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I havetwo articles about S Corp. and C Corp., and IJUST need towrite a conclusion paragraph based on professor's questions. can you help me to write it?

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Accounting Horizons Vol. 22, No. 4 2008 pp. 415-424 American Accounting Association DOI: 10.2308/acch.2008.22.4.415 The Moderating Effects of Acquisition Premiums in Private Corporations: An Empirical Investigation of Relative S Corporation and C Corporation Valuations James A. DiGabriele SYNOPSIS: This paper presents the results of a moderated multiple regression analysis to show that, all else held equal, a positive premium exists in the valuation of S corporations over C corporations from January 2000 to November 2006. The results of the regression show that the magnitude of the \"S corporation premium\" indeed depends on the level of interactions of several independent variables. In particular, the results of this study reveal that 1 the premium depends positively on net sales; 2 the premium is higher for the cases in which the transaction is done through asset sales rather than stock sales; and 3 the premium is higher for the cases in which rms are bought by private buyers rather than public buyers. INTRODUCTION any private business ventures are organized as either C corporations or S corporations. An S corporation is referred to as a ow-through entity because no tax is paid at the entity level, and the aggregate net income is passed through to shareholders. The pro rata share of S corporation income is then taxed on the shareholders' personal income tax returns regardless of whether the income was distributed. Undistributed income from an S corporation increases the shareholders' income tax basis in the stock, which is important for gain or loss determination. Conversely, a C corporation will pay tax on its entire net income at the corporate level. When dividends are distributed to the shareholders, they are also taxed at the individual level, potentially creating a double taxation. Shareholders of C corporations do not receive a change in the income tax basis of their stock if the corporation retains undistributed income. The single level of taxation provides S corporations with a distinct advantage over traditional C corporations. Some researchers have argued that this tax differential is a source of valuation differences, and that S corporations should be valued at a premium compared with C corporations Erickson and Wang 2002, 2007. Some have disagreed, and believe that the valuation of S M James A. DiGabriele is an Assistant Professor at Montclair State University. I thank Fran Ayres associate editor and two anonymous reviewers for their extremely helpful comments and recommendations. Submitted: September 2007 Accepted: May 2008 Published Online: November 2008 Corresponding author: James A. DiGabriele Email: digabrielej@mail.montclair.edu 415 416 DiGabriele corporations should be the same as comparable C corporations Mattson et al. 2002a, 2002b. Others have claimed that the tax differentials are intricate, and the S corporation premium depends on conditional components of the transaction Finnerty 2002. This paper renes the debate by investigating attributes of S corporation and C corporation acquisitions that may determine when a premium does in fact exist. The contrasting taxation schemes may in effect translate into valuation differences between S corporations and C corporations; however, when this premium actually occurs remains unanswered. The current study plans to ll this void in the literature by identifying transaction-specic features in acquisition data of S and C corporations purchased by public corporations and private entities that may indeed moderate the S corporation premium. This research makes several important contributions to the literature on the valuation of closely held companies. In a broader sense, this issue affects a cross section of disciplines including accounting, corporate nance, and economics. For the nontechnical and nontax reader, this research is important because fundamental knowledge of corporate operating choices and their essential characteristics are at the core of business disciplines. The current study is also important for the technical reader. This research adds an incremental layer to the knowledge base of the debate by rening the recognition of tax differentials between S corporations and C corporations that are reected in valuation differences. In addition, this study directly contributes to related topics of asset pricing of private equities. This paper is unique because it analyzes actual transaction data to address the issue of the potential existence of an S corporation premium relative to similar C corporations. The body of knowledge in this research provides further guidance on organizational choice for private corporations in an acquisition setting. This is of signicant concern to the academic disciplines of accounting, economics, and nance, and to practicing accountants, investment bankers, and nancial analysts. Furthermore, family-owned companies make up a signicant portion of the nation's wealth Astrachan and Shanker 2003 and are frequently organized as S corporations. Guidance on valuation issues of S corporations would provide much-needed knowledge to this vast audience. FRAMEWORK FOR STUDY The literature on the valuation of S and C corporations has taken different positions on the appropriateness of the premium associated with the tax benets of S corporations. The streams of literature that provoke this ongoing debate range from insightful theories to transactional evidence. Denis and Sarin 2002 analyzed the net tax advantages of S corporations relative to C corporations. The analysis concluded that the net tax advantage was economically important and varied with the company's payout ratio, the marginal corporate tax rate, and the capital gains rate of the particular investor. This benet uctuated \"inversely\" with the investor's personal tax rate. Finnerty 2002 extended this issue by examining how to apply the comparable company method of valuation to value pass-through entities such as S corporations, partnerships, and limited liability companies. Because there are no market prices to measure the value of the shares directly, participants in the private equity market often try to infer the value of an S corporation's shares or an LLC's units from the share prices of comparable publicly traded corporations. This study shows that despite the difference in tax treatment, a pass-through entity has the same value in a tax-free corporate acquisition as an otherwise identical C corporation. However, the passthrough entity is more valuable than the C corporation in a taxable acquisition. Finnerty 2002 concluded the net tax advantage of a pass-through entity S corporation, partnership, or LLC as compared with a C corporation will cause the buyer to pay a premium for a business if the Accounting Horizons American Accounting Association December 2008 The Moderating Effects of Acquisition Premiums 417 pass-through status provides tax or other benets that the buyer cannot obtain as cheaply on the buyer's own through conversion by some other way after the acquisition. Erickson and Wang 2002, 2003, 2007 further empirically investigated the S corporation premium by examining acquisition data from the Securities and Exchange Commission SEC disclosures for deals of S corporations from January 1, 1994, through December 31, 2000. The paper focused on the valuation effects that IRC Section 338 h10 has on S corporation acquisitions when the shareholders make this election. This analysis provided evidence that an S corporation premium does, in fact, exist when certain factors are present; specically when a public company is the acquirer, and an election is made by the shareholders to step up the tax basis of the assets that produce attractive tax benets. This study was based on very high deal prices and was silent on the universal effects across acquisition prices and ignored asset sales. The average