Top Three Lubbock Business Consulting Hurdles

Lubbock investors generally seek business consulting advice to determine an array of things, including the value of an investment, transaction basics, and the rate of return of an investment. While all of these things appear to be fairly transparent and straight forward, their seemingly intricate details become lost in their simplistic application. Failing to understand some of the common hurdles in an investment can cause a business consulting strategy to fail before it even started. 

Valuation 

Private securities do not have access to an active trading market and, therefore, must rely on point-in-time appraisal of a Lubbock business or be involved in a transaction (like a sale) for their value to be determined. However, there are many different concepts of value that Lubbock investors use interchangeably, which causes poor investment decisions. Below is a chart illustrating the different types of appraisal purposes and how they can be used in a Lubbock business consulting strategy:

When a Lubbock investor is seeking business consulting advice, they must be aware of instances when the value world collides. For example, owners are often faced with several decisions at the same time that require knowledge of the value worlds. This is important, primarily because it often happens to unsuspecting Lubbock business owners and their Lubbock business consultants. If owners are advised that their company is worth a specific dollar value, and that all of their decisions should revolve around that value, they could suffer as a result of that advice. A private business value is relative to the purpose and function of its appraisal. 

Transaction Basics

There are two primary structures to consider as part of your Lubbock business consulting strategy when selling a private company in a taxable transactions: an asset sale and a stock sale. There ate significant legal differences between these two approaches. Likewise, there are significant tax differences for both the buyer and seller.

Asset Sale

In an asset transaction, the selling company sells the majority of its assets to the buyer, but ownership of the selling company itself does not change hands. The gain from this sale transaction is calculated at the company level and either taxed to the company (C Corporation) or passed through and taxed at the individual level. In most business consulting strategies, the buyer will establish an acquisition company. This new Lubbock company becomes the new operating entity after the assets are purchased and transferred from the selling business. The buyer and seller must agree on an allocation of the purchase price (purchase price allocation) between the different classes and types of assets acquired. The assets are then stepped up in value or restated to a market value, equal to the purchase price. The difference between the value of the purchase price and the sum of the assets valued is known as goodwill (intangible value). The Lubbock buyer then, as part of their consulting strategy, begin depreciating or amortizing those assets post-closing. The primary tax benefit of an asset transaction is the buyer’s ability to obtain this stepped-up basis that in turn, creates tax-deductible depreciation, thus lowing the buyer’s taxable income and reducing future taxes.

Stock Sale

In a stock transaction of a Lubbock company, the selling shareholders sell their shares to the buyer. In this case, the company’s assets do not transfer, but rather the ownership of the company changes. The important distinction is that the seller is the shareholder, not the company. In comparison with an asset sale, there are different tax impact to both buyer and seller in a stock transaction. 

While there is no purchase price allocation in a stock sale for tax purposes, the company may be required to allocate the purchase price if the buying company issues GAAP financial statements (according to FAS 141R). Lubbock business consultants must be aware of these nuances when making investment strategies for their clients. This is not beneficial for the buyer because the buyer steps into the shoes of the seller and continues to depreciate the assets in the company from the seller’s position. The buyer’s stock basis is usually equal to the purchase price. That basis cannot be depreciated or deducted in any way until the stock is sold.

From a sellers perspective, individual Lubbock shareholders report the sale as a capital gain for both S corporations and C corporations. There are details that an investor should be aware of when selling stock in a pass-through entity, which must be discussed with a knowledgeable Lubbock business consulting firm. 

Rates of Return

Investors expect to earn a certain return from any investment, and return expectations for risk-free investments are often the starting point in the business valuation process. Just as the risk for any particular investment will vary greatly, so will the risk tolerance for any particular Lubbock investor. This fact has been well documented by many researchers. The important point to keep in mind is that required rates of return are not fixed but dynamic, varying with the changes in the risk tolerances of the market, the composition of the investors considering a particular opportunity, and the characteristics of the investment itself. 

Rates of return can affect any Lubbock business consulting strategy and will dictate how much money an investor wants to use vs. borrow. Generally, it is cheaper to borrow money compared to injecting one’s own capital. According to recent surveys by Pepperdine University, the typical private equity group (PEG) deal employs about 48 percent equity in the capital structure. The most recent Pepperdine survey indicates that senior lenders use a financial covenant of 2.5 run-rate EBITDA on total debt.