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Tag: mergers and acquisitions

Two iconic Berks pharmacies merging

Esterbrook Pharmacy is merging with West Reading Drug Store in January. 

Established in 1897, the West Reading Drug Store is the oldest pharmacy serving Berks County. 

The move is joining two iconic pharmacies with deep roots in the community. 

The merger will allow Tower Health Reading Hospital to use the current space held by Esterbrook Pharmacy to grow and expand. 

The West Reading Drug Store is located at 538 Penn Ave. in West Reading.  

Current Esterbrook Pharmacy customers can have refills or new prescriptions filled at the West Reading Drug Store.  

“Esterbrook Pharmacy customers will continue to receive the individualized service they are accustomed to by the same friendly, knowledgeable, experienced pharmacists and pharmacy staff at West Reading Drug Store,” said Eric Esterbrook, pharmacist and owner of West Reading Drug Store. “Being an independent pharmacy is of upmost importance to me.” 

Customers will continue to receive current benefits such as compounding service, immunizations provided on-site, free delivery within 10 miles of West Reading Drug Store, the filling of disposable mediplanners, long-term care, on-line prescription refills and access to a free app which enables a user to refill prescriptions 24 hours a day 7 days a week. 

M&A activity expected to be busy and big for the rest of the year

Merger and acquisition activity is expected to stay strong for the rest of 2021 with a large amount of money available to buy companies, and sellers who may be looking to avoid potential tax hikes in 2022.

Attorneys with Fitzpatrick Lentz & Bubba, Gross McGinley and High Swartz spoke about trends in M&A activity during a recent Lehigh Valley Business webinar and said they expect to stay busy in the field.

Keefe –

Colin Keefe of Fitzpatrick Lentz and Bubba, said it is an interesting time economically.

“The Lehigh Valley weathered the COVID-19 storm better than a lot of markets,” he said. “But there was still some damage.” Retail and hospitality businesses that financially struggled through the pandemic may be looking for buyers. And it may have nudged many business owners who were on the fence about selling in that direction.

Luckily, there are many interested buyers.

“There’s still a lot of cash out there looking for businesses to acquire, looking to spend itself,” Keefe said.

Tech companies and startups in the life science fields are very ripe for acquisition right now, he said. There is also a great deal of M&A activity in the health care field, however most deals have already happened.

“There are less and less juicy targets out there,” he said.

SPACs

The acquisitions that are happening right now tend to be larger ones, Keefe said. While the number of acquisitions barely ticked up in 2021 over 2020, the financials have nearly doubled because the deals that are going through are for larger targets. What’s driving those larger acquisitions are Special Purpose Acquisition Companies. These are companies that are formed to raise capital to make acquisitions and often have more than $100 million they’re looking to invest.

Because these companies generally only have two years to make an acquisition or give the money back, many will be looking to make deals they think are good investments.

Talent

The talent shortage is also a driver in acquisitions.

“The need for talented individuals to grow your business has never been greater. If you have talent and that talent will go with you in a merger that is a tremendous driver,” Keefe said.

Rees –

That however, does present some legal challenges said Thomas Rees of High Swartz. While Pennsylvania is an at-will state when it comes to employment and most employees don’t really have any rights to advanced knowledge of acquisitions or any potential termination, maintaining talent should still be a concern. Incentives to stay should be used to guarantee that needed leadership and key employees stay on through a transition and contracts need to be addressed.

There could also be legal challenges if an acquired key employee is terminated by the buyer.

Rees gave the example of one key employee who was hired by a company with the specific assurance that there would be no acquisitions in the near future, but then one happened and he was let go. “He was able to build a case of misrepresentation with the employer.”

Taxes

The possibility of taxes going up in 2022 is also driving many business owners to sell before the end of the year.

Nanovic –

Nicolas Nanovic of Gross McGinely said capital gains tax changes that could come next year are of specific concern. “As of today’s laws, the most they’re going to pay is 23.8%,” Nanovic said. A proposal by the Biden administration would eliminate the capital gains tax for individuals with a net income of more than $1 million.

