Are You Maximizing the
Value of Your Business?

                                                        Presented by:
    ...
Triggering Event

   What’s the Number One driver of
    business transitions each year?

   Retirement
    source: Amer...
Timing

   That means that business owners
    have some control over at least the
    timing of their exit.

But will th...
What’s Success?

   How Would You Define a Successful
    Exit
       Highest sales price?
       Fastest sales process...
Would You Be Surprised to Learn

   For 80% of business owners,
    maximizing sales price was NOT
    their top priority?
Just Like Gambling
In effect Owners play the exit slot machine …
but the rules are different.



          BUSINESS       ...
   75% of business owners report
    regretting selling their business 12
    months after the closing. WHY?

   They fa...
   To win you must get the three different
     issues to line up perfectly at the same
     time.


          PERSONAL  ...
   We’ll explore each topic in detail

   Let’s start with Personal Issues
Personal Issues




    PERSONAL
     PERSONAL   PERSONAL
                 BUSINESS   PERSONAL
                           ...
The Macro Picture
   77.7 million baby boomers in the United States are
    now between the ages of 41 and 60 years old.
...
The Macro Picture
Personal Situation
   Studies by PriceWaterhouseCoopers, MassMutual,
    Marquette University and others show that 1 out ...
Personal Goals
   Create family legacy
   Reward loyal employees
   Maintain community presence
   Stay involved in bu...
Exit Options
1.   Transfer Ownership to Family Members
2.   Sell to Other Shareholders
3.   Sell to Management (“MBO” or “...
Business Issues


   BUSINESS
    PERSONAL   BUSINESS
                BUSINESS   BUSINESS
                             MAR...
Business Valuation
   Retirement/Financial planning

   Estate tax

   Gift tax

   Life insurance

   Shareholder ag...
What Type of Valuation is Necessary?


   Rough Estimate

   Valuation Opinion

   Market Valuation

   IRS Sec. 59-60...
Definition of Value
   Fair Market Value

   Market Value

   Investment Value

   Liquidation Value
Different Values for the
 Same Company

  Exit        Exit       Valuation           Value           Resulting
Channel    ...
Business Issues

   Increase profitability
   Reduce customer concentration
   Groom management successor
   Increase ...
Value Factor Analysis

A fundamental analysis of a company’s strengths and
weaknesses from a buyer’s perspective

 •Attitu...
Value Enhancement Opportunities

          High Value,        High Value,
  High    Low Importance     High Importance

  ...
Keeping Valuable Employees
   Determine who is key or essential to the
    business and who is not. Look at impact on
   ...
Keeping Key Employees

   Cash compensation
   Non-cash Benefits
   Stay Bonuses
   Stock Incentives
   Restricted St...
Measurement Tools

   Financial benchmarks
   Operational benchmarks
   Marketing benchmarks
   Other

Make sure they ...
Market Issues


    MARKET
    PERSONAL   MARKET
               BUSINESS   MARKET
                           MARKET
Current Market Conditions
                                   U.S. M&A Deals Value vs. Volume

                     14000  ...
Why Is the Market Hot?

   Favorable tax environment
   Available bank funding
   Aggressive buyers
   Strong economy
...
$200 Billion in Available Funds

                          Private Equity Fund Raising

                $100              ...
Available Bank Debt


   Senior Debt/EBITDA 3.8x
   Total Debt/EBITDA 4.2x
   Requires 1 to 5 equity to total debt
    ...
Current Market Conditions
             Lower Middle Market EBITDA Multiples

 9
 8
 7   6.2                               ...
Lowest Capital Gains Rates in History

                                            Capital Gains Tax Rates
               ...
All Together…

   Makes it a very favorable market for
    both buyers and sellers

   But window is closing:
       Ta...
Exit Planning
   Alter the Odds




        PERSONAL
         PERSONAL      BUSINESS
                        BUSINESS   M...
   An Exit Plan helps Business Owners
    control the Spin of these wheels and
    reduce the element of chance in
    su...
What is an Exit Plan?
   A comprehensive road map to successfully exit a
    private business.

   It asks and answers a...
Assisting Business Owners with Goal
Setting


The 3 basic personal goals to be defined:

   Timing?

