Selling Your Business Tutorial

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What Business Owners Should Understand Before Iniating An Exit Strategy.

What Business Owners Should Understand Before Iniating An Exit Strategy.

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  • WELCOME I am Tony Vincent, President & Founder of AOCP. Introduce others in the room. Our job is to sell privately owned mid-market companies at maximum value. Depending on your time table, we’ll show you that this can mean selling at a deep discount compared to potential value; or It can mean selling at the highest price possible compared to your peer companies. B/F I go on, I’d like to explain the schedule for the workshop. Note that I said, Workshop. There will be exercises for each section of the presentation to help you focus what you are learning on your business. Rest Rooms Breaks Questions – after each topic, there we will take questions.

Transcript

  • 1. Selling Mid-Market Companies AT MAXIMUM VALUE © Alpha Omega Capital Partners LLC 2006
  • 2. Since 1999… Investment Bankers Providing Services Tailored To Privately Held Mid-Market Businesses ALPHA OMEGA CAPITAL SECURITIES, LLC An NASD Registered Broker/Dealer Richmond, VA ♦ New York, NY ♦ Lexington, KY ♦ Orlando, FL ~~~~~ Partners ~~~~~ Regional Vice Presidents Analysts IT & Admin.
  • 3. Full Range Of Services Sell-Side Representation Engaged Buy-Side Representation Certified Valuations Capital Raise Value Coaching Our Firm ALPHA OMEGA CAPITAL PARTNERS
  • 4. Planning Your Exit At Maximum Value Overview Part I: Valuation Methodology Part II: Considerations Before Selling Part III: Timing of the Sale Part IV: Value Maximization Part V: How To Sell Part VI: How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS
  • 5.
    • Definition of Value
    • Discount Factors
    • What are EBITDA and SDE?
    • Methodologies for Determining Value
    • Valuation Preparation
    • Multiples
    • Estimating Your Company’s Value
    • Why Values For Similar Companies Vary?
    Overview Part I: Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS
  • 6.
    • Market Value:
    • The amount at which property would change hands between a willing buyer and a willing seller when neither is acting under compulsion and when both have knowledge of the relevant facts. IRS
    • Other Definitions:
    • Investment Value: Value of goods or services to a particular investor.
    • Fair Value: A judicially determined concept that varies widely.
    • Book Value: Assets minus liabilities. GAAP
    • Liquidation Value: Proceeds from quick & orderly liquidation of assets.
    • Enterprise Value: The Market Value of the business including debt.
    • Transaction Value: The Enterprise Value less debt or Net Proceeds before taxes and fees.
    • AOCP:
    • Present value of all future income streams in today’s market.
    Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS Definition of Value
  • 7. When Risk Is Minimized For The Buyer, Maximum Value Is Obtained For The Seller! Our Goal: How To Sell At Maximum Value Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS Definition of Value
  • 8. Discount Factors are tangible and intangible conditions that exist in a company that reduce its value below the theoretical Market Value (Maximum) of the same company if those conditions did not exist. In other words, discounts a buyer will levee based on specific elements of risk that the buyer discovers during the buyer’s due diligence. To maximize seller value, buyer risk must be minimized. Discount Factors include but are not limited to the following: Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS The BIG Four Organizational Factors Operational Factors
    • Business Size
    • Depth of Management
    • Geographic Location
    • Industry Type
    • Importance of Key Personnel
    • Facilities & Equipment Age
    • Revenue Trends (top line growth)
    • Organizational Structure/Policies
    • Quality of Operations/Systems
    • Profitability Trends (bottom line)
    • Age of Workforce
    • Regulatory Compliance
    Financial Factors Product & Marketing Factors Miscellaneous Factors
    • Reliability of Financial Statements
    • Barriers to Entry & Life of Patents
    • Legal Structure
    • Lending Environment
    • Company or Product Life Cycle
    • Stability of the Industry
    • Capital Deficiencies
    • Diversification of Customer Base
    • Buyer Type & Terms of Sale
  • 9. 1. Size of Business – Larger businesses sell at higher values Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS Financial Factors That Affect Value Company Revenues Selling Price Value
  • 10. 2. Business Type – Selling Prices Vary Significantly by Industry Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS Financial Factors That Affect Value Industry Type Value As % of Revenues
    • Food Service
    • Independents
    • Franchises
    35% to 50% (low end) (high end) Generic Retail (Increases with revenues) 30% to 35% Generic Distribution (Increases with revenues) 30% to 50% Value Added Distribution (Increases with revenues) 40% to 60%
    • Construction
    • General Contracting
    • Specialty Trades
    20% 30% Contract Manufacturing (Increases with revenues) 60% to 80% Proprietary Manufacturing (Increases with revenues) 80% to 110%
  • 11.
    • 3. Revenue Growth Rate –
    • Higher growth rates lead to higher valuations
    • Flat sales eliminate any potential for a premium
    • Irregular sales introduce risk – even if for one year
    • Dropping sales results in a significant value discount
    • 4. Profit Margins –
    • Higher margins lead to higher valuations
    • Upward trends add significant value
    • Gross margin is especially important because overhead expenses can vary subject to owner operating criteria
    Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS Financial Factors That Affect Value
  • 12.
    • One Other: Breakeven Point –
    • Lower breakeven points lead to higher valuations – why?
    Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS Financial Factors That Affect Value $$$ Time Fixed Cost Variable Cost Sales Profit BE
  • 13.
            • Internal Discount Factors You Can Control
            • Business Size & Type
            • Growth & Company Life Cycle
            • Diversification:
            • Of Product Line & Customer Base
            • Of Suppliers
            • Organizational Structure:
            • Personnel Policies
            • Depth & Importance of Management
            • Geographic Location
            • Profitability & Stability of Earnings
            • Overhead Expenses
            • Quality of Financial Statements
            • Structure:
            • Financial & Legal
            • Intellectual Property
            • Condition of Operations & Equipment
            • Condition of Facilities
            • Systems
            • Safety, Health & Environmental
    IDENTIFY ELIMINATE DISCOUNT Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS Financial Factors That Affect Value
  • 14.
      • Economic Conditions
      • Lending Environment & Interest Rates
      • Tax Rate Issues
      • Type of Buyer
      • Conditions In Your Industry
      • Terms of Sale
      • External Factors Require Timing
    IDENTIFY ELIMINATE DISCOUNT Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS Financial Factors That Affect Value
  • 15. EBITDA (ĒBǏT-D-A) Pretax Earnings + Interest Expense + Income Taxes + Depreciation Expense + Amortization EBITDA SDE + EBITDA + Owner’s Comp - Replacement Salaries Seller Discretionary Earnings What are EBITDA and SDE? Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS
  • 16.
    • Obtain transaction information to learn about market comparables;
    • Determine historic EBITDA and then adjust for owners compensation, perks, and non-recurring items (SDE);
    • Analyze historical financial information;
    • Process information through AOCP proprietary software; and
    • Make adjustments based on experience & judgment.
