2018 Fall issue of Horizons

Fall 2018 A publication by RubinBrown LLP

The Growing Effect of Mergers & Acquisitions FEATURING u Seven Susceptible Areas for Post-Acquisition Failure

u How the New Tax Law Affects Mergers & Acquisitions

Featuring

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RubinBrown News

Chairman & Managing Partner John F. Herber, Jr., CPA, CGMA

Seven Susceptible Areas for Post-Acquisition Failure

Chicago Managing Partner Christopher J. Langley, CPA

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How the New Tax Law Affects Mergers & Acquisitions

Denver Managing Partner Michael T. Lewis, CFA, CGMA

Industry Updates

Denver Resident Manager Gregory P. Osborn, CPA, CGMA

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COLLEGES & UNIVERSITIES

PRIVATE EQUITY

NOT-FOR-PROFIT

The Emergence of Sell-Side Due Diligence Businesses are turning to sell-side due diligence to help better prepare for a sale.

Kansas City Managing Partner Todd R. Pleimann, CPA, CGMA

Prominent Mergers & Acquisitions in Higher Education

MANUFACTURING & DISTRIBUTION Manufacturers & Distributors Feel Impact of Mergers & Acquisitions The next wave of traditional ownership may be private equity or financial buyers. 33 Not-For-Profits Can Create Value through Strategic Restructuring Nonprofts consider restructuring techniques as economic challenges loom.

The college and university sector has felt the recent record-setting M&A activity.

Las Vegas Managing Partner Glenn L. Goodnough, CPA, CFE

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PUBLIC SECTOR

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CONSTRUCTION

Nashville Managing Partner Bryan Keller, CPA, CGMA

Consolidation: It’s Happening in Governments Too Local governments are consolidating to reduce overhead costs and achieve economies of scale.

Major Consolidation in the Construction Industry Increased spending and forecasted growth has created interest from private equity firms.

St. Louis Managing Partner Frederick R. Kostecki, CPA, CGMA

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HEALTHCARE

Editor – Dawn M. Martin Associate Editor – Farrell R. Clancy Art Director – Jen Chapman Designer – Brendan Coleman

Desire for Cost Savings and Changing Patient Preferences Drive Consolidation in Healthcare Hospitals aim to find cost-cutting measures to combat changing patient preferences.

Horizons , a publication by RubinBrown LLP, is designed to provide general information regarding the subject matters covered. Although prepared by professionals, its contents should not be construed as the rendering of advice regarding specific situations. If accounting, legal or other expert assistance is needed, consult with your professional business advisor. Please call RubinBrown with any questions. Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

www.RubinBrown.com

Readers should not act upon information presented without individual professional consultation.

Consolidation Remains the Trend All the statistics indicate the same trend, mergers and acquisitions in virtually every industry have continued to increase year over year. This year, in particular, has been steady, but momentous with the completion of many mega deals (i.e., Bayer’s $63 billion acquisition of Monsanto).

In the middle market, deal making remains healthy, with early estimates setting 2018 on pace with 2017’s record high.

Changes and evolutions in technology, along with globalization, have had a major impact on how companies operate. Technology acquisition now ranks as the top driver of merger and acquisition deals. Companies find that in order to compete it is easier to buy than to build. At RubinBrown, we too are seeing increased consolidation in the industries we serve. In fact, over the years we have solidified a team of advisers that focus on private equity firms and their portfolio companies across the country. We also help companies that are considering a sale, including assistance with buy and sell side due diligence, valuation, and more. This issue of Horizons provides key insights into the effect the increased mergers and acquisitions have had on the industries we serve. Please let us know if you have any questions as we continue to watch the trend and analyze its effect. We are working hard to make sure we’re serving you at the highest levels in this changing and evolving business environment.

John F. Herber, Jr., CPA, CGMA Chairman & Managing Partner

Pleasant reading,

At RubinBrown, we too are seeing increased consolidation in the industries we serve.

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RUBINBROWN NEWS

RubinBrown Moves Up to #42 Largest Firm in the U.S.

Inside Public Accounting published its annual “Top 100 Largest Accounting Firms” list in August 2018. RubinBrown proudly moved up four spots from #46 to #42. RubinBrown’s organic growth was up this year from the previous year, as well as heightened by the combinations of firms in the Las Vegas and Chicago markets.

Locally, RubinBrown ranks as the 11th largest firm in Denver, 10th in Kansas City, 2nd in Las Vegas, and 3rd in St. Louis.

RubinBrown News

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Jeff Albach Assurance Services Group Las Vegas

Becky Knezevich Assurance Services Group St. Louis

PROMOTIONS PARTNER

Stephanie Drew Business Advisory Services Group Denver

Mark Ommen Assurance Services Group St. Louis

Renita Duncan Assurance Services Group St. Louis

Andrew Schmitt Assurance Services Group St. Louis

Tim Kendrick Tax Services Group St. Louis

Jason Stalberger Tax Services Group St. Louis

Ethan Kent Assurance Services Group Las Vegas

CONNECT WITH US ON SOCIAL MEDIA We regularly post accounting and tax updates, as well as announce client seminars and other important and timely information.

