2012 Mergers & Acquisitions Update

Every year brings about new expectations and hopes for the coming year, especially as it relates to the economy and business performance.  Given the past three to four years, it is about time we had something to look forward to. 

I recently attended the annual AM&AA winter conference to see what others in the M&A market had experienced in 2011 and were anticipating for the coming year as we roll into 2012.

The conference itself is attended by people from all over the country that work in the M&A middle market, defined as working with companies valued between $5m – $250m.  The attendees are comprised of Investment Bankers, Private Equity Groups, Attorneys and Advisors.

The overall theme of the conference for this year was ‘culture’.  In particular, the role a company’s culture plays into the success of a transaction and the valuation it attracts.  In summary, those with great cultures that are ready for a sale and can be easily handed over to a new owner will generate the most interest from a buyer.  Those that do not have good cultures or team members with good work ethics will likely be passed over from a buyer perspective or heavily devalued as buyers are becoming more aware and more sophisticated on the cost of trying to overcome cultural issues with new acquisitions.

 Below is a summary of the discussions and expectations noted during the conference:

• 2011 Performance:
  • Deals done in 2011 were on a par with 2010.  While we are a long way from the highs of 2006 and 2007, it is encouraging to see deal activity stabilize and not retreat to pre 2010 levels.
  • Average deal valuation multiples remained constant in the $10m – $25m deal size range at 5.3 x EBITDA.  However, there was an increase in the overall middle market (deal sizes up to $250m) valuation multiples driven by deals north of $100m in deal value.
  • Debt multiples, the amount of purchase prices funded by debt, increased slightly.  Again this was at the larger deal level and was one of the reasons for increased valuations overall.
• As we head into 2012, it is encouraging to see the larger end of the middle market generating increasing value and bank lending easing up on.  While this has yet to benefit the smaller end of the market, it is a good leading indicator and we expect these trends to continue moving downstream into 2012 and 2013.
• Private Equity funds are still struggling to find quality deals they can invest in.  There is currently an estimated $450bn of private equity money that has not yet been deployed and many funds have moved downstream to look at smaller business, even those with EBIDTA of $1m are now getting interest from Private Equity Groups. We expect that Private Equity will continue this trend for the next few years as they try to put their money to work and justify raising additional funds in the future.

So is now the time to sell?  For most of our clients, we have yet to see a real uptick in the deal market that they would fall into and we anticipate the market improving over the next 12-24 months.  Therefore, we anticipate sellers being in a better market position towards the end of 2012 and into 2013.  However, given the buyers significant preference for well run companies we strongly advise anyone who is considering an exit in the next 3 – 5 years to really focus on internal improvements to make their business more attractive to a buyer.  

If you have any questions or would like more information on this subject please contact me at (719) 640-0831.

Entrepreneurial Corner | CyberSlacking: What is it and what can you do about it?

Revenue North Presentations

BiggsKofford was happy that three members of the management team got the opportunity to speak to many of Colorado Springs’ top businesses at the Revenue North Small Business Growth Summit, which was held January 20 and 21.

If you missed their presentations, you can find them here:

• Chris Blees, Strategically Preparing and Optimizing Growth Prior to Implementing an Exit
• Kurt Kofford, Use Pricing to Maximize your Profits and Stop Leaving Money on the Table
• Kurt Kofford’s handout
• Austin Buckett, Growth by Acquisition: Understanding the Acquisition Process

If you have any questions about how you can take your business to the next level of growth, value and success, please feel free to contact us.

2011 Year-End Tax-Saving Moves for Physicians

Year-end tax planning is challenging again this year because of uncertainty over whether Congress will enact sweeping tax reform that could have a major impact in 2012 and beyond. Regardless of what Congress does before the end of this year or early the next, there are solid tax savings to be realized by physicians taking advantage of tax breaks that are in effect for 2011.

We have compiled a checklist of actions for medical practices and individual physicians based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them.

Medical practices and practice owners

Medical practices should consider making expenditures that qualify for the business property expensing options (Section 179 expensing). Among the assets that qualify are tangible medical equipment, computers and off-the-shelf computer software, as well as some leased equipment depending on the terms of the lease.

For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2 million. Also, a limited amount of expensing may be claimed for qualified real property. This opens up significant year-end planning opportunities.

In addition, consider making expenditures that qualify for 100% bonus first-year depreciation if bought and placed in service this year. This 100% first-year write-off generally won’t be available next year unless Congress acts to extend it. Thus, medical practices planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.