price for S corporations was $50.31 million, whereas the mean deal price for C corporations was $46.24 million. Mattson et al. 2002a examined market evidence of 2,487 transactions from the Pratt's Stats database with the objective of investigating relative values of S and C corporations. The authors investigated price/sales multiples for S corporations and comparable C corporations from January 1991 through March 2002. The reason for selecting price/sales as the multiple of comparison was that private C corporations often distribute net income in the form of wages to a stockholder/ employee to reduce or eliminate corporate income tax. S corporations do not have the same incentive because of a single layer of taxation. The outcome of the difference of means tests did not support that S corporations were valued higher than C corporations. In fact, in the 17 size categories examined, C corporations had a higher mean price in 16 of the categories. In the multivariate analysis, the authors found no overall difference in the price-to-sales ratios of S and C corporations. In a follow-up article, Mattson et al. 2002b again presented an empirical analysis of market transactions of S corporations and C corporations. In this analysis, stock sales were parceled out to illustrate whether valuation differences exist in stock sales. The authors made specic reference to the Erickson and Wang 2002 study and the general price range of data used in the ndings of an S corporation premium. The results of the Mattson et al. 2002b regression equations did not provide support for an S corporation premium. However, for the two largest ranges based on sales in the study, the authors noted that the price-to-sales ratios of S corporations were higher than those for C corporations. The general size categories were similar to the Erickson and Wang 2002, 2007 study. Accordingly, these ndings motivate additional inquiry regarding the association between higher company sales and an S corporation premium. The lack of agreement among academics and practitioners regarding the relative value of S and C corporations has spawned signicant debate in the tax courts. In the case of Robert Dallas v. Commissioner, the tax court concluded that reducing the S corporation earnings by a hypothetical corporate tax rate was not appropriate.1 This practice is referred to as tax affecting and results in a reduction of value for the subject S corporation. Luttrell and Freeman 2001 suggested several theories as to why tax affecting is appropriate: 1 the universe of likely buyers of an S corporation are C corporations, such as publicly traded companies; 2 the potential buyer is known, and is a C corporation; 3 the subject interest is a minority interest, and the S corporation is expected to have signicant pass-through income without accompanying cash distributions; and 4 there is a high risk of the buyer not being able to retain S status. An example of tax affecting can be demonstrated by considering an S corporation with pretax earnings of $2 million and a capitalization rate of 20 percent to provide an indication of value. If the earnings are reduced by 1 Robert Dallas v. Commissioner, T.C. Memo 2006-212. Accounting Horizons December 2008 American Accounting Association 418 DiGabriele a hypothetical 38 percent tax rate, the value of the subject S corporation would be $6.2 million $2,000,000 $760,000 = $1,240,000/.20. If the hypothetical tax rate was ignored, the value of the subject S corporation would be $10 million $2,000,000/.20. This straightforward illustration underscores the magnitude of valuation differences when tax affecting is applied. However, in a case that was decided in April 2006 by the Delaware Court of Chancery, Delaware Open MRI Radiology Associates, PA v. Howard B. Kessler, the Court determined that a dissenting shareholder's interest should be tax affected.2 In this case, the Court was presented with valuations by both groups' experts. The plaintiff's expert submitted a valuation that did not tax affect the S corporation's income. The defendant's expert provided a valuation of the S corporation, Delaware Open MRI Radiology Associates MRI, and tax affected the earnings by a 40 percent corporate income tax rate. The Court was not persuaded by either expert and applied a valuation technique that resembled a tax affected rate based on a tax at the shareholder level. The Court clearly recognized that tax would have been paid at some level; otherwise, failure to tax affect to some degree would result in a windfall for the dissenting shareholder. The Court eventually applied a formula that considered shareholder level taxes and the differences between S corporations and C corporations. The Court tax affected the earnings of MRI by a rate of 29.40 percent. Since Gross v. Commissioner,3 the case that started this debate in 1999, there is a pending gap in the literature identifying whether the post-court case transaction data present valuation differences among S corporations and C corporations. Transaction studies on relative values of S corporations versus C corporations have presented results with limited data for the period subsequent to Gross v. Commissioner.4 Mattson et al. 2002a, 2002b used transactional information on comparable sales of S corporations and C corporations for the period of January 1991 through March 2002. Both of these studies concluded that there were no valuation differences for S corporations and comparable C corporations. However, Erickson and Wang 2007 analyzed a fact pattern when an S corporation can command a premium using transaction data from January 1, 1994, through December 31, 2000. The authors identied valuation differences between S corporations and C corporations when the shareholders of an S corporation agree to an Internal Revenue Code IRC section 338h10 election. When intuitively analyzing the body of work that has been introduced on this topic to date, an instinctive question arises: are the relative values of S corporations versus C corporations dependent on transaction-specic conditions? This paper explores that question, and at the same time expands the incremental knowledge base by examining transaction data to investigate whether there are differences in the relative values of S corporations and C corporations from 2000 through 2006. The literature has revealed noteworthy gaps that warrant further investigation into issues that identify transaction characteristics that can cause an S corporation premium to exist. In the current study a moderated multiple regression analysis was used to explore this phenomenon. Interaction variables such as company type by buyer type, company type by transaction type, company type by sales, and buyer type by sales were created to examine the nature of their effects on S corporation and C corporation acquisitions whereas ascertaining any inuence these variables may have on the potential of an S corporation premium. 