MBBI publishes a monthly eNewsletter.  All MBBI members are invited to submit articles for publication, please send an email to info@mbbi.org.

  • April 23, 2020 11:46 AM | Judy Pfeiffer (Administrator)

    Contributing Authors: Gene Barinholtz, CPA, Paul Wilkin, CPA, Lauren Clawson, CPA, Mitch Knopoff, CPA.
    KRD - Kutchins, Robbins & Diamond, Ltd. is a CPA firm that offers a full range of client services: outsourced accounting, audit and assurance, tax strategy and preparation, business valuations and financial planning advisory services. Their team of 80 members has been serving clients in Chicago, the surrounding areas and nationwide for over 30 years.

    Over the past two weeks, the SBA has approved and guaranteed over 1 million PPP loans to small businesses. Much attention and clarification was focused on determining eligibility for the loans and calculating the appropriate loan amount. Now that loans have moved to the funding stage, it makes sense to review the parameters for use of the loan proceeds and the loan forgiveness provisions. The information contained in this document is current as of April 20, 2020.  The CARES Act says the SBA has until 30 days after enactment, or April 27, 2020, to issue final guidance regarding loan forgiveness, although many banks are telling customers the date will be April 30, 2020.  

    Can I Still Apply for a PPP Loan? 

    • The Paycheck Protection Program is authorized to run through June 30, 2020. Small businesses are supposed to be able to apply up to that date.
    • The initial appropriation in the CARES Act was $349 billion. As of this update, loan approvals under the program have reached that limit, and the SBA is no longer accepting loan applications from the approved lenders until additional appropriations are made to the program.
    • The federal government has indicated a willingness to appropriate an additional $250 billion for the program. It is likely that funding for this program will be extended this coming week.  However, at this time, it is unknown when that appropriation will happen.  If you did not receive a PPP loan from the initial funding we urge you to be proactive with your bank to ensure they have your application and documentation ready when additional funds are appropriated.

    Is the Program As Confusing As People Make It Sound?

    Yes – but don’t worry, we are going to unpack all the details below. First, there are a few key terms that everyone who has either received or wants to apply for a PPP loan need to understand.

    Key Definitions

    Payroll Costs 

    • Payments to U.S. legal residents for:
      • GROSS salaries, wages, commissions, tips, vacation pay, family or medical or sick leave pay, separation pay and bonuses;
      • Group healthcare benefits including insurance premiums (employer’s share only);
      • Retirement benefits (employer’s share only);
      • State and local taxes assessed on employee compensation (generally these are state unemployment taxes);
      • Self-employment income of partners in a partnership;
      • Owner Compensation Replacement for a sole proprietor or independent contractor, also known as net earnings from self-employment.
    • Compensation, such as gross salaries, wages, net earnings from self-employment and partner self-employment income, is capped at $100,000 on an annualized basis for any individual, prorated for the eight-week period. This works out to 8/52 times $100,000, or $15,385 per person.
    • Payroll costs do not include any amounts used to claim the Emergency Paid Sick Leave Credit or the Emergency Family and Medical Leave Credit.
    • For a sole proprietor or independent contractor, healthcare insurance premiums and retirement benefits are not included.

    Full-Time Employees and Full-Time Equivalents (FTE) 

    • The definitions are the same as they were for determining Obamacare era penalties.
    • Full-time employee:  an employee who is employed on average at least 30 hours per week or 130 hours per month.
    • Full-time equivalent employee (FTE):  a combination of employees, each of whom individually is not a full-time employee because they are not employed on average at least 30 hours per week, but who, in combination, are counted as the equivalent of a full-time employee.
      • For example, two employees, each of whom works 15 hours per week, are the equivalent of one full-time employee.
    • To determine total FTEs, take the aggregate hours worked by non-full-time employees in a month and divide by 130, then add that result to the number of full-time employees.

    So I Received a Loan - What Can I Use the Money For?

    During the eight weeks immediately following the initial loan disbursement, PPP loans can be used to pay:

    • Payroll costs;
      • We recommend that any payments to partners made from the loan funds should be classified as guaranteed payments, so that there is no question that they constitute self-employment income to the partner.
      • We recommend that actual checks are written to partners in a partnership and that self-employed individuals write themselves checks over the 8 week period to prove payroll.  It is likely that a “book entry” will not qualify as sufficient documentation.
    • Group healthcare continuation costs for employees on paid sick, family or medical leave.
    • Mortgage interest on loans incurred prior to February 15, 2020.
      • Includes real or personal property.
      • Property must be used in the business.
      • Includes loans for vehicles and other equipment used in the business.
    • Rent or leases in existence prior to February 15, 2020. This appears to include non-facility leases such as machinery and equipment leases and copier leases.
    • Utility payments for services begun prior to February 15, 2020, which includes:
      • Gas, electric and water;
      • Telephone and internet;
      • Fuel for business vehicles.
    • Interest on any other debt obligations incurred prior to February 15, 2020. Keep in mind that loan proceeds used for this purpose will not be forgiven.
    • Refinance an Economic Injury Disaster Loan made between 1/30/20-4/3/20.
    • At least 75% of the loan proceeds MUST be used for payroll costs. Stated another way, no more than 25% of the loan proceeds can be used for mortgage interest, rent and utilities and interest on any other debt obligations
    • No prepayments are allowed on these costs.
    • These costs must be incurred and paid during the 8 week period.  Therefore arrearages are not eligible expenses.
    • Sole proprietors and independent contractors can only claim mortgage interest and utilities for their home office space if these are deductions taken on their Schedule C filings (Form 8829)

    Will My Loan Be Forgiven?