Traditional income tax planning calls for deferring income to 2012 and accelerating expenses into 2011. This strategy makes sense this year since the 2010 Tax Relief Act extended lower rates through 2012 and in most cases you will be subject to the same (or lower) tax rates this year as in 2012.

Physicians should also consider using a credit card to prepay expenses that can generate deductions for this year.

If you have a retirement plan for your practice consider adding a profit sharing option to your plan which could allow an additional deduction on your 2011 tax return for a contribution that doesn’t have to be paid until the due date of the practice’s tax return in 2012, including extensions.

If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

Individual physicians

If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2011.

You can realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding and then buy back the same securities at least 31 days later.

If you believe a Roth IRA is better than a traditional IRA and want to remain in the market for the long term, consider converting traditional IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2011.

If you expect to owe state and local income taxes when you file your return next year, consider increasing withholding of state taxes on your last payroll (or pay estimated tax payments) before year-end to pull the deduction of those taxes into 2011 if doing so won’t create an alternative minimum tax (AMT) problem.

When estimating the effect of any year-end planning moves on the AMT for 2011, keep in mind that many tax breaks allowed for purposes of calculating regular taxes (i.e. real estate taxes, state income taxes, miscellaneous itemized deductions and personal exemption deductions) are disallowed for AMT purposes.

You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.

You may qualify for a tax credit if you install energy saving improvements, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner, in your home before 2012.

Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Consequently, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. In addition, since contributions to many state 529 college tuition plans qualify for state income tax deductions you might think about making a 529 plan contribution before the end of 2011.

If you are age 70-and-a-half or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.

Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals, but you can’t carry over unused exclusions from one year to the next. The transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

These are just some of the year-end steps that can be taken to save taxes. It’s possible that tax legislation could still be signed into law before January 1, 2012 extending expiring tax breaks or making other changes for 2012 that would affect your 2011 year-end planning. Therefore, it is critical to review your tax situation with your tax advisor now and make any changes that are still possible before the end of 2011.

If you have any questions, please feel free to contact Greg Papineau, CPA,  or Deborah Helton, CPA.

Information from this article was furnished from an article published by Physician’s Money Digest.

2011 Business Tax Update

Recently, one of our tax directors, Greg Gandy, delevered a presentation to the Colorado Society of CPAs with updates for LLCs and partnerships at the federal tax level. 

Click here to check out the presentation. Feel free to contact us with any questions about how these updates affect your business.

How to Avoid Common Startup Mistakes

An Interview by John Gachiri

Editor’s Note: Entrepreneur Richard Branson regularly shares his business experience and advice with readers. What follows is the latest edited round of insightful responses.

Q: What are some of the most common mistakes entrepreneurs make when starting out? — John Gachiri

A: Making mistakes is part of the process of building a company; quickly recovering from them is what’s most important. It’s all part of the adventure of entrepreneurship, which will require all of your stamina, drive and determination.

But your way forward is not entirely uncharted: When you notice an opportunity that has never occurred to anyone else, there are certain steps to turning your vision into reality. You must formulate an innovative business plan, find funding, hire the right people to carry out the plan, and then step back from your role in the business at exactly the right moment.

Let’s take a look at these steps, and also at ways to avoid some of the most common mistakes new entrepreneurs make.

Step 1: Stay on Target
A mistake often associated with the first step is signaled by an entrepreneur’s inability to clearly and concisely convey his idea. You have to be able to generate buy-in from investors, partners and potential employees, so nail down your “elevator speech” — what you would say if you ran into an important potential investor in an elevator. Try using a Twitter-like template to refine the essence of your concept into just 140 characters. Once you’ve done that, expand your message to a maximum of 500 characters. Remember, the shorter your pitch is, the clearer it will be.

An associated error is lack of focus. If your start-up has been tagged as “the next big thing,” the adrenaline rush that comes with building buzz can lead to impetuous decisions and a loss of a sense of purpose. Many entrepreneurs end up sprinting in many directions instead of taking assertive steps toward their target. Clearly define your goals and strategies, then establish a timeline. Don’t let the other possibilities or hazy dreams distract you from achieving your goal.

Getting too far ahead of yourself is also dangerous. If your product or service is still on the drawing board, don’t get sidetracked by plans for future versions. As a general guideline, looking two or three years ahead is best, but the nature of your business and feedback from your investors will help you determine just how far ahead you should plan.

Be flexible, because just as a lack of planning can be a problem, adhering blindly to your plan is a surefire way to steer your company off a cliff. A successful entrepreneur will constantly adjust course without losing sight of the final destination.