2 3 4 Delaware Open MRI v. Howard B. Kessler, C.A. No. 275-N April 2006. Gross v. Commissioner, TCM 1999-254 July 29, 1999. Gross v. Commissioner, 2001 U.S. App. LEXIS 24803 6th Cir., November 19, 2001. Accounting Horizons American Accounting Association December 2008 The Moderating Effects of Acquisition Premiums 419 METHODOLOGY, ANALYSIS, AND RESULTS The primary source of the data used for this study was extracted from the Pratt's Stats private transaction database. The database contains details on approximately 9,420 sales transactions of private and closely held business sales from 1990 through the present. The data are collected from intermediaries across the United States and lings with the SEC. The initial sample consisted of 4,392 private company transactions from January 2000 through November 2006. The following variables were extracted: sales price deal/purchase price, net sales of the selling company net sales, company type S or C corporation, buyer type public or private, and transaction type asset or stock sale. From the original sample of 4,392 transactions, 49 were removed because net sales data were not provided; 8 were removed because they were not designated as S or C corporations, and 6 were removed because they were not designated as asset or stock sales. An analysis of outliers was then conducted, and 90 cases were removed because they were dened as statistical outliers i.e., greater than 2.5 SDs from the mean on net sales or price. This left 4,239 companies in the nal sample. The data analysis in the current study consisted of two stages: descriptive analyses including an examination of the normality of the continuous variables and inferential analyses to address the primary purpose of this study. Descriptive Analysis and Results Despite removing the most extreme values, the initial distributions of net sales range from $1,400-$401,957,950 and purchase price range from $3,000-$454,000,000 had an extremely positive skew because of a small number of very high sales gures and purchase prices. Logarithmic natural log transformations were applied to these two variables, which resulted in approximate normality for the two distributions. The values of skewness 0.46 for the log of net sales and 0.44 for the log of purchase price and kurtosis 0.20 for the log of net sales and 0.78 for the log of purchase price are indicative of approximate normality. Table 1 illustrates the several independent variables that were extracted for the current study: lnPurchase Price M = 14.24, SD = 2.38, lnNet Sales M = 14.46, SD = 1.96, Buyer Type M = .40, SD = .49, Company Type M = .49, SD = .50, and Transaction Type M = .34, SD = .47. Descriptive statistics were also provided for the interaction variables; Company Type by Buyer Type M = .11, SD = .31, Company Type by Transaction Type M = .09, SD = .28, Company Type by Sales M = 0.30, SD = 1.20, and Buyer Type by Sales M = .57, SD = 1.42. Table 1 also includes the correlations between the dependent variable lnPurchase Price, and the independent variables. There was a signicant p .01 positive relationship between all the independent variables and dependent variables, except for Company Type. The Company Type was negatively correlated with lnPurchase Price, rpb = 0.40, p .01. Overall, there were 2,159 50.9 percent C corporations coded as 0 in subsequent analyses and 2,080 49.1 percent S corporations coded as 1 in subsequent analyses in the nal sample of 4,239 companies. Private buyers coded as 0 in subsequent analyses were involved in the sale of 2,552 60.2 percent of the companies, whereas 1,687 39.8 percent of the buyers were public coded as 1 in subsequent analyses. Nearly two-thirds of the transactions n = 2,803, 66.1 percent were asset-based coded as 0 in subsequent analyses, whereas 1,436 33.9 percent were stockbased coded as 1 in subsequent analyses. Inferential Analysis and Results The purpose of the study is to examine the effects of transaction-specic variables that may contribute to a valuation premium of S corporations relative to C corporations. Accordingly, a moderated multiple linear regression analysis was conducted to estimate these effects using Accounting Horizons December 2008 American Accounting Association 420 DiGabriele TABLE 1 Descriptive Statistics Variable Mean Std. Dev. Corr. (Y,X) lnNet Sales lnPurchase Price Buyer Type Company Type Transaction Type Company Type by Buyer Type Company Type by Transaction Type Company Type by Sales Buyer Type by Sales 14.46 14.24 0.40 0.49 0.34 0.11 0.09 0.30 0.57 1.96 2.38 0.49 0.50 0.47 0.31 0.28 1.20 1.42 0.80** 0.77** 0.40** 0.57** 0.26** 0.18** 0.57** 0.59** ** p 0.01. This table includes the mean, standard deviation, for lnNet Sales, lnPurchase Price, Buyer Type, Company Type, Transaction Type, Company Type by Buyer, Company Type by Transaction Type, Company Type by Sale, and Buyer Type by Sales for the Final Sample n = 4,239. The correlation between the dependent and independent variables is also included. lnPurchase Price price as the dependent variable and lnNet Sales net sales, buyer type, transaction type, and company type as the independent variables. In particular, the effects of the independent variables and their moderating capacity were investigated by using two-way interaction terms. Prior literature and theory suggests that each of these variables could play a role in determining the impact of valuation differences between S corporations and C corporations. Theory suggests buyer types private/public could play a role in the valuation of S corporations and C corporations. Public corporations and private entities have innate tax differentials that may motivate transaction preferences in the acquisition process. Transaction type stock sale/asset sale was considered in prior research. Mattson et al. 2002a, 2002b found this variable offered no additional evidence of an S corporation premium. However, Erickson and Wang 2007 found a specic sector of stock sales that suggest an S corporation premium. Particularly, a section 338h10 election was found to provide a premium ranging from 10 percent to 20 percent over relative C corporations. The divergent results of these studies further motivate the inclusion of the transaction type into the current model. Prior studies have included valuation multiples in their models. Mattson et al. 2002a, 2002b and Erickson and Wang 2007 used valuation multiples similar to price/sales revenue, price/book value, and price/pretax income. In the current model the actual purchase price was used as the dependent variable rather than using a valuation multiple. Net sales were included as an independent variable in the regression model. The compelling justication remains in the innate differences between the entities and prior literature. S corporations and C corporations have different motivations relative to net income. A private C corporation has the incentive to distribute the net income to a shareholder in the form of additional salary to avoid double taxation. S corporations have the benet of a single level of taxation and thus do not have the same concerns. A comparison of net income-based multiples would not provide a useful comparison. In the absence of these comparisons using net sales as a proxy of fundamental value serves as an Accounting Horizons American Accounting Association December 2008 The Moderating Effects of Acquisition Premiums 421 accepted measure Damodaran 1994; Kamstra 2003. Furthermore, prior research Mattson et al. 2002a, 2002b; Erickson and Wang 2007 has suggested that net sales may affect the S corporation premium. Two-way interaction terms were also added to the model. The theoretical justication for including the interaction terms in the multiple regression analysis is based on the possibility that the change in the dependent variable price, as one of the independent variables changes, depends on the value of another independent variable Jaccard and Turrisi 2003. Because company type S corporation or C corporation is the focal point of the study, it appears reasonable to include this variable in all possible products among independent variables. The product variable buyer type by sales was also added to the model. Prior research compels this addition. Mattson et al. 2002a, 2002b found similar results to Erickson and Wang 2007 in the largest two size categories that were based on net sales. A moderated multiple regression analysis was carried out in two steps. Aiken and West 1991, Jaccard and Turrisi 2003, and Aguinis 2004 recommended this technique to properly investigate whether a moderating effect does in fact exist. Evidence of this effect would be illustrated by an increase in the model R squared for the second step. In the rst step, only the main effects of lnSales mean centered, Company Type, Transaction Type, and Buyer Type were included in the following equation: YInPurchase Price = + 1InNet Sales + 2Buyer Type + 3Company Type + 4Transaction Type. 1 In the second step, the remaining interaction terms were included between the independent variables: company type by buyer type, company type by transaction type, company type by sales, and buyer type by sales. In Table 2, the R2 from the model in step 1 was 0.785, suggesting that the chosen independent variables can explain 78.5 