    • PPP loans will be forgiven to the extent that the proceeds are used to pay the above expenses during the eight weeks following the date of the loan, with the exception of interest on debt obligations other than mortgages.
    • Borrowers will have to submit an application for forgiveness and related documentation such as payroll tax returns, cancelled checks, payment receipts and account transcripts, to their lender, who will be required to calculate the amount forgiven within 60 days. If you don’t apply for loan forgiveness, you won’t get it.  Forgiveness is a proactive process and not automatic.
    • Reductions to the amount of loan forgiveness:
      • The amount forgiven is reduced based on the failure to maintain the average number of FTEs during the covered period (the 8 week period) when compared to a base period that the borrower gets to choose. (See below for the exception to this.)  The choices are:
        • February 15, 2019, to June 30, 2019, or
        • January 1, 2020, to February 29, 2020.
      • The amount forgiven is reduced to the extent compensation for any individual making less than $100,000 per year is reduced by more than 25% when measured against the most recent full quarter that individual was employed.
      • If you have reduced your FTE’s between 2/15/20 and 4/26/20 as compared to your FTE’s on 2/15/20 there is no reduction in the amount forgiven if there is restoration of full-time employment and salary levels by June 30, 2020.
        • You can re-hire or replace individuals to get back to the needed FTE headcount.
        • You must increase the compensation of the same individuals who took pay cuts back to pre-pay cut levels.
      • Payments for non-payroll costs in excess of 25% of the loan will not be forgiven.
      • Grants received under the EIDL program will reduce the amount forgiven to the extent of the grant amount.
      • Amounts used for interest on debt other than mortgage obligations will not be forgiven.
      • Any amounts used for any expenses not listed above will not be forgiven.

    Forgiven PPP loans will NOT constitute taxable cancellation of indebtedness income for federal income tax purposes.

    How Do I Prove What I Spent the Money On?

    • We recommend you open a separate bank account for the loan funds.
      • Keep clear records of all checks written from the account – date, payee, purpose.
      • Keep receipts for items such as fuel for business autos and other utility payments.
      • Keep detailed records of payroll payments.
        • If you have a separate payroll account into which you normally transfer funds for payroll from a general checking account, transfer only the exact amount of the pay needed on the pay date from the separate loan funds account, so that you have a clear trail of the payroll costs paid.
        • If you use a payroll service, the transfers should match the cash requirements reports they provide.
        • Payment of the employer portion of FICA and Medicare taxes is not a permissible use of the funds. If you have a separate source of cash, you should transfer the funds to cover those federal taxes to the payroll account from the cash not in the loan funds account.
      • Keep detailed records of changes in your workforce.
      • You may be able to set up and run special reports from your accounting software for the 8-week period.
      • Submit copies of all records along with bank statements to your lender.
      • It is possible that the forgiveness process will involve an audit verification.  It is unclear at this time what is involved in an audit verification.

    If A Portion Is Not Forgiven - What Are the Terms?

    • The interest rate will be 1% per annum.
    • The term is two years.
    • No payments of principal or interest for six months – interest still accrues during this deferment.
    • No personal guarantees needed.
    • No collateral required.
    • No SBA or bank fees.

    The documentation requirements for loan forgiveness are going to be extensive, and some of the calculations may be complex. This is not a time when you want to attempt to go it alone, only to find out that your lender refuses to forgive a significant amount of your loan because you don’t have proper documentation, or you didn’t understand the spending requirements. KRD has the expertise, the processes and the procedures to guide you through the PPP loan maze. Rely on KRD to help you get the maximum forgiveness on your loan.  Call us today to discuss your specific situation.

    Robert Eisenstadt 
    Kutchins, Robbins & Diamond, Ltd.
    1101 Perimeter Drive, #760
    Schaumburg, IL 60173

    (847) 278-4422
    reisenstadt@krdcpas.com

  • April 16, 2020 12:38 PM | Judy Pfeiffer (Administrator)

    Kelleher & Buckley, LLC offers their clients a wide range of legal services including corporate representation, estate planning & administration, litigation services and tax wealth & structuring. Since 1997, they have been dedicated to protecting individuals, families and businesses alike.

    Many businesses are not fulfilling contractual obligations, such as paying bills or supplying goods and services, due to COVID-19. Governmental restrictions and supply chain disruptions may be impacting the ability to perform and/or pay. In certain circumstances, non-performance and/or non-payment may be excusable under a force majeure clause or other legal doctrines.

    What is force majeure?

    Force majeure is defined as unforeseeable circumstances that prevent fulfillment of a contract, such as natural disasters, government interventions and “acts of God.” A force majeure clause may cover potential inability to fulfill contractual duties due to events outside of the business’s control. 