That means the capital gains from a sale of stock or a business would be taxed at the normal rate of up to 39.6%.

“This might get them off the fence,” Nanovic said.

Buyers are likely going to use the threat of future tax implications to try and negotiate a better deal with the seller, warning them they may have to pay more if they hesitate.

But, he said, that is something a business owner will need to balance. They need to decide if the threat of potentially paying more in taxes on the sale is enough to drive them to perhaps sell a few years earlier than they wanted to.

Mergers & Acquisitions could see boost post COVID-19

Before the coronavirus hit, mergers and acquisitions were on an upswing. But now that almost everything in business has changed, has it impacted businesses changing hands?

The answer is complicated.

Tom Kerchner 

“Before this hit, the market was very active; then mid-March everything stopped,” said Thomas Kerchner, managing director of BMI Merger & Acquisition’s Allentown and Reading office.

Many mergers and acquisitions are definitely on pause, he said, but still some are going through.

“I did get two letters of interest this week,” he said.

Much depends on what type of industry a business is in, said Kimberly Decker, a partner in the Lancaster office of Barley Snyder Attorneys at Law.

For example, she said, banks are a stable investment right now. Even if some aspects of business are off, they are making money in other areas like Paycheck Protection Program loans, which recently became available. In fact, on April 15, Fidelity Deposit and Discount Bank of Dunmore announced it was in the process of acquiring Merchants Bank of Bangor.

Decker said any business involved in health care or personal protective equipment manufacturing might be an attractive investment now. In fact it might even be more of a sellers’ market than a buyers’ market in such fields.

Other businesses, such as restaurants, which have been hard hit by the shutdown, might be seen as too high of a risk. An owner who feels he or she can keep the business alive through the coronavirus may be reluctant to sell it at the bargain price anyone would likely be willing to offer for it.

Kim Decker 

“If you think you can get back on your feet, you’re not going to sell your business for that lower price,” she said.

But just because some deals are on pause, it doesn’t mean businesses with an interest in buying or selling aren’t still working on plans. They’re just doing it slowly and cautiously.

“They’re still looking at what they can do to shore up financing,” Kerchner said. “Everyone talking about this before is still talking about it.”

Kercher has talked with private equity groups that are looking at the current economic situation as an opportunity to buy and they do have money to spend.

Meanwhile, Jan Graybill of Legacy Planning Partners in South Whitehall Township, said now is the time businesses thinking about selling should be planning, especially those businesses shut down by the pandemic. “The financials of business are now unpredictable. What will the income be after this? Their business essentially has no value at its current point,” Graybill said.

Two factors that a business impacted by the coronavirus should be concentrating on if they want to keep a competitive value on their business are maintaining key employees and maintaining key customers, he said.

A buyer wants to know that a business that was successful before the coronavirus hit will have the staff that made it successful, Graybill said. So employers should concentrate on ways to keep valuable employees despite the shutdown so they don’t leave for other available jobs and not return.

Jan Graybill –

Helping serve customers’ essential needs at this time is also important because if those customers go out of business that will impact a company’s bottom line and value.

When mergers and acquisitions start rebounding, and how much they rebound, is dependent on many factors.

Kerchner said he expects activity to pick up again in May or June.

He said those involved in the transaction need time to re-evaluate plans.

“How do I value this? What am I paying for now? What will it be worth after?” are all questions that need to be asked, Kerchner said.

Decker thinks some spike in mergers and acquisitions is likely.

“There are businesses out there that have cash. They will be the ones that will be able to take a look at weaker businesses in a related, but not necessarily the same field,” she said.

In some cases she said the acquisitions will help the acquiring business grow, in others it may be helping the acquired business survive.

Either way, she expects longer than normal review of any deals as companies try to rethink what a business is worth post COVID-19

Before you rush into an M&A, know the tax traps

As per Deloitte’s “The State of the Deal: M&A trends 2020” report, U.S. companies held $1.55 trillion in cash at the end of 2019, with M&A being the top intended use for those funds. 

Are you a business owner looking to grow your business by acquiring other businesses?  Or are you open to the idea of being acquired? Before rushing into a deal, there are many tax traps laid upon the path for which you should be ready.