    AOCP’s Valuation Preparation Procedure Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS
  • 17. Methodologies for Determining Value Valuation Methodology ALPHA OMEGA CAPITAL PARTNERS
    • Book Value – Used to Determine Adjusted Going Concern Value
    • DCF – Discounting Future Earnings (discount factors apply)
        • With Growth
        • Without Growth
    • Industry Sale Comparables : Multiples of Cash Flow
    • Industry Ratio Comparables : Multiples of Revenue (Cap of Earnings)
    • Partner Experience (discount factors considered)
    VALUES PROVIDED TO SELLER Strategic Buyer – Public Strategic Buyer – Private Private Equity Fund Private Buyer
  • 18. Planning Your Exit At Maximum Value Overview Part I: Valuation Methodology Part II: Considerations Before Selling Part III: Timing of the Sale Part IV: Value Maximization Part V: How To Sell Part VI: How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS
  • 19.
    • Understanding Your Circumstances
    • The Cost of Selling the Business Yourself
    • Dead End Choices
    • Benefits of an Advisory Board
    • Understanding Your Needs
    Overview Part II: Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS
  • 20. ALPHA OMEGA CAPITAL PARTNERS Timing of the Sale Weighing The Facts ~ No Simple Answer Factors That Influence the Decision to Sell External Discount Factors Internal Discount Factors Personal Needs Decision To Sell
  • 21. Considerations Before Selling Personal Factors Retirement Health Problems Divorce Boredom Other Opportunities To Reduce Stress Load Spiritual Pursuits You Want to Travel Family/Children To Reduce Personal Financial Risk! Others? Internal Factors The Company Life Cycle Organizational Issues Operations Problems Facilities Problems Financial Problems Intellectual Property Others? External Factors Economic Conditions Lending Climate Interest Rates Industry Trends Tax Rates Buyer Offer Others? Factors that Can Influence the Decision to Sell ALPHA OMEGA CAPITAL PARTNERS Understanding Our Circumstances (Factors) Do I Have Enough Money?
  • 22. ALPHA OMEGA CAPITAL PARTNERS Timing of the Sale Sell?
  • 23.
      • COST of Taking Your Eye Off of the Business
      • COST of Not Having an Accurate Market Valuation
      • COST of Not Having a 3 rd Party Negotiating on your Behalf
      • COST of Excessive Legal, Accounting & Travel Costs
      • COST of Not Having Market Resources Readily Available
      • COST of Negotiating With One Buyer
      • COST of Not Being An Expert at Selling Businesses!
      • Others?
    “ Going Solo ~ Save Some Money?” Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS The Cost of Selling the Business Yourself
  • 24.
      • COST of Taking Your Eye Off of the Business = $0 (profits up)
      • OPPORTUNITY COST – Significant = $100,000
      • COST of Not Having an Accurate Market Valuation = $10,000
      • COST of Not Having a 3 rd Party Negotiating on your Behalf = See 4-8
      • COST of Excessive Legal, Accounting & Travel Costs = ~$45,000 lost
      • COST of Not Having Market Resources Readily Available = ?????
      • COST of Negotiating With One Buyer at a time = can’t get deal closed
      • COST of Not Being An Expert at Selling Businesses! = priceless
      • Others = 4+ years of John’s life (wants to retire), anxiety, reputation as being shopped, deal fatigue, etc.
      • AOCP was finally engaged and sold the company at a high multiple in six months (measured from engagement to closing date)
    ~The True John D Story~ Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS The Cost of Selling the Business Yourself
  • 25. ALPHA OMEGA CAPITAL PARTNERS Dead End Choices
      • A competitor will buy the business – I’ll wait for another letter! (lazy & generally unrealistic)
      • “ I’ll keep the business in the family”
      • (generally idealistic)
  • 26. Succession Issues ~80% Want Family <10% Transfer To Family Kids Aren’t Interested Kids Aren’t Qualified Money Needed For Retirement Reality Check ALPHA OMEGA CAPITAL PARTNERS Considerations Before Selling You Want to Keep the Business in the Family
  • 27. Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS
      • A competitor will buy the business – I’ll wait for another letter! (lazy)
      • “ I’ll keep the business in the family” (idealistic)
      • Fear of Change ~ Do Nothing
        • You like what you do (although you may not be doing it well).
        • You hate change, let my family deal with it. (lazy)
        • You don’t know what you would do if you retired.
        • You are defined by the business.
        • You are too young to retire but know you should sell.
        • Retire & Die- Everyone’s fear!
    Dead End Choices
  • 28. ALPHA OMEGA CAPITAL PARTNERS Considerations Before Selling Fear of Change Reading List Dead End Choices About Attitude! Bad Things Often Happen When We Fail To Take Action! A Job Is Not A Life Sentence!
  • 29. Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS
      • A competitor will buy the business – I’ll wait for another letter! (lazy)
      • “ I’ll keep the business in the family” (idealistic)
      • Fear of Change (fear)
      • Your Financial Goals are not met (practical)
        • Do Something About It
          • Hire Good Advisors
          • Create A Realistic Plan
          • Track Change
    Dead End Choices
  • 30. Why To Create a Decision Making Environment of Emotive-Logic Designed To Minimize Risk Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS Logical Decisions Based On Emotional Objectives Benefits of an ‘Advisory Board’
  • 31. Investment Banker Attorney Accountant CFA Corporate Structure Intellectual Property Tax Consequences Short-Term Long-Term Personal Trusts/Planning Investments Insurance Issues Annual Tax Work Short-Term Tax Plan Accounting Methods Market Value of Business Strategic Business Plan Value Mentoring Exit Strategies ALPHA OMEGA CAPITAL PARTNERS Considerations Before Selling Benefits of an ‘Advisory Planning Board’ Others?
  • 32. Considerations Before Selling Maslow’s Hierarchy of Needs- “An Idealistic View” Understanding Our Needs Determining How Much Is Enough? ALPHA OMEGA CAPITAL PARTNERS
  • 33. Physiological Needs = Fixed Cost Food, Water, Shelter Health Care Expenses Assisted Living Expenses Considerations Before Selling Needs Converted to Financial Reality ALPHA OMEGA CAPITAL PARTNERS
  • 34. Fixed Cost Safety Cost (Needs) = Financial Cushion Property Insurance Health Insurance Financial Cushion Cash Reserves “ To Protect Fixed Cost Issues” Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS Needs Converted to Financial Reality
  • 35. Fixed Cost Financial Cushion Clubs Faith Family Charity Legacy Education Love & Belonging = Feel Good Cost Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS Needs Converted to Financial Reality
  • 36. Fixed Cost Financial Cushion Best & Biggest Feel Good Cost Esteem (Discuss) Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS Needs Converted to Financial Reality
  • 37. Fixed Cost Financial Cushion Feel Good Cost Esteem Cost Actualization Cost Pursuing Your Dreams Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS Needs Converted to Financial Reality
  • 38. Financial Cushion Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS Needs Converted to Financial Reality Fixed Cost Feel Good Cost Esteem Cost Dream Cost Pursuing Your Dreams Best Biggest Clubs Faith Family Charity Legacy Insurance Security Financial Cushion Food, Water, Shelter Health Care Expenses Assisted Living Expenses
  • 39. The Number
    • Your lifestyle now -- and in the future;
    • How long you'll live;
    • How your health holds up;
    • What kind of returns your investments earn;
    • What happens with inflation;
    • What twists and turns the economy throws at you; and
    • What twists and turns your life throws at you.
