VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 1
VR Business BrokersSelling Your Business…
What every Owner needs to know
Page 2Copyright VR Business Brokers 2009
Today’s Agenda8:30 Greeting & Coffee9:00 Preparing to Sell – Your Exit Strategy9:15 Selling Your Business
9:15 What Buyers Want9:30 Valuation, What is your business worth?9:45 Financing & Deal Structure10:00 Deal Examples
10:30 – 10:45 Break 10:45 Your Exit Strategy – Post Sale
Investment Strategies11:45 Q & A
Page 3Copyright VR Business Brokers 2009
Why Develop an Exit Strategy?
An Exit Strategy will…Increase the price you realizeReduce your time on market Increase the odds of a successful saleMay lead to qualifying the business for an SBA loan and reduce or eliminate the need for Seller FinancingReduce your tax liabilityKeep your options open – you have nothing to lose and everything to gain $$$
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 2
Page 4Copyright VR Business Brokers 2009
Exit Strategy Steps to Success
Meet with a Professional VR
Intermediary
Business is confidentially
marketed
Buyer Mgmt, Offer, Deal Structure
Sale is Closed !
Meet with Professional
Financial Advisor
Develop FinancialStrategy
You decide it’s time to develop an exit strategy.
Post Sale Financial & Investment
Management
Meet with Professional Tax
Advisor
Develop Tax Plan with VR
& Tax Advisor
Deal Structure with offer &
escrow
Due Diligence, Financing,
Escrow
Page 5Copyright VR Business Brokers 2009
Preparing to Sell
Page 6Copyright VR Business Brokers 2009
Preparing to Sell:Maximizing the Value
How do I prepare to Sell?Maximize EBITDA/SDE for 2 to 3 years$Every extra $ of EBITDA = $2 to $4 in your pocket$Likewise, every $ of decline in EBITDA is $2 to $4 off your selling price, or more!
Growth – buyers love a growing businessClean up the office & building
First impressions are critical and hard to change.
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 3
Page 7Copyright VR Business Brokers 2009
What is EBITDA & SDE?
EBITDAEarnings Before Interest Taxes Depreciation & Amortization
EBITDA = Pre Tax Profit + Depreciation + Amortization
SDESeller’s Discretionary Earnings
SDE = Pre Tax Profit + Owner’s Salary & Benefits + Depreciation + AmortizationOr SDE = EBITDA + Owners Salary &
Benefits
aka DE, SDC, FCF, Owners Benefit, etc.
Page 8Copyright VR Business Brokers 2009
What is SDE?A Seller’s Discretionary Earnings is measure of the total financial benefit accruing to the owner of a business.
SDE is Calculated as follows (simplified):+ Pre Tax Net income+ Owner’s salary+ “Discretionary expenses” or perks+ Non-cash expenses (e.g. amortization & depreciation)+ Interest expense+ Non-operating expenses + Non-recurring/one time expenses
= SDE (Seller’s Discretionary Earnings)
Page 9Copyright VR Business Brokers 2009
Preparing to Sell: Books & Records
Your financial records (books & records) determine the value or your business, the value or amount of an SBA loan for the business, and ultimately may determine whether your business is sellable or not.
P&Ls must match tax returnsALL expenses must be documentedALL income must be documentedIf it isn’t documented it did not happen.
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 4
Page 10Copyright VR Business Brokers 2009
Preparing to Sell: Infrastructure & Systems
Infrastructure & Systems are vital to a successful transition and also key to selling the business. Buyers are concerned about their ability to take over and “replace” the owner without impacting revenue, profits, or the business.
Managers, Supervisors, LeadsSystems, procedures, documentation, trainingVendor/Supplier agreements
Page 11Copyright VR Business Brokers 2009
7 + Ways to Increase the Value of Your Company
1. Maximize SDE for 3 years2. Growth – growing businesses get a premium3. Books & Records - show ALL revenue &
expenses, ensure it is easy to follow/understand4. Prepare for new management & transition5. Training - train your staff for day to day ops6. Documentation & Procedures7. Spring Cleaning
Meet with a Professional Business Broker
Page 12Copyright VR Business Brokers 2009
Exit Strategy – Post Sale
How do I minimize my taxesDevelop a plan to minimize taxes from the sale of your business.