Connect with RubinBrown Recruiting

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Jonathan Ahrens Business Advisory Services Group St. Louis

Corey Robinson Assurance Services Group Kansas City

PROMOTIONS MANAGER

Emily Buckley Assurance Services Group St. Louis

Lisa Sanford Assurance Services Group St. Louis

Daren Chesbrough Assurance Services Group Kansas City

David Schomer Business Advisory Services Group St. Louis

John Drury Business Advisory Services Group St. Louis

Andrew Sexton Entrepreneurial Services Group Denver

Max Haberkorn Assurance Services Group Denver

Jimmy Young Assurance Services Group St. Louis

Matt Hall Tax Services Group Kansas City

Kris Zeid Business Advisory Services Group Kansas City

Katie Kantor Tax Services Group Kansas City

Sam Zeller Assurance Services Group St. Louis

Hillary Ravellette Assurance Services Group St. Louis

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* New talent as of July 31, 2018

John Russo Wealth Advisory Services Group St. Louis

NEW TALENT PARTNER NEW TALENT MANAGER

Mike Goot Assurance Services Group Chicago

Teri Garrett Tax Services Group St. Louis

Kyle Bumpous Tax Services Group Nashville

Daniel Vukosa Tax Services Group Denver

RUBINBROWN WEALTH ADVISORS

The RubinBrown Wealth Advisors website features a convenient location to access service offerings, market and investment news updates, client resources and more. www. RubinBrownWealthAdvisors .com

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Mark Your Calendars Glean insight into the latest tax legislation. Learn more about how new accounting rules will affect your business. Find out how your organization can benefit from business strategies and innovative ideas. Throughout the year, RubinBrown is an excellent source for learning and insight.

Registration will be available five weeks prior to each event at www.RubinBrown.com/Events .

Accounting for Bankruptcy Attorneys Seminar Series – Part 2 DENVER OCTOBER 18, 2018 Denver Center

Year End Update DENVER DECEMBER 4, 2018 Denver Center KANSAS CITY DECEMBER 5, 2018 Overland Park Convention Center LAS VEGAS DECEMBER 11, 2018 Bali Hai ST. LOUIS DECEMBER 6, 2018 Donald Danforth Plant Science Center

Public Sector Seminar DENVER JANUARY 18, 2019 Denver Center ST. LOUIS JANUARY 30, 2019 RubinBrown Center

Accounting for Bankruptcy Attorneys Seminar Series – Part 3 DENVER NOVEMBER 15, 2018 Denver Center

Manufacturing & Distribution Summit KANSAS CITY FEBRUARY 12, 2019 Plexpod Westport Commons

SEC Update ST. LOUIS JANUARY 8, 2019 RubinBrown Center

Not-For-Profit Form 990 Seminar DENVER NOVEMBER 28, 2018 RubinBrown Center KANSAS CITY NOVEMBER 29, 2018 RubinBrown Center ST. LOUIS NOVEMBER 27, 2018 RubinBrown Center

Not-For-Profit Update DENVER JANUARY 30, 2019 RubinBrown Center

KANSAS CITY JANUARY 31, 2019 Overland Park Convention Center ST. LOUIS JANUARY 29, 2019 Donald Danforth Plant Science Center

RubinBrown News

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Why Good People at Great Companies Cross Lines and How to Prevent It

2018 ETHICS SEMINAR

Bob Greisman Managing Director RKG Business Growth Advisors

Denver October 25, 2018 7:30a – 10:00a University of Denver

Bob Greisman has become an expert in white-collar crime and the gray areas of ethics and the law by going from successful

Kansas City October 30, 2018 7:30a – 10:00a Plexpod Westport Commons

executive to federal inmate. Bob will share his personal, first- hand experience as a former partner at BDO and how his participation in the firm's tax shelter scandal has shaped his understanding of “the ethical edge” in everyday professional and business life. Topics include: ∙ The relationship of the legal and criminal justice system with the business environment and the impact on risk management ∙ Factors that influence responsible and ethical decision-making ∙ A first-hand account of the tax shelter scandal ∙ Identifying warning signs for potential unethical practices and examining the danger and difficulty in drawing ethical lines in everyday business practices

St. Louis October 31, 2018 7:30a – 10:00a The Ritz-Carlton Las Vegas October 24, 2018 7:30a – 10:00a Bali Hai

For more information or to register, visit www.RubinBrown.com/Ethics

FEATURE

Susceptible Areas for Post-Acquisition Failure

by Christina Solomon, CPA, CFE, CFF, CGMA

It’s a fact, in recent years, mergers and acquisitions (M&A) have become increasingly common. As businesses extend and take on new opportunities through M&A, they naturally become exposed to risk and the possibility of failure.

With more than 20,000 deals in each of the past four years, the M&A marketplace has seen an uptick of activity since the 2008 recession. Businesses are acquiring other businesses to enter new markets, gain buying and pricing power, tap into synergies and for a host of other reasons. All of these reasons have one main goal – growth.