Step 2: Be Realistic About Costs
Don’t shortchange your start-up when estimating the funds you will require — you’ll just diminish your chances of success. Keeping your expenses under control is vital, but don’t confuse capitalization with costs. The playing field is littered with undercapitalized start-ups that were doomed from the outset.

In the late ’90s, David Neeleman told me he needed $160 million in start-up capital for JetBlue — a huge sum, far more than most entrants to the industry manage to raise. Most of the so-called experts scoffed at the notion that he would be able to find the money and launch a low-cost airline when established companies were failing one after the other, but he stuck to his guns and raised the money. As a result, JetBlue had one of the most successful airline launches of all time, and turned a profit only six months after its launch in 2000.

Step 3: Hire the People You Need, Not the People You Like
As tempting as it may be to staff your new business with friends and relatives, this is likely to be a serious mistake. If they don’t work out, asking them to leave will be very tough.

When Virgin starts any new business, we always hire a core team of smart people who already know the industry and its inherent risks. Take full advantage of the knowledge pool you’ve created; when a problem comes up, remember that nobody has all the answers, including you._One of your goals should be to find a manager who truly shares your vision, and to whom you can someday confidently hand the reins so that you can carry out the next step.

Step 4: Know When to Say Goodbye
A great entrepreneur knows when the time has come to leave the CEO role. It’s seldom easy, but it has to be done: few entrepreneurs make great managers. In my own case, managing the daily operations of a business simply isn’t in my DNA. (Or, as I’ve said to friends, “It’s not bloody likely.”)

Stepping back doesn’t mean turning your back on your business. At Virgin, I’m always involved in the launch of a new business, and then I gradually hand over control to the new management team as it starts to jell. But no matter how long it has been since I was at the helm, if I see something that I don’t like, I’m not at all shy about making my thoughts known and asking some very pointed questions.

Founders shouldn’t hesitate to re-insert themselves into their businesses when necessary — look at Larry Page, who temporarily returned to the CEO role at Google in April. That said, I had to laugh when I heard this news, wondering how many managers at Virgin businesses had thought, “Wow, I hope this doesn’t give Richard any ideas.”

This article was published by Stellar Risk Report & Journal.

If you have any questions about what it takes to start a company, please contact us.

Entrepreneurial Corner | The Seven Key Numbers You Need to Know to Succeed in the New Economy

This morning’s Entrepreneurial Corner presentation covered the seven key things you need to know to succeed in the new economy.

You can find the PowerPoint presentation here.

If you have questions about specific areas where your business might need an extra focus or about the presenation, please contact Austin Buckett or Kurt Kofford.

Interested in attending our future events? Contact Stephanie Johnson.

Could “Family Office” Support Benefit You?

In this day and age of social media, e-mails, texts, professional obligations and personal obligations, it seems as if there is no time to stop and smell the roses. In our fast-paced society, one of the most valuable resources that people fail to accumulate is their free time. The use of a Family Office can help you, the busy professional, regain your most valuable asset…your time.

The term Family Office is often a misunderstood term that most seem to associate with the rich and famous. While it is the rich and famous for whom Family Offices were originally created, it is a service that now is available to any professional who wants to regain their free time.  

While Family Offices take many forms and vary depending upon the individual that is being served, the most important feature that is common to all Family Offices is that there is a Trusted Advisor in place to oversee all aspects of your financial life.  For the remainder of this article, we will focus on the CPA serving the role of Financial Trusted Advisor. 

The services that a CPA can offer in a Family Office environment are that of a true Trusted Advisor, overseeing your entire financial life.

These services include:

• Personal bill paying
• Preparation of monthly personal financial statements
• Personal budgeting and cash flow planning
• Investment review and evaluation 
• Insurance review and evaluation
• Estate planning review and evaluation
• Asset protection review and coordination
• Charitable contribution planning
• Retirement  planning review and coordination
• Education planning review and evaluation
• Other concierge services as requested

A CPA can also perform more services that are offered by traditional accounting firms:

• Income tax return preparation
• Income tax planning

As you can see from the nontraditional Family Office services that a CPA can provide, one of the key features is the review and evaluation of investments, insurance, estate and asset protection planning. This coordination means that you need only one point of contact, the CPA. Your CPA can coordinate and monitor all other members of your financial team, like your attorney, investment advisor, etc.

 Please view our Web site for more information on how your CPA can help you manage your most valuable asset…your time.