    • Others?
    Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS How Much is Enough
  • 40. Considerations Before Selling ALPHA OMEGA CAPITAL PARTNERS *Distribution Yield Estimates March 2006 Per Leonard Levitch of Kasch, Levitch, McAleer, & Associates Decision Rules and Maximum Initial Withdrawal Rates by Johathan Guyton – Journal of Financial Planning – March 2006 How Much ‘Per Year’ is Enough Amount Invested Low Risk 4.0%* Medium Risk 5.0%* High Risk 6.0%* $1,000,000 $40,000 $50,000 $60,000 $2,000,000 $80,000 $100,000 $120,000 $3,000,000 $120,000 $150,000 $180,000 $4,000,000 $160,000 $200,000 $240,000 $5,000,000 $200,000 $250,000 $300,000 $6,000,000 $240,000 $300,000 $360,000 $7,000,000 $280,000 $350,000 $420,000 $8,000,000 $320,000 $400,000 $480,000
  • 41. Considerations Before Selling Per Lee Eisenberg ALPHA OMEGA CAPITAL PARTNERS How Much is Enough The Number by Lee Eisenberg (Bottom Line) To Be Here And Live Like This You Need $ Per Year COMFORTABLE Live one place, modest lifestyle but better than most, etc. $50,000 to $100,000 COMFORTABLE PLUS Occasional upgrades, mid-priced country club, small second home. $175,000 to $250,000 KIND OF RICH Like finer things, lives well, gives $ away, couple of nice houses. $350,000 to $500,000 RICH Spends weeks/months abroad, exclusive club, gated community, multiple homes, fractional jets, sets on boards. >$1,000,000
  • 42. Planning Your Exit At Maximum Value Overview Part I: Valuation Methodology Part II: Considerations Before Selling Part III: Timing of the Sale Part IV: Value Maximization Part V: How To Sell Part VI: How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS
  • 43.
    • The Company Life Cycle
    • Causes of Declining Value
    • Extending Life & Maintaining Value
    • Extending Life & Gaining Value
    • M&A Volume
    • Economic Conditions
    • Lending Environment & Interest Rates
    • Tax Rate Issues
    • Type of Buyer
    • Conditions in Your Industry
    • Weighing the Facts
    Overview Part III: Timing of the Sale ALPHA OMEGA CAPITAL PARTNERS
  • 44. S ELL AT M AX V ALUE? Liquidation Value GIVE UP? S ELL W HEN E VENTS D ICTATE? ALPHA OMEGA CAPITAL PARTNERS Timing of the Sale Company (Product Line) Life Cycle Stages TIME REVENUE 3) Cash Flow 1) Start-Up 2) Growth 4) Declining Value 5) Obsolescence
  • 45.
            • Dropping market share ~ Try to be 1 st or 2 nd
            • Management issues ~ Talent Concentration
            • Dropping or unstable revenues or earnings
            • Geographic location no longer viable ~ no growth room
            • Aging facilities, equipment or systems ~ requires investment
            • Intellectual property issues ~ tired products, poor documentation
            • Poor (or no) business strategy ~ no vision for the future
    ALPHA OMEGA CAPITAL PARTNERS Causes of Flat, Declining or Low Value Timing of the Sale
  • 46. Buy Time Gain Value Timing of the Sale Extending Life & GAINING Value ALPHA OMEGA CAPITAL PARTNERS $ Time
  • 47. Timing of the Sale M&A Volume ALPHA OMEGA CAPITAL PARTNERS
  • 48.  
  • 49. Timing of the Sale ALPHA OMEGA CAPITAL PARTNERS Macroeconomic Conditions – Weak Dollar Exchange Ratio: Chinese Yuan/1$
  • 50. Timing of the Sale Macroeconomic Conditions - Wealth ALPHA OMEGA CAPITAL PARTNERS Create New Project Create New Activity Log Create New Comp Set Create New Task My Projects US Dollar    Currency Profile Charting    Chart Builder   Relationship Management    Activity Logs   (Add)    Tasks   (Add)    Document Management    Audit History US Dollar ($USDUSD) > Currency Profile       Exchange Rate as of May-04-2007 Last Close 1.3603 Change 0.0000 Prev. Last Close 1.3603 % Change 0.0000 Exchange Rate Chart   [ Chart Builder ] Modify Chart Time Frame:   From:          To:        (mm/dd/yyyy)   Currency Conversion: Historical Equity Pricing Data supplied by                             GDP is shifting from developed countries like the USA and European Union to 3 rd world markets.       Expense Code:  Assign                           Search:                                                                                       © 2000-2007 Capital IQ, Inc., a division of Standard & Poor's. All Rights Reserved.        2007 GDP Growth Forecasts by Country Source: Asian Development Bank
  • 51. Timing of the Sale Macroeconomic Conditions - Wealth ALPHA OMEGA CAPITAL PARTNERS Create New Project Create New Activity Log Create New Comp Set Create New Task My Projects US Dollar    Currency Profile Charting    Chart Builder   Relationship Management    Activity Logs   (Add)    Tasks   (Add)    Document Management    Audit History US Dollar ($USDUSD) > Currency Profile       Exchange Rate as of May-04-2007 Last Close 1.3603 Change 0.0000 Prev. Last Close 1.3603 % Change 0.0000 Exchange Rate Chart   [ Chart Builder ] Modify Chart Time Frame:   From:          To:        (mm/dd/yyyy)   Currency Conversion: Historical Equity Pricing Data supplied by                             >4X increase in 15 years!       Expense Code:  Assign                           Search:                                                                                       © 2000-2007 Capital IQ, Inc., a division of Standard & Poor's. All Rights Reserved.       
  • 52. Timing of the Sale Macroeconomic & Political Conditions ALPHA OMEGA CAPITAL PARTNERS U.S. Imports of Goods and Services Past Trend Present Value & Future Projection Billion US Dollars ~ Quarterly Monthly Trade Deficit
    • China Off Shore Mfg.
    • India Out-Sourcing
    • Middle East Oil
  • 53. Timing of the Sale Macroeconomic & Political Conditions Geopolitical Events ALPHA OMEGA CAPITAL PARTNERS 9-11-01
  • 54. Timing of the Sale Macroeconomic Indicators - Inflation ALPHA OMEGA CAPITAL PARTNERS inflation
    • Notes:
    • CPI is the consumer prices index.
    • RPI is the retail prices index.
    • Inflation is the percentage change in the index in one year.
    inflation
  • 55. Prime rate forecast Source: the Financial Forecast Center Timing of the Sale Macroeconomic Indicators – Interest Rates ALPHA OMEGA CAPITAL PARTNERS
  • 56. Timing of the Sale Cap Gains Tax Rate Issues ALPHA OMEGA CAPITAL PARTNERS When Should You Sell? Scheduled Increase To 20% in 2010!
