BY MATT DAUS
At the outset of the pandemic, the business world expected, and certainly hoped, that Q4 of 2020 would bring about a gradual return for business. COVID had other plans. With the ramp-up of vaccinations in the first half of 2021, the recovery will take time. Company owners have had to continue to adjust their business plans to reflect that the recovery will be slower than we anticipated. That’s not to say there aren’t opportunities, but it’s probably a good time to reassess your options in the current climate.
Federal Grants and Loans Luckily for those business owners who want to fight on, the federal government has made some monies available to small business owners in the form of two rounds of the Paycheck Protection Program (PPP), Economic Injury Disaster Loans (EIDLs) and 504 Microloan program through the Small Business Administration, and the upcoming assistance specifically for motorcoach operators through the Treasury’s CERTS Act (expected to start accepting applications in several weeks). These lifeline programs have been widely covered in Chauffeur Driven, so click here for more information. Also, don’t overlook your state and local government for assistance.
Should I Buy or Sell? Either Way, Get Your Shop in Order!
The solution may instead come from strategic transactions such as selling the company, buying another company synergistic with the existing business, seeking an equity investment, or even entering into a joint venture. With so many companies in distress, the pace for mergers and acquisitions will naturally quicken.
Right now, it is difficult for a company in this sector given the uncertainty of when and how business travel may return, and whether there will be modal shifts affecting the long-term viability of a company. Not only is it challenging to develop a proper valuation for the business as a whole, but even the individual component assets, such as real estate, vehicles, and intellectual property.
So how can a company even think about buying, selling, merging, or engaging in a joint venture? Instead focus on identifying and cleaning up risks and problems to ensure that the business is appealing to prospective buyers and its value is maximized. If you are looking to sell or seek investors in the near future, your business should be reviewed by legal counsel now to resolve or mitigate weaknesses and risks where possible.
Delays in deals are common when a seller fails to prepare the company for sale and handle matters of concern to buyers and investors. Due diligence is an important aspect in any transaction and is an extensive process of thoroughly and completely assessing the company’s business, assets, liabilities, capabilities, licenses, tax status, and financial performance. Even if the buyer or investor does not conduct its proper due diligence, the definitive acquisition agreement will typically have a robust set of representations and warranties that will require the seller and its legal counsel to carefully review these materials. In other words, any problems will come to the attention of the buyer or investor sooner or later, which could delay or even kill the deal.
Some companies have consolidated operations and outsourced responsibilities and functions. Although it is difficult to go down that road if your company has accepted PPP funds and is required to bring back employees, that should not stop you from considering those changes once those obligations end. Anything that can be done now to make the balance sheet look better will help your ability to stay in business, as well as your company value. Editor’s note: If you’re looking for more information on due diligence, including a checklist, click here.
Transaction Structure: Asset Purchase, Stock Purchase, or Merger?
The information discovered in the due diligence process will also help to structure a sale transaction—in this case as an asset purchase, stock purchase, or merger.
In asset purchase deals, the buyer only acquires the target company’s assets and not most or all of its liabilities. This structure is generally preferred by buyers, especially when there are unusual or concerning liabilities identified. An important part of this negotiation will be determining which liabilities will be assumed by the purchaser (if any) or remain the responsibility of the seller. Although this structure will generally limit the liabilities assumed by the buyer, there are various exceptions to this such as environmental, pension, or successor liabilities, and in some cases may not be a viable deal structure. They can also be more complex and may take longer to close, particularly if the company has numerous contracts that cannot be assigned without the counterparty’s prior written consent (a common contractual term).
Sellers generally prefer a simpler stock or membership interest purchase. However, this does not enable a buyer to exclude any liabilities of the acquired business. This type of purchase also requires all equityholders to sign the purchase agreement, which may be difficult if there are holdouts. In such cases, a merger structure may be preferable, as it only requires the transaction agreement to be signed by the company and then the sale to be approved by a majority of the board of directors and a majority equityholder vote (subject to any special approval rights set forth in the target company’s governing documents). A merger effectively forces a sale by all equityholders, but may leave dissenting minority holders with “appraisal rights” that allow them to challenge in court the value paid in the merger, and perhaps receive some other amount.
