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70% of all mall and mid-sized owners who are thinking of selling their business and need to know how to prepare and follow-through the right way to successfully value their business.
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
The Art of
Buying & Selling a Business
PRESENTERS:
TOM MARX
CEO AND CO-FOUNDER
PAUL COOPERSTEIN
PRESIDENT & CO-FOUNDER
© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHO WE ARE
2
Advisors with over 25 years’ experience in the Automotive, Heavy Duty, and Commercial Aftermarket
Consulting services Brokerage:
Buy-Sell-Merge Equity and debt
financing
© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
MARX GROUP ADVISORS
TOM MARX
• Business growth & marketing focus
• 25+ years industry experience
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PAUL COOPERSTEIN • Venture capitalist &
investment banker • Business lawyer &
mediation specialist
DAVE BARBEAU
• Parts distributor & aftermarket executive
• Industry management consultant
CHRISTINE LEMAy
• Business development manager
• International specialist
© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
MORE THAN JUST MEMBERS…
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
TODAY WE WILL COVER:
1. Preserve your life’s work
2. Understand your exit strategies
3. Current state of the M&A landscape
4. Factors for considering selling / buying
5. When do you know it is time to sell?
6. Typical steps in the buy/sell process
7. Deal structures
8. Valuation methods
9. Getting paid
10. Why hire an intermediary?
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
PRESERVE YOUR LIFE’S WORK
―Most of my net worth is in the business. I am getting ready to retire and want to sell... Where do I start?‖
- Business Owner
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
TIMELESS QUESTIONS • Will my business survive me?
• How do I get my equity out and gain liquidity when I want to?
• How can I get a fair price when I sell, how do I value the business?
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
IF A CATASTROPHE HAPPENED TODAY, ARE YOUR DUCKS LINED UP?
• Is my succession plan in place both practically and legally? Could someone take my place tomorrow?
• If not:
– Company is at risk on all fronts
– Key staff is at risk professionally
– Uncertainty about direction/leadership can cause attrition
– Your family may not be taken care of
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
UNDERSTAND YOUR SHORT, MID AND LONG TERM GOALS
AND YOUR OPTIONS FOR EXIT STRATEGIES
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
70% OF ALL SMALL AND MIDSIZED BUSINESSES DON’T SELL AFTER THEY
ARE PUT ON THE MARKET
Selling a business is not like selling a piece of real estate or any other asset
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
CURRENT STATE OF THE
M&A LANDSCAPE
• M&A activity increased starting Q4 2010
• Transactions are being hampered by low valuations, tight fisted banks and cautious buyers
• As competition for acquisitions increases, prices will rise
• We live in times of great uncertainty
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
KEY FACTORS FOR CONSIDERING A TRANSACTION
FOR BUYERS:
• Expand geographic reach
• Enhance revenues, add critical mass
• Gain new customers, suppliers, management, technology
• Improve operating margins
FOR SELLERS:
• Freedom
• Financial challenges
• Disagreements between partners or family members
• Unforeseen events (illness, accident, death, natural disaster)
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHAT ARE THE TYPICAL STEPS IN BUYING/SELLING PROCESS:
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STEPS IN SELLING:
• Pre-Deal Preparation
• Confidentiality Agreements
• Identify Buyers
• Letter of Intent
• Definitive Agreement
• Due Diligence
• Close
• Post Close Execution
STEPS IN BUYING:
• Evaluation of Transactional Assumptions/Marketplace Assessment
• Financing/equity partners
• Target Selection
• Letter of Intent
• Definitive Agreement
• Due Diligence
• Close and Integration
© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
SELLERS
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHEN DO YOU KNOW IT
IS TIME TO SELL?
• You are tired of the hassles – no more fun
• You want to do something else in life
• Nostalgia – ―It ain’t like it used to be‖
• You aren’t sleeping at night
• You don’t want to talk with your spouse – or even your dog!
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHAT DO YOU NEED TO DO DURING THE SALES PROCESS
• Keep making profit
• Maintain adequate inventory, fill rates and margins
• Retain key people
• Keep customers happy
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
TYPICAL DEAL STRUCTURES
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Mergers Acquisitions Joint
Ventures
Management Buy-Out
Going Public Going Private
© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
TERMS OF SALE
• 100% paid at closing
• Seller Financing
• Earn-out based on multiples of earnings
• Earn-out based on revenues
• Hold-backs
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
HOW TO INCREASE THE
PRICE OF YOUR BUSINESS
• Keep revenues & profits growing
• Have credible successor management
• Have a broad customer base
• Pay attention to your balance sheet
– Quality of assets, inventory, old equipment, cores, level of debt, working capital reserve
• Other strategic assets (real estate, life insurance policies etc.)
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
PLAN AHEAD Ideally, begin to prepare at least 3 years before
you want to cash out
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
SELLING: OPTIONS
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
#1: SALE TO COMPANY
MANAGEMENT
Valuation is often book value and goodwill to founder via premium
or deferred compensation
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
#2: PASSING DOWN TO FAMILY
MEMBER TO RUN
• Valuation is more complex
• Estate and gift tax considerations significantly impact these transactions
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
#3: SALE TO PRIVATELY HELD
COMPANY
• Valuation is determined by the marketplace or the buyer
• Seller’s representatives can and should influence buyer’s valuation
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
#4: SALE TO PUBLICLY HELD
COMPANY
• Importance of some valuation components will vary between publicly-held buyers and privately held buyers
• Majority of components will be important to both groups
• Due diligence and discovery even more critical
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHAT IS YOUR COMPANY REALLY WORTH?