Review with a CPA that is familiar with Tax planning for business sales.
If you get a “standard” answer without careful analysis, get a second opinion.
Develop a plan to maximize the return on your proceeds and minimize the taxes.
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 5
Page 13Copyright VR Business Brokers 2009
When & Why to Sell
The best time to sell is whenSales and Profits are peaked or nearly soThe company is operating well & shows stability
Why to SellRetirementReduce your riskCash outNo Successor
Page 14Copyright VR Business Brokers 2009
When Not to Sell
You waited too long if:Earnings have dropped substantiallyYou must sell “quickly”Your competitors have already passed you by
You should wait if…You expect substantial growth soonYou KNOW things WILL improve
Page 15Copyright VR Business Brokers 2009
When to Sell Anyway
You should move on and sell if:Earnings are not likely to improveCompetition is growing strongerMarket is getting weakerProduct pricing and margins are erodingYou are burned out and simply aren’t willing to do what needs to be doneIf health or age are a concern and a successor is not in place
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 6
Page 16Copyright VR Business Brokers 2009
Selling Your Business
Page 17Copyright VR Business Brokers 2009
Why Buyers Buy
Top Reasons for Buying a businessCash FlowGrowthROIStrategic Fit (typically larger deals)Taxes (typically larger deals)Intangible Assets
Patents, Trademarks, Technology, Brand Names
Page 18Copyright VR Business Brokers 2009
What Buyers Want
Good Books & Records3 Years P&Ls and Tax Returns
Good Earningsmust be able to support debt service, buyers income & a return on investment
Good Price & TermsMarket price, sensible earnings multiplesSBA or Seller Note Financing
Easy or Manageable Transition
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 7
Page 19Copyright VR Business Brokers 2009
The Business Value Pyramid
Level of Risk
Seller’s Discretionary Earnings
Terms
Desirability/ Strategic Value
Page 20Copyright VR Business Brokers 2009
Decisions, Decisions…
Buyer’s have choices…Buy your businessBuy another businessKeep lookingDo nothingPassive investment
Buyers face tough decisions with limited information and great potential risk.
Page 21Copyright VR Business Brokers 2009
Valuation – A Buyer’s Perspective
The 2 X Myth…Popular belief with buyers is ALL that businesses sell for 2X earnings.
What earnings?SDE? SDE + inventory?EBITDA?Pre Tax Profit?
Myth has a basis: overall average is 2X SDEActual selling prices range from as low as 1X to
over 4 X SDE and as high as 5 X EBITDA
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 8
Page 22Copyright VR Business Brokers 2009
Seller’s Valuation Methods
I know what my business is worth:I checked the newspaper ads & internetMy accountant told me…My attorney told me…A friend told me…It would cost more than that to start one…I invested that much and it has potential!
Sellers Valuation Equation:Original Investment+Salary+Inventory+All Assets+Whatever I Want = Selling
Price
Page 23Copyright VR Business Brokers 2009
Pricing Rules of Thumb
Some typical pricing multiples are:SDE 1.5 X to 3 X Overall Average SDE = 2.15 XEBITDA 3 X to 5 XAverage EBITDA = 4 X
Multiples vary by industry type, business size and earnings level.
* Does not include real estate, and may not include A/R and inventory
Page 24Copyright VR Business Brokers 2009
Business Value Examples
Some Typical Values from Sold CompsServices 2.2 X to 3 X SDEManufacturing 2.5 X to 3.5 X SDEDistribution 2.5 X to 3 X SDE + inventoryRetail 1.0 X SDE to 2 X SDE + inventoryPrinters 1.8 X to 2.25 SDEExceptions to the rules…
Flower Shop sold for 10X earnings!But it was only earning $5,000
Industry averages presume the business is operating at industry norms
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 9
Page 25Copyright VR Business Brokers 2009
Recasting the Financials
The financial statements (e.g. P&Ls and tax returns) must be recast to reflect the company’s true earning power, SDE. Recast financial statements provide buyers with a common baseline to compare earnings from different businesses to each other as well as way to calculate their potential earnings.