In today’s age, however, as businesses grow and compete, some are left exposed to post-acquisition failure. Post-acquisition failure can be defined as any of the following:

∙ Acquirer needing to take a write-down

∙ Acquirer divesting shortly after acquisition

∙ Bankruptcy

∙ Cultural integration issues

∙ Exodus of talent from the acquired company

RubinBrown has highlighted seven areas that are most susceptible to post-acquisition failure and how these risks can be mitigated.

Revenue Recognition New revenue recognition rules, effective January 2019, overhaul authoritative guidance into one comprehensive framework for all private entities. For many businesses, revenue recognition is and will continue to be a complex issue in which several factors need to be considered. Revenue recognition is an integral part of any business, but one going through an acquisition that is seemingly providing growth can be especially complicated . It is essential to uncover revenue recognition practices of the acquired company in the due diligence stage to understand the differences between the two firms. Inconsistent practices that go unnoticed have the potential to lead to post-acquisition failure.

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integrate into the acquirer or continue to operate under its own systems. The likely path will be integration. Integration requires an understanding of both the acquired company’s systems and the acquirer’s systems. The company must first establish a strategy for converting the acquired company’s system into the acquirer’s system. Issues with convergence must be addressed, including consolidating financials and different methods of accounting. Any number of things throughout the integration process could fail, making it imperative that management understands the systems that are being integrated – especially those dealing with financial information. Lack of Due Diligence Financial statement misrepresentation is often cited when a fraud is discovered as part of a M&A transaction. This alone represents the importance of financial statement due diligence to try and avoid post-acquisition failure. Nonetheless, due diligence is often overlooked in the process. Due diligence, when performed by a third party, is transaction-based work that an acquirer can rely upon. Due diligence can include financial measures, such as a quality of earnings investigation, as well as non-financial measures such as related key observations of the business to be acquired. Financial due diligence will extract any one-time, non-business related expenses that will not be covered by the acquirer so as to represent fairly and accurately the true enterprise value of the company to be acquired. The information provided helps the acquirer benchmark future earnings, projects and performance objectives. In addition, due diligence provides an overall risk assessment of the company to be acquired and often exposes things

Revenue Recognition Resource Center Visit RubinBrown’s Revenue Recognition Resource Center for a series of articles on the new accounting guidance for revenue recognition in which the different aspects of the new standard are explored.

www.RubinBrown.com/RevRec

Inconsistent revenue recognition practices that could occur post-acquisition include:

∙ The acquirer must update the entire enterprise’s terms of shipping to include whether it is Free On Board (FOB) Shipping Point or FOB-Destination to ensure consistent practices in accurately booking revenue, inventory and shipping costs. FOB-Shipping Point allows the buyer to record the inventory the moment it is shipped. Conversely, FOB-Destination allows the buyer to book the inventory only once the goods are delivered. ∙ Strong cut-off policies coupled with month-end and year-end closing procedures could prevent timing issues. Fraudulent activity within timing issues include the acceleration or deceleration of revenue to meet sales goals, or smooth earnings and issues surrounding when to recognize revenue for a service firm. Systems Integration Post-acquisition transitions have the opportunity to make or break the success of an acquisition. One of the biggest pieces involved in the transition period, typically ranging from 6-24 months post-closing date, is systems integration. These systems include, but are not limited to, accounting systems, Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) systems.

The acquirer must decide how the acquired company will operate, if it will

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beneath the surface that the acquirer would want to know. Due diligence encompasses more than just financial information and should also include tax, legal and environmental concerns. Tax due diligence reports on the current and future tax liabilities of a business. Legal due diligence assesses contracts, loan covenants, changes in business structure (sole proprietorship, partnership, corporation, etc.) and all other legal matters. Environmental due diligence assesses real estate and the risks associated with potential contamination and usage. Not considering all elements of due diligence can adversely affect a transaction if risks and issues were to arise post-acquisition. Asset Management Fraudulent activities normally center on misappropriation of a company’s assets. Through an acquisition, it is imperative that the acquirer has a firm understanding of the acquired company’s assets (including inventory, intangibles and capital expenditures). Inventory levels should be investigated through financial due diligence to ensure that normal levels of inventory are being held and that the inventory does not include obsolete or damaged goods.

company’s books. A complete inventory count on the date of closing a transaction is a good practice for ensuring consistent inventory valuation. Intangible assets’ fair value needs to be determined. It is best practice to have an independent, third party value these intangibles so the acquirer may properly record their value. In the event that the acquirer is a public company, a purchase price allocation will be necessary to properly value the intangible assets. Capital expenditures (CapEx) need to be accounted for as well. An investigation into the acquired company’s future CapEx plans as well as an understanding of its capitalization policy should be undertaken. A capitalization policy outlines at what dollar threshold a company capitalizes an asset instead of expensing it. For example, a smaller company may have a lower capitalization threshold of $1,000 to not adversely affect its profit and loss (P&L), whereas a larger business may prefer a higher threshold of $50,000 since expensing expenditures under that threshold would likely not affect its P&L by a wide margin. As noted with intangible assets, it is best that an independent third party handle these offerings. It is important for the acquirer to determine its own capitalization policy going forward: whether continuing with the same or adopting a new policy post-acquisition.

