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VR Business Brokers 2/17/2009

Copyright VR Business Brokers 2009 1

VR Business BrokersSelling Your Business…

What every Owner needs to know

Page 2Copyright VR Business Brokers 2009

Today’s Agenda8:30 Greeting & Coffee9:00 Preparing to Sell – Your Exit Strategy9:15 Selling Your Business

9:15 What Buyers Want9:30 Valuation, What is your business worth?9:45 Financing & Deal Structure10:00 Deal Examples

10:30 – 10:45 Break 10:45 Your Exit Strategy – Post Sale

Investment Strategies11:45 Q & A


Why Develop an Exit Strategy?

An Exit Strategy will…Increase the price you realizeReduce your time on market Increase the odds of a successful saleMay lead to qualifying the business for an SBA loan and reduce or eliminate the need for Seller FinancingReduce your tax liabilityKeep your options open – you have nothing to lose and everything to gain $$$




Exit Strategy Steps to Success

Meet with a Professional VR

Intermediary

Business is confidentially

marketed

Buyer Mgmt, Offer, Deal Structure

Sale is Closed !

Meet with Professional

Financial Advisor

Develop FinancialStrategy

You decide it’s time to develop an exit strategy.

Post Sale Financial & Investment

Management

Meet with Professional Tax

Advisor

Develop Tax Plan with VR

& Tax Advisor

Deal Structure with offer &

escrow

Due Diligence, Financing,

Escrow


Preparing to Sell


Preparing to Sell:Maximizing the Value

How do I prepare to Sell?Maximize EBITDA/SDE for 2 to 3 years$Every extra $ of EBITDA = $2 to $4 in your pocket$Likewise, every $ of decline in EBITDA is $2 to $4 off your selling price, or more!

Growth – buyers love a growing businessClean up the office & building

First impressions are critical and hard to change.




What is EBITDA & SDE?

EBITDAEarnings Before Interest Taxes Depreciation & Amortization

EBITDA = Pre Tax Profit + Depreciation + Amortization

SDESeller’s Discretionary Earnings

SDE = Pre Tax Profit + Owner’s Salary & Benefits + Depreciation + AmortizationOr SDE = EBITDA + Owners Salary &

Benefits

aka DE, SDC, FCF, Owners Benefit, etc.


What is SDE?A Seller’s Discretionary Earnings is measure of the total financial benefit accruing to the owner of a business.

SDE is Calculated as follows (simplified):+ Pre Tax Net income+ Owner’s salary+ “Discretionary expenses” or perks+ Non-cash expenses (e.g. amortization & depreciation)+ Interest expense+ Non-operating expenses + Non-recurring/one time expenses

= SDE (Seller’s Discretionary Earnings)


Preparing to Sell: Books & Records

Your financial records (books & records) determine the value or your business, the value or amount of an SBA loan for the business, and ultimately may determine whether your business is sellable or not.

P&Ls must match tax returnsALL expenses must be documentedALL income must be documentedIf it isn’t documented it did not happen.




Preparing to Sell: Infrastructure & Systems

Infrastructure & Systems are vital to a successful transition and also key to selling the business. Buyers are concerned about their ability to take over and “replace” the owner without impacting revenue, profits, or the business.

Managers, Supervisors, LeadsSystems, procedures, documentation, trainingVendor/Supplier agreements


7 + Ways to Increase the Value of Your Company

1. Maximize SDE for 3 years2. Growth – growing businesses get a premium3. Books & Records - show ALL revenue &

expenses, ensure it is easy to follow/understand4. Prepare for new management & transition5. Training - train your staff for day to day ops6. Documentation & Procedures7. Spring Cleaning

Meet with a Professional Business Broker


Exit Strategy – Post Sale

How do I minimize my taxesDevelop a plan to minimize taxes from the sale of your business.

Review with a CPA that is familiar with Tax planning for business sales.

If you get a “standard” answer without careful analysis, get a second opinion.

Develop a plan to maximize the return on your proceeds and minimize the taxes.

