There have been times when tax issues had significant implications on deals for David Bovenizer, CEO of Lionheart Industrial Group.
Recently, he says, his company was trying to acquire a strategic target in the aerospace and defense sector. It was a good strategic match for the business, but the company had a lot of the hallmarks of a smaller company, including a lack of tax planning. It was a single individual owner C-corp, which meant there were fewer structuring options for a deal. And they also had issues such as a history expensing all their purchases and no inventory accounted for on the books.
"So, as a buyer, you're buying a manufacturing business, you expect to have a value of inventory of not zero," Bovenizer says. "You expect to be able to potentially pay fair market value for equipment. It might be not different than the book value, but it could be. And you would like to be able to deduct the purchase price over time."
The transaction had fairly high multiples. Bovenizer's company was in the running and had made an offer on the business that was doing around the low $20 million in sales, likely $6 million of EBITDA, which was tough to know exactly because the inventory issue made earnings an unknown. That, he says, had implications on how to diligence the company. Still, they made an offer that was in the market range, and proposed an asset deal.
"There weren't structuring options and we calculated that the penalty of doing a stock purchase of the C-corp was around $10 million over the life of the deal," he says. "So, pretty high ratios of the value of the business."
The seller, however, saw the asset structure as punitive.
"While we were high on the valuation range, there was one party that offered a stock deal, and there were three other asset deals, including us," Bovenizer says. "And we were told we finished second, whatever that means in an acquisition — there's no silver medal. So, we did not do that deal. We would have done the deal if they had chosen us, but that was the situation that ultimately killed the deal for us."
He says they weren't willing to pursue a stock purchase, largely, he says, because they did not feel comfortable doing so at what would be an valuation above their offer.
In another example, he says he was acquiring a product line from a company in California with the intention of moving the operations to Ohio. And as part of that transaction structuring, he worked with the seller to create a services agreement where Bovenizer's company would never take possession of the inventory or any other assets until the company relocated.
Soon after the deal was inked, the California Franchise Tax Board inquired because he says they learned of the transaction and wanted to tax it as a California entity.
"We successfully avoided that by showing them that agreement," he says, adding that the company had already moved to Ohio by the time the inquiry got serious.
Generally, though, Bovenizer says the earlier a company plans for their tax outcomes, the better.
"It's really detailed and complicated, and professional advice on taxes is worth it," he says. "It could save you millions, and it doesn't really cost that much in the grand scheme compared to potential adverse outcomes."