    Is COVID-19 considered a force majeure event?

    It is not always clear what constitutes force majeure. Agreements and business relationships will need to be reviewed on a case-by-case basis to determine if a force majeure clause exists and if the pandemic could be considered a valid excuse not to perform or pay.

    Do other legal doctrines excuse performance due to COVID-19?

    The doctrines of frustration of purpose and impossibility of performance, as well as certain provisions of the Uniform Commercial Code, may also excuse temporary or permanent inability to perform contractual obligations.

    What steps should I be taking now?

    Businesses should think about consulting with an attorney and consider the following:

    • What happens if you cannot fulfill a contractual obligation or pay?
    • What should you do if you receive a letter indicating nonpayment or nonperformance regarding a contract or business dealing?
    • What can you do to improve or preserve your business relationships in these situations?
    • What can you do to improve or preserve your legal position in these situations?
    • What evidence should you seek from a contracting party claiming force majeure or another legal doctrine excusing performance?
    • Can you terminate contracts and refuse payment due to coronavirus?
    • Are there any notice requirements before taking action?
    • What are your potential damages or liability exposure?
    • What happens if a lawsuit needs to be filed?
    Kelleher & Buckley, LLC can help you review key contracts and business relationships to address force majeure or other related issues, assist with insurance provider notification and identify any potential for litigation. If your company believes its performance has been or will experience business disruption due to the outbreak, please contact Andrew J. Kelleher or David P. Buckley at (847) 382-9130. 

    Andrew J. Kelleher 
    Kelleher & Buckley, LLC 
    102 S Wynstone Park Drive
    North Barrington, IL 60010 
    847-382-9130 
    akelleher@kelleherbuckley.com

  • April 15, 2020 3:17 PM | Judy Pfeiffer (Administrator)

    Securing Your Remote Workforce

    Contributing Authors: Jonathan Harris, Grant Menard and Jake Gregorich are part of the Equilibrium, an Ntiva company, team. A technology firm that strikes the perfect balance between strategic IT project work and IT support work, they are designed to help companies that are aggressively growing through acquisitions achieve their technology goals. 

    Due to the remote work paradigm we find ourselves in, technology is the central force driving businesses forward. However, as our reliance on technology increases, cyber-attacks, ransomware, and other data security threats are at an all-time high. For our clients, this requires us to manage and support comprehensive tools and resources that drive efficiencies and collaboration in an environment that is more secure and protected than ever before. These are just a few of the growing technological challenges that have emerged, ultimately effecting the way we do our daily work.

    To further prove this point, below is a snapshot of the increase in cyberattacks for the month of March, highlighting the massive spike in bad actors trying to take advantage of the remote workers.

    MBBI members are continuing to service their clients and keep business moving forward during these uncertain times, regardless of the type of support provided. Therefore, it is important for us to implement the technical requirements and performance considerations for reliable, safe, remote computing. As the IT group supporting many MBBI members, we’ve developed a list of resources for business requirements and best practices designed to address this challenge. We are in this together.

    Typical Requirements (Hyperlinks):

    So where do we go from here?

    Budgets are tight, leaders are being pulled in multiple directions, and the business environment is challenging, so Equilibrium, An Ntiva Company, is doing our part by offering MBBI members a no cost IT Security Cold Audit and a free live, collaborative Cybersecurity Awareness Training Course. Please reach out if you would like to schedule a cold audit or private virtual class for your organization or your partners.

    Equilibrium, an Ntiva company, is a technology firm that strikes the perfect balance between strategic IT project work and IT support work to help mid-market sized businesses achieve their technology goals. Our core services include - IT Strategy, Managed Services, Mergers & Acquisition IT Consulting, Disaster Recovery, IT Security, Infrastructure Services, Cloud Solutions, and ERP/CRM/LOB Software Selections.

    With experience in assessing IT for M&A deals (before or after Day 1), designing technology solutions, project planning, budgeting, implementing, documenting and supporting systems and network infrastructure, EQ has just what you need to quickly realize the benefits of merger integrations or divestitures. Please visit https://www.ntiva.com/covid-19-business-resources for a comprehensive catalog of highly valuable strategies to engage during this time.  This will help us all get past the challenge presented by COVID-19.

    Stay safe and be well.

    Contributors:

    Jonathan Harris Grant Menard Jake Gregorich
    jharris@eqinc.com  gmenard@eqinc.com  jgregorich@eqinc.com
    773-639-3715  414-659-2665  630-962-9288

  • April 03, 2020 12:00 PM | Judy Pfeiffer (Administrator)

    Contributing Author: Tom Kastner, President, GP Ventures

    Tom is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures. 

    For the past several years, Quality of Earnings Reports, also called ‘Q of E’ Reports, have become more popular in M&A deals.  Whether the seller’s financials are audited, reviewed, compiled, in QuickBooks, or on the back of a napkin, a Q of E report helps buyers become more comfortable with the seller’s numbers and identifies risks in the business.  Until recently, these reports were mostly completed for larger deals, but lately they have been performed for companies at $10 million in revenue or below.  The reports are for a specific M&A deal, performed by a third-party accounting firm, and usually take a few weeks (2-4 during off-season, 4-8 during tax season) to complete.

