Understanding and Maximizing Business Value

Understanding and Maximizing Business Value

Michael F. Coyle, CBIPrincipal/Exit Planning Advisor, CenterPoint Business Advisors

Michael F. Coyle, CBIPrincipal, CenterPoint Business Advisors, Inc.Exit Planning Advisor, Business Enterprise InstituteCertified Business Intermediary (CBI) Awarded by

the International Business Brokers AssociationMBA – Boston College, Carroll Graduate School of

ManagementSerial Entrepreneur

Center Point Business Advisors, Inc. assists the owners of small to mid-sized businesses in planning for and executing the most important financial event of their lives...the inevitable exit from their business.

• Advisory Market Valuations• Certified Business Appraisals• Machinery & Equipment Appraisals

• Value Drivers & Detractors• Strategic & Project Specific

•Sale to 3rd Parties• Transfer to Family, Employees or Partners• Recapitalization with Private Equity

During This Session You Will Learn:What is the Underlying Purpose of your BusinessWhat is the Reality for Most Small Business OwnersWhat are the Components of Business ValueWhat are Common Value Drivers & DetractorsKey Strategies for Improving Business ValueExiting Your Business is Inevitable, Plan for It

The True Purpose of Your BusinessIs to Give You LifeMichael Gerber, The E-myth Revisited, other E-

myth BooksThe Entrepreneur * The Manager * The

TechnicianRun your business to exit it, realize value to

support your life’s objectives Importance of creating systems & extracting

the business owner from the day-to-dayWorking “ON” and not “IN” your business

The Reality For Business OwnersExiting your business is Inevitable and the largest

value detractor is often what the owner IS or IS NOT doing.

80% of business owners exit their business to retire, they are not serial entrepreneurs

Their principal fear is “will I have enough money so that I can fund my retirement lifestyle without running out of money”

Other considerations may includewealth transfer to the next generation, charitable giving,and minimizing taxes

The Reality For Small Business Owners (2)Typically 50-75% of a business owner’s net worth is

in their business assets. The balance is in their personal real estate & financial investments

Business owners typicallyonly have ONE chanceto monetize their largest asset

Equities

Real Estate

Business

The Reality For Business Owners (3) Most business owners have only an anecdotal perception

of the value of their business

“My brother in law knew a guy who had a business like mine that sold for…”

Relying on this type of perception can leadto large gaps in future wealth and quality of life

The Reality For Business Owners (4)

85% of all small business owners do not have an exit plan, a wealth management plan, and/or an advisory team to assist them

Very few start the process early enough to achieve the maximum benefit of valuation and exit planning

Typical Business Owner ConcernsWho should I transfer my business to?

Family, Employees, Partners, a 3rd PartyWhen is the right time to leave my business?What is my business really worth?What is the right deal structure?

Tax avoidance vs. future riskHow do I ensure that I meet all of my future goals and

expectations?

There Are Only 4 Places Your Money Can Go

An Exit Plan will let YOU decide where your hard earned assets end up!

The Exit Planning Process

Why Value Your Business?Business & Financial PlanningEstate & Trust PlanningEmployee Stock Ownership Plans (ESOP)Partnership AgreementsLitigation & DisputesCreating an Exit Strategy

Value is in the Eye of the Beholder Individual/LifestyleFinancial IndustryStrategicRelated Parties (KEG or Family)

Business Value Components

Value Drivers & Detractors

Value = CF * MSimple Right?The Complexity is in the Subscripts

Value = CF (s), (t) * MSustainableTransferable

What Is A Business Valuation?Both a Product and a Process

Business valuation vs. a real estate appraisal

Significant value is in the Process

What Is A Business Valuation? (2)Process is a multi dimensional analysis of your business from the

Buyer’s Perspective

Financial, lifestyle, asset, risk & growth attributes Identifies what adds to and what detracts from valueUsually this leads to a handful of items that could greatly

improve value

Form of limited scope appraisal that determines a “Most Probable Selling Price” at a point in time (vs. “Fair Market Value” standard)

What Is A Business Valuation? (3)Determines economic benefit of ownership and not

tax value Goals are to minimize taxes and maximize economic

benefit

Measures your business against the industryTool for improving the business and maximizing value

What Is Valued?Tangible Assets

Leasehold Improvements Equipment, Furniture &

Vehicles Inventory, Accounts Receivable

Intangibles Goodwill (vs. “Blue Sky”) Patents & Copyrights Controlled Territories,

Product/Service Niche Customer & Supplier Contracts

What Are The Benefits of A Valuation?

Demystifies the value of your business Establishes a baseline for comparison in the futureMeasures returns on equity, assets, & timeProvides valuable data for an Exit Planning ProcessProvides tools to control where your

investment is going

What Kind of Valuation is Appropriate?