Page 26Copyright VR Business Brokers 2009
Business Value Economics
Page 27Copyright VR Business Brokers 2009
Business Value vs. SDE
$0$200$400$600$800
$1,000
$50 $100 $150 $200 $250 $300Seller's Discretionary Earnings ($000)
Bus
ines
s Va
lue
($00
0)
Typical Minimum
Typical Maximum
Overall average business value is 2.1 X SDE, typical SDE multiples range from 1.5 X to 3 X SDE + inventory value.
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 10
Page 28Copyright VR Business Brokers 2009
Do I Need a Valuation?
What about “Valuations” and Appraisals?You definitely need a Valuation if:
DivorcePartnershipTrustEESOP
Recommended for businesses over $1 million salesSupports best value, eases negotiationsTypical valuation costs run from $1,000 to $5,000, and can exceed $20,000 for complex or large deals
Page 29Copyright VR Business Brokers 2009
Do I need a Valuation?
You don’t necessarily need one ifBusinesses less than $1 million sales.The market value opinion from your advisors
makes sense to you.You are only interested in selling the business.
Valuation will not be very useful if:Poor books and records or poor tax returns.Less than 3 years of financial history.
Page 30Copyright VR Business Brokers 2009
Valuation Methods
Valuation Methods – the most common:Comparative Method (aka Market Data)Cost ApproachExcess Earnings (aka Income Capitalization)True Selling Price (Tetreault & Clements)Final Price Method (B of A)Weighted AverageRule of Thumb Approach
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 11
Page 31Copyright VR Business Brokers 2009
Financing & Deal Structure
There are only 2 real choices for Small Businesses:
SBA Loan – will finance 75% of dealSeller Note – typically 30% to 50% down with a 5 year, 8% note. Also can supplement SBA loan to lower down payment i.e. 10% to 15% down. All Cash – rarely occurs, and usually at the expense of the asking price. Odds are better with a lottery ticket!
Page 32Copyright VR Business Brokers 2009
Financing & Deal Structure
M&A Financing – a bit different, but…Still Rarely ALL cash.May still require a Seller note.Often includes earnouts such as employment contracts, severance, non-compete, consulting, commissions, bonuses on sales or other targets, etc.May include Stock Deal is generally too big for SBA loans, must use other debt financing.
Page 33Copyright VR Business Brokers 2009
Seller Risk & Selling Price vs. Down Payment
0%
20%
40%
60%
80%
100%
0% 20% 40% 60% 80% 100%
Down Payment (as % of Asking Price)
Selli
ng P
rice
& R
isk
vs. P
oten
tia
TheSweet Spot
(15-30%Down)
Selling Price as a Percent of Potential
Seller Risk as a Percent of Maximum
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 12
Page 34Copyright VR Business Brokers 2009
Cash vs. Leveraging
All cash deals rarely occur. Here is why…
Buyers realize a significantly higher net income with the same cash invested in deals with financing (leveraging).Buyers can double or triple their net after debt service with leveraging.
Page 35Copyright VR Business Brokers 2009
Cash vs. Leveraging
SBA financing + a small Seller note makes an attractive package for buyers.
Buyers can buy a larger business with less cash upfrontHigher ROE and higher net after debt service, even if they pay more for the business!
