College of William & Mary Law School William & Mary Law School Scholarship Repository William & Mary Annual Tax Conference Conferences, Events, and Lectures 1990 Buying and Selling Businesses - Small Company Acquisitions in Virginia Stephen D. Halliday Copyright c 1990 by the authors. is article is brought to you by the William & Mary Law School Scholarship Repository. hps://scholarship.law.wm.edu/tax Repository Citation Halliday, Stephen D., "Buying and Selling Businesses - Small Company Acquisitions in Virginia" (1990). William & Mary Annual Tax Conference. 219. hps://scholarship.law.wm.edu/tax/219
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College of William & Mary Law SchoolWilliam & Mary Law School Scholarship Repository
William & Mary Annual Tax Conference Conferences, Events, and Lectures
1990
Buying and Selling Businesses - Small CompanyAcquisitions in VirginiaStephen D. Halliday
Copyright c 1990 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository.https://scholarship.law.wm.edu/tax
Repository CitationHalliday, Stephen D., "Buying and Selling Businesses - Small Company Acquisitions in Virginia" (1990). William & Mary Annual TaxConference. 219.https://scholarship.law.wm.edu/tax/219
E. Negotiating the Financing ............................ 14
V. Postacquisition Integration ............................. 15
VI. The Business Plan ....................................... 15
VIII. Packaging Your Company for Sale .......................... 16
I. Overview
A merger or acquisition represents a major challenge to theparties involved. The decision makers on both sides of thetransaction must absorb a significant amount of technicaldata from internal and external experts, decide an optimalcourse of action, and successfully negotiate this result,usually within severe time constraints. Essential stepsoften include:
Preacquisition Review
* Determining the Purchase Price
* Financing the Acquisition
The Business Plan
* Postacquisition Integration
In addition, there are certain actions that a seller cantake to "package the company for sale."
II. Preacauisition Review
Once you find a company that appears to be the right fit,how do you determine if it is right for you? How do youavoid the disaster of a company that is dressed up forsale, and sold hard, based on an unrealistic history andpotential?
These bad situations can nearly always be avoided by goodbusiness planning, patience and doing your homework duringa preacquisition review.
Such reviews are normally performed in two phases: First,in connection with developing the bid proposal, and second,as part of a due diligence review once a letter of intentor purchase agreement has been signed.
Make a site visit to the corporate headquarters, and to asmany branch locations as possible. Look not only ataccounting issues, but also at how the operation works.
Perform as much research as possible before the site visitso your questions can address the industry's specific riskissues, its customers and other aspects of running thebusiness.
Such information is available from offering statements, SECfilings and industry publications -- all are helpful inidentifying potential issues and problems.
The issues you should research include:
General background of the business.
Overall industry conditions and competition.
Operations, including inventories and costing.
Overhead, selling, and general administrative expenses.
Financial considerations, which will encompass financialdata, capital structure, management, taxes and riskmanagement.
Management style and practices.
• Research, development and engineering.
Compliance with generally accepted accountingprinciples.
• Status of pension and retirement plans.
Once the central issues have been identified, companymanagement should be given the opportunity to respond toquestions arising from the site visit. The response shouldthen be confirmed through independent sources, if possible.
Market studies performed by industry analysts may supportor refute the management's statements on the company'smarket position. Any projections provided by themanagement should be evaluated in light of the most recentfinancial information available.
Other sources of information about the company should alsobe reviewed. There are many data based on specificindustries and trends, for example. Another source is any
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internal operating and financial analysis provided tomanagement. Internal and external audit reports,management letters and tax returns should be read. Also,leases, employment agreements, employee benefits plans,minutes, contracts and documentation relating to anylitigation can provide extra information about thecompany's future.
The skill and knowledge of the present management should beevaluated. Indeed, management should be polled todetermine whether key people will make the transition orwhether the new owner will need to replace top executives.
Once the initial study is completed, all information mustbe complied and condensed so that the most pertinent issuescan be identified.
III. Determining the Purchase Price.
Estimated fair market value (FMV) may be substantiallydifferent from the final transaction price. The process ofapproximating FMV and the expected transaction price hasbecome increasingly difficult as more and more diverseplayers with different objectives and perspectives enterthe mergers and acquisitions arena.