Obsolete and damaged goods should be properly accounted for on the acquired

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Cash should be monitored closely in post- acquisition. To ensure an accurate cash balance, consider implementing a check writing system in which two signatures from higher management are required for checks above a certain dollar threshold. Also, if it is not already being performed, a monthly cash reconciliation should be performed to ensure the cash balance on the company’s books matches what is in the bank account. Proper asset management will help prevent post-acquisition failure. Financial Controls Financial controls can often be overlooked as part of M&A transactions. When companies are merged or grow larger through acquisitions, old internal control systems are often rendered useless due to the scaling of the new business. Maintaining an effective internal control environment is key in limiting risk and exposure to potentially fraudulent activity that would adversely affect a transaction. As part of the transition, leveraging the larger staff of the acquirer (especially in the accounting function) may help strengthen the segregation of duties to further prevent and deter fraudulent activity. The segregation of duties is an important aspect of financial controls. Within an accounting team, ideally separate people will maintain the payables, payments, purchases and receivables. When segregation of duties is not present, one can commit fraud through setting up phony accounts and paying him/herself. Employee Transition Through business acquisitions, some jobs and responsibilities are created while others are lost. It is advisable for the acquirer to continue with its standard on-boarding process for all new employees, including those that are transitioning over from the acquired company to make sure those employees meet the acquirer’s standards.

It is important for the acquirer to establish effective internal controls for all employees to limit their exposure to information and processes susceptible to fraud. Since many business acquisitions happen with small to medium sized businesses, the acquirer could effectively employ the use of earn-outs, bonuses or employment contracts to retain key members of the management team. This would allow the acquirer to incentivize transitioning to the new company and help it succeed in its first few years. However, the payment structures can be complex, subjective and require a great deal of judgment. In order to mitigate post acquisition failure, incentive compensation calculations, key impacts and areas requiring accounting judgment should be critically analyzed. Culture Integration Cultural integration goes hand-in-hand with the employee transition phase. Cultural integration cuts to the core and asks “Does this make sense?” and “Does the acquired company fit within the culture and dynamics?” Workplace culture in the modern business is a main driver behind talent acquisition and retention. Employees are not afraid to vote with their feet and move on to work somewhere else believed to be a better fit. With all the M&A transactions that occur in the marketplace, it is easy to forget that cultures matter. If two firms are merging that do not share a common culture, whether it is dress code, office socializing, etc., it can lead to post-acquisition failure.

Cultural integration often comes down to one factor – communication.

As businesses grow through mergers and acquisitions, it is so important to stay on top of potential areas of post-acquisition failure. Through good management and the use of an independent, third party to conduct

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varying levels of due diligence and investigation, an acquiring company should have a good understanding of the exposure to fraud and potential risks involved in going through an acquisition. The importance of financial measures cannot be overshadowed by non-quantitative data such as employee transitions and cultural integration. If these aspects are overlooked, the deal may be doomed before closing. Mergers and acquisitions provide an excellent way to grow, but when left unchecked in the post-acquisition stage they can leave the acquiring company reeling and struggling to make the acquisition a success.

It is important for the acquirer to establish effective internal controls for all employees to limit their exposure to information and processes susceptible to fraud.

MERGERS & ACQUISITIONS SERVICES GROUP

RubinBrown’s team of Mergers & Acquisitions professionals has the experience to help your organization successfully navigate the transaction process. From the initial thought to the critical activities that must occur, our comprehensive approach will provide you with superior quality and service. For more information, visit www.RubinBrown.com/MandA .

Ben Barnes, CPA, CGMA Partner-In-Charge Mergers & Acquisitions Services Group 314.678.3531 ben.barnes@rubinbrown.com

Christina Solomon, CPA, CFE, CFF, CGMA Partner Mergers & Acquisitions Services Group 314.290.3497 christina.solomon@rubinbrown.com

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FEATURE

How the New Tax Law Affects Mergers & Acquisitions Immediate Expensing of Assets Now Available in Asset Acquisitions

by Henry Rzonca, CPA

Not only did the Tax Cuts & Jobs Act, passed in December 2017, have a dramatic impact on taxation for both individuals and businesses, it also provides a significant opportunity for those looking to purchase a business.

Benefits of the new law provides an even more compelling reason for an acquirer to purchase assets rather than the stock or units of a business.

When purchasing a business, consideration must be given to whether the assets or the stock/units of the business are to be acquired.

Business Structure Matters How the business transaction is structured will result in a different tax treatment for both the purchaser and the seller, and can often result in a significantly different purchase price being negotiated depending on what is being acquired. When a purchase of stock (C or S corporation) or units (partnership or LLC) is made, the purchaser capitalizes this purchase price and creates basis in the investment with the purchase. The purchaser, however, has no way of realizing a deduction for the price paid. Only when (or if) there is a future sale will the purchaser benefit from having the basis in the investment through a reduced gain or increased loss on the sale. Contrast this treatment with an asset purchase and you find that when a purchase of assets is made, the purchaser will allocate the purchase price based on the fair market value of the assets acquired. Tangible Personal Property When an acquisition includes tangible personal property, the fair-market value of these fixed assets acquired may be written off immediately under the newly revised bonus depreciation rules. In addition, any excess of purchase price over the fair-market value of the assets acquired may, as always, be written off generally over a period of 15 years as an intangible asset. For tangible personal property acquired after September 27, 2017, the Tax Cuts & Jobs Act allows a 100% bonus depreciation. In a related change that impacts purchases of assets, bonus depreciation now applies to used property. As such, purchasers of fixed assets in an asset acquisition may now receive an immediate tax deduction for the fair-market value allocated to fixed assets.

