Transaction Structures: Where to find hidden value and minimize risk

DealCast Episode 3

October 28, 2016

Neil C. Blair

President, KPMG Corporate Finance Inc.

KPMG in Canada


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DealCast webcast

Canada’s private merger market remains hot: more than 500,000 business owners say they want to exit their companies by 2022. With so much economic value coming up for sale, buyers and sellers can take advantage of subtle opportunities but also need to be aware of risks inherent in how deals are structured.

Finding a Price
A typical valuation consists of:

  • Headline Price – usually based upon an earnings multiple calculation or a discounted cash flow analysis
  • Price Adjustments – working capital variations from target working capital, deferred capital expenditures
  • Other Factors – outstanding commitments, liabilities

In initiating the due diligence process, the buyer needs to ask a variety of questions to ensure that both sides understand the deal’s parameters.

Some issues include:

  • Estimating a target cash flow – The nature of the company can be a factor. A stable, mature firm needs a different amount of working capital than does a high-growth start-up
  • Gauging large future expenditures – An owner might hold off buying large machinery in anticipation of a sale

Asset versus share purchase
Various parties to an agreement also must be aware that these arrangements have different implications depending upon if you are the buyer or seller.

Even something as seemingly straightforward as what is for sale changes under the different scenarios. For instance, the enterprise value of a company is not debatable when the transaction is share based; the entire company is on the auction block.

In an asset deal, however, the situation becomes more complicated. Thus, sometimes, figuring out what assets are included in this scenario can be difficult.

Other Implications
The deal’s structure also holds different tax ramifications for the purchaser and seller.

For buyers

An asset sale can help by:

o Allowing the opportunity to depreciate existing goodwill
o Allocating the purchase price in a favourable manner

A share sale can help by:

o Allowing access to loss carry-forwards
o Avoiding land transfer taxes on the sale of real estate assets

For sellers

An asset sale can help by:

o Gaining use of any loss carry-forwards
o Acquiring the ability to sell individual segments of company versus the entire entity as in a share deal

A share sale can help by:

o Getting access to existing capital gains tax exemption
o Eliminating the need for the conveyance of assets or transfer of employee

Buyers and sellers might have a basic agreement about what they are looking to transfer and at what price. Understanding the implications of how to structure an agreement and what opportunities exist and pitfalls loom, however, is an exceedingly complicated process and likely needs third-party advice.

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