In addition to the FMV that is established by mechanicalvaluation techniques, the determination of a purchase priceinvolves consideration of a variety of factors which mayvary depending on the characteristics of the target companyand the objectives of the buyer and seller.
For example, factors such as the goal to obtain valuabletrade names, the desire to take control of another entityor the acquisition of an increased market share for aparticular product may affect the negotiated purchaseprice.
A. Valuation Techniques
No single technique will result in the determination ofvalue, but rather, these techniques combined provideboth the buyers and sellers with a range of values toassist them in arriving at a mutually agreeable purchaseprice.
The DCF valuation approach, the most frequently usedvaluation technique, provides a "going concern" valuecalculated by the summation of the present value ofprojected cash flows for a determined period plus thepresent value of the residual value at the end of theprojection period.
Typically, a 5 to 10 year projection period ofpreinterest operating cash flows, with various terminalor residual value estimates will be discounted back tothe present by the risk adjusted, weighted-average costof capital. The cash flows are derived from projectedincome statements and working and fixed capital plans.This calculation produces a result that represents thevalue to both debt and equity holders. The outstandingdebt at the time of the acquisition must be subtractedfrom the total capital value to arrive at the equityvalue.
B. Value Versus Purchase Price.
1. Market synergies. A significant portion of thepremiums paid over the stand-alone value of thetarget company are strategically motivated.Companies looking for valuable trade names, specialtechnologies or valuable distribution channels areable to justify paying a premium because of theexpectation of creating additional cash flowsthrough the combination of their operations withthat of the target's, for example, productcross-selling between client bases. Foreigninvestors in particular are known for paying highpremiums for market niches or established brandnames.
2. Cost reductions. Another element of incrementalvalue is the expectation of cost reductions.Typically, corporate buyers expect to add value by
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actions such as utilizing excess manufacturingcapabilities and eliminating duplicate sales forces,distribution channels, and corporate overheads.These cost reduction expectations have become soprevalent that a due-diligence analysis may includethe names, salaries, and re-assignedresponsibilities and an estimate of the attendantcost savings.
3. Financial synergies. The analysis should alsoinclude any financial synergies and tax benefitsthat could be attained through an acquisition. Anacquisition by a larger corporate or foreign buyermay decrease the inherent risk of the combinedentities thereby decreasing the target company'scost of borrowing. Other expected synergies may bethe utilization of net operating losses and thestep-up in tax basis of assets.
C. The "Players" Perspectives.
Current U.S. mergers and acquisitions activity isbroadly driven by three players: domestic corporatebuyers, "financial" buyers and foreign investors, eachwith their own objectives and perspectives.
In order to understand the maximum purchase price thatdifferent buyers might be willing to pay to obtain thecompany (which may represent a premium over thestand-alone appraised value), it is necessary for aseller to understand the different perspectives of thebuyers.
1. Domestic Corporate Buyers. These buyers generallyacquire a target company because of either expectedstrategy benefits or synergies made possible throughelimination of operating redundancies.
Many domestic corporate acquirers will also considerfinancial synergies such as tax benefits (e.g., NOLsand asset "step-up") and may consider the valuationimplications of the tax deductibility associatedwith a highly leveraged acquisition financingstructure.
Corporate acquirers will generally pay a higherprice for any given company than a public stockoffering would attract. The reason is a strategicbuyer is willing to pay a premium price to gaincontrol of an entire company.
2. Foreign Acquirers. These buyers, typically, arelooking for strategic "footholds" in the U.S.,although more active acquirers may be in a positionto consolidate acquisitions with existingoperations. Foreign acquirers may bring differentrequired rate of return criteria to the bargainingtable, which can be an important pricing factor.However, this differential has been narrowing,particularly for Japanese and West Germanacquirers. Also, some foreign investors place morereliance on asset replacement cost or liquidationvalue where manufacturing companies are involvedthan do U.S. investors.
3. Financial Buyers. A leveraged buyout (LBO) is theacquisition of an existing business orchestrated bya LBO sponsor or investor group and financedprimarily with debt and equity capital. The newcompany uses the operating cash flows and the saleof nonoperating assets to service and repay the debtwhich it has incurred in financing the acquisition.Additionally, LBO investors can be very aggressivewith respect to cost elimination.
A LBO typically focuses on cash because it excludesseveral accounting charges, such as depreciation,that can obscure a company's true earnings. For amature company, for instance, hefty depreciation maytrim reported net income, while the real value ofits assets to a potential buyer may actually beappreciating.
