Understanding and Maximizing Business Value
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Understanding and Maximizing Business Value

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This presentation is for business owners who are interested in building and maintaining value in their company with an emphasis on positioning the business for transition, and exit plannig.

This presentation is for business owners who are interested in building and maintaining value in their company with an emphasis on positioning the business for transition, and exit plannig.

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Understanding and Maximizing Business Value Understanding and Maximizing Business Value Presentation Transcript

  • Understanding and Maximizing Business Value Michael F. Coyle, CBI Principal/Exit Planning Advisor, CenterPoint Business Advisors
  • Michael F. Coyle, CBI
    • Principal, CenterPoint Business Advisors, Inc.
    • Exit Planning Advisor, Business Enterprise Institute
    • Certified Business Intermediary (CBI) Awarded by the International Business Brokers Association
    • MBA – Boston College, Carroll Graduate School of Management
    • Serial Entrepreneur
  • Center Point Business Advisors, Inc. assists the owners of small to mid-sized businesses in planning for and executing the most important financial event of their lives...the inevitable exit from their business.
    • Advisory Market
    • Valuations
    • Certified Business
    • Appraisals
    • Machinery &
    • Equipment Appraisals
    • Value Drivers
    • & Detractors
    • Strategic &
    • Project Specific
    • Sale to 3 rd Parties
    • Transfer to Family,
    • Employees or Partners
    • Recapitalization
    • with Private Equity
  • During This Session You Will Learn:
    • What is the Underlying Purpose of your Business
    • What is the Reality for Most Small Business Owners
    • What are the Components of Business Value
    • What are Common Value Drivers & Detractors
    • Key Strategies for Improving Business Value
    • Exiting Your Business is Inevitable, Plan for It
  • The True Purpose of Your Business
    • Is to Give You Life
    • Michael Gerber, The E-myth Revisited , other E-myth Books
    • The Entrepreneur * The Manager * The Technician
    • Run your business to exit it, realize value to support your life’s objectives
    • Importance of creating systems & extracting the business owner from the day-to-day
    • Working “ON” and not “IN” your business
  • The Reality For Business Owners
    • Exiting your business is Inevitable and the largest value detractor is often what the owner IS or IS NOT doing.
    • 80% of business owners exit their business to retire, they are not serial entrepreneurs
      • Their principal fear is “will I have enough money so that I can fund my retirement lifestyle without running out of money”
      • Other considerations may include wealth transfer to the next generation, charitable giving, and minimizing taxes
  • The Reality For Small Business Owners (2)
    • Typically 50-75% of a business owner’s net worth is in their business assets. The balance is in their personal real estate & financial investments
    • Business owners typically only have ONE chance to monetize their largest asset
    Equities Real Estate Business
  • The Reality For Business Owners (3)
    • Most business owners have only an anecdotal perception of the value of their business “My brother in law knew a guy who had a business like mine that sold for…”
    • Relying on this type of perception can lead to large gaps in future wealth and quality of life
    "Paper or Plastic"
  • The Reality For Business Owners (4)
    • 85% of all small business owners do not have an exit plan, a wealth management plan, and/or an advisory team to assist them
    • Very few start the process early enough to achieve the maximum benefit of valuation and exit planning
  • Typical Business Owner Concerns
    • Who should I transfer my business to?
      • Family, Employees, Partners, a 3 rd Party
    • When is the right time to leave my business?
    • What is my business really worth?
    • What is the right deal structure?
      • Tax avoidance vs. future risk
    • How do I ensure that I meet all of my future goals and expectations?
  • There Are Only 4 Places Your Money Can Go
    • An Exit Plan will let YOU decide where your hard earned assets end up!
  • The Exit Planning Process
  • Why Value Your Business?
    • Business & Financial Planning
    • Estate & Trust Planning
    • Employee Stock Ownership Plans (ESOP)
    • Partnership Agreements
    • Litigation & Disputes
    • Creating an Exit Strategy
  • Value is in the Eye of the Beholder
    • Individual/Lifestyle
    • Financial
    • Industry
    • Strategic
    • Related Parties (KEG or Family)
  • Business Value Components
  • Value Drivers & Detractors
  • Value Drivers & Detractors
  • Value = CF * M
    • Simple Right?
