LOI Submitted

December 14, 2020

by a searcher from Columbia University - Columbia Business School in Princeton, NJ, USA

Hi, I just submitted my LOI to the seller of an asset light small manufacturing business that's been around for 30+ years (owner retiring) based in New Jersey. Deal is $3.4M ($6M in rev and $1M EBITDA) selling for 3.4x, with healthy EBITDA growth. Will be meeting the seller on site at his plant this weekend to discuss further.

A few items to note::
1. Business is a C Corp so stock sale is a preferred by seller, any pros/cons?
2. Besides understanding the capex and the WC needed at closing, any other important items to note at closing? Seller just purchased $200K machinery added to BS.
3. What should I focus on when visiting on site and talking to seller?
4. Are there a list of contacts that I can reach out to once I have a signed LOI (ie; lender, investor, partners, operators, counsel, etc)

Any comments or thoughts are much appreciated.

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Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA

If you're stuck buying a C Corporation you should explore a couple of options on how to structure the acquisition. The structure you pursue will need to be based on a variety of different facts of your situation, investor group, and what you think the future is. Couple of high-level options (not an exhaustive list) that should be explored with a tax professional in greater detail of pros/cons- 1) Structure so that you can benefit from section 1202 on a future exit. 2) Consider whether you're eligible to make an S-election post acquisition in order to get out of the double tax C corporation structure for future growth and a future exit. S Corp rules are easy to follow as long as you know what they are. Not a likely option if you're a traditional Searcher with investors that are not individuals and are not willing to share pro-rata. 3) Consider a freeze transaction in order for all future growth to happen outside of the C corporation. This may be more complex than what you need for this size of an acquisition.

Glad to discuss the above options. email me at robert.shefferly@plantemoran .com

Reply by a professional
from University of Colorado at Denver in Denver, CO, USA

Congrats on the LOI!! Happy to discuss anything from an accounting and QofE perspective (NWC, capex, etc.) redacted this weekend's site visit, in addition to understanding the ins-and-outs of the production, I'd pay attention to the little details. Kind of like going into a restaurant - if the bathrooms and dining area aren't clean, you can almost guarantee the kitchen isn't clean either.

Is there physical dust on inventory, signifying a slow moving SKU (I've seen it multiple times before)? When was the last time they performed an inventory count? Do they seem to be encouraging safety on the manufacturing floor? What is their QC process?

It's also interesting timing for them to sink $200k into new machinery. Do you know if it was to replace old machinery or to expand operations?

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