Tax Free Reorganizations of Corporations.  

When the transaction involves corporations, the shareholders should consider whether they can structure the transaction as a tax-free reorganization.  The Internal Revenue Code provides that certain types of reorganizations of corporations will result in no gain or loss being recognized if certain protocols are followed.  These types of tax-free reorganizations include the following:

  • Statutory mergers.
  • Acquisition by one corporation, in exchange solely for all or a part of its voting stock, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation.
  • Acquisition by one corporation, in exchange solely for all or a part of its voting stock, of substantially all of the properties of another corporation.
  • A transfer by a corporation of all or part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders, or any combination thereof, is in control of the corporation to which the assets are transferred.

Beware of the built-in gains tax

When you have a buyer interested in your business, it is common for the buyer to negotiate that the transaction take the form of an asset purchase rather than a stock purchase.  By structuring it this way, the buyer is reducing its risk that it may inadvertently be assuming the liabilities of the seller. However, if the selling corporation is an S corporation, the shareholders of the S corporation must be aware of the built-in gains tax.

This built-in gains tax applies when a corporation started as a C corporation, converted to an S corporation, and sells any assets that have unrecognized gains within five years after the conversion.  The tax rate applied is the highest marginal corporate tax rate, which is currently 21%.  

For example, assume that ABC Corporation began operations as a C corporation and bought property worth $700,000.  Further assume that ABC Corporation converts to an S corporation when that same property is worth $1,000,000. If ABC Corporation sells that property to a buyer within five years after electing to be taxed as an S corporation, then ABC Corporation will be responsible for a built-in gains tax of $63,000.  Assuming that the capital gains tax rate for the shareholders of ABC Corporation is 15%, the shareholders will then pay a capital gain tax of $35,550. Thus, the total federal tax paid on the sale would be $98,550. If the built-in gains tax had not applied, the total federal tax paid on the sale would be $45,000.

If the shareholders of ABC Corporation had waited until the five-year period expired, they could have saved $53,550 in federal taxes.

Ensure that the sales agreement addresses IRS Form 8594.

When assets of a corporation are sold, the buyers and sellers must allocate the purchase price among several classes of assets.  The seller will want to allocate more of the purchase price to assets that have a higher cost basis. The buyer will want to allocate more of the purchase price to assets that can be depreciated or assets that the buyer intends to sell shortly for a premium.  The IRS is very interested in how the purchase price is allocated, because it will impact the amount of gain or loss that the seller must report, and it will also impact the gain or loss that the buyer reports when such assets are sold in the future.

The IRS developed Form 8594 for buyers and sellers to disclose how the purchase price is allocated among different classes of assets.  The parties will be subject to penalties if they do not file Form 8594 for the year in which the sale takes place. The parties are not required to file consistent forms, but they should both be prepared for an audit if they file forms with inconsistent allocations of the purchase price.  Therefore, before a buyer and seller sign on the dotted line, they should ensure that they include the allocation of the purchase price as part of their negotiations.

There are many other tax traps for business owners looking to buy or sell, but this article provides a sample of some of the more common issues.  Before entering into any agreements, business owners should consult with their legal and tax advisors to review these types of issues.

Attorney R. Nicholas “Nick” Nanovic helps individuals and businesses understand their potential tax liabilities with the IRS and Pennsylvania Department of Revenue. He advises business entities on how to properly structure corporations, S corporations, LLCs, and partnerships.

Has technology changed the M&A process?

Business sellers and buyers have an easier time finding each other thanks to technology’s role in merger and acquisition digital deal-making.

From online “data rooms” where documents are uploaded, read and electronically signed to wire transfer settlements, fund transfers and database prospecting matchmakers geared to coupling sellers with buyers, the digital realm saves time, resources and money.

“(The internet is) a great tool to facilitate information in a controlled fashion to a great number of people, and it’s more secure than email,” said Ryan Hurst, a partner at financial services firm RKL in Lancaster.

He leads RKL’s transaction advisory services practice.

