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A Package Deal: Creating a Win-Win Solution Through Tax and Financial Due Diligence

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Mill Rock Capital (Mill Rock) is a growth- and operations-oriented private investment firm investing in family-owned businesses, owner-operators, and founder-led companies in North America. Mill Rock had already acquired one platform company in the specialty paper and packaging sector and, in the fall of 2020, identified an add-on investment opportunity with All Packaging Company of Aurora, CO.

As a leading designer and manufacturer of custom paperboard folding cartons for multiple consumer end markets and the creator of some cutting-edge child-resistant packages that served growing markets, All Packaging had the kind of advanced services and products that Mill Rock was built to invest in.

The Challenge

Mill Rock engaged Katz, Sapper & Miller to lead the buy-side due diligence process – including financial due diligence, tax due diligence, and IT due diligence – and advise on the structure of the deal. But, there were some unique aspects of the deal that the KSM team had to navigate, all during a period of surging COVID infection rates:

  • The letter of intent between the parties based the transaction price on 2020 projected earnings numbers, not the usual trailing twelve months of financials.
  • The seller had never been through a sale process before, and the post-transaction operation plan included keeping All Packaging’s leadership team in place going forward, as well as their significant reinvestment in the combined platform. So, it was even more important than usual that the deal be viewed as a “win-win” by all of the parties involved. This meant arriving at mutually beneficial solutions on the purchase price, the net working capital target, and the tax true-up.
  • There was a significant opportunity to generate a tax shield through appropriate tax elections, but KSM’s diligence team identified concerns about the validity of the seller’s tax structure.

The Solution

To meet these challenges, the KSM team modified the usual M&A playbook to deliver the best result for this transaction:

  • In order to negotiate the deal based on projections of year-end numbers, the KSM team developed a process that would update analytical documents rapidly as time passed and account balances shifted from “projected” to “actual.” The earnings analysis was updated several times during the closing process to ensure the price was based on the most accurate information available.
  • Virtual negotiations were always collaborative and non-adversarial, even as complications arose. Because the seller had never been through a transaction, the KSM team took a light-touch approach, leading with empathy and focusing on retaining positive relationships amongst all parties involved in the deal. KSM’s tax diligence team identified an opportunity for favorable tax treatment going forward if the transaction was structured as an asset purchase instead of a stock transaction. Such treatment often works to the detriment of the seller, but in this case Mill Rock was willing to gross up the transaction price to cover the additional costs to All Packaging’s owners and still wind up with a net saving over the long term.
  • The KSM tax diligence team generated a seller reorganization plan that allowed Mill Rock to receive the benefit of the tax shield while also offsetting the concerns regarding the seller’s tax positions.

The Result

KSM’s focus on a collaborative, flexible, cooperative negotiation between two parties that could both see the benefits of moving forward as one entity helped Mill Rock to acquire a packaging business that adds some unique and valuable services to its portfolio of specialty packaging products. The combined business offers All Packaging’s top-notch products to a broader range of potential customers through Mill Rock’s expanded distribution channels.

The KSM transaction team was instrumental in getting this deal across the line. They have the technical ability to analyze the financial and tax details but never lost sight of what we wanted to accomplish – a mutually beneficial outcome for us and for the sellers.

– Christopher Whalen, managing partner of Mill Rock Capital

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