Our exit consultant, Jim Collins made it crystal clear to Jerry Jones when he reviewed the Exit Strategies Solutions ESS report – the current range of value for American Coatings is $6M. To keep it simple we will assume that this is pre tax pre fees.So, he needs $9M to meet his personal goals– resulting in a $3M GAP.Tilt!
Jim Collins outlines Jerry’s options –Even if Jerry could stomach this option Mrs. Jones will notAt age 58, Jerry doesn’t believe that he has time to make up the GAP thru increased savings and better returns on his investmentsSo – really by default Jerry selects Option 3
As noted, Jerry’s primary focus was to produce financial reports to satisfy two parties – The IRS and the BankMany times we walk into a company and that is exactly what we see – monthly financial statements generated to satisfy a lender, annual statements compiled to produce a tax return, cash basis cigar box – checking accountsSo, the good news is that Jerry has committed to clean up the books and get serious about understanding the numbersWe asK the owner/mgt team ?
So, the basics are – of course –I/S, B/S, CF Accurate/ timely / GAAPAccrual5 days close
<60% of SMB prepare and use an operating budget Revenue units, $, COS, S, G&A by lineA/R INV A/P Collections, PaymentsMonthly budget, then this year – next yearMonthly/ quarterly year twoCompiledReviewedAudited
IOMA Budgeting Survey SMB < $10M, $10M-$99M
Revenue, expenses, EBIT, Cash FlowJustify variancesCorrective action plansCompensation affectedVariance analysis is used both as a report card and a planning / management tool to help understand the business and adjust accordingly
For sake of example we have assumed this Profit & Loss for Jerry’s businessOperating profit of 12%Before any interest expense – D&A addback of $300 = $1.5M or 15% EBITDA
ESS report showed a 4.0X multiple for American CoatingsThis was brought to Jim Collins by an M&A firm based upon industry comps, size of the firm and basic review of company
Grow into the exitIncrease EBITDA by 33% or $500K by 2014Reviewing the diagnostic report for company with IB, goal is to reduce risks, implement improvements and hope for a rising tide in the seller’s market ahead to gain – ½ turn - .5X multiple
Business Transaction World – Market Value<$10M – main street, SDEIndustry comps, multiples diiferWE will use EBITDA for American Coatings
Discount rateInterest rates, inflation, riskRisk free rateBeta – unsystematic risk – company risk vs. marketIndustrySizeEquitySize premiumThe business valuation world
Discount rateInterest rates, inflation, riskRisk free rateBeta – unsystematic risk – company risk vs. marketIndustrySizeEquitySize premiumThe business valuation world
ProcessWe have commitment from Jerry that he is ready to develop a growth plan First step is Discovery – work with Jerry and management team to understand the businessIn our 6 1stQtr Case Study writeups we noted a number of approaches – and areas to focus on
This deep dive diagnostic is to Income Statement as CPA audit is to Balance SheetDue diligence – deep diveWhere are the big holes?What does the core look like?For may companies, the biggest constraint is at the top - mgt skills, leadership style, vision
SIC Code, NAICS codePrimary – SomeUse third party resources / data bases to compare American Coatings to Industry
One the sources we use at B2B CFO is Profit CentsLiquidityProfits / Profit MarginSalesBorrowingAssetsEmployees
Industry ScorecardNeed to view comparisons to industry in the big pictureWhy up or down? Big gaps in ratios?Company is a mfg, assembly, distribute combo & have a service wingStart with primary business & adjustMany do business in more than one SIC code
Internal growth or External growthInternal / organic growth
Finders-Minders-GrindersWith more time spent making rain, can Jerry bring the growth?Offload his minding activities – numbers, admin, HR, etc?If we bring mgt info tools to Jerry – market, customer, product volume. $ profits can he manage the process and drive the growth needed?Top 10Listen! What keeps you up at night? Is that something that we can package? What else do you need ?
FRED REICHHELD – the Ultimate QuestionBain & SatmetrixFortune 500 companies have adopted thisEasy, common language with investors, cheap, predictive
Easy – 5 minutes using Survey MonkeySolid gauge of relative performanceCheap – in housePredictive – 9 0r 10 statistically a predictor of growth Will a customer repurchaseWill a customer refer you?
