Business Law

Buyer Beware of Working Capital Adjustments

Posted by on May 31, 2018 in Business Law | 0 comments

Buyer Beware of Working Capital Adjustments

Most stock transactions have a working capital adjustment.  Some buyers love them, some buyers hate them.  Without them a seller can often game the system to their benefit.  Many seem fair at the time, but unless well-planned they can result in unexpected purchase price adjustments post-closing when no one is in a mood to revisit the deal.  We have several tips for an effective working capital adjustment:   Know the balance sheet you will use. Reviewing the balance sheet and breaking down the components of the calculation will help your client understand the adjustment and how it will work.  Running some projected calculations will help identify flaws in the process.   Use a known balance sheet for the adjustment. Be specific that the balance sheet used in the calculation will be prepared consistent with past practice and custom.   When selecting the components of the working capital adjustment differentiate between operating and non-operating liabilities as well as the party benefitted by the liability. If the seller already received all the benefit of a liability, the seller should pay the liability from the purchase price proceeds and it should not be included in any working capital target calculation.   Write strong definitions based on the specific components of the adjustment again tying those components to past practice and custom. “Trade Payables” are obviously not the same as “Current Liabilities,” but often those details are lost on the drafter.   Provide a clear process for performing the working capital calculation and a clear process to resolve disputes. Make sure the timelines work and there is adequate time to lodge disputes.  Build in a small amount of time to negotiate a resolution so there is a chance to diffuse an escalating situation.   Consider an escrow based on a closing day estimate if the working capital of the target is prone to significant fluctuations which may require a big payment.   Make sure the working capital adjustment works within the limitations of any buyer financing or intercreditor agreements. Many times a post-closing payment of any kind to the seller before a payment to the lender will violate the terms of a loan agreement or intercreditor agreement.  The adjustment then has to be carved out of those covenants. Most deals have working capital adjustments.  A well-drafted and well-planned adjustment can protect a buyer’s working capital expectations in the deal.  However, to work effectively adequate time and attention must go into the provision. Andrew J. Miller, JD, CM&AA® advises buyers and seller of main street and middle market companies in private mergers and acquisitions.  He is recognized as a Certified Mergers & Acquisitions Advisor® by the Alliance of Mergers & Acquisitions Advisors, an organization focused on the private middle market.  He can be reached at (717) 845-1524, or *protected email*. Learn More About Andrew J. Miller, JD, CM&AA® > Learn More About Business Law:    Employee’s Management Status and the Creation of a Fiduciary Duty Amendments to UCC Article 9 Effective July 1, 2013 Member-Managed or Manager-Managed Limited Liability Company (LLC): What’s the Difference? Andrew Miller Completes Certification to Become a Certified Mergers & Acquisitions Advisor ® LLC or Corporation: Which is right for you?   Last Updated November 8,...

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Should I buy Assets or Stock?

Posted by on May 26, 2018 in Business Law | 0 comments

Should I buy Assets or Stock?

The most fundamental question for a buyer acquiring a business is whether to buy assets or stock. Most buyer-side accountants and many lawyers have the same gut response: Always asset. An asset acquisition can limit liabilities and provide tax benefits of asset basis step-up. But the devil is always in the details. Asset sales also carry much inherent operational risk. For most buyers it means setting up all new bank accounts, vendor accounts and re-hiring employees. For insurance brokers, it can mean having to re-apply for appointments which may be based on seniority that is now lost. For contracting firms it may mean obtaining new bonding and licensure. For healthcare providers it may mean applying for a new provider number which often requires a six-month holding period for approval during which time the practice cannot bill or collect. In some states, bulk sales tax also applies to some of the transferred assets. Sometimes these challenges are easily overcome, such as when the acquisition is purely for the assets, not the going concern business. But other times a stock acquisition with appropriate due diligence may be far more seamless and simple without exposing operational risks during the transition. Risk can be properly managed if the buyer does through due diligence, gets adequate representations and warranties from the seller and demands an adequate holdback or escrow to fund indemnities for breaches by the seller. The same tax benefits as an asset sale can also be achieved in a stock sale by using Section 338(h)(10) elections or similar tax treatments for partnerships and disregarded entities. Andrew J. Miller, JD, CM&AA® advises buyers and seller of main street and middle market companies in private mergers and acquisitions. He is recognized as a Certified Mergers & Acquisitions Advisor® by the Alliance of Mergers & Acquisitions Advisors, an organization focused on the private middle market. He can be reached at (717) 845-1524, or amiller@mpl-law.com. Learn More About Andrew J. Miller, JD, CM&AA® > Learn More About Business Law:  Pennsylvania Benefit Corporations  Buyer Beware of Working Capital Adjustments  The Tax Cuts and Jobs Act of 2017 Makes Bonus Depreciation Even More Useful  Using the Section 338(h)(10) Election  Legislative Update on Mechanic’s Lien Law of 1963     Page Updated November 8,...