  • 57. Timing of the Sale State Tax Rate Issues ALPHA OMEGA CAPITAL PARTNERS
  • 58. Timing of the Sale ALPHA OMEGA CAPITAL PARTNERS Buyer Trends
  • 59. Buyer Type Effects Price & Deal Size Small Deals <$3 million Yield Lowest Multiples Minimums Sales >$10 million EBITDA >$1 million Deal >$5 million Large Deals & High Multiples (Prices) Timing of the Sale ALPHA OMEGA CAPITAL PARTNERS Foreign Strategic Public < 10 Strategic Private < 100 Private Equity Finance (a few hundred possible) Private Equity Purchase (a few thousand possible) Private Buyers (large number of individuals)
  • 60. Timing of the Sale Example ~ Large Deal Selling Multiples ALPHA OMEGA CAPITAL PARTNERS
  • 61.
    • Individuals, frequently refugees from Corporate America;
    • Sometimes well-financed;
    • Well-educated;
    • Professional, honest, sincere, and focused;
    • Limited small business experience;
    • Investment equity ranging from $100,000 to $500,000;
    • Some backed by PEGs (Executive In Residence); and
    • Seeking perfection – Their Patch of Heaven With a Fence.
    • Active When Large Caps are declining & in a cost reduction mode.
    • Can’t afford to play at high valuation multiples.
    ALPHA OMEGA CAPITAL PARTNERS Buyer Type ~ Private & Job Seeking Buyers Timing of the Sale
  • 62.
    • Partner Buy-Outs:
      • Obtain an independent certified valuation,
      • Can be easy with strong, debt free balance sheet, or
      • Difficult if the company is fully leveraged.
      • SBA can be a good source of capital – management continuity.
    • Key Employee (Management) Buy-Outs:
      • Seller note may be required to make the deal work.
      • Private Equity Groups like Management Buy-Outs.
    • Employee Stock Ownership Plans:
      • Long-term method for equity removal with tax advantages.
      • Expensive to set-up and for administration.
    • Family
    ALPHA OMEGA CAPITAL PARTNERS Buyer Type ~ Internal Buyers Timing of the Sale
  • 63.
    • Funding from limited investor/partners or syndicated;
    • One or more General/Managing Partners that you will meet;
    • Extremely professional and well educated;
    • Seeking companies from $3 to $250 million in annual revenues;
    • Typically pay 50 to 80% in cash with remainder as Note and/or Equity;
    • Payout over 3 to 7 years (when Fund turns over the investment);
    • Can be public but generally private;
    • Management must stay with salary, incentive bonuses, and equity;
    • Opportunity to mitigate risk and cash out twice;
    • Fund Management concentrates on acquisitions; and
    • Operating management runs the business.
    • Becoming very competitive bidders.
    ALPHA OMEGA CAPITAL PARTNERS Buyer Type ~ Private Equity Groups Timing of the Sale
  • 64.
    • Competitors;
    • Suppliers of complementary products;
    • Companies of complementary industries (not obvious);
    • Domestic or international.
    • Pay premium multiplies for new products or market synergy although may be price conscious when acquiring market share only.
    • The days of gobbling up market share at inflated prices are gone.
    • Public companies pay more than private companies but are more difficult to attract to small deals.
    ALPHA OMEGA CAPITAL PARTNERS Buyer Type ~ Strategic Private & Public Timing of the Sale
  • 65.
    • Be an industry – or at least – a market leader,
    • Own proprietary products or service capabilities,
    • Be viewed as a platform for growth,
    • Be large enough to justify management’s time and expense,
    • Have an impressive, experienced management team in place,
    • Present a low risk profile to the buyer, and
    • Be prepared to make and support major cultural change.
    ALPHA OMEGA CAPITAL PARTNERS To Attract Foreign Buyers You Must Timing of the Sale
  • 66.
    • 115 Subsidiary Companies in 2001
    • Chapter 11 in 2002
    • Plumbing
    • Pipe Fitting
    • HVAC
    • Rigging
    • Electrical
    Timing of the Sale ALPHA OMEGA CAPITAL PARTNERS Conditions In Your Industry/Buyer Type ~ Roll-Ups Caution Is Warranted
    • Reasons For Failure
    • Overvalued Companies
    • Debt Load
    • Integration Strategy
  • 67. Timing of the Sale Conditions In Your Industry/Buyer Type ~ Roll-Ups A Few Large Players Can Dominate M&A Transactions In the Short-Term ALPHA OMEGA CAPITAL PARTNERS 1999 – 2000 Cenveo acquired 73 of 158 companies or 46% of M&A printing transactions. 2005 – Cenveo acquired 2 of 52 companies or 4% of M&A printing transactions. 2005 – Consolidated Graphics acquired 4 of 52 or 8% and own over 70 printing companies in North America. Market Making
  • 68. Timing of the Sale Conditions In Your Industry ~ Distribution ALPHA OMEGA CAPITAL PARTNERS
    • Industry Issues
    • Scope of distribution industry has changed:
      • Services offered
      • Channel shrinkage
    • Customer Consolidation
    • Industry Consolidation
    • Information technology
    Survival Is Directly Linked To Value Added Services
  • 69. Timing of the Sale Conditions In Your Industry ~ Global Trends ALPHA OMEGA CAPITAL PARTNERS 11/9/89 – The Fall of the Berlin Wall 5/22/90 – Windows 3.0 shipped 1991 – India abolished trade controls 8/9/95 – World Wide Web, Netscape, & Open Protocols – FTP, HTTP, SMTP, POP, TCP/IP, etc. Work Flow Software - EBay, Pay Pal Up-Loading – Apache, Linux Outsourcing – India & Y2K Off-shoring – 12/11/01 China joined the World Trade Organization Supply-Chaining: Wal-Mart, Dell In-sourcing: UPS & FEDEX (Toshiba, Ford) Informing – Collaboration: Google, Yahoo, MSN Steroids – Digital, Mobile, Personal & Virtual (Other Than War)
  • 70. Timing of the Sale Conditions In Your Industry ~ Manufacturing ALPHA OMEGA CAPITAL PARTNERS Proprietary technology, perishable, infrastructure related, or defense Or Exit! Made In China!
  • 71. Business to Business Timing of the Sale Conditions In Your Industry ~ Where Have They All Gone? ALPHA OMEGA CAPITAL PARTNERS Retail Fine Dining 80,000 Employees Eight Brands Outback Steakhouse Carrabba’s Roy’s Bonefish Grill Flemings Lee Roy Selmon’s Cheeseburger Paradise Paul Lee’s Out Sourcing Wal-Mart & Other Big Boxes Corporate Takeover of Family Markets Corporate Pressure to Mfg. Off-Shore Competitive Pressure to Out-Source
  • 72. Our Workshop Objective: Planning Your Exit At Maximum Value Overview Part I: Valuation Methodology Part II: Considerations Before Selling Part III: Timing of the Sale Part IV: Value Maximization Part V: How To Sell Part VI: How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS
  • 73.
