Exit Now or Exit LaterExit Now or Exit Later
PRESENTED BY:PRESENTED BY:
Monte Pendleton, Silver Fox Advisor.
Jim Griffing, Treasurer, Silver Fox Advisors.
Howard London, President, Silver Fox Advisors.
Pendleton BackgroundPendleton Background
Monte Pendleton is a mentor to owners on how to improve sales and profits;
Founder of Sun-X International with over 700 distributors in 69 countries.
Past President of the Intl. Franchise Assn.,
U. of Mo., B.S.C.E.
Griffing BackgroundGriffing Background
Jim Griffing is both a CPA and CFE.
After years of experience as a Regional Tax Partner with another firm, he founded Griffing & Company, P.C., a full service certified public accounting firm in 1987.
MS in Taxation degree from Drexel University.
London BackgroundLondon Background
Howard London is a business development expert;
Forty four years of hands on administrative, technical, creative, advertising, marketing and sales experience for start-up and growth companies;
Author of "Six Minute Business Plan".
Exit Objectives
Maximize Value; Reward Loyalty; and Perpetuate the Business.
Potential Business Exit StrategiesPotential Business Exit Strategies
Sale Merger Buyout Liquidation of Assets IPO
Private BusinessesPrivate Businesses
10% of family businesses survive to the third generation
10% of family business owners are financially independent from their business when they retire
—Grant Thornton data
Where Can Private Businesses Go?Where Can Private Businesses Go?
Go public Acquired by
- Strategic buyer – often a competitor
- Financial buyer – if income-producing Liquidated
- Owner cashes out.
- Bankruptcy.
Elements of Exit VehiclesElements of Exit Vehicles
Exit Vehicles Time to Completion
Form of Payment
Owner Involvement
Post-Implementation
Value Index*
IPO 2-3 years Registered Stock
100% and continued
10
Sale to a strategic buyer
1-2 years Some cash, notes and stock
None or limited 8
Sale to a financial buyer
1-2 years Some cash, notes and stock
Employment contract likely
4-6
Merger 1 year Cash and Stock Employment contract possible
7
* This index runs from 1 to 10, with 10 describing the exit vehicle with the greatest potential value. The values reflect a subjective opinion.
Don’t Let the Transfer of Your Business Don’t Let the Transfer of Your Business be Triggered by External Events:be Triggered by External Events:
Life surprises
- Death
- Disability
- Divorce Business surprises
- Adverse marketplace
- Competitive challenges
- Regulatory changes
Plan To ExitPlan To Exit
Sell to a competitor, corporation or individual;
My ideal buyer will be ___________________________________
The buyer will pay _______________________________________
I might sell in January 2011 or I might keep the
business.
Plan To ExitPlan To Exit
Document 2 to 3 years profit;
Increase the value of your business: Establish financial goals for 2010;
Establish management goals for 2010;
Establish marketing goals for 2010; and
Produce and/or update Personnel, Policy & Procedure Manuals.
Financial GoalsFinancial Goals for 2010for 2010
Total Sales: $_________________
Net Profit Before Taxes: $_________________
Equity (Net Worth): $_________________
Credit (Bank Loans and Lines): $_________________
Number of Clients: __________________
Number of Employees: ___________________
Management Goals for 2010Management Goals for 2010
Business Vision Statement by __________
Business Mission Statement by __________
Complete a Customer Satisfaction Survey by__________
Annual Budget by__________
Employment Contracts by __________
Write Job Descriptions by __________
More Management Goals for 2010More Management Goals for 2010
Employee Questionnaire by _____________________________ Monthly P & L Statements by ____________________________ Monthly Balance Sheets by ______________________________ Monthly Budget Analysis by _____________________________ Daily Sales, Cash, Problems, etc. Reports by __________ Weekly Proposals In Progress Reports by ____________ Weekly Work In Progress Reports by __________________
Marketing Goals for 2010 Marketing Goals for 2010
Produce a new website by ____________________________
Produce new marketing materials by _____________
Update customer & prospect database by __________
Create “Touch Marketing Program” by ______________
Create trade show program by _______________________
Create business network program by _______________
Personnel, Policy & ProceduresPersonnel, Policy & Procedures
Produce or update Policy Manuals: Personnel by ________________________ Credit by ____________________________ Audit by _____________________________ Insurance by ________________________ Safety by _____________________________
Personnel, Policy & ProceduresPersonnel, Policy & Procedures
Produce or update Procedures Manuals: Purchasing by ______________________________________ Selling by ____________________________________________ Order Processing by ________________________________ Hiring by _____________________________________________ Invoicing & Accounting by __________________________ Customer Service by _________________________________ Banking by ____________________________________________
What Is The Value?What Is The Value?
Revenue 2009 …………………………………… $1,000,000 100%Cost of Goods or Services … $380,000 38%G & A Overhead ……………….. 330,000 33%Executive Salary ………………….100,000 10%Selling/Marketing Expenses ..150,000 15%
TOTAL $960,000EBITDA $ 40,000 04%
5 x $40,000 (EBITDA) = $200,000
Double The ValueDouble The Value
WHAT IF?