Hurst said “data rooms” may also be known as “virtual data rooms” or “war rooms” – the monikers are interchangeable.

“Technology has allowed a good bit of the negotiation and closing process to take place virtually, which would have been cost-prohibitive 20 years ago,” Hurst said.

Technology has enhanced the overall M&A process, too, because it has created better access to both sellers and buyers, and it allows easier and more reliable access to essential deal-making data.

Glen Bressner, co-founder and managing partner of Activate Venture Partners in Bethlehem said technology has created a more comprehensive way to “aggregate” information about companies across the board.

Activate is located on the Lehigh University Campus at the Ben Franklin Technology Partners Center. Bressner is a Ben Franklin Board member.

“Firms now specialize in identifying and cataloging privately held companies. Their information is available, accessible and is sold in a way that was never available before,” Bressner said.

He specializes in early stage merger and acquisition development and has watched the industry evolve over the past 30 years.

Before the internet and technology’s advancements, Bressner said it would have been difficult, costly and time consuming to even consider – from his Pennsylvania office – purchasing a company on the West Coast.

No more.

“Now I can sit at my computer and search out 50 companies who might be doing what I’m looking for,” Bressner said.

And rich data collection, sourced and gathered by legitimate third-party companies, has made it easier for firms looking to advertise and sell their business.

Businesses poised for acquisition can take advantage of online tools to easily put their companies into the “for sale” marketplace.

“Legitimate data providers have names in the industry. They have the presence in the marketplace, and they are known and well regarded,” Bressner said.

It’s up to the seller to make sure “due diligence” is met when looking for a third-party data provider.

Bressner said online settlements created a greater potential for other business advisors – from bankers, attorneys, financial advisors or business partners, to be involved in M&A settlements, without business travel and its associated costs.

Bressner said since the adoption of federal legislation in Dodd-Frank Act of 2010, becoming a public company is more challenging, more expensive, and perhaps less attractive.

As a result, he noted an uptick in private business sector M&A activity.

Since technology has reduced the overall cost of doing M&A transactions, smaller transactions are more economical – and potentially attractive to buyers and private equity firms than ever before.

“We are seeing the flow of capital from traditional sources” moving into private equity and private markets, Bressner said.

Technology helps private M&A “exit” transactions, too, and he predicts these types of deals will continue to grow.

Kenneth R. Charette, an attorney shareholder at Fitzpatrick Lenz & Bubba in Allentown, said technology has impacted just about every aspect of business M&A transactions.

“It’s created easy and efficient access for the buying team to review documents,” Charette said.

Bressner said digital legal documents, contracts and providing financial information is more standardized now, and he credits technology’s use as “…a major positive development.”

Charette noted cyber security risks to data room documentation can be minimized when online access is restricted on a need-to-know or view basis.

“For example not everyone may need access to payroll records, but human resources staff does. Or financial documents can be restricted to only those who must review them, or in health care, HIPPA compliance documents,” he explained.

HIPPA stands for The Health Insurance Portability and Accountability Act of 1996.

Making data room folders restricted to tasks can also help protect, as well as streamline the process, Charette said.

He stressed information security and protocols – from how materials are stored to where they are stored (on hard drives or network servers) – are necessary to protect transactions because “everything happens quicker now.”

While digital M&A sales are commonplace and enhance the buying and selling process, Hurst said the personal touch remains a crucial part of sealing the deal in the York/Harrisburg/Lancaster market.

“Here, folks still want to look someone in the eye, and shake a hand,” Hurst said.

Healthy economy and retiring boomers should fuel manufacturers’ growth

The progress of innovation in manufacturing and the availability of investment capital have created an environment that’s primed for merger and acquisition activity in 2020. PHOTO/GETTY IMAGES –

The progress of innovation in manufacturing and the availability of investment capital have created an environment that’s primed for merger and acquisition activity in 2020.

Experts are seeing a healthy economy, for now, and a high number of aging business owners could mean 2020 will be a strong year for selling and buying activity in manufacturing.