More on this later…




When & Why to Sell

The best time to sell is whenSales and Profits are peaked or nearly soThe company is operating well & shows stability

Why to SellRetirementReduce your riskCash outNo Successor


When Not to Sell

You waited too long if:Earnings have dropped substantiallyYou must sell “quickly”Your competitors have already passed you by

You should wait if…You expect substantial growth soonYou KNOW things WILL improve


When to Sell Anyway

You should move on and sell if:Earnings are not likely to improveCompetition is growing strongerMarket is getting weakerProduct pricing and margins are erodingYou are burned out and simply aren’t willing to do what needs to be doneIf health or age are a concern and a successor is not in place




Selling Your Business


Why Buyers Buy

Top Reasons for Buying a businessCash FlowGrowthROIStrategic Fit (typically larger deals)Taxes (typically larger deals)Intangible Assets

Patents, Trademarks, Technology, Brand Names


What Buyers Want

Good Books & Records3 Years P&Ls and Tax Returns

Good Earningsmust be able to support debt service, buyers income & a return on investment

Good Price & TermsMarket price, sensible earnings multiplesSBA or Seller Note Financing

Easy or Manageable Transition




The Business Value Pyramid

Level of Risk

Seller’s Discretionary Earnings

Terms

Desirability/ Strategic Value


Decisions, Decisions…

Buyer’s have choices…Buy your businessBuy another businessKeep lookingDo nothingPassive investment

Buyers face tough decisions with limited information and great potential risk.


Valuation – A Buyer’s Perspective

The 2 X Myth…Popular belief with buyers is ALL that businesses sell for 2X earnings.

What earnings?SDE? SDE + inventory?EBITDA?Pre Tax Profit?

Myth has a basis: overall average is 2X SDEActual selling prices range from as low as 1X to

over 4 X SDE and as high as 5 X EBITDA




Seller’s Valuation Methods

I know what my business is worth:I checked the newspaper ads & internetMy accountant told me…My attorney told me…A friend told me…It would cost more than that to start one…I invested that much and it has potential!

Sellers Valuation Equation:Original Investment+Salary+Inventory+All Assets+Whatever I Want = Selling

Price


Pricing Rules of Thumb

Some typical pricing multiples are:SDE 1.5 X to 3 X Overall Average SDE = 2.15 XEBITDA 3 X to 5 XAverage EBITDA = 4 X

Multiples vary by industry type, business size and earnings level.

* Does not include real estate, and may not include A/R and inventory


Business Value Examples

Some Typical Values from Sold CompsServices 2.2 X to 3 X SDEManufacturing 2.5 X to 3.5 X SDEDistribution 2.5 X to 3 X SDE + inventoryRetail 1.0 X SDE to 2 X SDE + inventoryPrinters 1.8 X to 2.25 SDEExceptions to the rules…

Flower Shop sold for 10X earnings!But it was only earning $5,000

Industry averages presume the business is operating at industry norms




Recasting the Financials

The financial statements (e.g. P&Ls and tax returns) must be recast to reflect the company’s true earning power, SDE. Recast financial statements provide buyers with a common baseline to compare earnings from different businesses to each other as well as way to calculate their potential earnings.


Business Value Economics


Business Value vs. SDE

$0$200$400$600$800

$1,000

$50 $100 $150 $200 $250 $300Seller's Discretionary Earnings ($000)

Bus

ines

s Va

lue

($00

0)

Typical Minimum

Typical Maximum

Overall average business value is 2.1 X SDE, typical SDE multiples range from 1.5 X to 3 X SDE + inventory value.




Do I Need a Valuation?

What about “Valuations” and Appraisals?You definitely need a Valuation if:

DivorcePartnershipTrustEESOP

Recommended for businesses over $1 million salesSupports best value, eases negotiationsTypical valuation costs run from $1,000 to $5,000, and can exceed $20,000 for complex or large deals


Do I need a Valuation?

You don’t necessarily need one ifBusinesses less than $1 million sales.The market value opinion from your advisors

makes sense to you.You are only interested in selling the business.