Revenue 2009 …………………………………… $1,050,000 100%Cost of Goods or Services … $378,000 36%G & A Overhead ……………….. 336,000 32%Executive Salary ………………….100,000 9.5%Selling/Marketing Expenses ..157,500 15%
TOTAL $971,500EBITDA $ 78,500 07.5%
5 x $78,500 (EBITDA) = $392,500
Triple The Value
WHAT IF?Revenue 2009 …………………………………… $1,100,000 100%Cost of Goods or Services … $385,000 35%G & A Overhead ……………….. 330,000 30%Executive Salary ………………….100,000 9%Selling/Marketing Expenses ..165,000 15%
TOTAL $980,000EBITDA $ 120,000 11%
5 x $120,000 (EBITDA) = $600,000
Triple The Value
WHAT IF?Revenue 2009 ………………………………… $11,000,000 100%Cost of Goods or Services … $3,850,000 35%G & A Overhead …………………. 3,300,000 30%Executive Salary …………………. 200,000 0.2%Selling/Marketing Expenses ..1,650,000 15%
TOTAL $9,000,000EBITDA $ 2,000,000 18%
5 x $2,000,000 (EBITDA) = $10,000,000
How Do Owners Successfully How Do Owners Successfully Transfer the Business to Others?Transfer the Business to Others?
Recognize the transfer will be a complex process. Keep financial reports and
tax filings current. Strive for accuracy—
do your due diligence now. Make yourself expendable—
delegate success to your employees.
Negotiating and ClosingNegotiating and Closing
Valuation methods The wide range of terms available Stock versus assets example Types of financing available Earn outs Protecting your escrow
Valuation MethodsValuation Methods
1. Multiple of Earnings or EBITDA
2. Replacement Cost
3. Liquidation Value
4. Dividend Paying Capacity
5. Comparable Market Value
6. Discounted Future Earnings
7. Discounted Cash Flows
Other Issues affecting ValuationOther Issues affecting Valuation
Times net asset value Discounted increase in net worth Discounted free cash flow EBITDA (Earnings before interest,
taxes, depreciation and amortization) Internal rate of return (IRR)
Strategic BuyersStrategic Buyers
Beware of under-pricing your firm to a strategic buyer.
Value of your firm is driven by their internal needs.
Never be the first to mention price when dealing with a strategic buyer.
TermsTerms
All cash Cash down with installments
- Recapturing hot assets
- Personal guarantees of purchase All deferred
- (discussion of earn outs to come) Stock for stock, cash and stock Using gifting when selling to family members
Types of Financing TermsTypes of Financing Terms
Short-term Demand notes or lines of credit due to be repaid in 1 year or less
Medium-term Repayable in 1 to 5 years
Long-term Repayable over more than 5 years
Financing Terms Available by Financing Terms Available by SourceSource
Repayment TermsFinancing Source Short-term Medium-term Long-term
Factors x
Banks x x
Leasing companies x x
Asset-based lenders x x
Venture capital firms x x
Angel investors x x
Strategic alliances x x
Government financing x x x
Public offerings and private placements
x x x
Small business investment cos. x x
Savings & loan associations x
Insurance companies x
Earn OutsEarn Outs
Only part of purchase price is paid at closing, rest due as earnings or revenue milestones are met in the future.
Risk reduced to buyer. Seller has opportunity to get
higher price. Complicated by
- External economic or political issues
- Creates a long-term relationship
- Tax implications are tricky
After the CloseAfter the Close
Keep valuable employees by planning a well-communicated transition to the new owner—be honest with them!
If merging organizations, anticipate and manage cultural clashes—especially if they’ll affect customers.
New owners will need guidance in hands-on operational questions—anticipate who’ll provide it: previous owner or employees?
What’s the Worst and Best What’s the Worst and Best that can Happen?that can Happen?
Top Ten Reasons Owners Don’t Get the Best Deal
Guidelines for keeping a business “buy-able”
Ten Top Reasons Owners Ten Top Reasons Owners Didn’t Get Best DealDidn’t Get Best Deal
10. Were first one to mention price.
9. Didn’t plan to sell business.
8. Proper documentation was not demanded.
7. Didn’t correctly position business for sale.
6. Assumed they knew the best buyer.
Ten Top Reasons Owner Ten Top Reasons Owner Didn’t Get Best DealDidn’t Get Best Deal
5. Tried to sell to the wrong people.
4. Didn’t get proper counsel.
3. Didn’t understand the buyer’s motive.
2. Were unrealistic about price.
1. Didn’t understand the real value of the business.
A Buy-Able Business Stays in A Buy-Able Business Stays in Top ConditionTop Condition
Accurate and up-to-date financial statements.
Owner can be replaced—method of success is no mystery.
Owner is glad to keep the business until the right buyer is found.
Questions?Questions?
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