            • Dropping market share
            • Limited or obsolete product line
            • Limited or declining Customer Base
            • Poor (or no) business strategy
            • Leadership
            • Supplier Problems
            • Management issues
            • Escalating costs
            • Limited depth
            • Aging
            • Excessive overhead issues
            • Safety & Health
            • Dropping or unstable earnings
            • Geographic location no longer viable
            • Aging facilities, equipment or systems
            • Environmental problems
            • Intellectual property issues
    ALPHA OMEGA CAPITAL PARTNERS Value Maximization Discount Factors
  • 74. ALPHA OMEGA CAPITAL PARTNERS Discount Factors Value Maximization
      • Dropping Market Share
        • Limited or Obsolete Product Line
        • Limited or Declining Customer Base
  • 75. Cause One Customer or Limited Customer Base Cause Out of Touch Cause Serving a Single Market Cause Not Reinvesting Systems Equipment Etc. Cause Limited Marketing Effort ALPHA OMEGA CAPITAL PARTNERS Value Maximization Dropping Market Share Customers Are Single Sourcing Customer Sold Lost On Price Need QC Cert. Quality Poor >Competition Economy E-Commerce Don’t Know Moved Offshore Customer’s Sales Off Excuses or Symptoms
  • 76. ALPHA OMEGA CAPITAL PARTNERS
      • Poor (or NO) Business Strategy
      • Dropping Market Share
    Value Maximization Discount Factors
  • 77. ALPHA OMEGA CAPITAL PARTNERS Value Maximization Typical Business Strategy It’s A Bloody Red Ocean Existing Products To New Customers Current Geographic Region New Geographic Region Advertising New Reps/Agents Direct Sales Same As Current Acquisitions New Products To Old Customers Product Development Acquisitions Licensing
  • 78. Compete in existing market space, Beat the competition, Exploit existing demand, Make the value/cost trade-off, and Align the whole system of a company’s activities with its strategic choice of differentiation or low cost. Create uncontested market space, Make the competition irrelevant, Create & capture new demand, Break the value/cost trade-off, and Align the whole system of a company’s activities in pursuit of differentiation and low cost. ALPHA OMEGA CAPITAL PARTNERS - Blue Ocean Strategy by Kim & Mauborgne 2004 “ Bloody Red Ocean” “ Blue Ocean” Value Maximization Uncontested Market Space Business Strategy
  • 79. ALPHA OMEGA CAPITAL PARTNERS Cut Everything That is Not Mission Critical Value Maximization Buy/Mfg. Off Shore Assembly Only Vertical Integration Mission Critical Only Uncontested Market Space Business Strategy Certifications & Culture Systems & Procedures Integrated Supply No Sacred Cows Product Development Licensing Acquisitions No Grandfathered Items Internet Productive Reps Direct No Sacred Cows Innovative Products Highest Quality Most Effective Route To Market Lowest Cost New And Existing Customers
  • 80. ALPHA OMEGA CAPITAL PARTNERS Value Maximization You Don’t Risk Flying Without Feedback of Information Flight Plan Altimeter Compass Fuel Gauge Air Speed Indicator Oil Temp. Outside Temp. Tachometer Fuel Pressure
  • 81. ALPHA OMEGA CAPITAL PARTNERS Value Maximization Don’t “Fly” Your Business Without Measurements Learning & Growth Objectives Measures Targets Business Processes Objectives Measures Targets Customer Objectives ~ Measures ~ Targets Vision & Strategy If You Don’t Measure, You Don’t Control! Financial Objectives ~ Measures ~ Targets
  • 82. ALPHA OMEGA CAPITAL PARTNERS Value Maximization Leadership – Read It! Lead or get out of the way
  • 83. ALPHA OMEGA CAPITAL PARTNERS
      • Supplier Problems
      • Poor (or NO) Business Strategy
      • Dropping Market Share
    Value Maximization Discount Factors
  • 84. ALPHA OMEGA CAPITAL PARTNERS Supplier Problems? Value Maximization Declining Quality Limited (Uncertain) Supply Increasing Price Limited Negotiating Power DANGER SIGNS
  • 85.
    • 1 st - Set Goals for Improved Overall Value:
      • Higher quality at equal or lower cost,
      • The ability to track and measure results,
      • Integrated supply chain functions:
        • Product requirements
        • Systems integration
      • Reengineered processes, and/or
      • Use of alternative technology.
    Supplier Problems Or Opportunities? Value Maximization ALPHA OMEGA CAPITAL PARTNERS
    • 2 nd - Use a Process
      • Quantify Needs
      • Identify Partners
      • Evaluate
      • Select
      • Implement
      • Monitor Performance
  • 86. ALPHA OMEGA CAPITAL PARTNERS
      • Management & Overhead Issues
        • Escalating Costs
        • Limited Depth
        • Aging
        • Excessive Overhead Issues
        • Safety & Health
      • Supplier Problems
      • Poor (or NO) Business Strategy
      • Dropping Market Share
    Value Maximization Discount Factors
  • 87. ALPHA OMEGA CAPITAL PARTNERS MGMT ISSUES: Escalating Benefit Cost Value Maximization
  • 88. I’m Seymour, the Big Cheese! I AM the BUSINESS! Deduct 15% - 30% from the value. ALPHA OMEGA CAPITAL PARTNERS Value Maximization MGMT ISSUES: Limited Depth If the Seller is the source of ALL knowledge, what happens? VALUE REDUCED QUICK EXIT is UNLIKELY !
  • 89. ALPHA OMEGA CAPITAL PARTNERS Every Key Person Should Have a CROSS-TRAINED BACKUP ! ‘ especially the owner’ Value Maximization MGMT ISSUES: Cross-Training (One Owner) Owner VP Finance VP Sales VP Operations Assistant Assistant Assistant Assistant
  • 90. Value Maximization MGMT ISSUES: Age of Workforce Matters ALPHA OMEGA CAPITAL PARTNERS Does this trend affect the value of your business? Trying to pass this problem on to the next owner?
  • 91.
    • SOLUTIONS:
    • Identify &quot;older-keepers&quot;;
    • Modify workplace and compensation practices to be congenial to older workers;
    • Recruit or prepare understudies;
    • Reengineer processes so as to operate with fewer workers; and
    • Relocate production to a venue with a more qualified workforce.
    Value Maximization MGMT ISSUES: Age of Workforce Matters ALPHA OMEGA CAPITAL PARTNERS
    • BOTTOM LINE:
    • More Capital Investments;
    • Lower Benefit Costs ;
    • Job Sharing;
    • Higher Cost for Young, Educated People; and
    • ∑ Cost?
  • 92.
    • Unions +
    • ESOPs +
    • 401K plans =
    • Entitlement Mentality
    ALPHA OMEGA CAPITAL PARTNERS MGMT ISSUES: Excessive Overhead Issues Value Maximization
  • 93. ALPHA OMEGA CAPITAL PARTNERS MGMT ISSUES: Non-Compliance Value Maximization
    • With Environmental, Health & Safety Regulations
    • With Employment Laws & Regulations, or
    • Inconsistent personnel policies
  • 94. ALPHA OMEGA CAPITAL PARTNERS
      • Dropping or Unstable Earnings – Reason Unknown!