Costco 73%Apple 70%Amazon 68%I urge you all to adopt this tool to help your clients survey their customers – and encourage you to use with your customers
What other resources are available in the $1M Selling expense?80/20 in customers, $, products/ $?
Based upon the information we have about American CoatingsAn Investment in a M/S consultant may be $ well spentOcean BlueCompensation MasterThe 2012, 2013 expenses for consultants will be adjusted out / added back when company goes to marketA plan / process to transition to othersObservation to mention –Given Jerry’s direct involvement and weak mgt team it may make sense to explore selling product line to larger industry player – 1.5XGM-Sales and pay Jerry 2 year rep earnout on customers retained?
Understand customers, lines, productsTactical plan with high probability of success, to not rock the business modelVolumePricingCost reductions – materials, outside services in COS
Many approaches – all can yield good resultsWhat capabilities and capacity exist in Management Team and EEs to implement this?For every two hands you bring to the table you get a free brain…Cut the dead wood, top to bottom review of each EE, etc.
There are an abundance of cost reduction consultants and service providers who will provide audits, diagnostics and benchmarking for alternatives $ savings
Many legacy sales comp plans that are not serving ccmpany or reps well. Mature/declining companies have mfg rep, inside sales, house accounts with matrixes / %That would make your head spinRationalize it! $!0M sales – 10% $1M sales expense there will be some low hanging watermelonsG&A – Prune the dead woodLook at sacred cowsValue added?Core?Outsoucre questionUnderstand alternatives
Acquisition multiples reflect the risk (from the buyer’s view) of achieving the income stream. A “4” acquisition multiple means that the buyer believes the risk of the deal is 25% (the reciprocal of 4 is 25%). Acquisition multiples tend to group themselves within market segments. Often the company will be viewed by investors as more or less risky than its peer group. Examples – management structure, poor financial systems, high customer concentration. The core idea is that investors bring the multiple in the form of a return expectation – the seller cannot change that fact. What the seller can control is the presentation of EBITDA trend and forecast, but can improve comparison vs. peer group. What can we change to get that ½ a turn (4.0X to 4.5X)?
This schematic shows how the Value Drivers influence the valuation components of cash flow, risk, and growth in a business.Certain qualitative and quantitative strengths (SWOT) typically drive the value of a going concern business.Or – the factors that are critical to the ongoing viability and success of a business
Human capital – training, benefits, development
Mgt – knowledge, experience, depth
What are Value Drivers today?What value drivers can be improved, enhanced, negative to neutral?This will build the story to accompany the numbers to help Jerry reach his Target exit value
Anything you measure today or tomorrow can be a metricMay have 80-100 or more Performance IndicatorsThe challenge is to understand which metrics are key to meeting the targets of the company
Three major areasSpecificMeasureableTimely2-3 each for 6-9 total to startFocus team effortsFeed company culture
Cost variancesMatl vs. standard/planNon scheduled overtime
Xllerate offers packaged dynamic dashboards – adapt in house with toolConsults to reduce the steps involved in daily, weekly, monthly multi-source dataSpreadsheets, ERP, Access or other data bases.
CFO SCOREBOARDOwners love visual tools – doers – not analystsAssets – how effective are you converting Assets to SalesHow efficient are you at generating earnings from Sales?Earnings to cash flowMonthly to plan, etc.
