Selling Your BusinessSelling Your Business

A brief overviewA brief overview

Wayne Booker, MBAWayne Booker, MBA

Commercial & Business OpportunitiesCommercial & Business Opportunities

REALTORREALTOR®®Prudential CRES Commercial Real EstatePrudential CRES Commercial Real Estate

150 E. Mound St., Columbus, Ohio 43215150 E. Mound St., Columbus, Ohio 43215150 E. Mound St., Columbus, Ohio 43215150 E. Mound St., Columbus, Ohio 43215

614614--580580--17661766

wbooker@prudentialcrescolumbus.comwbooker@prudentialcrescolumbus.com

The Small Business Market The Small Business Market

90% of US small business closely held90% of US small business closely heldOver 20 million small businessesOver 20 million small businessesEmploy 2 out of 3 employeesEmploy 2 out of 3 employees50% of technical innovation50% of technical innovation39% of GNP39% of GNP39% of GNP39% of GNPOver $10 trillion dollars in wealth will transfer Over $10 trillion dollars in wealth will transfer over the next 10over the next 10--15 years15 yearsMost of this wealth is held by privately owned Most of this wealth is held by privately owned businessesbusinesses70% of those businesses will change hands70% of those businesses will change hands

Why Sell NowWhy Sell Now

Capital gains rate is the lowest ever at 15%Capital gains rate is the lowest ever at 15%

Interest rates are at an all time lowInterest rates are at an all time low

Economy is relatively stableEconomy is relatively stable

Large number of buyers with substantial cashLarge number of buyers with substantial cashLarge number of buyers with substantial cashLarge number of buyers with substantial cash

Early on the curve of retirement of baby Early on the curve of retirement of baby boomersboomers

Future risks leave many uncertaintiesFuture risks leave many uncertainties

Present value of payout can be worth more than Present value of payout can be worth more than the future potentialthe future potential

Why Businesses Sell for Less than Why Businesses Sell for Less than Maximum Value Maximum Value

Owner doesn’t know valueOwner doesn’t know value

Lack of key documentationLack of key documentation

Sold to the wrong buyerSold to the wrong buyer

Improper transaction structureImproper transaction structureImproper transaction structureImproper transaction structure

Sold at the wrong timeSold at the wrong time

Lack of proper advisorsLack of proper advisors

Steps in SellingSteps in Selling

Assemble a team: Accountant, Financial Assemble a team: Accountant, Financial Planner, Attorney, Business Broker, Planner, Attorney, Business Broker, Insurance Broker, Business Appraiser, Insurance Broker, Business Appraiser, Investment Banker.Investment Banker.Investment Banker.Investment Banker.

Determine Current ValueDetermine Current Value

Prepare an Exit PlanPrepare an Exit Plan

Market Your BusinessMarket Your Business

Steps in Selling (cont.)Steps in Selling (cont.)

Qualify BuyersQualify Buyers

NegotiationsNegotiations

Letter of IntentLetter of Intent

Due DiligenceDue DiligenceDue DiligenceDue Diligence

FinancingFinancing

Sales ContractSales Contract

Closing and PayoutClosing and Payout

Exit PlanningExit Planning

An exit plan is a comprehensive road map to An exit plan is a comprehensive road map to successfully exit a privately held business. A successfully exit a privately held business. A plan asks and answers all the business, plan asks and answers all the business, personal, financial, legal, and tax questions personal, financial, legal, and tax questions involved in selling a privately owned business.involved in selling a privately owned business.–– Contingencies for illness, burnout, divorce or the Contingencies for illness, burnout, divorce or the –– Contingencies for illness, burnout, divorce or the Contingencies for illness, burnout, divorce or the

owner’ death.owner’ death.–– Purpose is to maximize the value of the business at Purpose is to maximize the value of the business at

the time of exit.the time of exit.–– Minimize taxes.Minimize taxes.–– Insure that the business owner is able to accomplish Insure that the business owner is able to accomplish

all their personal and financial goals.all their personal and financial goals.

Failure to plan results in: Failure to plan results in:

–– An exit as result of circumstances other than the An exit as result of circumstances other than the owner’s intention.owner’s intention.

–– Timetable is forced instead of planned.Timetable is forced instead of planned.

–– Business is undervalued, with much hard work Business is undervalued, with much hard work wasted.wasted.wasted.wasted.

–– Taxes are higher than necessary.Taxes are higher than necessary.

–– Loss of control of the process.Loss of control of the process.

–– Failure to realize all the financial and personal goals.Failure to realize all the financial and personal goals.

–– Unnecessary psychological stress.Unnecessary psychological stress.

–– Lose confidentiality during the sale or exit process.Lose confidentiality during the sale or exit process.

Why businesses don’t sellWhy businesses don’t sell

The number one reason that businesses The number one reason that businesses

fail to sell is because of poor planning on fail to sell is because of poor planning on

the part of the owner. Only 30% of the part of the owner. Only 30% of

businesses actually sell, the rest are businesses actually sell, the rest are businesses actually sell, the rest are businesses actually sell, the rest are

liquidated with a huge loss of valuable liquidated with a huge loss of valuable

equity.equity.