percent of the variability in the natural logarithm of price, which was statistically signicant, F4,4234 = 3858.02, p .001. Although the main effects model is not the focal point of this research it is interesting to note that company type S or C corporation is statistically signicant, p .001, and negative, indicating S corporations are less valuable than C corporations. This is not surprising because prior research has found similar results using regression models that did not include moderating variables that are likely contributors to the S corporation premium. Mattson et al. 2002a, 2002b tested regression models and found seven size categories where S corporations' price-to-sales ratios were lower than comparable C corporations. If the study had stopped at this point it could have been said that S corporations are not more valuable than C corporations. However, when the interactions were entered in the second step, the R squared increased to 0.805, a change of 0.02, F4,4230 = change 108.412 p .001, suggesting that the interactions indeed moderate and add signicant explanatory power to the model that was specied in step 1. The nal model taken from step 2, illustrated in Table 2 can be written as: price = 13.532 + 0.845NetSales + 2.071BuyerType + 0.088CompanyType + 0.542TransactionType 0.659CompanyType*BuyerType 0.176CompanyType*TransactionType + 0.107CompanyType*NetSales 0.391BuyerType*NetSales 2 The above regression equation indicates, as expected, that higher Net Sales are associated with a higher valuation of the rm. Similarly, because \"Transaction Type\" was coded with a 1 for Accounting Horizons December 2008 American Accounting Association 422 DiGabriele TABLE 2 Results of Multiple Regression Analysis Step 1 Variable Constant Center LnNet Sales Buyer Type Company Type Transaction Type Model Summary for Step 1 R2 Adj. R2 R2 Change F Change df1 df2 Sig. Step 2 Variable Constant Center LnNet Sales Buyer Type Company Type Transaction Type Company Type by Buyer Type Company Type by Transaction Type Company Type by Sales Buyer Type by Sales Model Summary for Step 2 R2 Adj. R2 R2 Change F Change df1 df2 Sig. B 13.474 0.624 1.764 0.298 0.632 t Sig 395.448 57.207 35.551 8.028 13.952 0.001 0.001 0.001 0.001 0.001 t Sig. 347.32 37.079 35.627 1.744 10.164 6.518 1.899 4.368 16.142 0.001 0.001 0.001 0.081 0.001 0.001 0.058 0.001 0.001 0.785 0.785 0.785 3858.02 4 4234 0.001 B 13.532 0.845 2.071 0.088 0.542 0.659 0.176 0.107 0.391 0.805 0.804 0.020 108.412 4 4230 0.001 This table illustrates the results for the multivariate tests. The moderating effect is reected in the change in R2 in Step 2. Accounting Horizons American Accounting Association December 2008 The Moderating Effects of Acquisition Premiums 423 \"Stock\" and 0 for \"Asset,\" this implies that there is a higher selling price associated with a \"Stock\" transaction. The coefcient for \"Buyer Type\" which was coded with a 1 for Public Buyers and 0 for Private Buyers is given by the expression 2.071 .391 NetSales. This implies that the relationship between Buyer Type and Price is moderated by Net Sales. On average, it is observed that price tends to be higher when the buyer is Public. However, this \"Public Buyer premium\" tends to decrease for rms with higher Net Sales. Finally, the relationship of Company Type with selling price of a rm is analyzed. The fact that a positive signicant coefcient at the 0.10 level was found for variable \"Company Type\" conrms the existence of a premium in the valuation of S corporations over C corporations. Furthermore, the magnitude of this premium is moderated by the levels of the other independent variables that were included in the model. The expression for the premium is given by: 0.088 0.659BuyerType 0.176TransactionType + 0.107NetSales. 3 This implies that: 1 the premium is lower when the buyer of the rm is public than when it is private; 2 the premium is lower when the transaction type was \"Stock\" rather than when it is an \"Asset\" sale; and 3 the premium has a direct relationship with Net Salesrms with higher Net Sales tend to also show a higher premium for being an S corporation. Because price was transformed into its natural logarithm, the above expression can be taken as a good approximation of the percentage premium of S corporations over C corporations. For example, assume that the buyer is Private, the transaction involved an Asset sale, and Net Sales are equal to the average in the Data set so the centered natural logarithm of Net Sales would be equal to zero. In this case, the coefcient becomes simply 0.088, which suggests that for this type of rm, the premium of S corporations is 8.8 percent. Again, bear in mind that this premium can increase or decrease even becoming negative given different buyer types, transaction types, and net sales of the involved rm. CONCLUSION This paper presents the results of a moderated multiple regression analysis to show that, all else held equal, there exists a positive premium in the relative valuation of S corporations over C corporations in the period subsequent to the Tax Court rulings5 that started this debate. The model also allows for the moderation of this premium by varying different levels of a set of variables net sales, transaction type, and buyer type, with several two-way interaction variables. Results of the regression show that the magnitude of the \"S corporation premium\" indeed depends on the level of these variables. In particular, the ndings are 1 the premium depends positively on net sales; 2 the premium is higher for the cases in which the transaction is done through Asset sales rather than Stock sales; and 3 the premium is higher for the cases in which rms are bought by private buyers rather than public buyers. 5 In addition to Gross v. Commissioner, several other tax court cases did not consider tax affecting the net earnings of an S corporation for valuation purposes: Adams v. Commissioner, T.C. Memo 2002-80 U.S. Tax Ct. March 28, 2002; Heck v. Commissioner, T.C. Memo 2002-34 February 5, 2002; and recently Dallas v. Commissioner, T.C. Memo 2006-212. Accounting Horizons December 2008 American Accounting Association 424 DiGabriele The question of how these ndings relate to the existence of an S corporation premium may be answered only as follows: it depends. Because truly unique characteristics are associated with the circumstances when an S corporation premium can exist, it may be safe to assume that the value of an S corporation is condition specic. For the value of an S corporation to be properly calculated it appears that an investigation of the facts and circumstances of a particular transaction should occur in the due diligence process of a valuation exercise in a similar manner to other factors that are considered; that is, economic outlook and revenue projections. In addition, it may also be prudent for a range of values for an S corporation to be presented in the face of several valuation scenarios. The study had several data limitations. The data did not allow identication of the private buyer entity type. Second, information was lacking as to which S corporations were formerly C corporations with exposure to the built-in gains tax provided in IRC Section 1374. REFERENCES Aguinis, H. 2004. Regression Analysis for Categorical Moderators. New York, NY: Gilford. Aiken, L. S., and S. G. West. 1991. Multiple Regression: Testing and Interpreting Interactions. Newbury Park, CA: Sage. Astrachan, J. H., and M. C. Shanker. 2003. Family businesses' contribution of the U.S. economy: A closer look. Family Business Review 16 3: 262-277. Damodaran, A. 1994. Damodaran on Valuation. New York, NY: John Wiley. Denis, D. J., and A. Sarin. 2002. Taxes and relative valuation of S corporations and C corporations. Journal of Applied Finance: 5-16. Erickson, M. M., and S. Wang. 2002. The effect of organizational form on acquisition price. Working paper, University of Chicago. -, and -. 2003. Response to the Erickson-Wang myth. Business Valuation Update 9 3: 1-4. -, and -. 