Other resources coming this year:Member Bob ScarlataFinancial MetricsRob SleeMidas Metrics
GROWING INTO YOUR BUSINESS EXIT Pinnacle Equity Solutions March 6, 2012 Lee A. Dahmer CPA, CM&AA firstname.lastname@example.org 847-812-1407
Jerry has a Value GapFACT : Market value is $6,000,000FACT: Post-exit lifestyle need is $9,000,000 VALUE GAP IS $3,000,000
Jerry’s Options …• Reduce post-exit lifestyle• Increase savings / return on investments• Increase the value of the business
American Coatings Financial Management• Tax returns and Bank external reporting only• Management reports – how do you know where you are making money? o By Market o By Customer o By Product
American Coatings Financial ManagementMonthly financial statements Income Statement Balance Sheet Cash Flow Statement Current period and Y-T-D vs. Last yearAccurate, timely, GAAP o Accrual basis – not Cash basis! o 5 days after month end – max 10 days
American Coatings Financial Management• Annual Operating Budget by month o Actual vs. Plan, variance analysis• Two year rolling Forecast o IS, BS, CF o Story to support the numbers
American CoatingsSales $10,000 100%Cost of Goods Sold $6,000 60%Gross Profit $4,000 40%Marketing & Sales $1,000 10%General & Administrative $1,800 18% Total Operating Expenses $2,800 28%Operating Profit $1,200 12%Add D & A $300 3%EBITDA $1,500 15%
EBITDA2011 Actual - Trailing twelve monthsEBITDA Multiple Value$1,500,000 4.0 X $6,000,000
EBITDA2011 Actual - TTMEBITDA Multiple Value$1,500,000 4.0 X $6,000,000TargetEBITDA Multiple Value$2,000,000 4.5 X $9,000,000
Enterprise ValueENTERPRISE VALUE (EV)EV = Earnings (E) X Multiple • Multiple of Seller’s Discretionary Earnings (SDE) • Multiple of Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) • Multiple of Earnings Before Interest & Taxes (EBIT)
Capitalization of Earnings IRV formula: I / R-g = V V – Invested Capital I – Cash flows R – Risk (Discount rate) g – Long term growth R-g = Capitalization rate
American Coatings IRV formula: I / R-g = V I = $1,300,000 R= 25% g= 3% V= $5,900,000
DiscoveryUnderstand the business model, processes,products/services, management, supply chainComplete diagnostic of the business
Diagnostic of the businessDeep dive into the numbers – Due diligence I/S Where do they make money? Volume and $ Product/Service line, Customers, Markets Variable and Fixed Costs structure Incremental sales profitability Working capital / Debt
Diagnostic of the businessComparison to Industry Metrics• Understand company performance vs. industry• Focus management improvement goals• Industry metrics are resource to help set company metrics
Increase SalesORGANICo More sales to existing customerso New customers with existing productso New customers with new productsACQUISITIONo Buy another businesso Buy another product line
Increase SalesJerry is the Finder• Key sales & relationship manager in the company• Brought the volume but margins deteriorating• Go visit top 10 customers• Customer satisfaction survey
Customer SatisfactionBain and SatmetrixNet Promoter Score Methodology Predicting the likelihood of a customer either purchasing from you again or referring your company to someone o Used by many Fortune 500 companies o PEGS to measure their portfolio companies and acqusition targets
Customer SatisfactionCustomer SatisfactionNet Promoter Score“On a scale of 0 to 10, how likely are you to referAmerican Coatings to a friend or colleague?”9-10 = Promoters7-8 = Passive0-6 = Detractors
Customer SatisfactionNet Promoter Score9-10 = Promoters 45%7-8 = Passive 20%0-6 = Detractors 35%45%-35% = 10% o AVERAGE OF 10% TO 15% o ABOVE AVERAGE 15% PLUS o WORLD CLASS = >50%
Increase SalesTop Line Review• Customers, Product/Service, Suppliers, Channels• Sales less variable costs – understand margins• Rationalize your customer base
Increase SalesDoes Jerry need help?• Bring in Marketing / Sales consultant• Develop market, product, pricing growth plan• Any help from current management team?• Jerry’s direct relationship with customers big risk factor
Decrease ExpensesInternal• Process maps• Is this adding value? Keep doing it? Outsource it?• Zero build – justify each line item• % across the board reductions
Decrease ExpensesExternal• Managed IT• Freight in & out (UPS, FedEX, carriers)• Telephone• Energy• HR / Payroll / Group Health / Benefits• Sales and Use taxes / Property taxes• Professional service providers• Building lease
VALUE DRIVERSOPERATING1. Repeat Customers – Customer List2. Proprietary Products3. Market share4. Diversified Products, Customers, Geographic5. Industry Specialization6. Trained and Knowledgeable Workforce7. ISO 9000 Registered Vendor
