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

© 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


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


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


MORE THAN JUST MEMBERS…

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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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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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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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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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UNDERSTAND YOUR SHORT, MID AND LONG TERM GOALS

AND YOUR OPTIONS FOR EXIT STRATEGIES

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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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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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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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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


SELLERS

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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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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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TYPICAL DEAL STRUCTURES

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Mergers Acquisitions Joint

Ventures

Management Buy-Out

Going Public Going Private


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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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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PLAN AHEAD Ideally, begin to prepare at least 3 years before

you want to cash out

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SELLING: OPTIONS

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#1: SALE TO COMPANY

MANAGEMENT

Valuation is often book value and goodwill to founder via premium

or deferred compensation

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#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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#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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#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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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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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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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


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


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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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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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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EARN OUT OPTIONS: GETTING PAID

33 © Marx Group Advisors - 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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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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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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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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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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BUYER

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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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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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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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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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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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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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WHEN DO YOU KNOW THE DEAL IS GOING WELL

When the deal closes and money is transferred!

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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.”


WHAT TO LOOK FOR WHEN HIRING A BROKER OR M&A CONSULTANT

• Knows Your Industry

• Experience

• References

• Intelligent Strategy

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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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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

[email protected]

Paul Cooperstein 617.328.7333

[email protected]

www.marxgroupadvisors.com

BOSTON SAN RAFAEL

HOUSTON DETROIT NEW YORK

FLORIDA PHOENIX

Marx Group Advisors are located nationwide:

THANK YOU