D. LBO Analysis.
The new capital structure of the acquired company isdesigned to optimize the value of the firm's assets byminimizing the company's tax burden. A company's debtto equity ratio can be as high as 10 to 1 depending onsuch factors as the predictability and stability of itscash flow.
The primary valuation technique used by LBO investors isthe DCF technique. The cash flows after interest, taxesand principal repayments are projected and discounted bythe risk-adjusted cost of equity. The risk-adjustedcost of equity will often be considerably higher thanbefore the acquisition because of the increased debtlevels. This new risk-adjusted cost of equity will takeinto consideration two types of risk: operating risk -the risk associated with the company's operations, andthe financing risk - the risk attributable to thecompany's capital structure. One indication of theincreased risk is the lower-than-normal debt coverageratios.
The maximum purchase price that the LBO investor iswilling to pay is a function of anticipated costreductions, the new capital structure, and the minimumequity returns that the equity participants are willingto accept. In most cases, the common equity investorsexpect a substantial annual compound return, generally30% or higher a year. They expect to receive thesesuperior returns as compensation for the financial riskbeing assumed.
A buy-out analysis often begins by checking the ratiobetween a company's total value (its debt plus themarket value of its equity) and its pre-tax operatingcash flow (or pre-tax operating profit plusdepreciation). This multiple should be comfortablywithin a 6 to 8 times range based on recent sales.
Example. A company is valued at $9.5 million. Thebuy-out will be accomplished with $8.5 million ofdebt and $1 million of equity.
The proposed restructuring includes the immediatesale of a $3.5 million asset. This will reduce thevalue to $6.0 million or 6.7 times the $.9 millioncash flow remaining after the asset sale.
The asset sale will reduce debt to $5 million.Through growth and improved profit margins,management expects annual cash flow to grow to $1.25million in five years. After taxes and interestpayments, they figure they will be able to retireanother $1.5 million of debt.
With improved cash flow and operating margins andreduced debt the restructured assets are projectedto be worth 7.2 times cash flow -- or $9 million.Subtract the remaining $3.5 million of debt, and thevalue of the remaining equity would then be $5.5million. That means the $1 million of originalequity would grow 5.5 times in five years -- a 41%compounded annual rate.
The so-called financial or LBO investors over the lastdecade increased substantially in number and financialstrength. For example from 1981 to 1989, LBO funds andtheir pension-fund investors took hundreds of companiesprivate in a buy-out binge totaling more than $250billion.
However, the 1980s leveraged buy-out boom is now amemory, and LBO funds are rushing to cash out with salesof companies in their portfolios. One reason thecompanies are so ripe for sale, either to the public orcorporate acquirers, is that LBO funds are anxious tosell to generate returns for their investors. That'sunlike publicly traded corporations, where managementsoften resist takeover bids to avoid losing their jobs.Buy-out funds typically start thinking about taking aprofit within a few years, once they have made anyplanned changes in a company and paid down buy-out debtsufficiently to generate a healthy return. Buy-outstypically generate the highest annual rates of returnfor their investor over a three-to-five-year period.The flurry of sales is occurring now because we're at atime three to five years from when a lot of buy-outswere done.
Future LBO activity will be slowed by the drop-off inthe stock market as well as the collapse of thehigh-risk, high-yield junk bond market whose sale istypically used to finance 30% of a buy-out.
IV. Financing the Acquisition.
While the buyer and seller may be able to negotiate amutually agreeable purchase price for the target company,few buyers have the desire or available assets to completethe transaction without securing debt and/or equityfinancing. The buyer will need to assess the costsassociated with debt and equity financing-and consider howthe target or the buyer's consolidated operations will meet
its future obligations in terms of cash flow and return onequity. The buyer must also convince the lenders andinvestors that the buyer will be able to meet theobligations of the financing package.
The past few years have produced different kinds of debt andequity instruments which have made acquisition financingmore flexible. This is due in part to the increased volumeof transactions and, in part, to the buyer's goal ofretaining as much equity in the new company as possible.
A. Forms of Financing
The principal forms of financing are debt --senior andsubordinated -- and equity -- preferred and commonstock. Increasingly, "mezzanine financing" is replacingsubordinated debt and other forms of debt instruments.The term refers to those financial instruments that havecharacteristics of both debt and equity. Examples ofdebt and equity vehicles that the buyer may use includelines of credit, term loans, mortgage notes, convertibledebentures, warrants, redeemable or convertiblepreferred stock and common stock.