   Financial securi...
Who Should be Involved?
   Shareholders (the owners)
   Spouse (or significant other)
   Children and grandchildren
  ...
Evaluating Goals
   Specific
   Optimistic
   Realistic
   Short and long term
   Measurable
   Lifestyle-based
   ...
Satisfaction Depends on …

   Personal Identity
   Marital Status
   Financial Resources
   Involuntary vs. Voluntary ...
Action Plans

Personal       Who

Business       What

Market         When

               Verify
The Exit Planning Report
1.    EXECUTIVE SUMMARY
2.    YOUR GOALS AND OBJECTIVES
3.    PERSONAL CONTINGENCY PLAN
4.    YOU...
Timing is Everything

Step                                       Min. Period

1. Prepare exit plan                       6...
Multidisciplinary Approach


                  Financial
      Attorney
                   Advisor




     Investment
   ...
The ROI of Exit Planning
Case Study


Stan owned a very successful financial
  services consulting company
o He was 62 years old

o Owned business ...
Company Value

Before:
 Revenue $5.5MM

 EBITDA $.9MM


   Baseline value estimated at $5.4MM
Maximizing Value
Strategic analysis showed that Stan needed
to:
   Developed a stronger mid-level
    management team
  ...
A Case Study

                                      After 24 months:


12,000,000                             Revenue inc...
A Case Study
The Results:

Before:          $5.4MM
After:           $15MM
Value-added:     $9.6MM

  Professional planning...
During the
Exit Planning Process Stan . . .

   Saved $900,000 in capital gains
    taxes

   Developed an estate plan t...
The ROI of Exit Planning

     Costs
     Exit Plan        $15,000
     Estate Plan      $15,000
     Financial Plan    $4...
The ROI of Exit Planning

  Returns
  Capital Gains Tax Saving            $900,000
  Value Enhancement                 $9,...
Results Can Be Stunning …
with Good Planning!


    PERSONAL    BUSINESS   MARKET




               WINNER!!!
Questions?




             Learn more about Exit Planning

                Get Your Copy Now!
                      Avail...
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Are You Maximizing the Value of Your Business?