    Q of E reports are almost standard for all public and private-equity buyers for deals above a certain size.  This is to provide a third-party analysis and review of the seller’s financials and the structure of the deal.  Third parties are independent and have no stake in the game, so they are generally unbiased and not influenced by any pressure to do a deal.  Public company boards of directors and private equity investors typically insist on getting these reports, not only for their independent analysis, but to provide another prospective on the deal that the buyers may have missed (in other words, ‘CYA’).

    The Q of E provides analysis into the ‘quality’ of earnings, that is, how sustainable are revenues and earnings, and how realistic are the seller’s projections.  Depending on the scope of the report and the buyer’s concerns, the Q of E team can look into a wide range of topics.  For example, if the seller’s customers are mostly well-financed blue-chip companies, revenues are based on long-term contracts or repeating programs, and revenues have climbed steadily, those earnings would be generally ‘high quality’.  However, if customers are mostly smaller companies, orders are lumpy or spotty, there are a lot of one-time orders, suppliers are small and overseas, the equipment was purchased in the 80’s, and revenues have been up and down, the Q of E team would probably rank those earnings as lower quality.

    The Q of E report also looks at the quality of assets, various accounting policies, the quality of the supply chain, financial controls, the level of the management team/financial reporting, IT systems, and a wide variety of other factors.    The scope of the report depends on the concerns of the buyer and the complexity of the business.   The costs also depend on those factors and can range from around $25K for a limited report to up to $100K for a complex report for businesses in the $10-100 million range.

    In recent years, sellers have become more proactive and have requested Q of E reports on themselves.  This is a bit like getting a home inspection completed before selling a house or getting the mechanic to check out your car before you sell it online.  Getting a sell-side Q of E report gives buyers confidence early on, uncovers issues, makes the process quicker, and is a strong signal that the seller is serious (and wants a serious value for the company).  Sell-side Q of E reports are becoming standard, so not having it puts the company behind other sellers.  If something negative comes up, you can hit the ‘pause’ button and fix it before going to market, or at least disclose it in advance and avoid any surprises.  Sellers who are thinking of going to market in a few years could get a report done now, then have plenty of time to correct any issues.  A re-fresh of the report when the company is ready to go to market should be easier and less expensive than the original report.

    As an owner or executive of a company, you have worked there for years, so you understand the business well and have accepted all (or at least most) of the risks of the business and industry.  Owners can get blinded by familiarity, and they all think their babies are beautiful.  Buyers may come from a slightly different part of the industry and may organize their business differently. Private equity or other investors may not know the industry well.  A Q of E report can give the owners and executives a perspective of the business that they otherwise would not receive.

    Who pays for the Q of E report?  If it is a sell-side Q of E report, the seller pays, but it typically pays off in higher valuations and a smoother deal.  If the buyer asks for it, the buyer typically pays.  However, some buyers may say that the seller has avoided paying audit fees for years, so the seller should at least pay half.  For companies under $10 million in value with relatively simple organizations, a Q of E report may be overkill, but it is recommended for larger companies with more complex organizations.  If the buyer requests the Q of E, it is almost always after a Letter of Intent is signed and the parties have entered into an exclusive due diligence period.

    The main differences between a financial audit or review and a Q of E report are that audits check to see if the financials conform to GAAP and they are backward-looking.  Q of E reports take into account add-backs, a variety of risks, and also cover forward-looking projections.

    A great Q of E report can help support a higher valuation, better terms (more cash at closing, less earnout), a smoother negotiation and due diligence process, and better reps and warranties terms (or lower Reps and warranties insurance premiums).  It can help the buyer with their financing efforts and help them get approval from their board of directors or investment committee.  A Q of E report does not replace buyers’ due diligence, but it can be a very important independent tool for understanding the business.


  • April 03, 2020 9:29 AM | Judy Pfeiffer (Administrator)

    Contributing Author: Tom Kastner, President, GP Ventures

    Tom is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures. 

    Wouldn’t it be a lot easier if we could buy and sell companies online?  Owners could avoid a lot of trouble and fees, as well as get deals done quicker.  Imagine going to a 55-year high school anniversary, and finally deciding to retire.   The next day, simply put the business up for sale on eBay, collect the cash a few days later, and never worry about the business again.  Unfortunately, it’s just not that easy.  Here are some reasons why a business cannot be sold online, and how owners can make the sale process go more smoothly.

    Businesses are Complex:   A business is more complex than a beanie baby collection or a pair of shoes.  Even a small business is vastly more complex than any product you find online.   They are hard to understand and hard to explain correctly.  Owners tend to overstate their value, and buyers tend to tear them down.  Buyers’ eyes start to glaze over if the owner has a 15-minute no-break answer to ‘How’s business?’.  Try to understand your business well enough to break it down into a simple explanation, including what is special about the business. 

    People are Complex:  The value of a business is usually mostly in the people, and people are more complex than a used flat screen TV.  Both buyers and sellers have agendas, as does management and the employees.  Most people involved in deals seem to make the deals more complex than they need to be: we can’t help it.  At some point, both sides need to make it easy to get a deal done.