The tax impact will also need to be considered. While asset purchase transactions can provide certain tax benefits for buyers, they may carry adverse tax implications for sellers, particularly if the target company is a corporation (in which case there may be two layers of taxation: one paid by the target company and a second paid by its stockholders). A stock or membership interest purchase has only one layer of tax, and is generally more tax favorable to the seller.
Valuation
There are a variety of methods for conducting a valuation, which include:
• Asset-based methods start with the “book value” of a company’s equity. The liquidation value is the net cash that a business would generate if all of its liabilities were paid off and its assets were liquidated today. This “liquidation” value is more of a baseline, as it does not account for growth potential or future cash flows.
• Discounted cash flow analysis uses the inflation-adjusted future cash flows to project a value for the business. This is most suited to established and cash-generative companies with long-term business prospects.
• Valuations based upon multiples of revenue are arguably the simplest. It is a popular quick-form method to expeditiously value a company and can be a useful metric when comparing companies with different profit levels, but similar characteristics in terms of margins, products, markets and competition.
• Valuations based upon multiples of EBITDA, a measure of the financial performance of a company, are also very popular. This enables the comparison of earnings of similar companies, while excluding any distortions that result from interest, taxation, depreciation, or amortization (e.g. of goodwill).
A combination of the above may ultimately be used to settle on the price. Sophisticated buyers will also take into account other value considerations, including non-recurring revenue and expenses; market size, competitive landscape, and barriers to entry; intellectual property rights or strong brand recognition and loyalty; businesses scalability costs; customer concentration risks, payment history and satisfaction; contractual restrictions on the business; and debt and other liabilities. In any case, it is important to have skilled professionals to help guide both parties through the process.
Should I File for Bankruptcy? When and What Type?
Bankruptcy is a viable option for those that just don’t see any other way through, and it doesn’t necessarily mean closing the doors (although that’s a possibility, too). There are two primary types of business bankruptcy cases: Chapter 7 (liquidation) and Chapter 11 (reorganization). Within Chapter 11 there are a number of subcategories, including new Subchapter V, which includes game-changer benefits for small business debtors. As these options require a bit more detail than this article can explore, click here for the pros and cons of each.
What Do I Do Next?
Diminished revenues are continuing into 2021 for many business, although the second round of PPP has certainly helped and may allow companies to meet payroll and other obligations while staving off bankruptcy. However, these are only stop-gap measures and everyone must be thinking several steps ahead. Recently, we have seen some companies shut operations or file for bankruptcy. If there is a comeback before the end of 2021 and your business is not primed for buying, selling, or other options, it may be too late to start the process and your options will be limited.
As an alternative, transportation companies may want to consider the merits of a merger/acquisition or sale, given that no one is able to adequately predict the market in the near-term. Many companies have already arrived at that fork in the road. They should take it—after applying for the PPP loans and other assistance—to travel into 2021, 2022, and beyond.
If your company is not involved in networking with others and you feel like you are on an island, especially with many in-person trade conferences on hold, you are NOT alone. Firms like ours represent large, small, and middle market mobility companies that are interested in buying, selling, merging, and engaging in partnerships with others in light of the new post-pandemic economy. Discussing your options with professionals will clarify what is best for you and your company. [CD0221]
Disclaimer: The foregoing is provided solely as general information, is not intended as legal advice, and may not be applicable within your jurisdiction or to your specific situation. You are advised to consult with your attorneys for guidance before relying upon any of the information presented herein.
Matt Daus is a partner with the law firm Windels Marx, president of IATR, and a leading authority on ridesharing apps. He can be reached at mdaus@windelsmarx.com.