Are You Maximizing the
Value of Your Business?
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.
What’s the Number One driver of
business transitions each year?
source: American Family Business Survey – MassMutual 2002
That means that business owners
have some control over at least the
timing of their exit.
But will that exit be successful?
How Would You Define a Successful
Highest sales price?
Fastest sales process?
Accomplish personal goals?
Highest net proceeds?
Best strategic fit?
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 BUSINESS BUSINESS
Getting three in a row means you lose, not win!
Credit: Thanks to Rob Slee for this powerful analogy!
75% of business owners report
regretting selling their business 12
months after the closing. WHY?
They failed to line up the three
To win you must get the three different
issues to line up perfectly at the same
PERSONAL BUSINESS MARKET
This requires a great deal of planning or a great deal of luck!
We’ll explore each topic in detail
Let’s start with Personal Issues
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.
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?
Create family legacy
Reward loyal employees
Maintain community presence
Stay involved in business
Benefit charitable interests
Fund retirement lifestyle
Enjoy more spare time
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
5. Sell to a Third Party
6. Refinance or Recapitalize the Business
7. Go Public
8. Liquidate the Business
Buying or selling a business
What Type of Valuation is Necessary?
IRS Sec. 59-60 Valuation
Definition of Value
Fair Market Value
Different Values for the
Exit Exit Valuation Value Resulting
Channel Option Authority Standard Value
Family Gifting/GRAT IRS Fair Market Value $6,500,000
Owners Buy-Sell Owners Negotiated value or $9,000,000
Agreement Fair Market Value
Third- Controlled Buyer, Investment Value or $10,250,000
Party Auction Seller and Market Value
Value Factor Analysis
A fundamental analysis of a company’s strengths and
weaknesses from a buyer’s perspective
•Attitude of Owner •Market Position
•Family/Partner Consensus •Corporate Structure
•Barriers to Entry •Lawsuits
•Historical Performance •Taxes
•Management Team •OSHA
•Sales and Marketing Literature •Intellectual Property
•Customer Base •Track Record
•Product/Service Quality •Operating Margins
•Employees •Shareholder’s Equity
•Fixed Assets •Economy
Value Enhancement Opportunities
High Value, High Value,
High Low Importance High Importance
Value Low Value, Low Value,
Low Importance High Importance
Low Importance High
Keeping Valuable Employees
Determine who is key or essential to the
business and who is not. Look at impact on
Sales and profits
Potential exposure of trade secrets and
loss of employees to competitors
Plans for expansion
Morale/loyalty of other employees
Mentoring of successor managers
Make sure they are significant,
relevant and measurable.
Current Market Conditions
U.S. M&A Deals Value vs. Volume
Total Value ($billions)
Number of Deals
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Total Value Number of Deals
Why Is the Market Hot?
Favorable tax environment
Available bank funding
$200 Billion in Available Funds
Private Equity Fund Raising
No. of New Funds
2000 2001 2002 2003 2004 2005
$ Raised # Funds
Available Bank Debt
Senior Debt/EBITDA 3.8x
Total Debt/EBITDA 4.2x
Requires 1 to 5 equity to total debt
Lowest Capital Gains Rates in History
Capital Gains Tax Rates
(Historic & Projected)
Capital Gains Rate
Makes it a very favorable market for
both buyers and sellers
But window is closing:
Tax increases in 2010
Political and economic uncertainty
Alter the Odds
An Exit Plan helps Business Owners
control the Spin of these wheels and
reduce the element of chance in
successfully exiting a business.
What is an Exit Plan?
A comprehensive road map to successfully exit a
It asks and answers all of the
tax questions involved in selling a privately
Assisting Business Owners with Goal
The 3 basic personal goals to be defined:
Defining ownership succession?
Who Should be Involved?
Shareholders (the owners)
Spouse (or significant other)
Children and grandchildren
In-laws (spouses of children)
The local community
Short and long term
Satisfaction Depends on …
Involuntary vs. Voluntary Transition
Contact with Others
Having a Plan
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
10. ACTION PLANS
11. PROFESSIONAL ADVISORS
13. EXHIBIT A: PRESALE DUE DILIGENCE CHECK LIST
14. EXHIBIT B: LIMITED SCOPE BUSINESS VALUATION REPORT
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
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
Baseline value estimated at $5.4MM
Strategic analysis showed that Stan needed
Developed a stronger mid-level
Increased formal sales training
Change reporting and accountability
“Productize” their services to capture
A Case Study
After 24 months:
12,000,000 Revenue increased to
Earnings $11MM (from 5.5MM)
Cash flow increased to
6,000,000 $2.4MM (from $0.9MM)
2,000,000 Company sold to a
0 foreign strategic buyer
A Case Study
Professional planning and
implementation almost tripled the
value of this client’s company in 24
Exit Planning Process Stan . . .
Saved $900,000 in capital gains
Developed an estate plan that
saved over $1 million in estate
Dramatically increased the value of
The ROI of Exit Planning
Exit Plan $15,000
Estate Plan $15,000
Financial Plan $4,000
Tax Plan $30,000
Total Costs $76,000
The ROI of Exit Planning
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!!!
Results Can Be Stunning …
with Good Planning!
PERSONAL BUSINESS MARKET
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