Selling Your Business Blue Sky Version V1

Thinking About Selling Your Business or Growing

Through Acquisition?

A Discussion of Things to Consider

Merger & Acquisition Consultants Group, LLC

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Group, LLCMerger & Acquisition Consultants

Agenda

• Current Situation • Buyers • Preparing to Sell • Valuation Methodology• Case Studies• The Acquisition Process• Growth Thru Acquisition• Question & Answers

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Current Market Situation

• Market is Active – Industry Buyers– Private Equity

• Trends– Credit loosening?– “Overhang” of PE funding?– Threats to current value creation models– Aging of “Boomer” business owners– Expiration of current capital gains rates

• Valuations

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Sunair/Middleton

• Offer of $2.75/share X 13.1 Million shares = $36.0 Million

• Debt as of 6/30 = $15.6 Million• Total consideration = $51.6 Million• Revenues TTM 6/30 = $52.6 Million (down 18%

from $64.0 on 9/30/07)• EBITDA YE 12/30/2008 - $6.3 Million (8.2X)

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Types of Buyers & Motivations

Strategic Buyers • A cash flow stream• Customer density/fixed cost absorption• Improvement of overall profitability• Talent• Eliminate a competitor/keep from competitor• New market/geography entry • Improve their businessFinancial Buyers• An earnings stream• Industry entry

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What Buyers Are Looking For?

Operating/Financial Characteristics – Revenues (Trailing 12; Booked)– Revenue per customer/service mix; clarity– Pricing– “Adjusted” EBITDA– Predictability in performance; trends; candor

Non-financial Characteristics– Stability/reputation in the marketplace– Talent within the organization; “turn key”

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Preparing to Sell

“Always be prepared to sell your business, but operate it with the mindset that it will be yours forever”

•What are your objectives?•How do I achieve those objectives?

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Preparing to Sell

• What’s the curb appeal of your business?• Target a purchaser • Improve key business fundamentals

– Adjusted EBITDA– Customer count growth– Improve customer retention– Revenue per customer

• Unique competence • Eliminate deal breakers• Increased transparency • Corporate form (C vs. S, LLC)

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Issues With C Corp Acquisitions

• Most buyers prefer asset purchase– Avoid the perceived liability; unknown– Less complex due diligence; cost– Deductibility of goodwill (simple example, 1.0M, 500K goodwill, 100K tax benefit)– No governance required going forward; simply put the assets on the books

• C Corp shareholder prefer stock purchase– Dramatically more tax efficient for seller

• Intractable issues often prevent deals • In certain situations there are alternatives• Recommendation

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How Buyers Value a Business

• Multiple of “Adjusted” Cash Flow (EBITDA or EBITA)– Transparency of information is critical– Risk adjustment for retention or other perceived material risk– Synergies

• Strategic/inducement premium• Treatment of debt • Communicate as multiple of revenues; most readily understood

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External Factors

• Multiple buyers• Stability of potential buyers local operation• Legal/franchise conflicts• Strategic value of the marketplace• Macro-economic trends• Timing

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Valuation Range

• Lower retention• Lower pricing• Stagnant growth• Lack of transparency• Low curb appeal• Higher risk• Market economics• Unpredictable revenues stream

• Solid fundamentals• Need a platform• High transparency• Integration ease• EBITDA• High curb appeal• Market economics• Competitive buyer dynamics• Solid personnel• Lower risk

Low Valuation Premium Valuation

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Valuation Myths

• “It is worth that much to me ….”• “1.0 (or more) times revenue is the going rate”• “My business is unique……”• “I should be paid for the value of the synergies”

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Case Study # 1

• $6.0 Million in revenues; 6 locations• Top 10 companies; 3rd generation enterprise• Market expansion & entry• $6.0 Million all in• 10-12% EBITDA, not transparent, synergies not clear• Complex IT integration• Unique selling model; emphasis on commercial• Customer information, business metrics unclear • Only strategic buyer

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Case Study # 2

• $3.0 Million in Revenues• Market entry - strategic• Complex timing• Complex deal structure and due diligence• $4.5 Million• Entry into the 2nd largest lawn care market• Ease of IT integration• Prospects of future business relationship

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Case Study # 3

• $2.0 Million in Revenue; 15%-20% EBITDA• One major buyer precluded from the market• Not an attractive market• One major buyer needed a platform so strategic motivation• Strategic buyer made offer in 2002 of $2.1 Million; • Despite competitive situation, market economics; buyer

makes a compelling offer• Owner rejected offer, no sense of a plan• 2003 buyer began servicing select areas with small satellite• Owner came back in late 2004; buyer offered $1.5 Million

which was rejected• 2006 seller again initiates discussion; 2006 buyer is no

longer interested

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Case Study # 4

• $2.1 Million in revenues in a solid market• Buyer made an attractive offer • Potential seller indifferent; no counter• The financial situation changed for the buyer• Seller wanted to re-engage in October• Buyer would no longer interested for two reasons;

perception of gamesmanship and change in market conditions

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The Acquisition Process

• Confidentiality agreement• Worksheet & financial statements• Business analytics• First meeting • Term sheet, LOI, or other form of non-binding offer• Internal approval• Due diligence• Purchase document generation• Closing• Integration

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Employees

• Meeting as soon as possible• Buyer typically targets retaining customer level employees• MVR, drug screens, background checks• Compensation & benefits typically better• Career paths • Different expectations

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Growth Thru AcquisitionFundamental Questions

• How will acquiring another company improve your business

• What are you specifically trying to accomplish?

• How will you define and measure success?• Do you have an integration plan going in?• What is the degree of complexity?

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Understanding Key Metrics - Revenues

• Revenue mix; recurring vs. non-recurring• Service frequency and program design

similarity• Average annual revenue per customer• Pricing per service visit • Commercial vs. residential

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Understanding Key Metrics – Cash Flows

• Easily determined• Owner benefit• Market compensation package• Upside for improving current cash flow

without investment or major change to the business

• Financials transparent and format comparable

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Understanding Key Metrics – Retention

• Historical retention of the business• Are differences explainable and do they make sense?• What affect does pricing/service have? Low/low

model? Low/high model?• Service guarantees understandable, are they

important part of the value proposition, are they aligned, and impact of change?

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Integration ChallengesKey to Success

• Business model compatibility• Asset conversion• Ease of IT integration• Integration of previous years information• Brand integration/marketing & selling

processes

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Integration ChallengesKey to Success

• Talent to deliver the level of quality of service and upside

• How are decisions made currently?• Compensation and incentive symmetry• Performance standards and measurements• Ability to handle the transition issues

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Summary

• Buyers• Preparing to Sell• Valuation• Case Studies• Process• Employees• Key metrics & integration

Questions & Answers

Mark LongBlueSky Group, LLC

[email protected] - 614.448.6640

Fax – 614.659.9392

mailto:[email protected]

Selling Your Business Blue Sky Version V1

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