How we helped our client maximize the benefits from his company’s acquisition
Our network of resources and expertise in planning and acquisition provided a valuable combination of strategic insight and solutions to support this acquisition. Thanks to this collaboration, we established a business that was viable and in compliance will all the terms of the deal.
The situation
A publicly traded company was looking to acquire our client’s business, and he was considering the terms. The offer was $150 million, of which the he would receive $30 million. While half of the offer was in cash up front, the other half was in stock paid out monthly over 30 months. Since our client had never sold a company before, he looked for guidance from our group, several competitors and his attorneys.
The strategy
The attorneys did a fine job providing legal advice to help ensure that the transaction was technically sound. However, our client was still hesitant. He was not optimistic about the future of the acquiring company.
After reviewing the term sheet, we realized that he was to receive a fixed number of shares each month, which equated to $500,000 monthly, but at current price levels. With the current terms, if the stock fell 50%, the net proceeds he would receive would also decline by 50%.
After reviewing this with him, he insisted on receiving a fixed-dollar-amount equivalent of shares each month. The acquiring company agreed.
The results
Once the deal was made, we worked with our 10b5-1 team to review the various types of plans—duration, stock price, timing, etc. While our competitors wanted this business, it was our thoughtful and thorough approach to laying out the various options that won over our client. We were able to implement the trading plan for him. Since the stock was received monthly, we continued to coordinate with the company’s internal counsel, their stock transfer agent, and the 10b5-1 specialists. All of this happened seamlessly, which enhanced our client’s experience working with us.
Lastly, there were tax considerations. Since the initial company stock was considered Qualified Small Business Stock (QSBS), there was a great potential tax savings. If done correctly, rolling QSBS eligible proceeds into a new QSBS business can exclude up to $10 million of capital gains. But our client began working for a competitor and could not easily establish a new company to roll the proceeds into.
Our Advanced Planning Group introduced the client to experienced QSBS tax experts. We coordinated a discussion with them, our client and his tax and legal team. While his current tax advisor was familiar with the QSBS concept, he was not versed enough to fully consider what types of businesses might or might not actually work. After considering a variety of new businesses that might be deemed acceptable by the IRS, the client decided on an art gallery consisting of blue chip pieces and artists. It was an area he has interest in, there are not wild swings in valuation, and outside of the art itself it is not a capital intensive business.
Even in this instance, there were a number of questions that our expert QSBS partner was able to weigh in on–How many employees are needed? Could it be an online gallery? How much inventory actually needs to be sold in any given year? After all potential road block were overcome, the client created the business within the guidelines that were deemed acceptable by our partners, and he was able to shelter $2 million of capital gains.
By being fully aware of the client’s situation, and by having access to experts in various areas, we were able to identify a solution that his own tax and legal team were not equipped to. Put simply, the resources we brought to the table saved the clients millions of dollars that otherwise would have been used to pay taxes.
