Process for a Successful MBO

• Seller should address tax planning proactively– Ideal to evaluate sale implications 2 years in advance of sale

• Seller will generally have a bias to do a share deal– Access to $800,000 lifetime capital gains exemption (CGE)– May have multiple access to CGE based on family trust

planning– Buyer may be willing to get paid over time to defer gain

recognition

• Consider merits of an asset deal• Plan for real estate if applicable• Address post-sale employment of vendor

Tax Planning - Vendor

• Nature of deal will influence the tax planning for the buyers

• Consider mechanism so that OpCo funds / profits can assist with funding purchase price

• Address deductibility of interest expense, i.e. where is interest expense incurred

• Tax effective structure for buyers• Address shareholder agreement terms for

buyers

Tax Planning – Buyer Group

• Tax due diligence should be completed by buyers• Address tax planning for business income on a post-acquisition basis• Address shareholder agreement terms for buyers• Is insurance required

– Key man– Fund buyout terms

• Tax minimization for business owners and families– Merits of holding companies and family trusts

• Ensure all buyers have up to date wills • Equity or stock options for key employees

Tax Planning

BDC Subordinate Financing

Speaker: Mike Blattman, MBA

• Traditional Bank loans• Alternative Financing• Vendor Financing• Management/New

shareholder equity

Financing Options

Debt

Financing

Subordinate Financing

Equity

Monthly payments Flexible Flexible or none None

Securities Priority rank Subordinate rank No security

Return Fixed

(Interest)

Fixed and variable

(Interest and

participation)

Variable

(participation)

Risk Low Medium-high High

Involvement in

management

None Minimal Management rights

and board of

directors

Financing Comparison

DebtTraditional Guarantee

Cash flow Loans

Mezzanine

SyntheticEquity

Capital-stocks

Return

Ris

k

Products offered byBDC Subordinate Financing

BDC Subordinate Financing

-

100,000

200,000

300,000

400,000

500,000

600,000

Year 1 Year 2 Year 3 Year 4 Year 5

Cash sweeps and royalties

Principal Interest + royalty

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Year 1 Year 2 Year 3 Year 4 Year 5

Fixed principal and interest

Principal Interest

Structuring Flexibility

• Postponement• Earn-out• Balloon Payment• Intercreditor

Agreements• Subordination• Vendor take-back

(VTB)

• Valuations• Guarantee• Goodwill• Debt servicing• Cash Flow

Banking Terminology

1. It’s never too early to begin discussing opportunities with your business and financial professionals

2. There is no cookie cutter solution

3. Likely multiple parties will be involved in any transaction.

Three Things to Remember

Q & A

Bruce Fischer, MBA, CMCChairman - WelchGroup Consultingbfischer@w-group.comwww.w-group.comca.linkedin.com/in/bfischerTwitter: @welchgroup

Mike Blattman, MBAManager, Subordinate Financing - BDCMichael.Blattman@bdc.cawww.bdc.caca.linkedin.com/pub/mike-blattman/15/153/141Twitter: @BDC_News

Jim McConnery, CPA, CA, TEPPartner - Welch LLPjmcconnery@welchllp.comwww.welchllp.comwww.linkedin.com/pub/jim-mcconnery/24/761/4886Twitter: @welchllp