2007. Tax benets as a source of merger premiums in acquisitions of private companies. The Accounting Review 82 2: 359-387. Finnerty, J. D. 2002. Adjusting comparable company method for tax differences when valuing privately held \"S\" corporations and LLCs. Journal of Applied Finance 12 2: 15-31. Jaccard, J., and R. Turrisi. 2003. Interaction Effects in Multiple Regression. Thousand Oaks, CA: Sage. Kamstra, M. 2003. Economic review. Federal Reserve Bank of Atlanta. 1st Quarter. Atlanta, GA: Federal Reserve Bank. Luttrell, M. S., and J. W. Freeman. 2001. Taxes and the undervaluation of \"S\" corporations in marital dissolutions. American Journal of Family Law 15 4: 301-307. Mattson, M. J., D. S. Shannon, and D. E. Upton. 2002a. S corporation values same as C corporations. Business Valuation Update Part 1 8 11/November: 1-5. -, -, and -. 2002b. S corporation values same as C corporations. Business Valuation Update Part 2 8 12/December, 1-4. Accounting Horizons American Accounting Association December 2008 A Critical reading and writing framework for empirical (and other) academic (practitioner) papers. This Framework is also used for critical discussions BUT no write up is required. What to look at How relevant are the results? Where and in what context was the research carried out? What are the author's credentials? Is there legitimate knowledge offered by the article? What are alternatives perspectives on the topic? Positive and negative appraisals and grounds for knowledge expansion. Data - collection methods - what did they actually do? Style Is it constructed clearly? Can you follow the argument through a logical development? Does the use of tables, charts and diagrams add value to the conclusions or the explanations? Analysis What is the central issue dealt with in the paper? Provide a critique of the research. What is good or bad about the manuscript? Are the findings useful? Is the claim of the research question or hypotheses justified? What assumptions have been made (e.g. about the generalisability of the results)? To what extent are the central insights grounded in evidence? What is the evidence supporting these assumptions? What suggestions would you make to enhance the study or would you design it differently? Is there any related research or current event that helps to explain or refute the findings in the manuscript? (with proper citations and bibliography) In what ways is this article similar or different from others you might have read? Reflection How do you respond to what the author is saying? How does it relate to other concepts you have come across? Does it point to further research in a particular direction? What experiences are omitted from the article that strike you are important? What contribution does this article make ? Does this article challenge or confirm existing ideologies? To what extent is the article connected to practice? Conclusion ______________________________________________________________________________ What contribution does this article make ? Does this article challenge or confirm existing ideologies? What does this article add if anything to your knowledge on the topic. Are there any suggested areas of future research this topic can benefit from? Propose between 1 to 3 research questions/hypotheses on the topic? To what extent is the article connected to practice? References must following APA citation guidelines please see: http://www.apastyle.org/ Helpful hints: 1. Spend less time repeating what is in the manuscript and more time with the critique and analysis. 2. Use the research questions/hypotheses proposal effectively. 3. The merging of a current event(s) or other research is a critical element of emphasis in the analysis. 4. Please DO NOT prepare your write up structured around each question. The write up should use the above questions as a guide to write a logical connective analysis. Journal of Business Valuation and Economic Loss Analysis Volume 7, Issue 1 2012 Article 5 The Moderating Valuation Effects of the Organizational Form of Flow Through Entities James A. DiGabriele, Montclair State University Recommended Citation: DiGabriele, James A. (2012) "The Moderating Valuation Effects of the Organizational Form of Flow Through Entities," Journal of Business Valuation and Economic Loss Analysis: Vol. 7: Iss. 1, Article 5. DOI: 10.1515/1932-9156.1114 2012 De Gruyter. All rights reserved. Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM The Moderating Valuation Effects of the Organizational Form of Flow Through Entities James A. DiGabriele Abstract A flow through entity is a legal form of entity choice where income is passed directly to the owners. Types of flow through entities are; general partnerships, limited partnerships, limited liability companies, master limited partnerships and S Corporations. Although, a common tax regime exists among S Corporations, partnerships, limited liability companies, and master limited partnerships, prior literature has implied there should also be corresponding valuation parity among these entities. The literature is void in identifying a fact pattern of when a situation arises that provides a distinction of such potential valuation differentials. This research intends to add incrementally to the literature by investigating acquisition transactions of privately held flow through entities to determine which characteristics moderate valuation differentials between these types of entities. KEYWORDS: tax partnership, flow through entity, S Corporation, valuation Author Notes: James A. DiGabriele: Department of Accounting, Law & Taxation, School of Business, Montclair State University, One Normal Avenue, Montclair, NJ 07042, digabrielej@mail.montclair.edu, jim@dmcpa.com. Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM DiGabriele: Moderating Valuation Effects of the Organizational Form I. Introduction A flow through entity (FTE) is a legal form of entity choice where income is passed directly to the owners. The income of the entity is treated as the income of the owners, and taxed appropriately on their personal income tax returns for Federal income tax purposes in the United States. Types of FTEs are general partnerships, limited partnerships, limited liability companies, master limited partnerships, and S Corporations. FTEs are generally required to file an annual tax return reporting the income allocated to the owners, and to provide each owner with a statement allocating the proper amount of income or loss reportable on their personal income tax returns. Many privately held firms are frequently organized as an FTE rather than a C corporation. This decision is inspired by the single layer of taxation offered by FTEs (Schwidetzky, 2009). In addition to the tax incentives that are an inherent difference between FTEs and regular corporations (C Corporations), valuation factors can also play a part in the decision of entity type. Previous literature has set the stage for inquiry into valuation differentials among different tax regimes. Erickson and Wang (2007), investigated a distinct condition where the valuation effects of a special election afforded by IRC Section 338(h) (10) presents an S corporation premium over an otherwise identical C Corporation when certain factors are present; specifically when a public company is the acquirer, an election is made by the shareholders to step up the tax basis of the assets that produce attractive tax benefits, and the deal price is in the range of $46.24 to $50.31 million. DiGabriele (2008), refined the S Corporation premium further and concluded; the premium is lower when the buyer of the firm is public than when it is private, the premium is lower when the transaction type was a stock sale rather than an asset sale, and the premium has a direct relationship with company sales. Particularly, firms with higher sales tend to also show a higher premium for being an S corporation. The common methodology among the referenced studies is that C Corporations resided in a distinct category as well as S Corporations. Dauchy (2005) used a similar approach to compare differences between regular corporations and FTE's. The author partitioned the data with