This schedule depicts some of the key characteristicsgenerally found in the four basic financing forms.
Debt EquityCharacteristics Senior Subordinated Preferred Common
Tax deductible financecosts X X
Covenants/ restrictions X XNo required fixedpayments X X
Can be used in tax-freeexchange X X
Base for leverage X XCommon equity
convertibility features X XNot subject to redemption XCost of financing Low Higher Higher HighestDilution of ownership X(a) X XEPS dilution of shares X(a) X X
(a) For example, subordinated debt may have attached warrantswhich may be common stock equivalents and ultimately leadto a dilution of ownership.
In addition to the basic debt and equity securities discussedabove, a number of less traditional financial instruments haveenjoyed popularity for both the buyers and investors:
High-yield, high-risk securities (so-called junk bonds) aregeneral obligation bonds that have credit ratings belowinvestment grade and are appealing to those investors willingto increase their risk, given correspondingly high rates ofreturn.
Debt securities with interest and/or principal payable incash or securities of the issuer at the issuer's option,so-called paid-in-kind or PIK securities.
Debt securities with equity warrants, giving the debt holdera participation in the future performance of the company.
PIK preferred stock which, like PIK debt, pays dividends incash and/or additional shares of preferred stock at theissuer's option.
Adjustable rate preferred stock with interest rates that arereset at periodic auctions.
Debt securities with an investor put option.
Sale-leaseback financing which is similar to senior debt.These transactions are complicated by who receives therisk/benefit of the residual value.
The advantages and disadvantages of the financing form selectedmust be evaluated very carefully to ensure that it is the bestalternative. While senior debt is the cheapest form of financingand offers the advantage of interest-expense deductibility, debtprincipal repayment is an additional drain on cash flow.
Interest expense is also a burden on the company's futureprofitability, and excessive debt levels may result in financialdistress leading to the forced disposal of valuable assets, and,in some cases, to bankruptcy.
B. Leveraged Financing.
Historically, most companies have employed "traditional" capitalstructures comprising both short- and long-term senior debttailored to the useful life of the company's assets, subordinated
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long-term debt to help finance long-term assets, and permanentequity capital as a significant component of total capital.
Increased use of highly leveraged purchases over the last severalyears has resulted in significant changes in the collateralrequirements and the number of lenders involved in financingacquisitions. This schedule shows how a buyer may expect aleveraged financial structure to compare with the moretraditional structure:
Forms Traditional Company Leveraged CompanyMgmt Mgmt
Investors/Lenders A B C Owners A B C D E Owners
Debt
Senior X X X
Subordinated X X X X
. Equity
Preferred X X
Common X X X X X
Notice that in the traditional structure, the senior andsubordinated lenders do not have any equity position.Rather, they look to the asset values to secure theirloan(s), and to earnings and cash flow to support theexpected rate of return embodied in the interest rate.
In the ieveraged structure, some lenders also look to theasset values to secure their loans, and the interest rateto obtain an acceptable rate of return. However, becauseof the increased risk inherent in a leveragedtransaction, subordinated lenders (such asinvestors/lenders C and D) often require an equity"kicker" as part of their compensation for providing theacquisition capital.
C. Cost of Financing.
The costs associated with both debt and equity financingare primarily a function of risk. Lenders and investorsrequire compensation in proportion to the risks they bearin providing financing. Additionally, the liquidity of
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the financing instrument (i.e., the relative ease ofconverting the instrument or assets underlying theinstrument into cash) will also affect its cost. Allelse being equal, higher liquidity entails a lower costof financing.
The cost of debt and the cost of equity differ primarilyin two ways. First, the annual cost of debt is known(whether the interest rate is fixed or adjustable, it isexplicit), whereas the cost of equity is never explicitand, thus, must be estimated. Second, since providingequity capital is riskier than providing debt, capitalequity has a higher cost than debt. Although equity doesnot require fixed payments, its cost is inherent in thereturn on investment provided through dividends and stockprice appreciation necessary to entice investors toprovide initial equity capital, and to be willing toleave that capital in the business.