Valuation will not be very useful if:Poor books and records or poor tax returns.Less than 3 years of financial history.


Valuation Methods

Valuation Methods – the most common:Comparative Method (aka Market Data)Cost ApproachExcess Earnings (aka Income Capitalization)True Selling Price (Tetreault & Clements)Final Price Method (B of A)Weighted AverageRule of Thumb Approach




Financing & Deal Structure

There are only 2 real choices for Small Businesses:

SBA Loan – will finance 75% of dealSeller Note – typically 30% to 50% down with a 5 year, 8% note. Also can supplement SBA loan to lower down payment i.e. 10% to 15% down. All Cash – rarely occurs, and usually at the expense of the asking price. Odds are better with a lottery ticket!



M&A Financing – a bit different, but…Still Rarely ALL cash.May still require a Seller note.Often includes earnouts such as employment contracts, severance, non-compete, consulting, commissions, bonuses on sales or other targets, etc.May include Stock Deal is generally too big for SBA loans, must use other debt financing.


Seller Risk & Selling Price vs. Down Payment

0%

20%

40%

60%

80%

100%

0% 20% 40% 60% 80% 100%

Down Payment (as % of Asking Price)

Selli

ng P

rice

& R

isk

vs. P

oten

tia

TheSweet Spot

(15-30%Down)

Selling Price as a Percent of Potential

Seller Risk as a Percent of Maximum




Cash vs. Leveraging

All cash deals rarely occur. Here is why…

Buyers realize a significantly higher net income with the same cash invested in deals with financing (leveraging).Buyers can double or triple their net after debt service with leveraging.


Cash vs. Leveraging

SBA financing + a small Seller note makes an attractive package for buyers.

Buyers can buy a larger business with less cash upfrontHigher ROE and higher net after debt service, even if they pay more for the business!



Stock vs. Asset SaleMost deals are Asset salesAsset sales are

Simpler to concludeMore favorable for Buyer for taxesLess favorable for Sellers for taxes

Tax strategies can reduce tax liabilitySuccessor Liability – reduced risk

Stock Sales areMore favorable for seller – taxesLess favorable for Buyers – taxes, liabilities, etc.Successor Liability issues




Deal Examples: Small Business #1

Service company; $2,100,000 annual sales, $250,000 Seller’s Discretionary Earnings

Sale Price 2.5 X SDE = $625,000Stock Sale of C Corp.SBA Loan = $468,750Seller Note = $75,000

5 years, 8%, $18,249/year principle +interestTotal repayment = $91,244

Buyer Down = $81,250plus points, taxes, and closing costs



Total Seller Compensation$550,000 cash at closingDeferred Income

$18,249/year principle + interest on noteTotal Deferred Income = $91,245

Total Compensation = $641,245


What if…?

What if the Seller had an Exit Strategy?Workman’s Comp and other expenses had increased sharply, but owners prices had not been increased in several years.Earnings were on a downward trend.Infrastructure was good.Customer base was excellent.

Exit strategy would have focused on reducing expenses and increasing earnings. Owner was not aggressive in this area as he was burned out. Probably sold the business 2 years too late.





Service company; $1,400,000 annual sales, $260,000 Seller’s Discretionary Earnings

Sale Price 3.12 X SDE = $810,000Asset SaleSBA Loan = $610,000Seller Note = $0Buyer Down = $200,000

plus points, taxes, and closing costs.



Total Seller Compensation$810,000 cash at closingDeferred Income – none.Total Compensation = $810,000

Seller used a structured sale and tax strategy to reduce his taxes by $180,000.


Why did this Seller do better?

This Seller had an Exit Strategy?Workman’s Comp increased, other expenses had decreased, and revenue increased.Earnings were on a upward trend, with additional growth potential.Infrastructure was good.Customer base was excellent.

Seller had an Exit Strategy focused on reducing expenses and increasing earnings. Owner was aggressive in this area and had a timeline in place to sell his business.