      • Management & Overhead Issues
      • Supplier Problems
      • Poor (or NO) Business Strategy
      • Dropping Market Share
    Value Maximization Discount Factors
  • 95. Value Maximization ALPHA OMEGA CAPITAL PARTNERS You MUST be Able to Pinpoint the Inflows & Outflows
    • Keep Detailed Financials
    • Construct Common Size Financials
    • Make Notes Where Appropriate
    Revenue Analysis Example: Dropping or Unstable Earnings ~ Vague Financials
  • 96. Value Maximization ALPHA OMEGA CAPITAL PARTNERS Cost of Goods Sold (COGS) Analysis Example: Dropping or Unstable Earnings ~ Vague Financials
  • 97. There are always alternative routes to market – Know Your Costs Value Maximization ALPHA OMEGA CAPITAL PARTNERS Dropping or Unstable Earnings ~ Vague Financials
  • 98. What Do Those Executive Perks Cost?...............Can You Prove What You Make? Value Maximization ALPHA OMEGA CAPITAL PARTNERS Dropping or Unstable Earnings ~ Vague Financials
  • 99.
    • DO YOU DO THESE THINGS?
    • Common size everything – use percentages to spot trends.
    • View numbers with a fresh mind- assume you know nothing.
    • Have someone else comment on results and trends – don’t be myopic.
    • Organize data logically and consistently – use a detailed chart of accounts.
    • Allocate true cost to Cost of Goods Sold, not just purchases.
    • Allocate true costs to Sales, Accounting, and Administration.
    • Track freight- it is a cost that someone has to pay.
    • Track quality problems and report cost on income statements by dept.
    • Don’t cheat the tax man – You can’t get paid for what you can’t prove.
    • Benchmark your business to prior years, competitors, & trade info.
    • Set detailed financial goals & track: lack of planning is planning to fail.
    “ AOCP Analytic Rules” ALPHA OMEGA CAPITAL PARTNERS Value Maximization Dropping or Unstable Earnings ~ Vague Financials
  • 100. ALPHA OMEGA CAPITAL PARTNERS
      • Geographic Location No Longer Viable
      • Dropping or Unstable Earnings – Reason Unknown!
      • Management & Overhead Issues
      • Supplier Problems
      • Poor (or NO) Business Strategy
      • Dropping Market Share
    Value Maximization Discount Factors
  • 101. Value Maximization ALPHA OMEGA CAPITAL PARTNERS Reasons for Owning Company Occupied RE
    • Tax benefits -> Depreciation
    • Cash flow -> Income Stream
    • Appreciation -> Cash Out
    • Principal pay-down -> Retirement
    • Cost control -> Myth
    • Required by franchisor -> Good Reason
    • The nature of your business -> Good Reason
    • CONTROL -> Baseless Reason
    Geographic Region No Longer Viable
  • 102. ALPHA OMEGA CAPITAL PARTNERS Value Maximization Challenges of Owning Company Occupied RE
    • RE can become Albatross
    • Poor Use of Precious Capital
    • Strategically Inflexible
    • RE Not Synchronized with Business
    • Business Can’t Pay Fair Market Rent!
    • Must Move Business to Sell Both @ FMV
    • Limits the # of Buyers for a Business
    • Strategic Buyers DO NOT Want RE
    Geographic Region No Longer Viable
  • 103.
    • ALL lenders will require an itemized “fair market” appraisal of assets before funding a deal.
    • Clean, well managed businesses sell for a premium
    • Compliance to all environmental, health and safety standards over the long-haul, will add value
    • Educated Buyers will subtract justifiable capital expenditure requirements from the purchase price.
    Value Maximization Poorly Maintained Equipment & Facilities ALPHA OMEGA CAPITAL PARTNERS
  • 104.
    • Considerations for Documentation….
        • Patents & Trademarks
        • Documented Operating & Software Systems
            • - Order Processing, Production, Inventory & Process Control
        • Customer Records
            • - Call Reports, Correspondence & Contact Management Systems
        • Quality Programs & Certifications
            • - ISO designations
    ALPHA OMEGA CAPITAL PARTNERS Intellectual Property Value Maximization NOT Documenting Systems & Procedures Can Significantly REDUCE Value When a Buyer is Concerned About Maintaining Continuity.
  • 105. Our Workshop Objective: Planning Your Exit At Maximum Value Overview Part I: Valuation Methodology Part II: Considerations Before Selling Part III: Timing of the Sale Part IV: Value Maximization Part V: The Selling Process Part VI: How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS
  • 106. ALPHA OMEGA CAPITAL PARTNERS Overview Part V: The Selling Process
    • The AOCP Selling Process
    • Owner’s Involvement In the Selling Process
    • Timeline
    • Why Does It Take So Long?
    • Valuation Process & Low Value Options
    • The Offering Memorandum & Marketing
  • 107. Propose Marketing Plan Financial Analysis & Valuation Initial Consultation & Execute Listing Agreement Prepare Descriptive Offering Memorandum Screen Buyers & Coordinate Offer Implement Marketing Plan Due Diligence & Arrange Financing 1 2 4 5 6 8 3 7 Client Decides to Proceed or Retainer Refunded   ALPHA OMEGA CAPITAL PARTNERS The AOCP Selling Process ~ Duration: Six to Twelve Months ~
  • 108. Determine The Best Option For You?
    • Third Party Sale
      • Strategic
      • Private Equity
      • Individual
        • Management Buy-Out Key Managers
        • Family Members
      • Partial Equity Liquidation
      • ESOP
    ALPHA OMEGA CAPITAL PARTNERS Public Stock Offering
  • 109.
    • Gather information needed to prepare Market Valuation
    • 2) Provide information for the Offering Memorandum
    • 3 ) Meet with any serious buyers; and consider all offers.
    AOCP does everything else! ALPHA OMEGA CAPITAL PARTNERS Owner’s Involvement in the Selling Process The Selling Process
  • 110. 5 ALPHA OMEGA CAPITAL PARTNERS
    • Preparation
        • Initial Meeting & Review Listing Agreement
        • Market Valuation & Plan
        • Prepare Executive Summary
        • Prepare Descriptive Offering Memorandum
        • Internet Site Selection
        • Data Base Selection & Analysis
    Timeline- What to Expect The Selling Process
  • 111. 5 ALPHA OMEGA CAPITAL PARTNERS
    • Marketing Phase
        • Internet Site Postings
        • Mailing Program Design & Approval
        • Strategic Mailing Program Begins
        • Financial Mailing Program Begins
        • Telephonic Follow Up Begins
        • Print Ad Program (if required)
        • Complete Telephonic Follow Up
    Timeline- What to Expect The Selling Process
  • 112. 5 ALPHA OMEGA CAPITAL PARTNERS
    • Closing Phase
        • Buyer Meetings & Visitations
        • Buyer Valuation Process Complete
        • All Buyer Offers Received
        • Letters of Intent Finalized
        • Financing Secured
        • Final Purchase Agreement Signed
        • Due Diligence Complete
    Timeline- What to Expect The Selling Process
  • 113.