corporations in a distinct category measured against all other non regular corporate entities such as partnerships, limited liability companies, and S Corporations suggesting a uniform composition among FTEs. The study concluded that organizational form and the impact of taxation were deciding factors in entity choice. The segregation of the data was motivated due to parallel tax regimes suggesting all FTE organizational forms were homogenous implying these entities should also be priced the same. S Corporations are governed by Subchapter S of the IRC while general partnerships, limited partnerships, limited liability companies, and master limited Published by De Gruyter, 2012 1 Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM Journal of Business Valuation and Economic Loss Analysis, Vol. 7 [2012], Iss. 1, Art. 5 partnerships are administered under Subchapter K. Previous research (Erickson and Wang 2007) and DiGabriele 2008) has explored valuation differentials based upon competing tax variations. The results naturally generated an escalating research observation that questions if there are valuation differentials among FTE's dwelling in distinct sections of the tax code. Currently, the literature is lacking in identifying a fact pattern of when a situation arises that makes the distinction for such valuation differentials. This study intends to add incrementally to the literature by investigating acquisition transactions of privately held FTEs to determine which characteristics, if any, moderate valuation differentials between these types of entities. To the best of this researcher's knowledge, a study of this type has not been previously reported in the literature. This research makes several important contributions to the body of knowledge on the valuation of privately held companies. First, investigating pricing differentials between S Corporations and tax partnerships is an area not yet explored in previous academic literature. This issue directly impacts academic areas such as accounting, corporate finance, and economics, for asset pricing and organizational form are critical common components within each discipline. This research is also essential to practitioners such as; accountants, lawyers, investments bankers, and financial analysts because understanding a specific fact pattern where organizational form can influence acquisition price assists in more effective transaction analysis. This paper is organized as follows: Section II provides the literature that inspires the motivation for the study; Section III provides the sample selection and model; Section IV provides the results; Section V presents the discussion of the findings; Section VI provides the conclusion with recommendations for future research. II. Motivation for Study FTEs are governed under two different but similar tax regimes; Subchapter S for S Corporations and Subchapter K for partnerships, limited liability companies and master limited partnerships. The latter entities will be referred to as tax partnerships (Schwidetzky, 2009). The benefits associated with the various forms of FTEs are usually embedded in a combination of tax and non tax considerations. There are various situations when an S Corporation will offer genuine benefits not available to tax partnerships, and conversely. S Corporation shareholders involved in a trade or business are generally paid as employees and accordingly receive a W-2 reporting the compensation paid and taxes withheld. Distributive shares of income distribution above the amount reported as the fair market value of wages are not subject to self employment 2 Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM DiGabriele: Moderating Valuation Effects of the Organizational Form taxes. This can result in a significant after tax savings for S Corporation shareholders. The difference from a valuation perspective creates higher after tax cash flow and potentially achieves a higher entity value when considering self employment taxes using an income method of valuation (Alfonsi and McGrail, 2010). An S Corporation also benefits from a tax planning strategy that effectively solidifies favorable long term capital treatment. This condition occurs when an S Corporation shareholder owns undeveloped land and intends to develop the property for sale. In advance of development, the taxpayer/shareholder can sell the property to an S Corporation they control where the land is developed and sold. The presale long term capital gain remains with the shareholder and the S Corporation acquires a fair market value basis. An example of such a transaction would be where a taxpayer/shareholder owns undeveloped land at a cost of $100,000. The undeveloped land is then sold to an S Corporation controlled by the taxpayer/shareholder for $500,000. The capital gain (assuming long term) is locked in at $400,000 to the taxpayer/shareholder. The S Corporation then develops the land and sells the property for $1,000,000, creating only $500,000 of ordinary income. A potential acquirer in the real estate development business would find this type of target more attractive than a tax partnership since this type of deal cannot be achieved using a tax partnership. IRC Section 707(b)(2) considers these types of gains as ordinary income if a partner/member owning more than 50% sells property to a tax partnership which is not deemed a capital asset within this mode of organizational form (Schwidetzky, 2009). Upon disposition a partner/member will usually seek a price premium to offset the tax cost associated with ordinary income rates. There are times when an S Corporation offers non-tax advantages over tax partnerships. Transaction costs associated with transferring interests from existing owners to new owners differ between S Corporations and tax partnerships. The transfer or modification of ownership interests in tax partnerships could be steep because these transactions usually require amendments to a partnership agreement or operating agreement in order to transfer asset title. Alternatively, the corporate form provides an ease of the transfer of ownership through the comparatively economical sale of stock (Ayers, Cloyd, and Robinson, 1996). This is particularly attractive to venture capital funds where the fund invests in a privately held firm with the primary intention of an exit strategy usually through an Initial Public Offering (IPO). The increased transaction costs have the potential to be recouped by an acquirer through a pricing differential when considering between the purchase of an S Corporations or tax partnerships (Willis et.al. 2008). Alternatively, tax partnerships can offer more flexibility regarding owner allocations of income and deductions. A fifty percent (50%) owner in a tax partnership can be allocated ninety percent (90%) of income or deduction items Published by De Gruyter, 2012 3 Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM Journal of Business Valuation and Economic Loss Analysis, Vol. 7 [2012], Iss. 1, Art. 5 using special allocation rules (Schwidetzky, 2009). A major restriction on S Corporations is the shareholder must base distributions of income, gain, loss or deduction on a pro-rated ownership basis. Distributions made to S Corporation shareholder's on a regular basis lacking conformity with this rule is viewed as creating a second class of stock effectively causing the termination of the S election (Pace, 2009). An acquirer aiming for a more flexible income or deduction arrangement could view a tax partnership more valuable than a comparable S Corporation target. Restrictions on S Corporation ownership have the potential to impact value in contrast to a tax partnership. Purchasers such as foreign individuals, tax partnerships and tax exempt trusts would cause an S Corporation to terminate its flow though status (Jalbert, 2002). When valuing comparable entities within this framework a restricted buyer would assign a premium to a tax partnership since the single taxation regime remains intact. In Mandelbaum v. Commissioner (1995) the tax court considered these types of restrictions on the