Price Opinion Based upon broad “rules of thumb” For the “curiosity seeker”

Business Valuation “Most Probable Selling Price” Multi dimensional analysis Information for planning and

control & decision making

Fair Market Value Appraisal Tax, litigation, refinance

Who to Select for the Business Valuation Process?Accountant/CPACertified Business Broker/Valuation

ProfessionalLicensed Commercial Appraiser

With the proper training all can do the work.

Select a professional who can best understand the industry and find the value builders and detractors

Business Valuation

Exit Planning: Key to Value Realization

Demographics are changing Aging population of baby boomer business ownersMore than 8.4 Million Business owners will seek to exit

their business in the next 10-12 years. (70%)Many businesses are still based in an “old economy model”Next generation of buyers want “new economy models’Supply of Businesses for sale will outstrip DemandOnly those business owners that Plan will be successful

From The Endless Focused Work in Building Your Business…

...To Achieving Your Life’s Next Goals

Takes A Cohesive Team Approach

Your Legal & Tax TeamYour Wealth Planning TeamYour Business Advisory

TeamYour Business Intermediary

Team

You!

Step One: Identify Exit Objectives“When a man does not know which harbor he is heading

for, no wind is the right wind.” - Seneca

Step One: Identify Exit ObjectivesUniversal ObjectivesHow much longer does the owner want to work in the

business before retiring or moving on? _________ yearsWhat annual after-tax income does the owner want

during retirement (in today’s dollars)? $_________To whom does the owner want to transfer the

business?Family?Co-Owner?Key Employee(s)?Outside party?ESOP?

Step One: Identify Exit ObjectivesWorking with a Team of AdvisorsNo one professional has all the answers.Diverse skills and talents are necessary.Team approach minimizes time and cost.

If properly facilitated and led.

Step One: Identify Exit ObjectivesWho is on the Advisor Team?

Valuation SpecialistBusiness Intermediary Investment BankerBusiness or Management

ConsultantBankerExit Planning Advisor

Financial Planner Insurance Advisor Investment AdvisorBusiness AttorneyEstate Planning AttorneyCPA/Accountant

Step Two: Quantify Business and Personal Financial Resources

“Beauty is in the eye of the buyer.”

Personal Wealth PlanHaving a Post Retirement Plan on How to Support Your

Lifestyle Delivers “Peace Of Mind”Personal Wealth Plan + Business Value = Retirement

Income Plan

Business ValuationBenefits to the OwnerProvides a baseline business value by

projecting cash flow.Measures business and personal resources

both today and as a basis for future projections.

Allows you to monitor progress toward your stated objectives.

Business Valuation (2) Identifies what is being sold

Inventory, Equipment, Real Estate, StockEstablishes profitabilityAssesses risk Identifies value driversScans marketplaceConsiders financing strategiesEstablishes relationship between earnings and valueShould be done Cyclically with business planning

Step Three: Maximize and Protect Business Value

“Making a silk purse from a sow’s ear.”


Benefits to the OwnerGrow business value and intangible value of the business.Reduce income taxes upon sale of business.Protect assets from potential business and personal

creditors.Create ability to sell the business.Motivate and keep key employees.


Promote Value Through Value Drivers

Focus on increasing cash flow.Develop operating systems that improve

sustainability of cash flows.Solidify and diversify customer base. Implement strategies to grow the company. Improve company performance as

measured by industry metrics.Build a solid management team and

groom a successor.

Business ValuationFinancial statements are key!

EBITDA multiples Discretionary income multiples Cash and non-cash add backs Value derived from market data

Strategies for Maximizing ValueValue your business early… and oftenFocus on implementing business

improvementsCreate and participate in your own

Exit Planning ProcessWealth Management TeamLegal & Tax TeamBusiness Advisory & Intermediary Team

Step Four: Ownership Transfer to Third Parties“Making a mountain out of a molehill.”

Step Four: Ownership Transfer to Third Parties

Benefits to the OwnerCash at closing.Eliminate financial risk.No family succession issues.Speed of exit.


Third Party Sales – Not Just About the BusinessAbility to sell and business value are determined by:

Intrinsic Value: the value drivers.Extrinsic Value: the value the market places on the

business.Effectiveness of the sale process.


Current M & A MarketplaceOf businesses with sales of less than $10 million per year,

20 percent are for sale, but only one out of four actually sells.

Businesses with sales of $10 million per year aren’t much better – only one-third sell.

Above $10 million per year, the odds improve to 50-50.

Step Five: Ownership Transfer to Insiders“Making a molehill out of a mountain.”

Step Five: Ownership Transfer to Insiders

Benefits to the OwnerAchieves Exit Objective of:

Selling to Key Employee Group (KEG). Transferring to a Family Member.

Motivates and retains key employees.Planning reduces risk and increases amount of money

received.