    • Initial Speed Of The Seller
    • Market Approach – Use of Phased Marketing
    • Buyer Type: Strategic, PEG, Private
    • Market Interest In The Business
    • Financial Institutions: Local, SBA
    • Transaction type: Asset or Stock
    • Environmental Testing
    • LEGAL
    ALPHA OMEGA CAPITAL PARTNERS Why Does It Take So Long? The Selling Process
  • 114. Propose Marketing Plan 1 Week Financial Analysis & Valuation 2-3 Weeks Initial Consultation & Execute Listing Agreement Prepare Descriptive Offering Memorandum 3-4 Weeks Screen Buyers & Coordinate Offers 6-26 Weeks Implement Marketing Plan 2 Weeks Due Diligence & Arrange Financing 8-12 Weeks 1 2 4 5 6 8 3 7 Client Decision Proceed or Retainer Refunded End of Week #4 Latest   ALPHA OMEGA CAPITAL PARTNERS The AOCP Selling Process ~ Six to Twelve Months ~
  • 115. ALPHA OMEGA CAPITAL PARTNERS The Market Valuation Process
    • CALCULATION METHODS
    • Book Value to Determine Adjusted Going Concern
    • DCF – Discounting Future Earnings
    • Industry Sale Comparables: Multiples of Cash Flow
    • Industry Ratio Comparables: Multiples of Revenue
    • Partner Experience Method
    • VALUES PROVIDED TO SELLER
    • Strategic Buyer – Public
    • Strategic Buyer – Private
    • Private Equity Fund
    • Private Buyer
    ĒBǏTDĂ ĒBǏT-D-A Pretax Earnings + Interest Expense + Income Taxes + Depreciation Expense + Amortization EBITDA SDE + EBITDA + Owner’s Comp - Replacement Salaries Seller Discretionary Earnings
  • 116.
    • Stay Longer-
    • “ I can make that much if I stay three more years!”
    • Close the Business
        • “ You’ll Show Them”
    • Hire a General Manager
        • “ Now it’s six more years!”
    • ESOP two or three debt rounds!
    • Just Accept Less- No Energy Left
    • AOCP Value Coaching to Maximize Value
    “ We Should Have Sold Before …….” ALPHA OMEGA CAPITAL PARTNERS The Selling Process Low Value ~ Options
  • 117. ALPHA OMEGA CAPITAL PARTNERS Void Agreement Return Retainer Establish Value Market & Sell Value Mentoring The Selling Process Value Too Low Value Acceptable Sign & Pay Retainer Decide! AOCP Value Coaching to Maximize Value
  • 118. Propose Marketing Plan 1 Week Financial Analysis & Valuation 2-3 Weeks Initial Consultation & Execute Listing Agreement Prepare Descriptive Offering Memorandum 3-4 Weeks Screen Buyers & Coordinate Offers 6-26 Weeks Implement Marketing Plan 2 Weeks Due Diligence & Arrange Financing 8-12 Weeks 1 2 4 5 6 8 3 7 Client Decision Proceed or Retainer Refunded End of Week #4 Latest   ALPHA OMEGA CAPITAL PARTNERS The AOCP Selling Process ~ Six to Twelve Months ~
  • 119. Domestic Competitors Complementary Markets Similar Foreign Markets Research PEG Objectives Proprietary Data Base Research Public Data Base Research Seller Suggestions Internet Research ALPHA OMEGA CAPITAL PARTNERS Marketing Planning ~ Buyer Search Process Capital IQ D&B Goldmine
  • 120. Propose Marketing Plan 1 Week Financial Analysis & Valuation 2-3 Weeks Initial Consultation & Execute Listing Agreement Prepare Descriptive Offering Memorandum 3-4 Weeks Screen Buyers & Coordinate Offers 6-26 Weeks Implement Marketing Plan 2 Weeks Due Diligence & Arrange Financing 8-12 Weeks 1 2 4 5 6 8 3 7 Client Decision Proceed or Retainer Refunded End of Week #4 Latest   ALPHA OMEGA CAPITAL PARTNERS The AOCP Selling Process ~ Six to Twelve Months ~
  • 121. Offering Memo Sample ALPHA OMEGA CAPITAL PARTNERS
  • 122. ALPHA OMEGA CAPITAL PARTNERS The Selling Process Moving Forward: Offering Memorandum (OM)
    • SECTIONS OF THE OFFERING MEMO:
      • Ownership Structure
      • Corporate Structure
      • Company History & Strengths
      • Industry Information
      • Products
      • Sales History by Product, Area, and Customer
      • Route To Market
      • Summary of Competitors
      • Personnel: Benefits, Management Team Resumes, Chart of Employees, Organization Chart
      • Operations: QC, Insurance, Intellectual Property, Facilities, EH & S Programs
      • Financial Information
      • Photographs: Products, Facilities, Equipment, People
      • Area Demographics ~ When applicable.
  • 123. The Selling Process ALPHA OMEGA CAPITAL PARTNERS Our Electronic Approach Allows For Extensive Use Of Graphics After execution of a rigid NDA, every OM is accessible at the Client Log-In porthole of our website using a unique, encrypted password. Every OM includes a section with: Unadjusted Financial History, Common Size & Benchmarking, Adjusted Cash Flow, and Other Sections as needed. The Offering Memorandum
  • 124.
    • So Buyers Can Qualify The Business (Easily Without Costly Travel)
    • To Avoid Wasting Seller Time
    • To Maintain Confidentiality (Fewer Visits)
    • To Minimize Disruption!
    • We MUST earn the trust and confidence of the buyer
    • to obtain maximum value for the business!
    ALPHA OMEGA CAPITAL PARTNERS The Selling Process Why Such a Detailed Descriptive OM?