Business ValuationBusiness Valuation

EBITA and recast financialsEBITA and recast financials

Market research Market research –– what similar firms in similar industries what similar firms in similar industries sell forsell for

Direction of the businessDirection of the business

Direction of the industryDirection of the industryDirection of the industryDirection of the industry

Competitive situationCompetitive situation

Book valueBook value

Brands, copyrights, patents, reputationBrands, copyrights, patents, reputation

Employees and systemsEmployees and systems

Customer loyaltyCustomer loyalty

RepeatabilityRepeatability

Difficulties Sellers EncounterDifficulties Sellers Encounter

Valuing the businessValuing the business

Keeping it confidentialKeeping it confidential

MarketingMarketing

NegotiatingNegotiating

TimingTiming

Dealing with buyersDealing with buyers

… when trying to sell their own business… when trying to sell their own business

MarketingMarketing

Structuring the dealStructuring the deal

FinancingFinancing

Preparing documentsPreparing documents

Dealing with buyersDealing with buyers

Remaining objectiveRemaining objective

Running their Running their business AND selling business AND selling their businesstheir business

Value of the Business BrokerValue of the Business Broker

–– Knowledge of the processKnowledge of the process

–– Connections with key advisorsConnections with key advisors

–– ConfidentialityConfidentiality

–– Marketing assistance to find buyersMarketing assistance to find buyers

–– Coordination with other key professionalsCoordination with other key professionals–– Coordination with other key professionalsCoordination with other key professionals

–– Assistance in valuation and in getting the business Assistance in valuation and in getting the business ready for saleready for sale

–– Prequalification of buyersPrequalification of buyers

–– Negotiations with the buyers and the financial Negotiations with the buyers and the financial institutionsinstitutions

Value of ProfessionalsValue of Professionals

AccountantAccountant

AttorneyAttorney

Financial PlannerFinancial Planner

Business BrokerBusiness BrokerBusiness BrokerBusiness Broker

Certified AppraiserCertified Appraiser

BankerBanker

Insurance BrokerInsurance Broker

EBITDA & RECASTINGEBITDA & RECASTINGEarnings per tax returnEarnings per tax return --300300

Interest expenseInterest expense 25,00025,000

TaxesTaxes 10,00010,000

Depreciation (buildings & equipment)Depreciation (buildings & equipment) 30,00030,000

Amortization (intangibles)Amortization (intangibles) 5,0005,000

Country Club DuesCountry Club Dues 6,0006,000

Boat PaymentBoat Payment 12,00012,000

MotherMother--inin--Law WagesLaw Wages 75,00075,000

Mercedes PaymentMercedes Payment 12,00012,000

Convention TravelConvention Travel 20,00020,000

RECAST EARNINGSRECAST EARNINGS 194,700194,700

Typical TransactionTypical Transaction

Purchase Price $ 1,000,000

Business Asset Value 400,000

Buyer’s net worth after down payment 200,000

Bank Loan @ 8.5%, 7 years 600,000

Buyers down payment 200,000

Seller Financing @ 5%, 5 years 200,000

Business EBITA 250,000

Seller Financing Cost 45,000

Bank Financing Cost 114,036

Annual Cash Flow to New Owner $ 90,964

Tax ImplicationsTax Implications

25% Goodwill 50% Goodwill 75% Goodwill

Sale Price $1,000,000 $1,000,000 $1,000,000

Professional Fees $ 100,000 $ 100,000 $ 100,000

Capital Gains Taxes @ 15% $ 33,750 $ 67,500 $ 101,250

Ordinary Income Taxes @ 35% $ 236,250 $ 157,500 $ 78,750

Debt Repayment $ 200,000 $ 200,000 $ 200,000

Balance $ 430,000 $ 475,000 $ 520,000

PLANNING SEARCH DEAL MAKING CLOSING

Plan for Selling Activate Buyer Search Plan

Buyer Visit First Meeting Coordinate Due Diligence

Gather Your Data Distribute 1-Page Business Summary

Tour Business Loan Request Package

Recast Your Financial Statements

Qualify Buyer Probe Buyer Interest Lender Introductions

The Steps to Selling A BusinessThe Steps to Selling A Business

Statements

Determine Value and Assets to be Sold

Determine Buyer Interest

Motivate Buyer to Act –Offer to Purchase

Assist in Resolving All Issues

Prepare CBR /Data Package

Sign Nondisclosure Agreement

Facilitate Negotiations Definitive Purchase Agreement

Prepare 1-Page Business Summary

Present CBR/Data Package

LOI or offer to purchase Review Final Documents

Close!

What Buyers Look ForWhat Buyers Look For

Cash flowCash flow

Diverse customer baseDiverse customer base

Growth potentialGrowth potential

Transition (by seller for 1Transition (by seller for 1––6 months)6 months)

Reasonable priceReasonable price

Flexible termsFlexible terms

Living wageLiving wage

How Long Does it Take to Sell? How Long Does it Take to Sell?

20

25

30

35

40

% Sold

0

5

10

15% Sold

'1-3 '4-6 '7-9 '10-12 '12-18 '>19

Months

DocumentationDocumentation

Last 3 years tax returnsLast 3 years tax returns

Current P&L and Balance SheetCurrent P&L and Balance Sheet

Current AR and AP JournalsCurrent AR and AP Journals

Payroll RecordsPayroll Records

Equipment ListEquipment List

Property DescriptionProperty Description

Employee ListEmployee List

Law Suit DisclosureLaw Suit Disclosure

Patents and Patents and CopywritesCopywrites ownedowned

CompetitionCompetition

SuppliersSuppliers

CustomersCustomers

Role of an IntermediaryRole of an Intermediary

Provides confidentialityProvides confidentiality

Educates all parties on processEducates all parties on process

Create customized marketing packageCreate customized marketing package

Executes strategic marketing planExecutes strategic marketing planExecutes strategic marketing planExecutes strategic marketing plan

Act as buffer for emotionsAct as buffer for emotions

Provides negotiation skillsProvides negotiation skills

Facilitates process from start to finishFacilitates process from start to finish

Thank you!!!Thank you!!!We’re part of the “Rock”!We’re part of the “Rock”!