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Impact of Fixed Assets What is good for the purchaser is not good for the seller. Sellers of assets have a reason why they would prefer less of the purchase price to be allocated to fixed assets. Any amount allocated to fixed assets over the net tax value of the assets sold must be

The gain is taxed at the entity level. In order to get the sale proceeds out of the entity to the owners of the C corporation, there will likely be a taxable dividend paid to the owners resulting in double taxation. Careful consideration must be given to what is being acquired when purchasing a business. The natural desire to purchase assets, enhanced due to the law change, could result in a higher purchase price than if purchasing stock/units given the difference in tax treatment.

“recaptured” with the result being ordinary tax treatment rather than capital gain treatment.

Also, if the business being acquired is a C corporation, the gain on the sale of the assets must be recognized by the C corporation which continues to be owned by the seller of the assets with the resulting tax being paid by the C corporation.

TAX SERVICES GROUP

RubinBrown works with our clients to provide tax planning opportunities integrated with business operations to contain or reduce tax function costs, and integrate bottom line results through tax savings and added value. For more information, visit www.RubinBrown.com/Tax .

Henry Rzonca, CPA Partner-In-Charge Federal Tax Services Group 314.290.3350 henry.rzonca@rubinbrown.com

Steve Brown, CPA Chair & Partner Tax Services Group 314.290.3326 steve.brown@rubinbrown.com

Tim Sims, CPA, CGMA Partner-In-Charge Tax Services Group 314.290.3434 tim.sims@rubinbrown.com

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Tax Cuts & Jobs Act Resource Center

RubinBrown’s Tax Cuts & Jobs Act Resource Center, dedicated to the most significant overhaul to the U.S. tax code in 30 years, shares news and important updates regarding the Tax Cuts and Jobs Act (H.R. 1).

Resources include:

∙ A comprehensive overview of the new tax law ∙ Industry-specific articles ∙ A rebroadcast of RubinBrown’s webinar detailing important changes in the new tax law

Visit the resource center at www.RubinBrown.com/HR1

The rebroadcast is available in the Tax Cuts & Jobs Act

Resource Center. Listen to the special two-hour roundup of the changes included in the new tax law that will affect nearly every household and business. Presented by RubinBrown’s tax experts.

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INDUSTRY UPDATE COLLEGES & UNIVERSITIES

Prominent Mergers & Acquisitions in Higher Education by Chester Moyer, CPA

D uring the first six months of 2018, a record $2.5 trillion in mergers and acquisitions were announced, according to The New York Times . Although this record-setting pace reflects dollars being transacted for control of for-profit companies, the general trend of increased merger and acquisition activity can also be observed in the not-for-profit and public (state and local) college and university sector. Although, for colleges and universities, this trend is happening on a slower and smaller scale and with notably less consideration paid out in the process, relative to the for-profit sector.

Higher education has recently seen mergers and acquisitions driven by a variety of motivations:

∙ To expand market share

∙ To defend against industry disruptors

∙ To realize synergies of more offerings to students than would otherwise be possible

∙ To realize efficiencies that result in cost reduction

∙ To continue the mission of a struggling institution

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A few examples of mergers and acquisitions in higher education in recent years highlight these motivations. However, even when a merger has the potential to achieve the desired motivation, there are potential difficulties to consider in the merger process. Purdue Acquires Kaplan In April 2017, the trustees of Purdue University formed a new nonprofit public benefit corporation of which Purdue is the sole shareholder and named it Purdue NewU, Inc. (in February of 2018, the name changed to Purdue University Global, Inc.). For consideration of $1.00, the new nonprofit agreed to purchase Kaplan University’s institutional assets and operations, which included its online programs and 33,000 students. From Purdue’s perspective the merger with Kaplan helped achieve its desire to expand its market, gaining immediate access to a large adult student population (over 60% of Kaplan’s student-body was 30 or older) and an increased online reach. The merger also helped Purdue defend against industry disruptors. In an interview with Bloomberg Businessweek , Mitch Daniels, Purdue’s president, commented on the potential for e-learning companies to disrupt the traditional on-campus educational experience. In an effort to compete with prominent e-learning companies such as Udacity, Coursera and Khan Academy, Purdue acquired Kaplan to deliver Purdue’s highly regarded brand on an e-learning platform that was already well scaled and established. Berklee & Boston Conservatory Merge In 2016, two prominent Boston area performing arts institutions merged. The Boston Conservatory (the Conservatory), founded in 1867, had an enrollment of about 730 students and an endowment of approximately $15 million. Berklee, founded in 1945, had an enrollment of more than 4,000 students and an endowment of $320 million.

