The twin destructive forces of taxation and low private equity buyout offers can be avoided.

By John Lindsay

Many years ago a business owner engaged a private equity buyout firm to make him an offer for his business. After extensive review of the financials and legal status of the firm the agent presented the offer.

The business owner took one look at the offer and said, “There’s the door!”.? Obviously, the offer was not very attractive but why was it rejected? It was because the offer was only 3 times net after tax earnings. And even worse, the offer was not for cash but rather a series of payments over time, albeit with a down payment.

The business owner felt the private equity buyout firm was showing a lack of appreciation of:

The strategic nature of the business in the oil & gas sector,

The firm’s financial strength (it earned 30 times more annually after tax than it paid in interest for a seasonal line of credit)

And the solid devotion of customers who benefited from 24 hour delivery of parts critical to constant operation of diesel compressors required to push natural gas thousands of miles through pipelines.

Yet three times net earnings with terms is a very common offer for successful private businesses whose operating metrics are every but as good as any publicly traded firm. I regularly see double digit returns on equity, capital and assets.

My proprietary “R3” Case Study shows why private equity buyout firms make such low offers and what can be done as an alternative to net at least ten times net earnings and skate by the tax department using sections of the Income tax Act.

By the way this business owner who lives in Edmonton AB, became a client and last time I sent him a form requiring signature he and his wife were on a world cruise. His total package is 22 times net earnings.