Recent Transactions

About SC&H Capital

SC&H Capital - an affiliate of SC&H Group, LLC - offers a portfolio of services that assist companies throughout the entire life cycle of the business. Our services help companies to grow the business organically, to expand the business through acquisitions, and to develop the optimal exit strategy. Led by a team with experience in the fields of buying, growing, and selling businesses, SC&H Capital provides the methodology, tools, and resources to define and execute clear business and transactional strategies.

Our services include:

• Transaction Advisory
• Strategic Planning
• Corporate Finance Advisory
• Capital Markets Advisory
• Tax Advisory

Our professionals focus on consistently providing value and delivering effective outcomes everyday – not just on the day our clients decide to sell the business.

For more information on SC&H Capital, please visit us on the web at www.scandh.com/cc.

Welcome

Happy New Year and welcome to 2010’s first edition of M&A Spotlight, the electronic newsletter from SC&H Capital, developed for our friends in the business community. As we reflect on the 30 M&A transactions we have overseen in the past four years, we are especially grateful to our clients and referral sources. It is because of these strong relationships that we are able to advise so many companies in their business transactions.

As always, our SC&H Capital team is prepared to invest time getting to know your business. For more information on our services or to schedule a complimentary advisory session, please call me at (410) 785-8049.

Best Regards,

Christopher Helmrath, Managing Director

The Importance of Proper Worker Classification

By Tim Ellenwood, Leader, SC&H Employment Tax

Due diligence is a critical aspect of every M&A transaction. The goal when conducting due diligence is to ascertain a complete understanding of the target's business model and to fully understand the inherent risks and opportunities that are present. One often misunderstood, and many times overlooked aspect of a target's business model, is the distinction between employee and independent contractor.

As a result of the recent economic malaise, taxing authorities are identifying sources of additional tax revenue. The IRS and many states have recently announced plans to intensify their attention on misclassified workers through increased employment tax audits. Outcomes of these employment tax audits may result in large future unexpected tax liabilities as well as other legal and operating issues.

• Increased operating expenses as a result of increased employment tax. This reduction in EBITDA will have an effect on both financial / lending ratios in a leveraged deal.
• Liabilities that will carry over in a stock transaction and may still apply in asset transactions. These future cash requirements may be large and immediate without suitable financial reserves, especially in leveraged transactions.
• Inadequate buyer protection related to the representations and warranties in the deal. Is the escrow sufficient?
• What are the buyer's ultimate responsibilities and exposures post-transaction?
• What is the statute of limitations for past transgressions?
• Is the target company in an industry or situation that is at risk for an employment tax audit?

Not properly identifying the inherent risks associated with employment taxes during due diligence can have devastating consequences for the acquiring company. In one of our recent due diligence projects, a private equity firm was looking to acquire a regional trucking company as part of its strategy to expand an existing portfolio company. The purchase price of the target company was approximately $200 million. During the due diligence process, worker classification issues were identified as having approximately $218 million in employment tax exposure. Once these worker classification issues were discovered, the PE firm walked away from deal. If this exposure had not been identified, the acquisition cost could have ultimately exceeded $400 million.

A company's due diligence process should cover a full range of issues, including employment taxes. The due diligence findings will be extremely valuable when crafting deal related documents (representations/ warranties/indemnifications/escrows) to protect against pre-acquisition conditions.

For more information about Employment Tax, contact Tim Ellenwood: 703-852-1182 or TEllenwood@SCandH.com.

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Securities offered through Stout Causey Capital Corporation, Member FINRA/SIPC.
Licensed to sell securities in California, Maryland, Massachusetts, Pennsylvania, Virginia and the District of Columbia. SC&H Capital is a registered trade name of Stout Causey Capital Corporation, a subsidiary of SC&H Group, Inc. SC&H Group, Inc. is a member of SC&H Group, LLC.

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