transferability of S Corporation stock and determined a thirty percent (30%) marketability discount was appropriate. Considering the advantages and disadvantages between S Corporations and tax partnerships, previous research has implied that FTEs are of the same valuation character. Finnerty (2002) examined the application of the comparable company method of valuation to value FTEs such as S corporations and tax partnerships. Participants in the private equity market often try to infer the value of a privately held company from the share prices of comparable publicly traded corporations. The Finnerty (2002) study compares the value of C Corporations to FTEs. The theory illustrated in the analysis is that FTE's are similarly valued due to their favorable and similar tax status. Finnerty (2002) directly compares FTEs that include S Corporations and tax partnerships to otherwise comparable C Corporations, and concluded the net tax advantage of FTEs as compared with C corporations will cause the buyer to pay a premium for a business if the FTE status provides tax or other benefits that the buyer cannot obtain as cheaply through their own conversion by some other way after the acquisition. An additional study by Denis and Sarin (2002), illustrates a theoretical model to justify the tax benefits associated with S Corporations. The model illustrates that S Corporations command a valuation premium over otherwise identical C Corporations. However, the authors went further to include master limited partnerships as a benchmark to assess the relative valuation of FTEs to comparable C Corporations in order to corroborate their findings. The inference of considering master limited partnerships as a point of reference to support the findings in this study seemingly establishes that the authors deem there is valuation parity between S Corporations and tax partnerships. 4 Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM DiGabriele: Moderating Valuation Effects of the Organizational Form Previous literature had set forth the assumption of pricing similarity among S Corporations and tax partnerships. Yet, there are conditions that distinguish these entities and have the potential to lead to valuation differentials. This study uses actual transaction data to identify a course of events that lead to pricing variations between S Corporations and tax partnerships. III. Sample Selection and Model The data was extracted from Pratt's Stats transaction database. The complete database contains approximately 10,000 sales transactions of privately held businesses from various types of entities such as C Corporations, S Corporations, partnerships, limited liability companies and unincorporated businesses from 1990 through the present date. The database is updated on a regular basis to include current transaction data received from intermediaries across the United States and filings with the SEC. Since the tests included comparisons of S Corporations and tax partnerships, a matched sample was sought. Propensity score matching introduced by Rosenbaum and Rubin (1983) was utilized with an ensuing support match consistent with the methodology utilized by Mattson et. al. (2002a, 2002b) and Erikson and Wang (2007). For each S Corporation acquisition a corresponding matched transaction was identified for tax partnerships based on net sales and two-digit SIC codes. One-to-one matching in accordance with Leuven and Sianesi (2003) indicated a less than 1% difference in the absolute distance for each matched control comparative to the propensity score. The sample consisted of 969 matches for a total sample size of 1,938 transactions for the period of September 1993 through October 2008. DiGabriele (2008) indicated that when comparing entities with different compensation schemes net sales provide a strong relationship to price. This is because net income based metrics such as earnings before income taxes, depreciation and amortization (EBITDA) varies across organizational form. In view of the fact that S Corporations generally pay shareholders' salaries in the form of compensation and that tax partnerships usually pass income to partners/members through distributions, net income based measures will not provide a useful relationship. The type of transaction in an acquisition setting was considered in prior research. Mattson et. al. (2002a, 2002b) found no evidence in valuation disparity between a stock sale and asset sale for S Corporation and C Corporation acquisitions. However, Erickson and Wang (2007) found stock sales using an Internal Revenue Code (IRC) section 338(h)(10) election provided S Corporations with a valuation premium over otherwise identical C Corporations. The premium was not universal and appeared in the larger deals that ranged from $46.24 to Published by De Gruyter, 2012 5 Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM Journal of Business Valuation and Economic Loss Analysis, Vol. 7 [2012], Iss. 1, Art. 5 $50.31 million. These conflicting outcomes motivate the incorporation of Transaction Type into the current model. In the sample data for this study, the transactions for tax partnership sales of partner/member interests are classified as stock sales. Since the focal point of the study is Company Type, and its affect on price, S Corporations and tax partnerships were segregated and included as an independent variable. A moderated multiple regression analysis was carried out in a two stage format where: (1) Y ln Purchase Pr ice 1 ln Net Sales 2 Company Type 3 Transaction Type The second stage included interaction variables between Net Sales by Company Type, and Net Sales by Transaction Type. Aiken and West (1991), Jaccard and Turrisi (2003), and Aguinis (2004) recommended a two stage technique to appropriately examine whether a moderating effect exists. Evidence of this effect would be demonstrated by a corresponding increase to the model R squared in the second stage as such: (2) Y ln Purchase Pr ice 1 ln Net Sales 2 Company Type 3 Transaction Type 4 Sales X CT 5 Sales X TT Where: lnPurchase Price lnNet Sales CT TT Sales x CT Sales x TT = = = = = natural logarithm of selling price centered natural logarithm of firms' sales 1 if tax partnership, and 0 if S Corporation 1 if asset sale, and 0 if stock sale product variable of lnNet Sales multiplied by Company Type = product variable of lnNet Sales multiplied by Transaction Type Selling price of a firm is usually higher for companies with higher sales, implying larger firms yield higher prices. DiGabriele (2008) found this to be the occurrence in privately held corporations. Hence, it is expected that the coefficient for (lnNetSales) is positive. The primary purpose of this study is to observe whether there are valuation differences between S Corporations and tax partnerships. Accordingly, there is no directional prediction for the variable company type (CT) due to the condition specific advantages and disadvantages associated with each type of entity. 