Page 36Copyright VR Business Brokers 2009
Financing & Deal Structure
Stock vs. Asset SaleMost deals are Asset salesAsset sales are
Simpler to concludeMore favorable for Buyer for taxesLess favorable for Sellers for taxes
Tax strategies can reduce tax liabilitySuccessor Liability – reduced risk
Stock Sales areMore favorable for seller – taxesLess favorable for Buyers – taxes, liabilities, etc.Successor Liability issues
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 13
Page 37Copyright VR Business Brokers 2009
Deal Examples: Small Business #1
Service company; $2,100,000 annual sales, $250,000 Seller’s Discretionary Earnings
Sale Price 2.5 X SDE = $625,000Stock Sale of C Corp.SBA Loan = $468,750Seller Note = $75,000
5 years, 8%, $18,249/year principle +interestTotal repayment = $91,244
Buyer Down = $81,250plus points, taxes, and closing costs
Page 38Copyright VR Business Brokers 2009
Deal Examples: Small Business #1
Total Seller Compensation$550,000 cash at closingDeferred Income
$18,249/year principle + interest on noteTotal Deferred Income = $91,245
Total Compensation = $641,245
Page 39Copyright VR Business Brokers 2009
What if…?
What if the Seller had an Exit Strategy?Workman’s Comp and other expenses had increased sharply, but owners prices had not been increased in several years.Earnings were on a downward trend.Infrastructure was good.Customer base was excellent.
Exit strategy would have focused on reducing expenses and increasing earnings. Owner was not aggressive in this area as he was burned out. Probably sold the business 2 years too late.
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 14
Page 40Copyright VR Business Brokers 2009
Deal Examples: Small Business #2
Service company; $1,400,000 annual sales, $260,000 Seller’s Discretionary Earnings
Sale Price 3.12 X SDE = $810,000Asset SaleSBA Loan = $610,000Seller Note = $0Buyer Down = $200,000
plus points, taxes, and closing costs.
Page 41Copyright VR Business Brokers 2009
Deal Examples: Small Business #2
Total Seller Compensation$810,000 cash at closingDeferred Income – none.Total Compensation = $810,000
Seller used a structured sale and tax strategy to reduce his taxes by $180,000.
Page 42Copyright VR Business Brokers 2009
Why did this Seller do better?
This Seller had an Exit Strategy?Workman’s Comp increased, other expenses had decreased, and revenue increased.Earnings were on a upward trend, with additional growth potential.Infrastructure was good.Customer base was excellent.
Seller had an Exit Strategy focused on reducing expenses and increasing earnings. Owner was aggressive in this area and had a timeline in place to sell his business.
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 15
Page 43Copyright VR Business Brokers 2009
Deal Examples: Mid Sized Business
Mfg company; $10,000,000 annual sales, $1,000,000 EBITDA
Sale Price 3.5 X EBITDA = $3,500,000Asset SaleSBA Loan = $1,000,000Mezzanine Financing = $1,000,000Seller Note = $500,000
5 years, 8%, $121,658/year principle +interestSeller Consulting/Employment = $500,000
$100,000/year for 5 yearsBuyer Down = $500,000
Page 44Copyright VR Business Brokers 2009
Deal Examples: Mid Sized Business
Total Seller Compensation$2,500,000 cash at closingDeferred Income
$100,000/year consulting/employment$121,658/year principle + interest on noteTotal Annual Deferred Income = $221,658Total Deferred Income = $1,108,290
Total Compensation = $3,608,290
Page 45Copyright VR Business Brokers 2009
Why Businesses Don’t Sell
PriceBooks & RecordsFinancingSeller (owner) is not motivatedUnattractive Market or IndustryHighly Specialized Industry
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 16
Page 46Copyright VR Business Brokers 2009
Why Businesses Don’t Sell
PricePriced above comparable businessesExcessively High MultiplesEarnings won’t support the asking price
Earnings won’t support the buyers income requirements after debt service
Earnings are weak or inconsistent
Page 47Copyright VR Business Brokers 2009
Why Businesses Don’t Sell
Books & RecordsPoor Books & Records make already cautious buyers suspicious.Revenue or Earnings that don’t stack up against owner’s claims.Inconsistent figures from year to year.