Senior debt is the least risky and the least expensiveform of financing since its claims take priority to allother debt financing. Secured senior debt holds liensagainst specific assets such as inventory, receivables,and fixed assets and, therefore, is less costly thanunsecured debt. Interest rates for secured and unsecureddebt are generally based on a "spread" above the "primerate" charged by commercial banks.
Subordinated debt isbelow senior debt in liquidationpriority. Because of its higher risk as well as thedifficulty in assessing the risk, providers ofsubordinated debt demand higher yields than those chargedon senior debt. The interest rate required for manysubordinated loans is so high that a portion of therequired yield may be satisfied with an equity "kicker,"usually warrants. Generally, equity kickers will haveputs (ability to sell the instrument back to the issuer)at a minimum price in order to guarantee the lender aminimum yield.
Preferred and common equities are subordinate to all debtfinancings. Their economic costs are higher than that ofdebt financing because the investor will require a higherreturn on the investment to compensate for the higherinherent risk caused by a lower claim on the assets ofthe company. This investment return is comprised of twocomponents -- dividends and appreciated value.
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The cost of preferred equity is generally lower than thatof common equity, although its dividend rate is generallyhigher and is accrued at fixed periods and is paid beforecommon dividends.
Common equity, the riskiest form of capital, is moreexpensive than preferred equity because investors requirea combined return from dividends and investmentappreciation to reflect the risks assumed (lack of anyclaim on assets and lack of a specified periodic return,such as preferred dividends or interest). If the companydoes not meet the investor's expectations, it may not beable to raise new capital through the issuance of commonstock.
D. Sources of Financing.
1. Venture Capital Firms. Venture capital firms are inthe business of making high-risk investments, whichusually includes their participation in the ownershipof the company. The investment goals of venturefirms are generally geared toward medium-rangecapital gains. They are willing to take financialrisks, which make them a source of financing forleveraged buyouts. However, they are rarelyinterested in turnaround situations because it takestoo long for their investment to become liquid. Theymay also require voting control before they willfinance a deal, which drastically affects the buyer'sownership goals.
Venture firms will invest in subordinated debt, butgenerally only if it is convertible to equity, sincethey prefer to invest in any and all types of equitysecurities. They typically charge a one to twopercent commitment fee and require a very highcompound annual rate of return (35-50% compound) witha provision that will allow them to liquidate theirposition in five to seven years. This provision maybe a "put" requiring the company to buy them out, oran agreement to register the stock which causes theconversion of debt to marketable equity securities(in which the company would retain a right of firstrefusal).
2. Sellers. The sellers of a target company may also bewilling to provide financing. Seller financing isuseful because it allows the buyer to reduce cash
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investment in situations where traditional lenderswould not be willing to provide additionalfinancing. A seller may be willing to finance partof the transaction if the seller receives a premiumover an all cash price or if the seller is convincedthat the deal will not be completed without theseller's participation, and if the seller believes inthe buyer's ability to operate the company and repaythe loan.
Sellers who are willing to finance part of thetransaction will usually take back long-term,subordinated debt such as purchase money notes and,occasionally, preferred stock. The terms of thesenotes will generally comprise longer maturities,deferred principal payments, balloon payments, andlower interest rates than outside financing. Whenthe transaction involves a covenant-not-to-compete,employment or consulting contracts, or leases ofproperty, the agreement should be structured toensure maximum use of potential tax benefits.
Transactions that include the continued involvementof the seller, especially situations that may allowthe seller to reacquire control, may not qualify forpurchase accounting treatment.
Earn-out arrangements (arrangements in which sellersreceive additional future consideration usually basedon future earnings) are also used to compensate aseller in situations where the value of a company isdependent upon the occurrence of more speculativefuture events. In an earn-out arrangement, theseller has the opportunity to enhance the effectivereturn he realizes on the sale by helping the companyto achieve certain profit performance objectives.
E. Negotiating the Financing
A primary focus of negotiations is the restrictions andcovenants lenders attempt to include in their loanagreements to protect their interests against a technicaldefault and deterioration of the company's financial oroperating condition. Many of the provisions reflect goodbusiness practices; however, excessive restrictionsshould be avoided. Typical loan restrictions include:
Limits on company stock pledged as collateral.
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Negative covenants restricting managementprerogatives in critical areas. For example,limiting the ability to raise additional long-termdebt or preventing a sale or merger of the business.
Limits on dividend payments, company stock (treasurystock) acquisitions, or owner/employee salaries.