    People Embellish (Lie):  People lie all the time, whether it’s a white lie, an embellishment, or out and out fraud.  We at least tend to push the envelope on the truth, but if we overdo it, the other side will lose trust.  If it happens on eBay, the seller’s rating will go down, but in the real world a buyer will walk away.  Stick to the truth, and while a seller can emphasize the positive aspects of the deal, you have to be careful not to overdo it.

    Culture:  Culture is a very important aspect of a business, but it is often ignored.  The value of a business can be in the culture, or the culture could be a toxic negative.  It is very hard for owners to understand and explain their culture, and they might be wrong about it.  Buyers often say that they do not want to change anything, then they change everything after an acquisition.  Take the time to understand the important aspects of your company’s culture and break it down into 5-10 important items.

    Multi-Step Deals: Acquiring a business takes a lot of steps, no matter how simple the business is.  Each step gives both sides the chance to rethink the deal, or to find better options.  If you’re buying a gift card for your nephew, you might waffle a little before settling for an Applebee’s card.  Business buyers tend to consult with a variety of advisors, and there could be over 100 interactions between buyer and seller before a deal is completed.    It is important to keep communicating, stick to a schedule, and resolve issues quickly in order to keep a deal going.

    Changes: The sale of a business takes time, so things change during the process.  The overall economy can change, competitors may change, customers change, people leave, and buyers themselves get acquired.  If we could freeze a business in time, that would make things easier.  The best way to deal with change is to expect change, and if something comes up, disclose it quickly and fairly to the other party.

    Lack of Preparation:  Owners are often woefully unprepared to sell their business, both personally and professionally.  Even if you could list the business online, many owners would take it down afterwards because they realized that they do not know what to do in retirement.   If the perfect buyer walked in the front door with a suitcase full of cash, almost no owners would be prepared to disclose the data needed to give the buyer enough comfort to go through with the deal.

    How to Make it Easier:  Although the sale of a business will never be as easy as selling used gym equipment, there are a number of ways to make it easier.  First, the owner needs to be prepared mentally and have their personal finances and planning in order.  The owner should also talk with their advisors in the legal, accounting, and M&A fields in order to get the business ready.  Try to find the skeletons and fix them if possible.  Be sure to really understand the valuations in the market.   Owners should also talk with key stakeholders, such as partners (spouses/kids) and key employees, to make sure everyone is on the same page.  The sale will never be as easy as getting rid of your Aunt Betty’s antique silver set, but through proper personal and business preparation you can help to make the process smoother.

  • January 01, 2020 9:57 AM | Judy Pfeiffer (Administrator)

    Contributing Author: Raymond J. Horn III is a Partner with Meltzer, Purtill & Stelle LLC and President of MBBI

    Meltzer, Purtill & Stelle LLC a law firm with offices in Schaumburg and Chicago. Ray concentrates his practice of law in the areas of mergers and acquisitions, contract negotiation, drafting and review, owner strategic planning through buy-sell agreements, business fractures, and secured lending. Ray is President and a member of the Board of Directors of MBBI. Ray can be reached by phone at (847) 330-2430, and by email at RHorn@MPSLaw.com


    New Year's Greeting

    First, and foremost, a very Happy New Year to each of you. I hope you enjoyed a wonderful holiday season and a very successful 2019.Looking back on 2019, MBBI experienced another very successful year, hosting numerous engaging and diverse events throughout the year. We started off the year on a very high note with our January annual conference focusing on M&A trends in the craft beverage industry, including an excellent presentation and tasting with more than 150 attendees. Following a highly successful and record-setting golf outing in 2018, we again reset the bar with 240 golfers, over 275 for dinner, as well as contributing more than $10,000 to Child’s Voice. Among other events, MBBI members and guests attended an informative presentation on the state of the banking industry in May, connected with The Enclave Association in September, enjoyed a successful Cubs’ event in September, expanded their knowledge of ethical matters in M&A transactions in October, and then enjoyed another Bears’/Packers’ game (this time at Lambeau Field) in December (with a result this time favoring our colleagues in Wisconsin). Also in December, our Wisconsin Chapter again knocked it out of the park with a very successful 9th Annual Private Equity Connection, with attendance of over 350. We have continued to build connections through marketing and website initiatives and have worked diligently to engage with members to ensure they are receiving a valuable return on their investment of time, talent and resources in MBBI.

    In looking ahead for 2020, I am very confident MBBI will continue to build on 2019 successes (just as we did so in 2019). I want to encourage you to stay involved and attend as many events as possible, starting with our Annual Conference on January 23, focusing on the current economic impact manufacturing makes in Illinois and featuring a partnership with the Illinois Manufacturers’ Association. If you have not already registered, please do so as soon as you can so you do not miss this exciting event. We have many more events planned for 2020, including our Golf Outing in July, and I encourage you to visit our website at MBBI.org for information and details on registration.

    As is true with every organization, value received by members is directly tied to member engagement in the organization. As you have heard me say more than once, I again want to strongly encourage all MBBI members to become (or stay) involved in MBBI. MBBI is better with your guidance and input and, if I dare say it, I believe its members are better from that engagement with MBBI. From personal experience, I can state without reservation that MBBI is well worth an investment of one’s time, talent and resources.