Financing – there are only 2 real choices for Small Businesses: SBA or Seller Note
All Cash – rarely occurs, and usually at the expense of the asking price and think about the tax implications.
Page 48Copyright VR Business Brokers 2009
Why BusinessesDon’t Sell
Financing – Seller wants CASH now!Cash vs. Leveraged Deal – a comparison
Buyer with $250,000 cash can double or even triple their net after debt service with financing.
Business A: $250,00 cash, $250,000 total purchase price
$125,000 SDE based on 2X SDEBusiness B: $225,000 down; $1,125,000 SBA
financing + $150,000 seller note, $1,500,000 total purchase price
$307,000 net after debt service Debt ServiceWhich one would you buy?
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 17
Page 49Copyright VR Business Brokers 2009
Why Businesses Don’t Sell
Other reasonsUnmotivated Seller
I’ll sell for the right price… (e.g. my price)I want ALL cash…I don’t need to prove anything…
Specialized or Unattractive IndustryBoth have very limited interested buyersSpecialized may have difficulty finding buyers
qualified to operate the businessOne Man shows – owner is key to operation, and
can’t be replaced
Page 50Copyright VR Business Brokers 2009
Negotiating the Deal
Negotiate & be prepared to play ballBe Patient!Focus on key points
Don’t sweat the small stuffBe prepared to settle on small points
But get something in return…Adopt a Win-Win styleCommit everything to writing Using an intermediary allows you to stay neutral
Page 51Copyright VR Business Brokers 2009
The Deal Will Die 3 Times!
Problems along the way…Deal DisagreementsDue Diligence SurprisesFinancingBad adviceBuyer’s/Seller’s remorse
May cause the deal to die (you think)Some deals die 3 times before finally closing.View these as challenges and hurdlesCan be overcome with cooperation
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 18
Page 52Copyright VR Business Brokers 2009
Am I Stuck with the Note?
If I carry a Seller Note am I stuck with it for the full term?
No, you can sell your note on the secondary market.
Note Brokers will buy/sell your note.But you will have to discount it.Must be “seasoned” for 2 to 6 monthsDiscount varies according to term, interest rate, security/collateral.
Page 53Copyright VR Business Brokers 2009
Doing the Deal
Can I do it my self?Confidentiality? Marketing?Business interruption & your time.IBBA stats indicate an average of 36 to over 50 buyer inquiries to sell a business, only 1 in 15 buyers actually buy a business.Negotiations.Often up to 3 offers to close a deal.Deal Structure and Closing?
Purchase Agreement, Due Diligence, Escrow, …Financing?
Page 54Copyright VR Business Brokers 2009
Doing the Deal
Why Use a Broker/Intermediary?ConfidentialityMarketing the businessBuyer Screening, Sourcing, Management
1 out of 15 buyers actually buy a business!36 to over 50 prospects to sell a business priced fairlyAs many as 3 offers to sell a business (close the deal)
Deal Structure & NegotiationsNegotiating directly puts you at a disadvantageIntermediaries have deal experience
Closing the DealIntermediaries have experience in getting the deal done
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 19
Page 55Copyright VR Business Brokers 2009
Getting Good Advice
Why Use Tax/Accounting Professionals?Exit Strategy development & implementation in conjunction with your Business BrokerTax AdviceDeal Structure AdviceDue DiligencePost Sale Tax & Financial Advice
Page 56Copyright VR Business Brokers 2009
Legal Advice
Consult your Attorney whenYou need a Note & Security AgreementYou do not understand or are unsure of the contract or terms of the deal, or need legal adviceStock Sales
Reps & Warranties, Note Offsets, etc. M&A deals
LOI, deal terms & agreement, Due Diligence
Page 57Copyright VR Business Brokers 2009
VR Business Brokers Getting Deals Done
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 20
Page 58Copyright VR Business Brokers 2009
VR Exit Strategy Seminar
Resources & information
Page 59Copyright VR Business Brokers 2009
Presenter Bio’s
Page 60Copyright VR Business Brokers 2009
Reading & other Resources
Books & Reference Guides“A Basic Guide for Buying & Selling a Company”, Wilbur Yegge “Selling Your Business”, Russell Robb “Buying Your Own Business”, Russell Robb“ Valuing Small Businesses & Professional Practices” – Shannon PrattVR Business Brokers Seller’s Guide
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 21
Page 61Copyright VR Business Brokers 2009
More Resources…
Web Resources www.vrbusinessbrokers.comwww.ibba.org (International Bus Brokers Assoc)
www.bizbuysell.comValuation & Comp Resources
BizcompsPratt’s Stats
Page 62Copyright VR Business Brokers 2009
VR’s Proven Selling Process
Documentation & Packaging
Marketing& Screening
Offers &Negotiation
Due Diligence
Closing
Average time to sell a business nationwide is 7 months, but varies widely by type of business, asking price and financing terms.