  • 125. Propose Marketing Plan 1 Week Financial Analysis & Valuation 2-3 Weeks Initial Consultation & Execute Listing Agreement Prepare Descriptive Offering Memorandum 3-4 Weeks Screen Buyers & Coordinate Offers 6-26 Weeks Implement Marketing Plan 2 Weeks Due Diligence & Arrange Financing 8-12 Weeks 1 2 4 5 6 8 3 7 Client Decision Proceed or Retainer Refunded End of Week #4 Latest   ALPHA OMEGA CAPITAL PARTNERS The AOCP Selling Process ~ Six to Twelve Months ~
  • 126. We Can Use Phased Marketing To Reach The Right Buyer At The Right Time To Maximize Value! Direct Mail To Strategic Buyers Telephonic Follow Up Direct Mail & Email To Financial Buyers (Private Equity Groups) Telephonic Follow Up Internet Advertising For High Net Worth Job Seeking Buyers Screening & Coordination Of Buyers ALPHA OMEGA CAPITAL PARTNERS The ‘Phased Marketing’ Option
  • 127. Propose Marketing Plan 1 Week Financial Analysis & Valuation 2-3 Weeks Initial Consultation & Execute Listing Agreement Prepare Descriptive Offering Memorandum 3-4 Weeks Screen Buyers & Coordinate Offers 6-26 Weeks Implement Marketing Plan 2 Weeks Due Diligence & Arrange Financing 8-12 Weeks 1 2 4 5 6 8 3 7 Client Decision Proceed or Retainer Refunded End of Week #4 Latest   ALPHA OMEGA CAPITAL PARTNERS The AOCP Selling Process ~ Six to Twelve Months ~
  • 128. “ A Value Differentiator” ALPHA OMEGA CAPITAL PARTNERS The Selling Process Our Approach is Different We Provide Monthly or Weekly Reports- at the Sellers Discretion Buyer Name And/or Company Buyer Status Pending FU
  • 129. Propose Marketing Plan 1 Week Financial Analysis & Valuation 2-3 Weeks Initial Consultation & Execute Listing Agreement Prepare Descriptive Offering Memorandum 3-4 Weeks Screen Buyers & Coordinate Offers 6-26 Weeks Implement Marketing Plan 2 Weeks Electronic Due Diligence & Arrange Financing 8-12 Weeks 1 2 4 5 6 8 3 7 Client Decision Proceed or Retainer Refunded End of Week #4 Latest   ALPHA OMEGA CAPITAL PARTNERS The AOCP Selling Process ~ Six to Twelve Months ~
  • 130. Our Approach is Different! Arrange Financing Appraisal Buyer Agreement Seller Agreement Need A Seller Note? “ We Are The Deal Management Police” The Selling Process Coordinating Due Diligence & Financing ALPHA OMEGA CAPITAL PARTNERS Due Diligence Meetings
  • 131. Our Workshop Objective: Planning Your Exit At Maximum Value Overview Part I: Valuation Methodology Part II: Considerations Before Selling Part III: Timing of the Sale Part IV: Value Maximization Part V: The Selling Process Part VI: How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS
  • 132. What Is Your Definition of Deal Value? How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS
  • 133. Deal Value Is Not Selling Price! Deal Value Equals The Present Value of the Real Dollars Realized After Adjustments, Taxes and Fees! What Is Deal Value? How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS
  • 134. External Discount Factors – Terms of Sale How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS Terms Price Parity
  • 135. External Discount Factors – Terms of Sale How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS Notes Earn-Outs Escrows Guarantees Allocations No Debt Working Capital A Flexible Seller Gets A Higher Price Accept More Risk > Price
  • 136. External Discount Factors – Terms of Sale How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS All Cash Walk Away Closing No Escrows No Guarantees Favorable Allocations Debt Assumption No Working Capital Price Drops As Buyer Risk Increases Dictate Terms < Price
  • 137. External Discount Factors – Terms of Sale How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS DEFINITIVE SALE AGREEMENT Notes Earn-Outs Consulting Employment Real Estate Indemnifications Escrow Guarantees Allocations Debt Working Cap Commissions Taxes Legal Fees Non-Compete
  • 138. Terms of Sale - Notes How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS Typical Historic Structure 1/3, 1/3, 1/3 Buyer Equity, Bank Equity, Seller Note Typical Seller Note Terms: 10 year amortization 5 year balloon Floating rate 1 – 2 points > Prime Security – 2 nd lien + personal guarantee
  • 139. Terms of Sale – Earn Outs How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS Uncertain trends, or Buyer/Seller disagree on value Typical Terms: 3 years ≥ 50% guaranteed ≤ 50% based on performance Tagged to Revenues or EBITDA
  • 140. Terms of Sale – Employment How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS Often coupled with Earn-Out, or PEG Buyer Typical Terms: Salary + Benefits Bonuses based on performance Stock options and/or gifts Employment agreement
  • 141. Terms of Sale – Consulting How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS Actual work varies Zero time to a few months Typical Terms: Daily, hourly, weekly Allocated from selling price Buyer writes off as paid Formal agreement
  • 142. Terms of Sale – Non Compete How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS Must be limited to be enforceable; Geographically, by product type, by customer Typical Terms: 3 – 7 years Allocated from selling price Amortization = 7 years Formal agreement
  • 143. Terms of Sale – Indemnifications How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS Stock versus Asset Transaction Prior acts: Products, Employees, Environmental, Tax May require Escrows or Guarantees!
  • 144. Terms of Sale – Allocations How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS Of Purchase Price to BS Items Accounts Receivable Inventory Fixed Assets Goodwill Tax Allocations greater than book value result in recapture of expense & taxation at income rates.
  • 145. Terms of Sale – Debt How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS Stock versus Asset Transaction Stock Transaction: Buyer Assumes Debt + Other Consideration Transaction Value to Seller Asset or Stock Transaction: Full Enterprise Value w/o Debt - Seller debt payoff Net to Seller ¹ ¹ Seller sometimes keeps cash, AR & payable
  • 146. Your debt coverage ratio ≤ 133%. (most lenders require 125%) Internal return from debt ≥ alternative uses. When selling, less debt is better. (Transaction Value = market value less debt) Final Thoughts ALPHA OMEGA CAPITAL PARTNERS Your Balance Sheet - Debt
  • 147. Terms of Sale – Working Capital Adjustments How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS Asset Sale Cash usually excluded AR may be excluded Inventory acquired at cost Stock Sale Current Assets = 2 times Current Liabilities Price adjusted up/down at closing.
  • 148. How Much You Really Get ALPHA OMEGA CAPITAL PARTNERS How Legal Structure Affects Taxes of a C-Corp C Corps are taxed as separate legal entities and have there own tax schedules, different from individuals’. C Corps must pay taxes first before distributing profits (Dividends) to shareholders. How to sell the Assets Sale of a C-Corp Without Double Taxation? Call AOCP. How Legal Structure Affects Taxes of a Sub S Corporation A Sub S corporation is a corporation which elects subchapter S tax treatment under the IRS’s Internal Revenue Code. This allows the corporation’s profits or losses to pass through to the shareholders and avoid double taxation.
  • 149.
      • Seller Must Understand Buyer’s Issues
      • Cash is King!
      • Must generate 120% Debt Service Coverage Ratio, and
      • Must provide acceptable return on assets employed (down payment).
      • Can the business be Financed?
      • As valued, does the company meet all lender requirements?
      • Will Seller help finance?
      • Is the price Fair?
      • Discount Factors (Risk) – number and type,
      • Value of the assets,
      • Working capital, and
      • Deal structure – all cash will result in a 15-30% discount.
      • Business continuity risk?
      • Is Seller required for business continuity?
      • Will Seller be available to assist Buyer for a reasonable period of time?
    ALPHA OMEGA CAPITAL PARTNERS The Selling Process Key Points to Remember About the Price
  • 150. 7202 Glen Forest Drive Ste 300 Richmond, VA 23226 Voice: 804.282.7680 www.aocp.com Thank You