    • The Complexity is in the Subscripts
    • Value = CF (s), (t) * M
    • Sustainable
    • Transferable
  • What Is A Business Valuation?
    • Both a Product and a Process
      • Business valuation vs. a real estate appraisal
    • Significant value is in the Process
  • What Is A Business Valuation? (2)
    • Process is a multi dimensional analysis of your business from the Buyer’s Perspective
      • Financial, lifestyle, asset, risk & growth attributes
      • Identifies what adds to and what detracts from value
      • Usually this leads to a handful of items that could greatly improve value
    • Form of limited scope appraisal that determines a “Most Probable Selling Price” at a point in time (vs. “Fair Market Value” standard)
  • What Is A Business Valuation? (3)
    • Determines economic benefit of ownership and not tax value
      • Goals are to minimize taxes and maximize economic benefit
    • Measures your business against the industry
    • Tool for improving the business and maximizing value
  • What Is Valued?
    • Tangible Assets
      • Leasehold Improvements
      • Equipment, Furniture & Vehicles
      • Inventory, Accounts Receivable
    • Intangibles
      • Goodwill (vs. “Blue Sky”)
      • Patents & Copyrights
      • Controlled Territories, Product/Service Niche
      • Customer & Supplier Contracts
  • What Are The Benefits of A Valuation?
    • Demystifies the value of your business
    • Establishes a baseline for comparison in the future
    • Measures returns on equity, assets, & time
    • Provides valuable data for an Exit Planning Process
    • Provides tools to control where your investment is going
  • What Kind of Valuation is Appropriate?
    • Price Opinion
      • Based upon broad “rules of thumb”
      • For the “curiosity seeker”
    • Business Valuation
      • “ Most Probable Selling Price”
      • Multi dimensional analysis
      • Information for planning and control & decision making
    • Fair Market Value Appraisal
      • Tax, litigation, refinance
  • Who to Select for the Business Valuation Process?
    • Accountant/CPA
    • Certified Business Broker/Valuation Professional
    • Licensed Commercial Appraiser
    With the proper training all can do the work. Select a professional who can best understand the industry and find the value builders and detractors
  • Business Valuation
  • Exit Planning: Key to Value Realization
    • Demographics are changing
    • Aging population of baby boomer business owners
    • More than 8.4 Million Business owners will seek to exit their business in the next 10-12 years. (70%)
    • Many businesses are still based in an “old economy model”
    • Next generation of buyers want “new economy models’
    • Supply of Businesses for sale will outstrip Demand
    • Only those business owners that Plan will be successful
  • The Exit Planning Process
  • From The Endless Focused Work in Building Your Business…
  • ...To Achieving Your Life’s Next Goals
  • Takes A Cohesive Team Approach
    • Your Legal & Tax Team
    • Your Wealth Planning Team
    • Your Business Advisory Team
    • Your Business Intermediary Team
    • You!
  • The Exit Planning Process
  • Step One: Identify Exit Objectives
    • “ When a man does not know which harbor he is heading for, no wind is the right wind .” - Seneca
  • Step One: Identify Exit Objectives
    • Universal Objectives
    • How much longer does the owner want to work in the business before retiring or moving on? _________ years
    • What annual after-tax income does the owner want during retirement (in today’s dollars)? $_________
    • To whom does the owner want to transfer the business?
      • Family?
      • Co-Owner?
      • Key Employee(s)?
      • Outside party?
      • ESOP?
  • Step One: Identify Exit Objectives
    • Working with a Team of Advisors
    • No one professional has all the answers.
    • Diverse skills and talents are necessary.
    • Team approach minimizes time and cost.
      • If properly facilitated and led.
  • Step One: Identify Exit Objectives
    • Who is on the Advisor Team?
    • Valuation Specialist
    • Business Intermediary
    • Investment Banker
    • Business or Management Consultant
    • Banker
    • Exit Planning Advisor
    • Financial Planner
    • Insurance Advisor
    • Investment Advisor
    • Business Attorney
    • Estate Planning Attorney
    • CPA/Accountant
  • Step Two: Quantify Business and Personal Financial Resources
    • “ Beauty is in the eye of the buyer.”