Family Owned BusinessesKeeping the Family Peace while Growing Business Value“Many Hats” ProblemFewer than 50% transfer to 2nd Gen and less than 20% to

3rd GenSpecial Considerations

Estate PlanningLeadership DevelopmentChoosing AdvisorsCompensation & PerformanceStrategic Planning

Step Six: Business Continuity Planning“Making sure the business continues when the owner

doesn’t.”

Step Six: Business Continuity Planning

Benefits to the OwnerObjectives can still be achieved if you don’t survive your

exit.Retains ownership and control of company if co-owner

departs.Can force non-contributing owners to leave the business.Provides consistency between lifetime and death

objectives.Ensures survival of the business for the benefit of others.Results in family receiving value of owner’s interest, in

cash.

Step Seven: Personal Wealth and Estate Planning“When the ‘slings and arrows’ of outrageous

fortune befall you, fight back.” - William Shakespeare (Hamlet)

Step Seven: Personal Wealth and Estate Planning

Benefits to the OwnerPreserve wealth, minimize taxes using both

lifetime and death planning tools. Coordinates and integrates lifetime exit

objectives wishes with estate plan. In effect, estate planning becomes part of

business and exit planning.

Key StrategiesImproving Business Value

Manage Value as Seen By The MarketPositioning in the market place

Strategic buyersIndustry buyersFinancial buyers

Business continuityBalance short term and long term business needsEmployee development and mentoring


Good Planning Eases AdversityOwner illnessDivorceDeathDisabilityLitigation


Reduce Business Viability ConcernsPerformance relative to benchmarks

Revenues and revenue trendsIncome and cash flow trends

Expansion potentialCompetitive advantages

Core competenciesCompany Culture

Owner dependenceIs the owner the business?

Key StrategiesImproving Business Value (2)

Financial ConcernsNeed for good & accurate record keepingPositive cash flow and focus on value not tax

minimizationRealistic growth strategies

Valuation and Price justification3rd party valuationReturn on Investment to buyerPayback periods in years


Owner’s RoleDelegate more effectively

Reduce reliance on business ownerFormal employee training

Succession/Exit PlanIdentify and groom a successorDeveloping & Mentoring key personnel

Succession takes time and effortComplex mix of potentially conflicting issues


Partners and EmployeesExecute agreements with partners

Buy/sell and buyout agreementsEmployee dependency

Employee tenure/turnoverEmployee contracts401(k) plans to keep employees

Human resource documentationEmployee handbooksJob descriptionsPersonnel files


Operational ProcessPolicies and procedures

ProcessesCore activitiesSystems (consistency of quality, customer service)Equipment Maintenance

Technology and Web PresenceIT currentWeb links to the world


Operational Process (2)Streamline processes

Evaluate each product or service to verify contribution to bottom line

Outsource non-core activitiesAnalyze and outsource activities that can be obtained

cheaper on the outside Inventory Control

Inventory turnover relative to industry standardsReview methods (FIFO, LIFO, etc.)


SuppliersSupplier relations

Supplier/approval selection processLong-term contract benefitsOwner dependent relationships

Cost of input materialsReview frequentlyRenegotiate if necessary


CustomersRetention

Friends or relatives of ownerCustomer service and supportCustomer loyalty

Limit Customer Concentration80% of revenue concentrated around a small group of

customers20% of business concentrated with one customer

Reevaluate Marketing/SalesDirectReps & AgentsInternet – new channels


Marketing and AdvertisingEnhance marketing strategy/plans

AdvertisingTrade ShowsInternetBrand Awareness and P.R.Clear and consistent message/value propositionDifferentiation


CompetitionKnow your competition

Use industry groupsAsk your customers

Know what they do differentlyArticulate your advantages and disadvantagesPricing strategies

Learn from competitorsBenchmarkBorrow good ideas


Legal Issues Intellectual property…is it secure?

Patent, copyright and trademark applicationsLitigation issues

Settle all litigationResolve all product liability casesResolve all insurance claims

Form of incorporation pros & consC-Corp, S-CorpLLC, PartnershipProprietorship


Regulatory IssuesClear environmental complianceHave environmental review by reputable firmReview all permits and licensesOSHA issuesPending zoning issues

The vast majority of owners are unaware there is a specific planning and implementation process that can help ensure they achieve

their objectives.

Most business owners spend more time planning a family vacation than how to build value and exit

from their business.

This is not due to a lack of desire or intelligence. It is simply because they don’t know how or where to begin.

Get Started with Maximizing & Realizing the Full Value of Your Business

Read my Newsletter, Exit Planning Review on Value Building, Bi-monthly advertising-free subscription

Explore the handout materials and try out the questions in the Business Owner Exit Planning Checklist

Contact me for a FREE copy of How to Run Your Business So you Can Leave It In Style by John Brown

Read White Paper “Inevitabilities” and contact me for copies of other topics or FREE assessment.

Understanding and Maximizing Business Value

Business

Transcript of Understanding and Maximizing Business Value