Page 63Copyright VR Business Brokers 2009
The Sale Process
Documentation & Packaging
Marketing& Screening
Offers &Negotiation
Due Diligence
Closing
1. Commitment: You commit to selling with us at terms consistent with the marketplace.
2. Documentation: You sign necessary forms and provide copies of required documentation.
3. Valuation: We analyze your business, review comparables and agree with you on the listing price and terms.
4. Packaging: We develop a confidential business profile, non confidential Internet, and in some cases digital video Confidential Business Profiles on your business.
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 22
Page 64Copyright VR Business Brokers 2009
The Sale Process
5. Marketing: We advertise your business and others like on our website and the most popular industry websites maximizing buyer interest and inquiries. Note that 90% of buyers buy something other than the business they initially called us about. So the driver of success is overall exposure for VR listings, not individual ads.
6. Screening: We interview prospective buyers to eliminate those unlikely or unable to buyer your business. We obtain signed confidentiality and net worth statements.
7. Introduction. We take only serious, qualified buyers to meet you and view your business.
8. Financial Assistance. We work with you, prospective buyers and select financial institutions and brokers to structure appropriate financing.
Documentation & Packaging
Marketing& Screening
Offers &Negotiation
Due Diligence
Closing
Page 65Copyright VR Business Brokers 2009
The Sale Process
9. Offer to Purchase: We encourage buyers to write fair offers backed by earnest money checks. We present offers to you along with buyer profiles.
10. Counter Offer: You may accept an offer as presented or we will assist you in structuring a counter offer.
11. Offer Acceptance: Once both parties agree on terms, we have an offer “signed both ways” but not a done deal.
Documentation & Packaging
Marketing& Screening
Offers &Negotiation
Due Diligence
Closing
Page 66Copyright VR Business Brokers 2009
The Sale Process
12. Due Diligence: Buyer inspects and approves of your financial records, equipment, contracts, etc. You review the buyer’s qualifications.
13. Real Estate Transfer: We work with you, the buyer and your landlord to transfer your lease. If you own the real estate, we can sell it with the business, or separately, and if appropriate, co-broke with a realtor.
14. Note Assumption: If existing liabilities are to be assumed, we work with all parties to ensure the transfer of those obligations.
15. Contingency Removal: Once the buyer and you are satisfied, contingencies are removed, escrow is opened, and the offer is binding.
Documentation & Packaging
Marketing& Screening
Offers &Negotiation
Due Diligence
Closing
VR Business Brokers 2/17/2009
Copyright VR Business Brokers 2009 23
Page 67Copyright VR Business Brokers 2009
The Sale Process
17. Closing Preparation: We guide you and the buyer through closing with a rigorous checklist to ensure that everything necessary to complete the sale is in order and the transaction is completed in a timely manner.
18. Inventory: A count of inventory is made near the closing by you and buyer together or with a third party auditor.
19. Closing: At closing, money, title and possession of the business changes hands.
20. Celebration. Now it’s time to celebrate and move on to retirement or the next phase of your career.
Documentation & Packaging
Marketing& Screening
Offers &Negotiation
Due Diligence
Closing
Top Related