    Looking forward to seeing you at an upcoming event. All the best for a very happy and successful 2020.

    Raymond J. Horn III
    MBBI President - 2020

    Raymond J. Horn III is a Partner with Meltzer, Purtill & Stelle LLC and President of MBBI

  • November 04, 2019 10:17 AM | Judy Pfeiffer (Administrator)

    Contributing Author: Greg Lafin, Managing Director, BKD Capital Advisors.

    Greg is the head of BKD Capital Advisors, LLC’s Chicago office which supports the Midwest Region for BKD encompassing 9 office locations and has provided merger and acquisition advisory services to small and mid-sized businesses for more than 25 years. He has extensive experience in providing investment banking services for transaction values up to $300 Million Dollars to include seller services, acquisition searches, due diligence, financial structuring and modeling, negotiation support and profit improvement advisory support. Gregory serves various industries, including health care, manufacturers and distributors, trucking and logistics, business services and technology firms. Greg can be reached at: (P) 630-282-9569 (EM) glafin@bkd.com.

    Transportation and Logistics M&A

    Overall, mergers and acquisitions activity within the trucking, transportation and logistics market has been flat or slightly declining in 2019. That trend is expected to continue through the balance of the year for a number of reasons.

    While e-commerce and condensed consumer delivery expectations are fueling growth, tariffs are slowing import traffic and adversely impacting volumes.  Industry wide, downward pricing pressure continues. Meanwhile, driver shortages are still a top issue and firms using independent contractors remain under heavy scrutiny.

    Another challenge comes in the form of fuel expense, which continues to rise due to commodity price stabilization and higher taxes, thus pressuring profit margins. At the same time, technology investments continue to rise, particularly in the areas of driver safety and compliance, fleet management and migrations to customer-centric cloud platforms.

    The trend toward adopting green initiatives continues to add cost to fleet additions as many firms try to incorporate alternative-fuel vehicles to enhance efficiencies and satisfy customer requests and demands. Finally, industry consolidation continues as smaller firms, outside of certain specialty niches, are challenged to compete and invest.

    Recommendations for Investors Whether it’s preferable for a logistics or transportation company to be asset-heavy or asset-light depends on the nature of the sale. Both of these platforms are needed to move freight. Asset-heavy transactions are valued approximately one-third less from an adjusted EBITDA multiple perspective; however, they do offer significant downside protection given the liquidation value of the fleet assets. Asset-light transactions are viewed more favorably because the significant annual investment in fleet assets is eliminated. Relationships and niches typically drive the premium in asset-light transactions, making retention of key employees and customers a critical factor.

    For sellers, it’s wise to market companies with sell-side due diligence in hand because often it leads to enhanced value. The potential financial and compliance surprises during diligence are usually removed, which helps improve initial valuations, increases the certainty of closing value and can speed time to close. Key areas of focus continue to be state and local taxation, employee versus independent contractor reporting, revenue recognition, and capital lease and operational lease accounting standards, along with overall financial integrity.

    Overall, the broad M&A landscape continues to be a seller’s market with near record-high valuations. The trucking, transportation and logistics market will continue to consolidate, offering PE and growth-minded companies an opportunity to build some exciting, accretive enterprises. This industry continues to change and disrupt the norms of the past with technological advancements, including autonomous fleets using artificial intelligence and drone delivery. Innovative and operationally intensive companies will emerge as winners in this future state. Companies will continue to outsource delivery, warehousing and more, thus focusing on their core competencies, opening the door for more—and new—customer acquisition opportunities within the industry.

    Greg Lafin is managing director of BKD Capital Advisors. This article is for
    general information purposes only and is not to be considered as legal advice. Consult your BKD adviser or legal counsel .


  • August 12, 2019 10:06 AM | Judy Pfeiffer (Administrator)

    Contributing Author: Vasili (Vas) Russis chairs the Tax & Wealth Structuring practice group at Kelleher & Buckley, LLC law firm.

    Vas concentrates his practice on the representation of closely held businesses and high net worth individuals, mainly in the areas of tax structuring and planning, estate planning and administration, business structuring and planning, asset protection, IRS disputes, real estate and commercial litigation. Vas can be reached at: (P) 847-382-9130 (EM) vrussis@kelleherbuckley.com

    Succession Planning to Retain S Corporation Status

    Under the current tax law, S corporations are the most commonly used entity for operating businesses (other than for holding real estate). Generally, the rules for S corporation ownership allow for individuals (or their living trusts) to hold shares in an S corporation. Proper ownership of shares allows for S corporation status, which avoids the unwanted scenario of “double taxation” that is found with C corporations.  Many business owners choose not to have the results associated with C corporation “double taxation”.

    However, when an S corporation shareholder dies, depending on how that shareholder’s estate plan is structured, there can be a loss of S corporation status, and the corporation can be brought back into the C corporation structure, if prior planning is not properly addressed. Often a shareholder will plan to have shares in an S corporation held in a separate trust after his or her death; however, that trust needs to be properly structured in order to continue with the entity’s S corporation status.

