Must-Know Lessons for M&A Success

Summary In this conversation, Sharon Heaton, an M&A advisor, discusses various aspects of selling a business. She emphasizes the importance of building a transferable company and transitioning from an owner-dependent to a management-driven company. Sharon also explains the factors that affect the valuation of a business, including EBITDA and company characteristics. She provides insights into valuations in government contracting and the challenges of earnouts. Additionally, Sharon discusses the contentious issue of networking capital and the tax considerations involved in converting ordinary income to capital gains. In this conversation, Jon Stoddard and Sharon Heaton discuss the topic of seller financing and its implications for capital gains tax. They explore the concept of the installment sale doctrine and how it allows for the payment of taxes over time. They also highlight the importance of having an interest rate on seller financing to differentiate between ordinary income and capital gains. Overall, the conversation provides valuable insights into the tax considerations involved in seller financing.

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Takeaways

• Building a transferable company is crucial when considering selling a business.
• Transitioning from an owner-dependent to a management-driven company increases the value of the business.
• Factors such as EBITDA and company characteristics impact the valuation of a business.
• Understanding valuations in government contracting requires industry-specific knowledge.
• Earnouts can be challenging to structure and should be fair and clear.
• Networking capital is essential for the functioning of a business and should be neither an increase nor decrease to the purchase price.
• Converting ordinary income to capital gains can result in significant tax savings.
• Seller financing can be a strategy to manage capital gains tax by spreading the tax liability over a period of time.
• The installment sale doctrine allows for the payment of taxes on seller financing as it is received, rather than upfront.
• Having an interest rate on seller financing helps differentiate between ordinary income and capital gains.
• It is important to consider the potential risks and benefits of paying taxes over time, as tax rates may fluctuate.

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Chapters 00:00 Introduction and Background to Sharon

01:13 Deciding to Sell and Understanding the Value of the Company

04:44 Factors Affecting Valuation: EBITDA and Company Characteristics

07:06 Importance of Building a Transferable Company

08:49 Transitioning from Owner-Dependent to Management-Driven Company

10:12 Scoring Characteristics of a Business for Valuation

12:56 Negotiating the Purchase Price and Value of the Company

14:55 Determining Market Comps and Valuation in Government Contracting

17:35 Factors Driving Valuations in Government Contracting

20:22 Stock Sales vs. Asset Sales in Government Contracting

22:12 Considerations for Strategic Buyers in Government Contracting

24:56 Earnouts and Challenges in Structuring Deals

27:47 Valuation Examples and Importance of Recurring Revenue

35:06 Contentious Issues in M&A: Networking Capital

40:45 Tax Considerations: Converting Ordinary Income to Capital Gains

42:29 Seller Financing and Capital Gains Tax

43:26 The Installment Sale Doctrine

43:54 Paying Taxes Over Time

44:13 Interest Rates on Seller Financing