• Conflicting concepts
– Value to buyer & seller
– Sale to company management
– Passing down to family member
– Sale to privately or publicly held company
– Book value
– Industry standards, benchmarks, trends
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHAT DOES THE SELLER CONSIDER
WHEN VALUING THE BUSINESS?
• Looks at brighter future and diminishes past issues, including those caused by The Great Recession
• Promotes strengths for higher price
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
VALUATION METRICS
• Revenue & operating trends: Past/Current/Projected
• Strength of balance sheet
• Amount of long term debt
• Cash flow (EBITDA)/interest expense ratio
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Slow Pay
Less Cash
More Debt
Decrease in Purchase Price Assumed Debt
© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
VALUATION COMPONENTS THAT ARE IMPORTANT TO PUBLIC BUYERS
The larger the seller is in relation to the buyer, the more important these components are.
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Operating Earnings Margin
Buyer Wants to Avoid Dilution
Prediction of Earnings
Public Market Avoids Erratic Performance
Large Amounts of
Goodwill
Cuts Earning Per Share
© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
DETERMINING THE VALUATION
• Recast your P&L
• Operating earnings averaged over a period of years x a multiple
• Consistency in earnings (margin & growth) = fewer years needed
• Typical average is prior 3 years
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
DETERMINING THE MULTIPLE
• Strong revenue & profit growth = higher multiple
• Above average margins= higher multiple
• Strong buyer marketplace = higher multiple
• Valuable assets = higher marketplace
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
POTENTIAL FACTORS THAT REDUCE THE MULTIPLE
• Long term debt
• High level of goodwill compared to assets and net income
• High percentage of aged receivables
• Dominance of a few customers
• Lower operating margin than that of buyers
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
EARN OUT OPTIONS: GETTING PAID
33 © Marx Group Advisors - SSA- October 12, 2011
© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
BASED ON MULTIPLE OF EARNINGS
• Typically 30-50% paid at closing in stock or cash
• Additional payments over 2 – 5 years based on meeting profit targets
• Sometimes a kicker for revenue growth
• Sometimes a claw-back if key client or metric is lost or missed or if AR is uncollectible
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
GETTING PAID: OTHER OPTIONS FOR OWNERS
• Management Buyout
• ESOP – will be covered in another presentation
• Mezzanine/Equity Partner
• Deferred Compensation Payment
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
MEZZANINE/ EQUITY PARTNER
• Mezzanine financing is a combination of debt and equity financing that is often used for expansions
• Equity partners may be a valid interim or long term strategy
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
DEFERRED COMPENSATION PAYMENT
• Company buys back stock – resells to management
• Payout over time – 5 to 10 years
• Secured by life insurance – if something happens to principals
• Avoid bank borrowing – hopefully, financed by company cash flow
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
CASHING IN DOES NOT ALWAYS MEAN SELLING OUT
• Stay on in some fashion (if you choose)
• Employee
• Consultant
• Run the business for a defined period of time
• Grow the business with someone else’s investment
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
BUYER
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
BUYERS CAN GROW
• Take out a competitor
• Take out low price leader
• Expand into regions that allow you to grow your business
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHAT DOES THE BUYER CONSIDER WHEN VALUING THE BUSINESS?
Looks at the same financial statements from a buyer’s perspective
• Trailing profit and loss to determine trends
• Weaknesses so they can present lower offer
• Wonders about the true value of inventory and collectability of receivables
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHAT OTHER CONCERNS KEEP BUYERS UP AT NIGHT?
• Loss of a key customer
• Loss of key employees
• Hidden legal or accounting traps
• If real estate is included, environmental or structural issues
• Will the seller go into competition (hence non-compete clauses
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHAT OTHER CONCERNS KEEP BUYERS UP AT NIGHT?
• Degradation of sales and/or profits during the acquisition process
• Changes in the marketplace, competition or the economy
• Losing the competitive edge if word gets out
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
REDUCING THE STRESS OF THE TRANSACTION
• Get all skeletons out of the closet—eventually they will be discovered anyway
• Full disclosure of all positives and negatives
• Timely review and response
• Carefully think through all responses so they are complete and accurate
• Have an intermediary do the heavy lifting
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHEN DO YOU KNOW THE DEAL IS NOT GOING WELL
• LONG delays in response
• Every deal results in a new detail
• When every paragraph of the LOI ends with ―BUT‖
• When the legal bills are double and triple what you were originally estimated
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHEN DO YOU KNOW THE DEAL IS GOING WELL
When the deal closes and money is transferred!
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHY HIRE AN INTERMEDIARY OR A SUCCESSION PLANNING EXPERT
• Having someone else find prospects and negotiate the deal reduces emotions and usually results in higher sell price
• Focus on what you do best: running your business
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“Only an idiot would sell his own deal.” “I don’t do my own dental work.”
© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
WHAT TO LOOK FOR WHEN HIRING A BROKER OR M&A CONSULTANT
• Knows Your Industry
• Experience
• References
• Intelligent Strategy
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
SUMMARY
• Preparation is key when planning for the future
• Gather the information you need
• Regularly update and review your business plan and other documents
• Enroll your family/key employees in your plans
• Don’t do this alone – get the support of professionals to help you maximize your investment
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© 2011 Marx Group Advisors – Succession Planning For Family Businesses in the Aftermarket ACOFAS and SSA- October 12, 2011
If you would like a copy of this presentation or further information on buying or selling, please contact us below:
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TOM MARX 415.453.0844 ext. 106
tmarx@marxgroupadvisors.com
Paul Cooperstein 617.328.7333
pcooperstein@marxgroupadvisors.com
www.marxgroupadvisors.com
BOSTON SAN RAFAEL
HOUSTON DETROIT NEW YORK
FLORIDA PHOENIX
Marx Group Advisors are located nationwide:
THANK YOU
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