Deal Examples: Mid Sized Business

Mfg company; $10,000,000 annual sales, $1,000,000 EBITDA

Sale Price 3.5 X EBITDA = $3,500,000Asset SaleSBA Loan = $1,000,000Mezzanine Financing = $1,000,000Seller Note = $500,000

5 years, 8%, $121,658/year principle +interestSeller Consulting/Employment = $500,000

$100,000/year for 5 yearsBuyer Down = $500,000


Deal Examples: Mid Sized Business

Total Seller Compensation$2,500,000 cash at closingDeferred Income

$100,000/year consulting/employment$121,658/year principle + interest on noteTotal Annual Deferred Income = $221,658Total Deferred Income = $1,108,290

Total Compensation = $3,608,290


Why Businesses Don’t Sell

PriceBooks & RecordsFinancingSeller (owner) is not motivatedUnattractive Market or IndustryHighly Specialized Industry





PricePriced above comparable businessesExcessively High MultiplesEarnings won’t support the asking price

Earnings won’t support the buyers income requirements after debt service

Earnings are weak or inconsistent



Books & RecordsPoor Books & Records make already cautious buyers suspicious.Revenue or Earnings that don’t stack up against owner’s claims.Inconsistent figures from year to year.

Financing – there are only 2 real choices for Small Businesses: SBA or Seller Note

All Cash – rarely occurs, and usually at the expense of the asking price and think about the tax implications.


Why BusinessesDon’t Sell

Financing – Seller wants CASH now!Cash vs. Leveraged Deal – a comparison

Buyer with $250,000 cash can double or even triple their net after debt service with financing.

Business A: $250,00 cash, $250,000 total purchase price

$125,000 SDE based on 2X SDEBusiness B: $225,000 down; $1,125,000 SBA

financing + $150,000 seller note, $1,500,000 total purchase price

$307,000 net after debt service Debt ServiceWhich one would you buy?





Other reasonsUnmotivated Seller

I’ll sell for the right price… (e.g. my price)I want ALL cash…I don’t need to prove anything…

Specialized or Unattractive IndustryBoth have very limited interested buyersSpecialized may have difficulty finding buyers

qualified to operate the businessOne Man shows – owner is key to operation, and

can’t be replaced


Negotiating the Deal

Negotiate & be prepared to play ballBe Patient!Focus on key points

Don’t sweat the small stuffBe prepared to settle on small points

But get something in return…Adopt a Win-Win styleCommit everything to writing Using an intermediary allows you to stay neutral


The Deal Will Die 3 Times!

Problems along the way…Deal DisagreementsDue Diligence SurprisesFinancingBad adviceBuyer’s/Seller’s remorse

May cause the deal to die (you think)Some deals die 3 times before finally closing.View these as challenges and hurdlesCan be overcome with cooperation




Am I Stuck with the Note?

If I carry a Seller Note am I stuck with it for the full term?

No, you can sell your note on the secondary market.

Note Brokers will buy/sell your note.But you will have to discount it.Must be “seasoned” for 2 to 6 monthsDiscount varies according to term, interest rate, security/collateral.


Doing the Deal

Can I do it my self?Confidentiality? Marketing?Business interruption & your time.IBBA stats indicate an average of 36 to over 50 buyer inquiries to sell a business, only 1 in 15 buyers actually buy a business.Negotiations.Often up to 3 offers to close a deal.Deal Structure and Closing?

Purchase Agreement, Due Diligence, Escrow, …Financing?