  1. 1. Are You Maximizing the Value of Your Business? Presented by: Richard Jackim The CHRISTMAN Group LLC Contents excerpted from “The $10 Trillion Opportunity: Designing Successful Exit Strategies for Middle Market Business Owners” by Richard E. Jackim and Peter G. Christman, available at www.exit-planning-institute.org and major on-line booksellers.
  2. 2. Triggering Event  What’s the Number One driver of business transitions each year?  Retirement source: American Family Business Survey – MassMutual 2002
  3. 3. Timing  That means that business owners have some control over at least the timing of their exit. But will that exit be successful?
  4. 4. What’s Success?  How Would You Define a Successful Exit  Highest sales price?  Fastest sales process?  Accomplish personal goals?  Highest net proceeds?  Best strategic fit?
  5. 5. Would You Be Surprised to Learn  For 80% of business owners, maximizing sales price was NOT their top priority?
  6. 6. Just Like Gambling In effect Owners play the exit slot machine … but the rules are different. BUSINESS BUSINESS BUSINESS LOSE!!! Getting three in a row means you lose, not win! Credit: Thanks to Rob Slee for this powerful analogy!
  7. 7.  75% of business owners report regretting selling their business 12 months after the closing. WHY?  They failed to line up the three spinning wheels.
  8. 8.  To win you must get the three different issues to line up perfectly at the same time. PERSONAL BUSINESS MARKET WINNER!!! This requires a great deal of planning or a great deal of luck!
  9. 9.  We’ll explore each topic in detail  Let’s start with Personal Issues
  10. 10. Personal Issues PERSONAL PERSONAL PERSONAL BUSINESS PERSONAL MARKET
  11. 11. The Macro Picture  77.7 million baby boomers in the United States are now between the ages of 41 and 60 years old.  That’s 27.5% of the total U.S. population.  28.3% of all businesses are owned by baby boomers – that’s 4 million privately owned companies.  Retirement is the number one reason that business owners exit their companies.
  12. 12. The Macro Picture
  13. 13. Personal Situation  Studies by PriceWaterhouseCoopers, MassMutual, Marquette University and others show that 1 out of every 2 businesses will experience a change in ownership over the next 15 years.  75% of these business owners do not have any idea how they will exit from their businesses when they do decide to retire.  25% have no formal estate plan in place.  Where do your clients fit?
  14. 14. Personal Goals  Create family legacy  Reward loyal employees  Maintain community presence  Stay involved in business  Benefit charitable interests  Fund retirement lifestyle  Enjoy more spare time  Reduce stress
  15. 15. Exit Options 1. Transfer Ownership to Family Members 2. Sell to Other Shareholders 3. Sell to Management (“MBO” or “LBO”) 4. Sell to an Employee Stock Ownership Plan (“ESOP”) 5. Sell to a Third Party 6. Refinance or Recapitalize the Business 7. Go Public 8. Liquidate the Business
  16. 16. Business Issues BUSINESS PERSONAL BUSINESS BUSINESS BUSINESS MARKET
  17. 17. Business Valuation  Retirement/Financial planning  Estate tax  Gift tax  Life insurance  Shareholder agreements  Buying or selling a business  Corporate finance
  18. 18. What Type of Valuation is Necessary?  Rough Estimate  Valuation Opinion  Market Valuation  IRS Sec. 59-60 Valuation
  19. 19. Definition of Value  Fair Market Value  Market Value  Investment Value  Liquidation Value
  20. 20. Different Values for the Same Company Exit Exit Valuation Value Resulting Channel Option Authority Standard Value Family Gifting/GRAT IRS Fair Market Value $6,500,000 with discounts Owners Buy-Sell Owners Negotiated value or $9,000,000 Agreement Fair Market Value Third- Controlled Buyer, Investment Value or $10,250,000 Party Auction Seller and Market Value Buyer their advisors
  21. 21. Business Issues  Increase profitability  Reduce customer concentration  Groom management successor  Increase revenues  Expand market share  Reduce cyclicality
  22. 22. Value Factor Analysis A fundamental analysis of a company’s strengths and weaknesses from a buyer’s perspective •Attitude of Owner •Market Position •Family/Partner Consensus •Corporate Structure •Barriers to Entry •Lawsuits •Historical Performance •Taxes •Products/Services •Environmental •Management Team •OSHA •Sales and Marketing Literature •Intellectual Property •Customer Base •Track Record •Product/Service Quality •Operating Margins •Employees •Shareholder’s Equity •Fixed Assets •Economy
  23. 23. Value Enhancement Opportunities High Value, High Value, High Low Importance High Importance Value Low Value, Low Value, Low Importance High Importance Low Low Importance High
  24. 24. Keeping Valuable Employees  Determine who is key or essential to the business and who is not. Look at impact on  Sales and profits  Potential exposure of trade secrets and loss of employees to competitors  Plans for expansion  Operations  Morale/loyalty of other employees  Mentoring of successor managers  Customer relations
  25. 25. Keeping Key Employees  Cash compensation  Non-cash Benefits  Stay Bonuses  Stock Incentives  Restricted Stock  Phantom Stock
  26. 26. Measurement Tools  Financial benchmarks  Operational benchmarks  Marketing benchmarks  Other Make sure they are significant, relevant and measurable.