The Conservatory recognized strengths in classical music and musical theater, while Berklee was recognized for its music business and contemporary music programs. After more than six months of exploring the consequences of a potential merger, the trustees of the two schools agreed to combine. In a document posted by Berklee to respond to questions about the merger, Berklee stated that the motivation to merge was not financial (and using publicly available IRS filings, a review of the financial condition of the schools supports that statement), but it was to benefit the student experience. Because the schools’ strengths complemented each other, the trustees believed a combined school could offer more opportunities to students than would otherwise be possible. aggressively consolidated institutions resulting in an estimated $24 million in savings since the consolidations began in 2011. As a chancellor oversees the Georgia system and the system does not require legislative approval to consolidate, the process of consolidation in Georgia for state colleges and universities is not as challenging as it might be in other states. The approach to consolidation has been to follow six principles that the regents of the Georgia system developed in order to objectively evaluate consolidation opportunities. The consolidations that have taken place tend to bring together complementary institutions in the same region or merging two-year institutions into four-year institutions. Due to the pace of consolidation in the state system in recent years, the system is revisiting the results in an attempt to identify inefficiencies from the resulting administrative set up. Georgia State Consolidation The University System of Georgia has

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Exempt Organizations New Tax Law Update – Taxation of Certain Fringe Benefits The Tax Cuts and Jobs Act (the Act), enacted

the same level of discussion as the changes to itemized deductions, but could have a material impact on many exempt organizations. The rules became effective on January 1, 2018 for all exempt organizations, regardless of the year-end of the organizations. Many exempt organizations are currently modeling through the potential implications of the new rules, including how increased UBI could impact budgets for 2018 and future years, estimated timing for federal/state UBI tax payments and internal changes in policies and procedures to mitigate the effect of the new provisions. It should be noted that many details and questions regarding the applicability of the new rules have not yet been addressed by the IRS, although guidance is expected at a later date.

in late 2017, was the most significant change in the tax law in over 30 years. Several provisions of the Act could have a direct or an indirect impact on not-for-profit/tax-exempt entities (exempt organizations). There has been much discussion about decreases in individual charitable giving due to changes in itemized deductions and greater applicability of the increased standard deduction for many taxpayers. The impact of these changes on donations to Section 501(c)(3) organizations could be realized by organizations currently and in the near future. Another change made by the Act is the cost of providing commuter transportation and parking fringe benefits to employees, which is now considered unrelated business income (UBI) to exempt organizations. This change has not created

AIB Folds Into State of Iowa AIB College of Business, founded in 1921, ceased operations on June 30, 2016, by donating its campus facilities to the State of Iowa Board of Regents. Roughly 1,000 students attended AIB, previously the least expensive private college in the state, and AIB had an endowment of about $6.7 million with $1.5 million of debt. Although AIB’s debt to asset ratio was above an acceptable threshold, something significant had to change because AIB was moving through cash at an unsustainable rate and the budget was not balanced. The trustees evaluated the donor base, the ability to increase tuition and the ability to secure additional debt, ultimately leading the trustees to determine that none of those options could be relied upon with confidence to support operations at a long-term sustainable level. The trustees of AIB also evaluated the density of competition of private higher education in the state of Iowa and determined it was such

a competitive environment that to ultimately succeed in the long-term, AIB would need a new strategy and an exceptional commitment to pull it off. The trustees noted that the land and buildings of AIB were in a desirable location, of good quality and the endowment was positive, affirming that it was in the best interest of the school to continue the mission of AIB by donating itself to the State of Iowa Board of Regents. As one AIB trustee commented, the donation to the State of Iowa Board of Regents was favorable because universities under the Iowa Regents would last “forever.” Potential Obstacles Even when a merger has the potential to achieve the desired motivation, there are a myriad of obstacles to consider in the merger process. Some obstacles include determining how the new entity fits, taking on additional debt

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because of the merger, maintaining the identities of the original merged entities, logistical space issues and new requirements to finish programs. The Purdue acquisition of Kaplan has not been well accepted by the faculty, as more than 300 faculty members signed a petition urging the Higher Learning Commission to block it. In addition, the University Senate has refused to endorse the acquisition. Purdue faces a long challenge to determine how Kaplan will fit, given the resistance from important constituents. The Purdue acquisition of Kaplan has an additional challenge – the Department of Education’s (ED) position that Purdue may not disassociate itself from the obligations Kaplan incurred prior to the merger. As with all merger negotiations, Purdue and Kaplan negotiated the terms of the merger, and they agreed to include a clause that states “…none of the Purdue Parties shall have or assume any Liabilities of (Kaplan)…” ED’s position comes from the perspective that it wants to be made whole on the loans it provided or subsidized through Kaplan prior to the merger. Bringing the responsibility for those loans to Purdue could impact how Purdue is able to participate in the ED’s loan programs in the future. The merger of Berklee and The Boston Conservatory addressed an issue of trying to maintain a distinct identity for the Conservatory, as many students and donors are proud of the Conservatory’s legacy.