“My view is yes, there will be transactions throughout the year,” said Joseph Zimring, director of Lehigh Valley Search Fund LLC in Allentown, a company he began that’s looking to buy a business. “I would encourage business owners to consider those types of buyers who are independent. That provides business owners that are maybe considering an exit a different set of expectations.”

Many companies, including manufacturers, look to acquisition as a way to grow their business, said Richard Hobbs, president and CEO of Manufacturers Resource Center in Upper Macungie Township.

He believes there will be more mergers and acquisitions this year for several reasons: the availability of cash from the 2017 Tax Cuts and Jobs Act legislation, low interest rates, innovation in manufacturing, and the growing number of baby boomers who are business owners.

“Everyone is sitting on some cash, the tax cuts helped everyone on the corporate side,” Hobbs said.

For one Berks County M&A expert, it’s not easy to determine whether there will be more mergers and acquisitions for manufacturers in 2020.

“It’s really going to be dependent on the economy,” Randy Raifsnider, partner in the management advisory services group at Herbein+Co. of Spring Township. “We have not seen a slowdown of mergers and acquisitions. I think it’s tough to say if there’s going to be an increase.”

More innovation = higher value

Innovation helps make companies attractive to both buyers and sellers.

“The companies that are innovating more and have more to offer are usually higher valued,” Hobbs said.

As an example, East Penn Manufacturing in Berks County bought a lithium-ion company last year instead of developing the technology on their own. Developing new products can take years, whereas acquiring a company that already produces it is a quicker process, Hobbs said.

Innovations give manufacturers the ability to diversify their cash flow and most have multiple lines of products, added Raifsnider.

The high number of baby boomers reaching retirement age also gives buyers more choices, he said.

“What we have seen is a lot of individuals who want to transition out of their business,” Raifsnider said. “I think with some of the warning signs out there that the economy is teetering a little bit, people are getting a little nervous; things are starting to slow a little bit.”

Timing is critical

Buyers want a business that’s stable and if possible, one that’s demonstrated an ability to sustain operations during the last recession as there’s talk of a potential recession on the horizon, he added.

“In eastern Pennsylvania, there’s a dense manufacturing base,” Zimring said. “There are business owners that are rightfully thinking about what’s around the corner. I think the baby boomer generation is really a part of this.”

Baby boomers who are approaching retirement and who own these businesses may not have children, or their children may not be involved in the business so they need a buyer.

Timing is important too, because if another recession arrives, business owners would have to wait several years for the economy to turn around again before it would be an attractive time to sell, he added.

“I think there is a window that has presented itself where in 2020, for certain buyers, it could be an attractive time to sell,” Zimring said.

Sellers should be aware of the types of buyers out there

When it comes time to sell, business owners should be mindful of the different types of buyers in the market.

The trade/strategic buyer is often looking to acquire a similar company that’s doing the same thing and wants to keep it operating for a long time, Hobbs said. Meanwhile, the financial buyer is more concerned with numbers and could be a private equity or venture-capital company.

“The trade/strategic buyer wants something that fits well and hangs onto it for a long time,” Hobbs said.

“The financial one is just looking for numbers, something that makes them more money than they already have.”

The sellers should be thinking about what type of buyer they want, he added. Often, a financial buyer will hold onto the company for only a few years, or decide to relocate or shut the company down.

If the company is family owned, or independently owned, the buyer with an entrepreneurial or strategic approach would keep it as is, Zimring said.

“There will be entrepreneurs in the market,” Zimring said. “I think that’s a trend. I think there are business owners who recognize that. An offer is going to look and feel different if it’s more of an entrepreneurship through acquisition.”

A buyer that’s operating in that manner is looking for a healthy company, a business that’s enduringly profitable and has a history or strong cash flows, Zimring said.

When thinking about what’s best for the future of the company, the buyer and seller should have experienced advisers that they work with, he said.

Typically, a financial buyer might sell the company sooner while a strategic buyer or a family member who buys the company would likely hold onto the company for a longer time, said Raifsnider.

If a company is sold to a family member or strategic buyer, that’s a good indicator that the new owner wants to grow the company.

 

 

 

 

 

 

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