* Capital expenditure restrictions.
Prohibition of the sale of a "substantial" part ofthe company's assets.
Restrictions on net worth, working capital and other
financial ratios.
V. Postacauisition Integration
Why do so many acquisitions fail to meet the buyer'sexpectations? Commonly, business combinations are arrangedby a small group of senior executives of the acquiringcompany without the involvement of operating personnel. Theintegration of the acquired company into its new parent israrely well planned in advance because of the tendency todeal with more immediate priorities. Operational aspectstend to be addressed only after the legal combination hasbeen achieved. This frequently causes serious disruptions,high management turnover and failure to achieve businessobjectives. A well-planned and executed integration processis critical to all acquisitions.
VI. The Business Plan
The business plan should provide both the debt and equityinvestor with a comprehensive view of the target that couldaid the lender/investor in reaching a decision on whether ornot to pursue the transaction.
A business plan demonstrates the viability and potential ofthe business, as well as management's knowledge andunderstanding of the variables that will affect thesuccessful attainment of the company's objectives. It alsoprovides the lender and equity investor a basis on which toevaluate both the business potential for return on investmentand the individuals who will manage the company. Since thebusiness plan is the initial presentation of the company'sproduct and capabilities, it must be carefully prepared. Itcan also serve as a valuable planning exercise which shouldincrease the chances of success for the company.
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The business plan is generally a further refinement of thepreacquisition review. A good business plan includes:
* Executive summary
* Historical background and description of business
* Description of manufacturing process/sources of supply
Market and marketing strategy
Description of facilities and equipment
Management team qualifications
Financial summary, including projected and historical(audited where possible) financial statements, and anytransaction-related pro forma adjustments
VII. Packaging Your Company for Sale
Owners are sometimes more concerned with tax savings thanwith reporting earnings and financial condition until theyare seeking financing, going public or structuring theircompany for sale. Their accounting practices historicallymay be designed solely to minimize income taxes. Theirfinancial statements may not have been audited or evenprepared in accordance with generally accepted accountingprinciples. Such companies should be prepared to put their"accounting house" in order to package your company forsale.
Conformity of financial statements to prescribed rules andgenerally accepted accounting principles will be required bythe acquiring company, particularly if it is public, becauseof SEC requirements. These requirements apply whether thereis to be a pooling (exchange of shares) or an acquisition ofyour company for cash and/or stock. Poolings require thatcertified or financial statements be available forconsolidation with the acquiring company on an historicalbasis. Under purchase accounting, the SEC requires that thehistorical financial statements of the acquired company arepresented under certain conditions.
Even if statutory requirements are not a factor for theacquiring company, for the seller there is no way todemonstrate true financial condition or results ofoperations except by having financial statements prepared inaccordance with generally accepted accounting principles.
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Since most purchase acquisitions are highly leveraged (thatis, accomplished by borrowing and pledging the assets to beacquired), it is necessary to demonstrate to the acquirer'sfinanciers that the underlying acquisition has the assetsand earning power required for leveraging.
The basic price for a company will be determined by a numberof factors, all relating, of course, to its demonstratedearning power. Other vital considerations include whetherthe deal can be leveraged and the necessary tax benefitsderived from the underlying acquisition, whether thepurchase is of stock or of underlying assets. The acquiredcompany's past tax practice may influence whether or not thedeal can even be consummated and the price.
It is not necessary that the financial statements of thecompany be audited, but rather that they be auditable sincethe acquirer will generally review the underlying financialpresentations using its own auditors and financialconsultants.
Tax issues that may have to be addressed by some companiesinclude treatment of cash sales, personal expenses,comingling of the owner's personal expenditures with companyexpenses and inventory "cushions" or understatements. Theexistence of such tax and accounting problems may impair acompany's ability to demonstrate earning power and mayrequire significant documentation in order to establish proforma results of operations to the satisfaction of thebuyer.
Related party transactions also need to be reviewed andperhaps restructured, particularly when a company is goingpublic or when part of a group of related companies is beingsold as an economic unit. If certain related companies arebeing sold, they must firm up their financial position bycreating a discrete unit not dependent on other affiliatedeconomic units. For example, if real estate is owned by theseller personally, he or she must decide whether to includethat in the sale or arrange for long-term leases so that theeconomic viability of the unit being sold can be determined.