Two ways that the issue of identity was addressed were by the Conservatory being called the “Boston Conservatory at Berklee” and graduates receiving a diploma with the name the Boston Conservatory at Berklee rather than Berklee. Mergers of campuses can create additional logistical issues with space, such as finding adequate parking. One of the ways that the University System of Georgia addressed this issue was by affecting the merger through shared programming and administration, rather than closing facilities. Keeping the facilities of the merged institutions open minimized the issues around having enough space to serve the students. The donation of AIB to the State of Iowa Board of Regents resulted in confusion on what steps were necessary to complete degrees from students of AIB who were unable to do so prior to its closure, how credit hours earned would be accepted and how additional or different degree requirements would be addressed. The answers to many of these questions, and similar ones, should be determined prior to a merger to avoid confusion and frustration. On the whole, mergers in higher education are happening for a variety of reasons that are generally in the best interest of the institutions and the constituents of those institutions, but those mergers often come with challenges that should be considered before the mergers take place.

COLLEGES & UNIVERSITIES SERVICES GROUP

RubinBrown’s Colleges & Universities Service Group provides a full range of assurance, tax and consulting services to colleges and universities. Our specialized services and expertise are delivered with close personal attention to our clients. For more information, visit www.RubinBrown.com/Colleges .

Brent Stevens, CPA, CGMA Partner-In-Charge Colleges & Universities Services Group 314.290.3428 brent.stevens@rubinbrown.com

Chester Moyer, CPA Partner Colleges & Universities Services Group 816.859.7945 chester.moyer@rubinbrown.com

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INDUSTRY UPDATE CONSTRUCTION

Major Consolidation in the Construction Industry by Chris Daues, CPA

T here is no doubt that construction activity in the mergers, acquisition and private equity space is more prevalent throughout most of the country than has been in many years. This prevalence is a positive trend for the industry as it increases opportunities for growth and offers more options with succession planning for construction business owners. As the result of a growing population in metropolitan areas and aging infrastructure, construction spending in the U.S. continues to rise. Per Baker Tilly Capital, LLC’s Engineering and Construction M&A Update: H2-2017 , construction spending totaled $648.8 billion

in the second half of 2017, which is a 12% increase over the first half of 2017 and a 2% increase over the second half of 2016. Overall, since the first quarter of 2012 through 2017, construction spending has steadily increased. Baker Tilly’s report also indicates that the American Institute of Architects (AIA) is estimating 4% growth for non-residential construction spending during both 2018 and 2019. The AIA’s forecast cited natural disasters, tax reform, infrastructure focused legislature and business confidence levels as reasons for growth in the engineering and construction (E&C) arena.

Major Consolidation in the Construction Industry

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5.6 TEV/EBITDA Additionally, employment can be a strong indicator of industry health. Per the 2018 Associated General Contractors of America (AGC) 2018 Construction Outlook National Survey , 26% of construction firms surveyed expect to increase employee count anywhere from 11% to 25%. Based on increased spending and forecasted growth, it should not be a surprise that private equity and M&A activity is alive and well in the construction industry. Private Equity Historically, private equity firms have not been heavily interested in the construction industry. General contractors (GCs) rarely garner private equity interest primarily because their project-based work does not generate a recurring revenue stream. However, the private equity market has become more interested in construction firms that specialize in certain niche areas (such as infrastructure, HVAC and electrical). Private equity interest in subcontractors is supported by time and material maintenance contracts, which consist of recurring revenue streams with long-term customers. Predictive revenue streams such as these long-term maintenance contracts are more attractive to outside buyers. Per Pitchbook , the number of deals closed in the E&C space increased from 48 to 65 from 2016 to 2017, which represents an approximate 35% increase. Additionally, the 6.2 5.8 6.0 5.35 6.1 5.65

ViewPoints Construction Services Blog View the latest construction industry topics and news by visiting www.RubinBrown.com/ViewPointsBlog

total value of these deals increased from approximately $3.2 billion in 2016 to $7 billion in 2017 (a 118% increase). Per GF Data, the multiples of earnings before interest, taxes, depreciation and amortization (EBITDA) to total enterprise value (TEV) for infrastructure and other specialty contracting E&C firms has continued to rise, nearing the peaks during the 2006 to 2009 time range. Specifically, specialty trade contractors are seeing multiples near six times, which is approximately a 5% growth from the 2010 to 2013 time frame. It is also approximately 10% higher than utility construction firms and approximately 13% higher than heavy and civil engineering construction firms. Mergers & Acquisitions If public company activity is any indicator, M&A activity will continue to thrive in 2018, specifically in the E&C space. Per FMI’s 2018 M&A Trends for Engineering and Construction Report , “more than 20% of all M&A activity in the engineering and construction industry in 2017 had a public company buyer, which is the highest level since 2011.”