Doing the Deal

Why Use a Broker/Intermediary?ConfidentialityMarketing the businessBuyer Screening, Sourcing, Management

1 out of 15 buyers actually buy a business!36 to over 50 prospects to sell a business priced fairlyAs many as 3 offers to sell a business (close the deal)

Deal Structure & NegotiationsNegotiating directly puts you at a disadvantageIntermediaries have deal experience

Closing the DealIntermediaries have experience in getting the deal done




Getting Good Advice

Why Use Tax/Accounting Professionals?Exit Strategy development & implementation in conjunction with your Business BrokerTax AdviceDeal Structure AdviceDue DiligencePost Sale Tax & Financial Advice


Legal Advice

Consult your Attorney whenYou need a Note & Security AgreementYou do not understand or are unsure of the contract or terms of the deal, or need legal adviceStock Sales

Reps & Warranties, Note Offsets, etc. M&A deals

LOI, deal terms & agreement, Due Diligence


VR Business Brokers Getting Deals Done




VR Exit Strategy Seminar

Resources & information


Presenter Bio’s


Reading & other Resources

Books & Reference Guides“A Basic Guide for Buying & Selling a Company”, Wilbur Yegge “Selling Your Business”, Russell Robb “Buying Your Own Business”, Russell Robb“ Valuing Small Businesses & Professional Practices” – Shannon PrattVR Business Brokers Seller’s Guide




More Resources…

Web Resources www.vrbusinessbrokers.comwww.ibba.org (International Bus Brokers Assoc)

www.bizbuysell.comValuation & Comp Resources

BizcompsPratt’s Stats


VR’s Proven Selling Process

Documentation & Packaging

Marketing& Screening

Offers &Negotiation

Due Diligence

Closing

Average time to sell a business nationwide is 7 months, but varies widely by type of business, asking price and financing terms.


The Sale Process



Offers &Negotiation

Due Diligence

Closing

1. Commitment: You commit to selling with us at terms consistent with the marketplace.

2. Documentation: You sign necessary forms and provide copies of required documentation.

3. Valuation: We analyze your business, review comparables and agree with you on the listing price and terms.

4. Packaging: We develop a confidential business profile, non confidential Internet, and in some cases digital video Confidential Business Profiles on your business.




The Sale Process

5. Marketing: We advertise your business and others like on our website and the most popular industry websites maximizing buyer interest and inquiries. Note that 90% of buyers buy something other than the business they initially called us about. So the driver of success is overall exposure for VR listings, not individual ads.

6. Screening: We interview prospective buyers to eliminate those unlikely or unable to buyer your business. We obtain signed confidentiality and net worth statements.

7. Introduction. We take only serious, qualified buyers to meet you and view your business.

8. Financial Assistance. We work with you, prospective buyers and select financial institutions and brokers to structure appropriate financing.



Offers &Negotiation

Due Diligence

Closing


The Sale Process

9. Offer to Purchase: We encourage buyers to write fair offers backed by earnest money checks. We present offers to you along with buyer profiles.

10. Counter Offer: You may accept an offer as presented or we will assist you in structuring a counter offer.

11. Offer Acceptance: Once both parties agree on terms, we have an offer “signed both ways” but not a done deal.



Offers &Negotiation

Due Diligence

Closing


The Sale Process

12. Due Diligence: Buyer inspects and approves of your financial records, equipment, contracts, etc. You review the buyer’s qualifications.

13. Real Estate Transfer: We work with you, the buyer and your landlord to transfer your lease. If you own the real estate, we can sell it with the business, or separately, and if appropriate, co-broke with a realtor.

14. Note Assumption: If existing liabilities are to be assumed, we work with all parties to ensure the transfer of those obligations.

15. Contingency Removal: Once the buyer and you are satisfied, contingencies are removed, escrow is opened, and the offer is binding.



Offers &Negotiation

Due Diligence

Closing




The Sale Process

17. Closing Preparation: We guide you and the buyer through closing with a rigorous checklist to ensure that everything necessary to complete the sale is in order and the transaction is completed in a timely manner.

18. Inventory: A count of inventory is made near the closing by you and buyer together or with a third party auditor.

19. Closing: At closing, money, title and possession of the business changes hands.

20. Celebration. Now it’s time to celebrate and move on to retirement or the next phase of your career.



Offers &Negotiation

Due Diligence

Closing

VR Business Brokers › images › Documents... · VR Business Brokers ... your business.

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Transcript of VR Business Brokers › images › Documents... · VR Business Brokers ... your business.