6 Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM DiGabriele: Moderating Valuation Effects of the Organizational Form Transaction Type has the propensity to vary across the spectrum of acquisitions as prior research has indicated (Mattson et. al. 2002a, 2002b, Erikson and Wang, 2007). Consequently no directional prediction is offered for this variable (TT). Two-way interaction terms were also added to the model. Theory suggests including the interaction terms in the model; this suggestion is based on the possibility that the change in the dependent variable as one of the independent variables changes, depends on the value of another independent variable (Jaccard and Turrisi 2003). Since prior research found higher sales resulted in greater valuation premiums (Mattson et. al. 2002a, 2002b, Erikson and Wang 2007) it seemed logical to include lnNetSales in all possible products among independent variables. Since the interaction terms are product variables no directional prediction is offered. IV. Results Descriptive Statistics Data was retrieved for a total of 1,938 transactions for S Corporations and tax partnerships. As indicated in the previous section, the variables extracted from each transaction were the Selling Price, Net Sales, Company Type, and Transaction Type. The results illustrated in table 1 indicate that the Price and Net Sales variables had very high skewness and kurtosis (outside the [-1, +1] range) suggesting that these variables were not normally distributed. As a result, these variables were transformed to their natural logarithms, lnPurchase Price and lnNet Sales. The skewness and kurtosis statistics of the transformed variables suggest they now satisfy the assumption of normality. Table 1 Descriptive Statistics for Purchase Price, Net Sales, lnPurchase Price, lnNet Sales N Min Max Mean SD Purchase Price 1938 6,000 3,190,000,000 17,994,800 109,209,136 22.269 591.183 Net Sales 1938 4,754 2,920,000,000 17,060,481 98,758,462 19.125 477.640 In Purchase Price 1938 8.70 21.88 13.9240 2.381 .498 -.727 ln Net Sales 8.47 21.79 14.2350 2.036 .583 -.111 1938 Published by De Gruyter, 2012 Skewness Kurtosis 7 Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM Journal of Business Valuation and Economic Loss Analysis, Vol. 7 [2012], Iss. 1, Art. 5 Tables 2 and 3 presents the sample by year and indicates the number of deals for the period of 1993 through 2008. The sample is further demonstrated by organizational form. The aggregate value of S Corporation deals is approximately $14.2 billion. The aggregate value tax partnership deals are approximately $20.7 billion. The deal pattern is gradual with a peak in 2007. Panel B of table 2 and 3 presents the sample by organizational type and one-digit SIC. The services and retail sector had the highest concentration. Panel C of table 2 and 3 displays the transaction type for S Corporations and tax partnerships for the sample period. Table 2 Sample Selection and Composition Acquisitions of S Corporations completed during the Period 1993-2008 Panel A: S Corp sample composition by year Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total Number of Deals 1 5 10 29 51 73 86 76 70 73 56 75 90 55 157 62 969 Percent of Total 0.1% 0.5% 1.0% 3.0% 5.3% 7.5% 8.9% 7.8% 7.2% 7.5% 5.8% 7.7% 9.3% 5.7% 16.2% 6.4% 100.00% Deal Value ($ Millions) 0.1 44.5 196.2 366.9 617.6 1,210.1 1,047.1 1,255.5 399.9 345.0 987.2 579.1 1,700.3 722.3 4,223.7 503.3 14,198.8 Percent of Total 0.0% 0.3% 1.4% 2.6% 4.3% 8.5% 7.4% 8.8% 2.8% 2.4% 7.0% 4.1% 12.0% 5.1% 29.7% 3.5% 100.00% 8 Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM DiGabriele: Moderating Valuation Effects of the Organizational Form Panel B: Sample composition by One-Digit SIC SIC Code 0 1 2 3 4 5 6 7 8 Total Number of Deals 8 31 72 96 45 278 30 270 139 969 Percent of Total 0.8% 3.2% 7.4% 9.9% 4.6% 28.7% 3.1% 27.9% 14.3% 100.00% Deal Value ($ Millions) 3.8 674.5 1,861.8 3,006.3 1,623.4 909.3 1,145.3 3,433.1 1,541.3 14,198.8 Percent of Total 0.0% 4.8% 13.1% 21.2% 11.4% 6.4% 8.1% 24.2% 10.9% 100.00% Panel C: Sample composition by Transaction Type Transaction Type Stock Asset Total Number of Deals 242 727 969 Percent of Total 25.0% 75.0% 100.00% Deal Value ($ Millions) 10,283.0 3,915.8 14,198.8 Published by De Gruyter, 2012 Percent of Total 72.4% 27.6% 100.00% 9 Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM Journal of Business Valuation and Economic Loss Analysis, Vol. 7 [2012], Iss. 1, Art. 5 Table 3 Sample Selection and Composition Acquisitions of Tax Partnerships completed during the Period 1993-2008 Panel A: Tax Partnership sample composition by year Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total Number of Deals 1 1 4 17 37 53 71 69 56 65 68 112 114 78 152 71 969 Percent of Total 0.1% 0.1% 0.4% 1.8% 3.8% 5.5% 7.3% 7.1% 5.8% 6.7% 7.0% 11.6% 11.8% 8.0% 15.7% 7.3% 100.00% Deal Value ($ Millions) 25.4 0.1 102.2 214.0 355.4 784.8 1,103.2 602.4 1,888.7 1,057.5 532.6 931.3 4,545.8 1,165.9 2,868.5 4,497.5 20,675.3 Percent of Total 0.1% 0.0% 0.5% 1.0% 1.7% 3.8% 5.3% 2.9% 9.1% 5.1% 2.6% 4.5% 22.0% 5.6% 13.9% 21.8% 100.00% Deal Value ($ Millions) 4.4 775.9 6,016.4 5,264.4 1,163.5 931.9 1,330.3 3,666.6 1,521.9 20,675.3 Percent of Total 0.0% 3.8% 29.1% 25.5% 5.6% 4.5% 6.4% 17.7% 7.4% 100.00% Panel B: Sample composition by One-Digit SIC SIC Code 0 1 2 3 4 5 6 7 8 Total Number of Deals 8 31 72 96 45 278 30 270 139 969 Percent of Total 0.8% 3.2% 7.4% 9.9% 4.6% 28.7% 3.1% 27.9% 14.3% 100.00% 10 Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM DiGabriele: Moderating Valuation Effects of the Organizational Form Panel C: Sample composition by Transaction Type Transaction Type Stock Asset Total Number of Deals 218 751 969 Percent of Total 22.5% 77.5% 100.00% Deal Value ($ Millions) 14,541.9 6,133.4 20,675.3 Percent of Total 70.3% 29.7% 100.00% Table 4 illustrates for every year, the following information: (a) the number of deals in each year, (b) the percentage of those deals that involved tax partnerships, (c) the percentage of those deals that involved S Corps, (d) the percentage of those deals that were Asset sales, and (e) the percentage of those deals that were Stock sales. For example, in year 2000 there were 145 deals. Of these, 47.59% were Tax Partnerships and 52.41% were S Corps. Also, of the 145 deals, 73.79% were Asset and 26.21% were Stock sales. Table 4 Distribution by Organizational form and transaction type by year of transaction Year of Sale 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Number of Deals 2 6 14 46 88 126 157 145 126 138 124 187 204 133 309 133 % of Tax Partnerships % of S Corp 50.00% 50.00% 16.67% 83.33% 28.57% 71.43% 36.96% 63.04% 42.05% 57.95% 42.06% 57.94% 45.22% 54.78% 47.59% 52.41% 44.44% 55.56% 47.10% 52.90% 54.84% 45.16% 59.89% 40.11% 55.88% 44.12% 58.65% 41.35% 49.19% 50.81% 53.38% 46.62% Published by De Gruyter, 2012 % Asset 100.00% 100.00% 85.71% 80.43% 69.32% 66.67% 67.52% 73.79% 80.16% 88.41% 81.45% 82.89% 75.00% 75.19% 73.46% 78.20% % Stock 0.00% 0.00% 14.29% 19.57% 30.68% 33.33% 32.48% 26.21% 19.84% 11.59% 18.55% 17.11% 25.00% 24.81% 26.54% 21.80% 11 Authenticated | jim@dmcpa.com Download Date | 6/24/12 5:15 PM Journal of Business Valuation and Economic Loss Analysis, Vol. 7 [2012], Iss. 1, Art. 5 Table 5 presents descriptive data relating to the S Corporation and Tax Partnership acquisitions during the sample period. The mean purchase price for S Corporation targets is $14.7 million. The mean purchase price for LLC's was $20.8 million, $33.1 million for LLPs and $17.2 million for partnerships. The average revenues for S Corporations were $12.4 million whereas the average LLC reported $20.3 million, LLPs $36.2 million and partnerships $20.5 million. The additional descriptive financial data presented in table such as book value of equity, pre-tax income, EBITDA, gross cash flow, and EBITDA to revenue varied across all organizational forms indicating that each entity utilized different distribution schemes to pass income to the owners. Table 5 suggests revenue of the firm was an efficient valuation metric rather than book value of equity, pre-tax income, EBITDA, gross cash flow, and EBITDA to revenue. Principally, the data as illustrated in table 5 signifies that samples are similar in size. Table 5 Descriptive Financial Data for Sample Composition during 1993-2008 (amounts in $ million) Company Type LLC Mean Median Std. Deviation N LLP Mean Median Std. Deviation N Partnership Mean Median Std. Deviation N S Corporation Mean Median Std. Deviation N Total Mean Median Std. Deviation N Book Value Pre-Tax Gross Cash EBITDA to of Equity Income EBITDA Flow Revenue Deal Size Revenue 1.7 -0.5 0.2 -0.4 -55.3% 20.8 20.3 0.2 0.1 0.1 0.1 9.4% 0.6 0.9 29.8 16.5 17.7 17.4 692.5% 160.8 132.5 421 726 505 510 505 731 731 12.3 3.4 4.1 3.5 12.1% 33.1 36.2 1.7 0.2 0.9 0.6 10.5% 7.0 7.4 39.1 13.5 8.5 8.1 31.2% 66.2 79.0 72 85 66 67 66 85 85 3.3 0.6 1.5 1.1 -21.2% 17.2 20.5 0.2 0.0 0.1 0.1 12.9% 0.3 0.5 26.0 5.6 7.9 7.2 407.0% 76.2 157.0 72 152 115 116 115 153 153 3.7 1.0 1.4 1.3 -5.6% 14.7 12.4 0.5 0.1 0.1 0.1 9.2% 0.6 1.1 14.6 4.7 6.0 5.9 296.6% 55.0 42.3 510 966 721 728 721 969 969 3.5 0.5 1.1 0.8 -23.8% 18.0 17.1 0.4 0.1 0.1 0.1 9.6% 0.6 1.0 24.5 11.2 119 11.6 480.7% 109.2 98.8 1075 1