Construction Multiple by Year

5.925

Heavy & Civil Engineering Construction

Utility System Construction

5.4

5.4

Specialty Trade Contractors

5.25

5.25

5.3

5.2

5.15

5

2006 – 2009

2010 – 2013

2014 – 2017

Source: GF Data

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Annual U.S. Total Construction Spending

$94 trillion on infrastructure by 2040 to meet demand.” Based on this forecast demand, M&A activity should continue to increase in the infrastructure niche. GCs have not historically been attractive acquisition targets, however as they look to diversify revenue streams and integrate business lines, the acquisition of a specialty contractor could make sense. RubinBrown is seeing more of these deals throughout the country, helping GCs increase margins by self-performing certain work while diversifying their revenue streams. Similar to the cyclical nature of the construction industry, it is not expected that the increased activity will continue in perpetuity. However, both the M&A and private equity space offer new avenues for construction firms to divest, diversify and grow. These opportunities should continue to be an attractive option while the economy is strong.

$1,300

$1,200

$1,100

$1,000

$900

$800

CONSTRUCTION SPENDING (MILLIONS)

$700

$850.5

$906.3

$1,005.6

2015 $1,113.6

2016 $1,191.8

2017 $1,246.0

2012

2013

2014

Source: U.S. Census Bureau

The activity has continued into 2018 with Granite Construction and Layne Christensen Company announcing a $565 million deal. Given the world’s growing population and aging roads and bridges, the need for construction firms with a focus on infrastructure continues to grow. FMI’s report also indicated, “the world will need to spend

CONSTRUCTION SERVICES GROUP

RubinBrown provides services to general contractors, specialty subcontractors and related companies in the construction industry. For more information, visit www.RubinBrown.com/Construction .

Ken Van Bree, CPA, CGMA Partner-In-Charge Construction Services Group 314.290.3429 ken.van.bree@rubinbrown.com

Mark Jansen, CPA, CGMA Partner Construction Services Group 314.290.3208 mark.jansen@rubinbrown.com

Matt Beerbower, CPA Partner Construction Services Group 303.952.1252 matt.beerbower@rubinbrown.com

Chris Daues, CPA Manager Construction Services Group 303.952.1276 chris.daues@rubinbrown.com

Chris Coleman, CPA, CCIFP Partner Construction Services Group 314.290.3263 chris.coleman@rubinbrown.com

Major Consolidation in the Construction Industry

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INDUSTRY UPDATE HEALTHCARE

Desire for Cost Savings and Changing Patient Preferences Drive Consolidation in Healthcare by Tom Zetlmeisl, CPA, CFE, CFF, CGMA & Zach Goers

O ver the past decade the healthcare industry has gone through a period of noteworthy consolidation. The increase in deal activity that has taken place in the wake of the Great Recession and the implementation of the Affordable Care Act (ACA) in 2010, is largely in response to healthcare providers looking to lower costs, as well as meet the shifting demands of patient care preferences. The ACA, also commonly referred to as Obamacare, was enacted to expand healthcare coverage and also improve and reduce the costs of healthcare services. With more patients having the ability to obtain

health insurance, hospitals are expected to reduce the amount of free or un-reimbursable services provided to patients. Reimbursements from Medicaid, Medicare or other healthcare insurers are, to some extent, based on the hospitals’ care quality, as determined by certain metrics, such as readmission rate. These new outcome-based reimbursements are meant to improve the overall quality of care. Economies of Scale In order to combat some of the challenges imposed by the ACA, hospitals have been consolidating to create economies of scale.

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By consolidating, hospitals have looked to spread out fixed costs across multiple locations, as well as begin to develop and implement new standardized care processes that provide patients less costly and more effective medical care. During the period of 2010 to 2016, there was an uptick in hospital transactions when compared to the prior period. In 2010 alone, hospital transactions saw a 39% spike from 2009, which peaked in 2013, reporting 71 total transactions. The decline in hospital transactions by year since 2013 could be the result of an inability of hospitals to consolidate further, as well as the shift in focus to acquiring and opening urgent care and outpatient facilities to meeting patient preferences. The Rise of Urgent & Outpatient Care Patient care preferences have changed recently and now more than ever, patients prefer the services of outpatient, urgent care or even home healthcare services. In recent data produced by the Agency for Healthcare Research and Quality, inpatient hospital stays have declined steadily by 6.6% since 2005. This decline in overnight hospital stays is a result of the convenience, flexibility and affordability of outpatient and urgent care centers when compared to hospitals. These facilities provide patients the opportunity to receive medical treatment at a location that is more convenient, closer to home and saves patients time and money by avoiding overnight hospital stays. To reduce the impact these non-primary providers have on hospitals’ financial performance and utilization, hospitals and healthcare providers are beginning to acquire or open their own urgent care or outpatient facilities. By tapping into this growing market, hospitals and primary care providers hope to fill the void of empty beds and begin to regain lost market share. Similar to the number of hospital transactions, the yearly number of outpatient care transactions flourished beginning in 2010. Throughout the same period, the yearly

Healthcare Transactions by Year

0

30

60

90

120 150

180

56 43 99 31 33 64

2008

2009

70 46 116 72 61 133 70 59 129 69 71 140 68 56 124 66 64 130

2010

2011

2012

2013

2014

2015

51 45 96 47 31 78

2016

2017

Outpatient

Hospital

Total

Source: Capital IQ

26 Desire for Cost Savings and Changing Patient Preferences Drive Consolidation in Healthcare