    In addition to trust planning, there are various mechanisms that can be used to preserve S corporation status upon a shareholder’s death. First, if shares are left to an individual, such a transfer will not cause a loss of S corporation status, provided other S corporation requirements continue to be met.  For the most part, individuals are considered as eligible S corporation shareholders.  Further, a buy-sell agreement, if properly drafted, can provide for a transfer of shares on a shareholder’s death to an individual or to such individual’s living trust. Both such parties are eligible shareholders and can continue the entity’s tax benefits found with S corporation status.

    Although trust planning is generally preferable for estate planning purposes, shares left to a trust may create a situation where S corporation status could be lost.  Two types of trusts – known as a Qualified Subchapter S Trust (“QSST”) and an Electing Small Business Trust (“ESBT”) – can be used to preserve an S corporation election after a shareholder’s death.

    To qualify as a QSST, a trust’s terms must provide that during the life of the current income beneficiary, the trust will have only one income beneficiary and under the terms of the trust, all of the trust's accounting income must be, or is required to be, distributed to the income beneficiary at least annually. This will cause the trust’s income to be taxed at the beneficiary’s income tax rate, which may be as high as 37% (the current highest marginal rate of income tax on ordinary income).  The trustee of the trust must distribute trust accounting income directly to the beneficiary or, if a minor is the beneficiary, to a custodial account for the benefit of the minor. In addition, the trust's terms must require that any distribution of assets above the trust’s income can be made only to the current income beneficiary.  The QSST must provide that the current income beneficiary's interest terminates at the earlier of (a) the current beneficiary's death or (b) the termination of the trust.  If the trust terminates during the current income beneficiary's life, the trust's assets must be distributed to the current income beneficiary; at death, the trust’s assets are distributed to the beneficiary’s estate.

    Unlike QSSTs, ESBTs may have multiple beneficiaries.  Further, trust income does not have to be distributed annually, and can be accumulated inside the trust or distributed among the multiple beneficiaries. However, with the flexibility an ESBT brings over a QSST, the tax treatment of an ESBT is not as simple as that of a QSST. An ESBT can be divided into two portions: an “S corporation portion” consisting of the S corporation stock, and a “non-S portion” consisting of all other non-S corporation stock property. One shortcoming of an ESBT is that its S corporation portion is subject to an almost “flat rate” of tax, that being the highest marginal rate of income tax on ordinary income (again, currently 37%) without the benefit of utilizing lower, marginal rates.  Further, because the trust pays tax on all the S corporation income from the “S corporation portion”, no matter if income has been distributed to the beneficiaries or not, the Section 199A QBI deduction related to the “S corporation portion” of the trust will reduce the S corporation portion’s income and such deduction will stay with the trust and not be allocated to the beneficiaries.

    To qualify for QSST or ESBT treatment, each trust needs to make elections.  Although procedural, this step is important as making the election timely can save time, money and stress involved with making a late election if making a timely election is missed. 

    The issues involving use of a QSST or ESBT for future planning come up when a business owner is involved in estate planning.  Although more refined estate plans contain provisions to modify a trust to allow for QSST or ESBT treatment, a business owner should review whether the QSST or ESBT structure makes sense for ownership after the business owner’s death to avoid issues where added costs and potential for losing S corporation status for an entity could come forward.  Tax costs, accumulation of income and continuance of S corporation status need to be weighed to make a proper decision on how business ownership may be structured for the future.


  • July 01, 2019 2:27 PM | Judy Pfeiffer (Administrator)

    Contributing Author: Cheryl Aschenbrener, CPA, is the Sikich Partner-in-Charge of the Private Equity Industry Group

    Specific to the Milwaukee office, she leads as Director of Business Development and the Manufacturing & Distribution practice. She has over 20 years of experience specializing in assurance services and provides business advisory services in areas such as operations improvement, strategic planning and mergers and acquisitions. She is actively involved in structuring and due diligence work for portfolio company acquisitions for strategic buyers and private equity funds, and various value-added planning for private equity funds. Cheryl can be reached at: (P) (262) 754-9400 (EM) Cheryl.Aschenbrener@Sikich.com

    LEARN WHY YOU MAY BE USING A QUALITY OF EARNINGS REPORT INCORRECTLY

    A company’s financial history tells a story. One that unveils its day-to-day operations through numbers: what is annual revenue? What is the company’s profit? How does it perform compared to its competitors? However, like any story, a company’s financial history can be easily manipulated into different tales depending on who you hear it from.

    Investing Answers finds that a Quality of Earnings (Q of E) Report tells an objective account: “A company that is genuinely doing well will show increases in sales and steady changes in expenses rather than rely on accounting changes to artificially pump things up. Regardless, the temptation to rely on accounting methods to improve earnings is widespread and is especially strong for companies that have cyclical sales and profits.”

    A complex report to gather, the Q of E Report provides a detailed analysis of all significant components of a company’s revenue and expenses. Unlike an audit or review, the Q of E Report focuses on the ongoing normalized operations of the company; this insight helps assess the sustainability and accuracy of historical earnings and the achievability of future projections.

    HOW TO USE A QUALITY OF EARNINGS REPORT

    The goal of a Quality of Earnings Report is to present facts and analysis to help the end user gather conclusions. It is NOT an audit or review.