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Using the Section 338(h)(10) Election

Posted by on May 16, 2018 in Business Law | 0 comments

Using the Section 338(h)(10) Election

Most people have heard of “Section 338(h)(10),” but not as many know when and how to use it. Normally, in a stock transaction, the buyer buys stock that will have basis outside the corporation in the amount of the purchase price for the stock. The amount paid for the stock cannot be depreciated or amortized to offset future taxes. The assets inside the corporation carry-over the basis without any change. A Section 338(h)(10) election can be used in a stock sale involving S-corporations to give the transaction asset sale treatment. This means the buyer gets a stepped-up basis in the business assets inside the corporation following the sale. This is significant because the buyer gets to depreciate and amortize assets inside the corporation which helps the buyer, especially in a leveraged transaction, offset net income from debt service payments or capex that may not be deductible to the pass-through shareholders. The seller usually pays more in taxes with asset-sale treatment so many times a seller demands a true-up of the purchase price to offset the additional taxes. Planning Tip: A Section 338(h)(10) election works best in stock transactions with considerable goodwill value because the seller will be taxed on the goodwill at the same rate it is taxed on the sale of stock. The buyer on the other hand can amortize the goodwill over 15 years rather than have the goodwill value “stuck” in the outside basis of the stock. We have found this to be a very useful tool in transactions involving government contractors or services firms where the buyer is paying substantial money for access to contract arrangements or people resulting in high goodwill values for the transaction. Andrew J. Miller, JD, CM&AA® advises buyers and seller of main street and middle market companies in private mergers and acquisitions. He is recognized as a Certified Mergers & Acquisitions Advisor® by the Alliance of Mergers & Acquisitions Advisors, an organization focused on the private middle market. He can be reached at (717) 845-1524, or amiller@mpl-law.com. Learn More About Andrew J. Miller, JD, CM&AA® > Learn More About Business Law: Should I Buy Assets or Stocks? Pennsylvania Benefit Corporations Legislative Update on Mechanic’s Lien Law of 1963 Using the Section 338(h)(10) Election The Tax Cuts and Jobs Act of 2017 Makes Bonus Depreciation Even More Useful   Last Updated November 8,...

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Andrew Miller Completes Certification to Become a Certified Mergers & Acquisitions Advisor®

Posted by on May 7, 2018 in Business Law | 0 comments

Andrew Miller Completes Certification to Become a Certified Mergers & Acquisitions Advisor®

Over the past 15 years, Andrew Miller has counseled numerous clients in various business transactions. During that time, he has consistently been a thought leader to his clients engaged in buying or selling businesses. He has recently bolstered his experience by becoming a Certified Mergers and Acquisitions Advisor® through the Alliance of Mergers & Acquisitions Advisors. The CMA&A® program is focused on Main Street and Middle Market private transactions. The CMA&A® designation is reserved for those who complete the intensive training course and pass an exam in deal process, capital structure, valuation, tax and law. The influence of the Main Street and Middle Market business sector (businesses with up to $500 million in revenues) in America is staggering. Main Street companies (small company under $5 million in revenues) make up the vast majority of business in the private markets. The Middle Market (companies with $5 million to $500 million in revenues) is one of the most important value drivers of America’s economy. Yet both fly largely under the radar. These markets account for more than a third of private sector Gross Domestic Product (GDP) and jobs, and has been growing, even over the past four “recession” years. If the Middle Market alone were a country, its GDP would rank it as the fourth-largest economy in the world, just behind Japan’s. Clearly, there is a need to better understand these important market sectors and provide it with the level of support, attention, and advocacy it merits. Representing clients that are buying or selling Main Street or Middle Market businesses requires knowledge and expertise in a variety if disciplines. Understanding the transactional process in private transactions is critical to closing successful deals. Knowledge of valuation metrics, financial statements, debt and equity options and deal terms are essential skills for an M&A attorney. “M&A is a careful blend of art and science,” says AM&AA founder, Michael Nall. “On one hand it is multi-disciplinary, complex, and analytical. On the other, it is all about people, relationships, nuances, timing, and instinct. This dynamic produces opportunity coupled with conflict, ambiguity and challenges, all supporting an exhilarating business ripe for those seeking to create value.” Learn About Mergers & Acquisitions > Andrew J. Miller, JD, CM&AA® advises buyers and seller of main street and middle market companies in private mergers and acquisitions. He is recognized as a Certified Mergers & Acquisitions Advisor® by the Alliance of Mergers & Acquisitions Advisors, an organization focused on the private middle market. He can be reached at (717) 845-1524, or amiller@mpl-law.com Learn More About Andrew J. Miller, JD, CM&AA®...

