Marx Group Advisors- SSA 2011 "Aspects of Buying/ Selling a Small Business"

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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

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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