VALUE DRIVERSFINANCIAL1. High Margins due to efficiencies2. Operating cash positive3. Key Management have incentive compensation plans4. Purchasing power5. Internal controls are well defined6. Budgeting system controls costs7. Strong liquidity position
VALUE DRIVERSINVESTMENT1. Additional capacity for growth (space, people, etc.)2. Commitment to human capital3. State of the art technology4. On-going investment in information technology5. Well maintained capital equipment6. Working Capital turnover7. Commitment to R&D
VALUE DRIVERSINTANGIBLES1. Management bench strength2. Growing industry3. Financial literacy of entire company4. Motivated and dependable workforce5. Special niche market6. Long history, reputation and name recognition7. Management focus on Growth and Value Creation
Privately held Small-Midsized Businesses (SMB)1. Less than 10% of SMB use metrics2. Less than 10% of SMB sell outside USA3. Less than 10% of SMB are creating value Rob Slee
Use Metrics as a tool to Improve the business1. Awareness2. Understanding3. Action4. Accountability
“Begin with the end in mind” Stephen Covey You must have a PLAN You must determine the VALUE DRIVERS You must have an ACCURATE REPORTING SYSTEM You must educate your workers on performance based METRICS You must have a BUDGET that supports the PLAN
Critical Success Factors CSFsThe big things that have to go right in order for thecompany value to meet target in 20141. Sales not dependent upon Jerry2. Sales and Gross profit growing3. Sales Expense and G&A expense reduced4. Customer satisfaction improving5. Key management and EEs know the score
Key Performance Indicators KPIsThe measurement of actions that drive the CSF’s• Marketing / Sales• Operational Effectiveness• Financial Effectiveness• Other Learning, etc.
Marketing / Sales• Customer satisfaction• Customer retention / Customer loyalty• New customers• % sales growth• Quotes to closing ratio• Jerry’s finder time % hours/week• Quotes to closing ratio
Operational Effectiveness Throughput per hours worked Cost variances Order processing cycle Effective lead times – wanted vs. promised Stock outs On time delivery Cost of Quality % outsourcing Return on plant Vendor rating
Financial Effectiveness Gross Profit $ and Margin o by product, by customer, by segment Contribution $ and Margin o by product, by customer, by segment Selling expense as % of sales General and administrative as % of sales EBITDA Revenue per employee Working capital turnover Z score Return on Assets Return on Equity
Measure & Track ProgressSCORECARDPerformance measurement tool to focus the company onprogress in major areas KPIs reported on a Dashboard. Each KPI will have a drill down into detail of actual to target Dashboard is a summarized performance in all areas Market / Customers Operational Financial Other
Measure & Track ProgressDASHBOARD In each quadrant are 3-6 metrics. Updated daily, weekly, monthly. Focus on current performance Red, Yellow, Green Each metric has a target. If target is met, it’s green. If not, it’s red. If it’s close, it’s yellow
• A confidential meeting with the owner(s), then interview company staff• Look at the company’s financial information, systems and processes• Benchmark financial information against regional industry averages• Create a confidential report of our findings with prioritized steps to improve
• Confidentially discuss the key findings from The Discover Analysis™• Review The Strategy GamePlan™• Discuss a preliminary timeline for The Strategy GamePlan™• Agree on the proposed costs for The Strategy GamePlan™• Initiate a preliminary discussion about Finders, Minders & GrindersSM• Begin strategic planning process
• Begin the implementation of the items agreed upon in The Strategy GamePlan™• Identify and train staff/others that will assist us with The Strategy Implementation™• Meetings with the owner(s) to discuss the progress made• Continue the discussions about Finders, Minders & GrindersSM• Help get company-wide buy-in on the strategic plan
• Report the results of The Strategy Implementation™• Discuss any non-numerical benefits achieved (Less stress, more free time, etc.)• Plan the next steps – The Excel Experience™ and The Exit Strategy™
• An ongoing relationship with the company as a trusted long-term business advisor• Assist your company with its goals to surpass, outclass and outrival key competitors• Identify efficiencies and processes to increase profit and cash• Help with financial & goal clarity
Finding The Exit® (National) 8 quarter program to grow the business in preparation for sale • Goal is rapid increase in growth and profitability for future sale • Quarterback the implementation plan