  27. 27. Market Issues MARKET PERSONAL MARKET BUSINESS MARKET MARKET
  28. 28. Current Market Conditions U.S. M&A Deals Value vs. Volume 14000 14000 12000 12000 Total Value ($billions) Number of Deals 10000 10000 8000 8000 6000 6000 4000 4000 2000 2000 0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total Value Number of Deals
  29. 29. Why Is the Market Hot?  Favorable tax environment  Available bank funding  Aggressive buyers  Strong economy  Low inflation
  30. 30. $200 Billion in Available Funds Private Equity Fund Raising $100 200 No. of New Funds Funds Raised $80 150 ($billions) $60 100 $40 $20 50 $- 0 2000 2001 2002 2003 2004 2005 $ Raised # Funds
  31. 31. Available Bank Debt  Senior Debt/EBITDA 3.8x  Total Debt/EBITDA 4.2x  Requires 1 to 5 equity to total debt ratio
  32. 32. Current Market Conditions Lower Middle Market EBITDA Multiples 9 8 7 6.2 6.2 5.9 6.1 6 5.5 5.3 5.3 5.5 5 4 3 2 1 0 1998 1999 2000 2001 2002 2003 2004 2005
  33. 33. Lowest Capital Gains Rates in History Capital Gains Tax Rates (Historic & Projected) 50.00 Capital Gains Rate 40.00 30.00 20.00 10.00 0.00 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009
  34. 34. All Together…  Makes it a very favorable market for both buyers and sellers  But window is closing:  Tax increases in 2010  Political and economic uncertainty
  35. 35. Exit Planning  Alter the Odds PERSONAL PERSONAL BUSINESS BUSINESS MARKET MARKET WINNER!!!
  36. 36.  An Exit Plan helps Business Owners control the Spin of these wheels and reduce the element of chance in successfully exiting a business.
  37. 37. What is an Exit Plan?  A comprehensive road map to successfully exit a private business.  It asks and answers all of the  business,  personal,  financial,  legal and  tax questions involved in selling a privately owned business.
  38. 38. Assisting Business Owners with Goal Setting The 3 basic personal goals to be defined:  Timing?  Financial security?  Defining ownership succession?
  39. 39. Who Should be Involved?  Shareholders (the owners)  Spouse (or significant other)  Children and grandchildren  In-laws (spouses of children)  Key employees  Non-essential employees  Customers/clients  Vendors/suppliers  The local community
  40. 40. Evaluating Goals  Specific  Optimistic  Realistic  Short and long term  Measurable  Lifestyle-based  Consistent  Honest
  41. 41. Satisfaction Depends on …  Personal Identity  Marital Status  Financial Resources  Involuntary vs. Voluntary Transition  Contact with Others  Having a Plan
  42. 42. Action Plans Personal Who Business What Market When Verify
  43. 43. The Exit Planning Report 1. EXECUTIVE SUMMARY 2. YOUR GOALS AND OBJECTIVES 3. PERSONAL CONTINGENCY PLAN 4. YOUR BUSINESS: A BASELINE VALUATION 5. VALUE FACTOR ANALYSIS 6. VALUE ENHANCEMENT OPPORTUNITIES 7. EXIT OPTIONS AND CONSIDERATIONS 8. TAX ANALYSIS 9. RECOMMENDATIONS 10. ACTION PLANS 11. PROFESSIONAL ADVISORS 12. GLOSSARY 13. EXHIBIT A: PRESALE DUE DILIGENCE CHECK LIST 14. EXHIBIT B: LIMITED SCOPE BUSINESS VALUATION REPORT
  44. 44. Timing is Everything Step Min. Period 1. Prepare exit plan 6 months – 1 year 2. Build value and complete tax planning 1 year or more 3. Investment banking/sales process 1 year 4. Transition process 1 year or more Total Time 3.5 years or more
  45. 45. Multidisciplinary Approach Financial Attorney Advisor Investment CPA Banker
  46. 46. The ROI of Exit Planning
  47. 47. Case Study Stan owned a very successful financial services consulting company o He was 62 years old o Owned business for 18 years o No strategic business plan o No exit plan o No tax plan
  48. 48. Company Value Before:  Revenue $5.5MM  EBITDA $.9MM  Baseline value estimated at $5.4MM
  49. 49. Maximizing Value Strategic analysis showed that Stan needed to:  Developed a stronger mid-level management team  Increased formal sales training  Change reporting and accountability  “Productize” their services to capture market share
  50. 50. A Case Study After 24 months: 12,000,000  Revenue increased to Earnings $11MM (from 5.5MM) 10,000,000 Revenues 8,000,000  Cash flow increased to 6,000,000 $2.4MM (from $0.9MM) 4,000,000 2,000,000  Company sold to a 0 foreign strategic buyer 2001 2003 for $15MM
  51. 51. A Case Study The Results: Before: $5.4MM After: $15MM Value-added: $9.6MM Professional planning and implementation almost tripled the value of this client’s company in 24 months!
  52. 52. During the Exit Planning Process Stan . . .  Saved $900,000 in capital gains taxes  Developed an estate plan that saved over $1 million in estate taxes  Dramatically increased the value of his company
  53. 53. The ROI of Exit Planning Costs Exit Plan $15,000 Estate Plan $15,000 Financial Plan $4,000 Valuation $12,000 Tax Plan $30,000 Total Costs $76,000
  54. 54. The ROI of Exit Planning Returns Capital Gains Tax Saving $900,000 Value Enhancement $9,600,000 Estate Tax Savings $1,000,000 Peace of Mind priceless Total Return $11,500,000 That’s a 151 to 1 return on his investment!!!
  55. 55. Results Can Be Stunning … with Good Planning! PERSONAL BUSINESS MARKET WINNER!!!
  56. 56. Questions? Learn more about Exit Planning Get Your Copy Now! Available at www.exit-planning-institute.org

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