The recent economic downturn has been financially challenging for many businesses. Existing credit lines have been reduced, new loans from commercial lenders are more difficult to obtain, and accessing the public capital markets is likely not an option. So in this difficult market climate, where does a middle-market company turn for financing? The answer may be mezzanine capital.

PCE recently participated on a panel regarding “Capital Markets Trends in Distribution” at the Strategic Pricing Associates Distribution Strategy Seminar in Fort Lauderdale, Florida. In attendance were owners and senior executives from over 70 different distributors and manufacturers across all major industries.

As expected, there was a significant decrease in mergers and acquisitions activity and valuations in 1Q09. During the first quarter the markets were still sifting through all the events that took place in the final four months of 2008 and the resulting uncertainty. In addition, expectations were high as the Obama Administration took the reins of power. Although progress was made on many fronts in the first quarter, many acquirers determined that it was best to sit on the sidelines due to tight credit markets and the high levels of economic and market uncertainty.

The question is “how much to transfer” rather than “whether to transfer”! Low values + low AFR = make transfers now

By now, I think we’ve all heard of the proposed legislation HR 436. I suppose that some sort of tax relief is contemplated. The question is “tax relief for whom?” The answer remains to be seen, but one thing is sure, the time to make transfers is now!

Moving forward and adapting in a rapidly-changing and challenging business climate-doing “what you need to do!” 

The current recession in the U.S. has created a range of opportunities and difficulties for most mid-market companies. While some have tightened their belts as taught as possible to weather the downturn others are using stronger positions to their advantage to take market share or complete acquisitions. In both of these cases the highly coveted and valued resource today called “capital” is needed to successfully execute either strategy.

During these unprecedented economic times, the use of an ESOP can provide business owners a unique path to liquidity and increase the cash flow of the business. The goal of liquidity is a challenge in today’s market due to stricter underwriting standards by lenders and buyers cautiously approaching acquisitions.

While the current economic environment and financial market meltdown have most business owners focused on conserving cash, controlling/reducing headcount and holding on for dear life, most of the wealthiest individuals in the world (including Mr. Buffett) will likely tell you that it is in these uncertain times that fortunes are made. Our belief is that this is true for distribution and industrial businesses that have the capital and courage to pursue strategic acquisitions in 2009. Valuations have meaningfully decreased and most of the attractive factors of the distribution marketplace remain – it is a large, diversified and growing market with considerable consolidation potential. A similar situation presented itself after the 2001/2002 slowdown and many distributors benefited handsomely from well-timed, highly strategic acquisitions.

Holman vs. Commissioner, 130 T.C. No.12 (May 12, 2008), is an interesting case chock full of issues. The court considers whether the transfer of assets constitutes a direct or indirect gift, whether the LP should be treated as analogous to a trust, whether the LP passes the tests of 2703(a) and whether the valuation presented is appropriate. Some issues are addressed in more creative ways than others. One of the most creative is the analysis of the valuation discounts applied.