    It features everything a buyer needs to know about a company to determine if it’s a worthy investment, and everything a seller needs to accurately (and honestly) present their company’s historical earnings and achievability of future projections. According to Seeking Alpha, a Q of E Report, “won’t tell you if the company is undervalued, if it’s experiencing growth, if its cash flow is strong or if it has too much debt. It will tell you whether you can trust the earnings presented by the company if the earnings are the result of a fundamental advantage that will persist over time or if they are temporary or possibly the result of manipulation.”

    WHY GET A QUALITY OF EARNINGS REPORT?

    Aside from the insight it gives you into a company’s earnings quality (stock, sales, steady changes in expenses), a Q of E Report can be utilized in many ways, including:

    1. Merger & Acquisition Transactions
    2. Sell-side and buy-side due diligence
    3. Final purchase price negotiations
    4. By a seller to highlight financial strengths and provide an independent and objective analysis of the company 5. By private equity firms

    HOW TO USE A Q OF E REPORT TO YOUR ADVANTAGE

    Companies may use a Q of E Report to compare its performance against another or determine whether it is making a sound investment. This report serves as a “professional financial analysis” that identifies any inaccuracies or trends which can help inform a business strategy moving forward. In addition to an audit or a review, a Q of E report that is assembled appropriately from a GAAP perspective and analytical perspective will tell you the most honest truth about a company.

    For more information on Quality of Earnings or to set up a review, please contact our team.


  • June 01, 2019 2:44 PM | Judy Pfeiffer (Administrator)

    Contributing Author: Scott M. Bushkie, Managing Partner, Founder, Cornerstone Business Services

    Scott Bushkie is the founder and president of Cornerstone Business Services. With more than 20 years in the M&A industry, Scott is a recognized leader in the field, providing exit strategies, sell- and buy-side transitions, along with valuation services in the lower middle market Scott can be reached at: (P) 920.436.9890 (EM) SBushkie@Cornerstone-Business.com

    “Lower middle market too hot to touch,” “M&A flies high,” “M&A activity speaks to confidence of CEOs.” These are the kind of headlines that have been dominating my news feeds lately. I’m sure you’ve seen something similar popping up in your own industry news sources.

    It’s not an exaggeration. In my 20 years in the industry, this is one of, if not the best, markets I’ve seen. So why is this a seller’s market right now, particularly in the lower middle market?

    Multiple factors are coming into play. First, there are substantially more buyers than quality sellers in the marketplace. It’s the old adage of supply and demand from Econ 101. Buyers are fighting over a few deals.

    The number of private buyers, meaning individuals and private equity buyers, has grown over the last few years, jumping from 53.4 percent of buyers in 2014 to 64.5 percent in 2017, according to Bloomberg Law data. Beyond the increase in competition, private buyers are more likely to depend on the seller for transition support or long-term consulting. That means they have an extra incentive to ensure the seller feels like they got a fair deal.

    Second, there are records amount of money out there. Private equity firms have raised more money in the last three years than any other time in history.

    These firms live and die on their ability to provide investor returns, so in a way, they’ve created their own competitive problem. They’re all out on the hunt for good deals and good opportunities they can turn into investor profits.

    On top of that, corporations are flush with cash. Non-financial companies’ liquid assets reached $2.4 trillion last year. Everyone horded cash through the recession, and now they want to put those funds to work.

    And while the labor shortage is hampering organic growth plans, it’s helping stimulate M&A. In May, the unemployment rate fell to an 18-year low of 3.8 percent. New hires are harder to find, and those you can get come at a higher cost. That means companies are looking at acquisition as a way to grow.

    Tying back to available capital, we still have strong, ongoing interest from the lending market. Banks are getting aggressive in their business lending strategies again.

    Federal Reserve data shows that commercial and industrial loans increased 3.4% in April vs. the year-earlier level. While that may seem like modest growth, the Treasury Department spring risk assessment noted that strong competition for quality loans has led to evidence of eased underwriting.

    And while interest rates are climbing, they remain at record lows. Money is still cheap. Back in the late 90s, the prime interest rate was at 8.5 percent and there were a lot of deals getting done. With prime today at 4.5 percent, we still have a lot of room for increases before we hit historic norms.

    Meanwhile, business confidence remains high. According to the Business Roundtable’s June economic outlook survey, economic confidence among the nation’s top CEOs was at its third highest level in the index’s 16-year history. Economic confidence was at 111.1 points, remaining above the historic average of 81.2 for the sixth straight quarter.

    High business confidence typically translates into increased investments and M&A activity as business leaders are confident in their ability to meet debt service and deliver return on investment targets.

    With confidence and money at their peak, competition is hot for available deals. That’s driving more buyers down into the lower middle market.

    Strategic buyers and private equity firms who once focused on middle market deals are now looking downstream. Whereas acquisition benchmarks once focused on EBITDA of $5 million and above, buyers are working harder and buying smaller companies.

    In summary, the lower middle market is a seller’s market. High competition is making it harder for buyers to win deals that hit their investment benchmarks. But it’s easier for sellers to exit their business on their own terms. People are selling because the market is right, not because they have to sell.




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