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Pennsylvania Mechanics Lien Law and Amendments under Act 142

Posted by on Jun 9, 2017 in Business Law | 0 comments

Pennsylvania Mechanics Lien Law and Amendments under Act 142

Act 142 of 2014 was signed into law in October of 2014 (the “Act”) and made sweeping changes to the Pennsylvania Mechanics Lien Law (the “Lien Law”). The Act provided for a website directory, called the Pennsylvania State Construction Notices Directory found at www.scnd.pa.gov (the “Directory”), for the registration of projects costing over $1.5 million. The Act also created four new types of notices for owners and subcontractors working on any registered project which, unless complied with, would terminate a subcontractor’s lien rights. Although signed into law two years ago, the changes are just now effective because the Directory was recently established. Executive Summary The Act provides owners with additional protections against mechanics liens. The owner must file and subsequently post at the job site a Notice of Commencement with the Directory prior to commencement of any physical work. A subcontractor, to preserve lien rights, must file a Notice of Furnishing with the Directory within 45 days of starting work on the project. A subcontractors’ failure to timely file the Notice of Furnishing with the Directory will result in a forfeiture of the subcontractor’s lien rights. Application and Procedure The Act only applies to “searchable projects”. A “searchable project” under the Lien Law is any private project consisting of the erection and construction, or alteration or repair, of an improvement costing a minimum of $1.5 million. Any project owner may register a “searchable project” with the Directory, although registration is not mandatory. Failure to register a searchable project means the owner cannot use the protections provided by the Act. The Act protects owners by stripping subcontractors of lien rights if they do not comply with outlined filing procedures for work on the searchable project. Once a searchable project is registered with the Directory, the project owner must take the following steps to obtain the protections of the Act: Notice of Commencement: The project owner (or its agent) must file a Notice of Commencement with the Directory prior to commencement of any physical work on the searchable project. The Notice of Commencement is designed to apprise contractors, subcontractors, and labor and material suppliers of information relevant to any lien rights and generally must contain the following: the contractor’s name, address, and email address; the owner’s name, address, and email address; surety and bonding information, where applicable; adequately identify the project and county in which it is located; and provide the identifying number of the project assigned by the Directory. If timely filed, the Notice of Commencement acts to limit the pool of potential lien claimants. If a Notice of Commencement is not timely filed, then the project owner loses this potential claim-limiting tool, but can continue to defend claims under the pre-existing lien rules. Contract language: Any subcontract for work on a searchable project must contain a written notice that failure to file a Notice of Furnishing will result in the loss of lien rights. The Lien Law provides the following express notice language to be included:“A subcontractor that fails to file a Notice of Furnishing on the Department of General Services publicly accessible Internet website as required by the act of August 24, 1963 (P.L. 1175, No. 497), known as the Mechanics’ Lien Law of 1963, may forfeit the right to file a mechanics lien. It is unlawful for a searchable project owner, searchable project owner’s agent, contractor or subcontractor to request, suggest, encourage or require that a subcontractor not file the required notice as required by the Mechanics’ Lien Law of 1963.” Posting: The Notice of Commencement must be conspicuously posted at the searchable project site prior to...

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Misrepresentations of Criminal Record on Job Applications

Posted by on Nov 25, 2014 in Business Law | 0 comments

Misrepresentations of Criminal Record on Job Applications

In McCorkle v. Schenker Logistics, Inc., 2014 WL 5020598 (M.D.Pa. Oct. 8, 2014) a federal district court ruled that an employer, Schenker, did not violate the Pennsylvania Criminal History Record Information Act (the “Act”) when it revoked a contingent offer of employment due to the job applicant’s failure to disclose misdemeanor and summary convictions in violation of employer’s policy. Schenker’s employment policy included a provision that misrepresentations on job applications may disqualify applicants from employment.  McCorkle disclosed on his application a conviction for stalking and harassment, and also acknowledged that providing false information was grounds for disqualification from employment.  He did not disclose convictions or guilty pleas to numerous misdemeanor and summary offenses, including possession of drug paraphernalia, DUI, and possession of controlled substances.  Schenker, after extending a contingent offer of employment, conducted a criminal history check on McCorkle which revealed the additional convictions and guilty pleas.  Upon discovery, Schenker asked McCorkle to review his application and identify any errors or omissions.  McCorkle failed to identify any, and Schenker notified him his application was disqualified due to misrepresentations regarding his criminal history.     McCorkle instituted an action alleging Schenker violated the Act by revoking his contingent offer of employment due to misdemeanor and summary offenses unrelated to his suitability for employment and failing to notify him in writing that employment was revoked due to his criminal history.  The Act generally prohibits employers from considering past convictions as a bar to employment unless they relate to the applicant’s suitability for the position.  The court found that Schenker did not disqualify McCorkle’s application because of the convictions and guilty pleas, rather it found that his application was disqualified for intentional misrepresentations made on his job application related to his criminal history.  The court expressly held Schenker “had a reasonable basis to revoke his offer of employment pursuant to the terms of the conditional offer and its hiring policies and was under no obligation to consider whether [McCorkle’s] convictions were related to his suitability for the position.”   If you have any questions regarding this article, or any other employment matters, please contact Andrew Miller, *protected email*, or Christian Miller, *protected email*, by email or phone at (717) 845-1524. Attorneys Andrew Miller Christian...

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