  • Personal Wealth Plan
    • Having a Post Retirement Plan on How to Support Your Lifestyle Delivers “Peace Of Mind”
    • Personal Wealth Plan + Business Value = Retirement Income Plan
  • Business Valuation
    • Benefits to the Owner
    • Provides a baseline business value by projecting cash flow.
    • Measures business and personal resources both today and as a basis for future projections.
    • Allows you to monitor progress toward your stated objectives.
  • Business Valuation (2)
    • Identifies what is being sold
      • Inventory, Equipment, Real Estate, Stock
    • Establishes profitability
    • Assesses risk
    • Identifies value drivers
    • Scans marketplace
    • Considers financing strategies
    • Establishes relationship between earnings and value
    • Should be done Cyclically with business planning
  • Step Three: Maximize and Protect Business Value
    • “ Making a silk purse from a sow’s ear.”
  • Step Three: Maximize and Protect Business Value
    • Benefits to the Owner
    • Grow business value and intangible value of the business.
    • Reduce income taxes upon sale of business.
    • Protect assets from potential business and personal creditors.
    • Create ability to sell the business.
    • Motivate and keep key employees.
  • Step Three: Maximize and Protect Business Value
    • Promote Value Through Value Drivers
    • Focus on increasing cash flow.
    • Develop operating systems that improve sustainability of cash flows.
    • Solidify and diversify customer base.
    • Implement strategies to grow the company.
    • Improve company performance as measured by industry metrics.
    • Build a solid management team and groom a successor.
  • Business Valuation
    • Financial statements are key!
      • EBITDA multiples
      • Discretionary income multiples
      • Cash and non-cash add backs
      • Value derived from market data
  • Strategies for Maximizing Value
    • Value your business early… and often
    • Focus on implementing business improvements
    • Create and participate in your own Exit Planning Process
      • Wealth Management Team
      • Legal & Tax Team
      • Business Advisory & Intermediary Team
  • Step Four: Ownership Transfer to Third Parties
    • “ Making a mountain out of a molehill.”
  • Step Four: Ownership Transfer to Third Parties
    • Benefits to the Owner
    • Cash at closing.
    • Eliminate financial risk.
    • No family succession issues.
    • Speed of exit.
  • Step Four: Ownership Transfer to Third Parties
    • Third Party Sales – Not Just About the Business
    • Ability to sell and business value are determined by:
      • Intrinsic Value: the value drivers.
      • Extrinsic Value: the value the market places on the business.
      • Effectiveness of the sale process.
  • Step Four: Ownership Transfer to Third Parties
    • Current M & A Marketplace
    • Of businesses with sales of less than $10 million per year, 20 percent are for sale, but only one out of four actually sells.
    • Businesses with sales of $10 million per year aren’t much better – only one-third sell.
    • Above $10 million per year, the odds improve to 50-50.
  • Step Five: Ownership Transfer to Insiders
    • “ Making a molehill out of a mountain.”
  • Step Five: Ownership Transfer to Insiders
    • Benefits to the Owner
    • Achieves Exit Objective of:
      • Selling to Key Employee Group (KEG).
      • Transferring to a Family Member.
    • Motivates and retains key employees.
    • Planning reduces risk and increases amount of money received.
  • Family Owned Businesses
    • Keeping the Family Peace while Growing Business Value
    • “ Many Hats” Problem
    • Fewer than 50% transfer to 2 nd Gen and less than 20% to 3 rd Gen
    • Special Considerations
      • Estate Planning
      • Leadership Development
      • Choosing Advisors
      • Compensation & Performance
      • Strategic Planning
  • Step Six: Business Continuity Planning
    • “ Making sure the business continues when the owner doesn’t.”
  • Step Six: Business Continuity Planning
    • Benefits to the Owner
    • Objectives can still be achieved if you don’t survive your exit.
    • Retains ownership and control of company if co-owner departs.
    • Can force non-contributing owners to leave the business.
    • Provides consistency between lifetime and death objectives.
    • Ensures survival of the business for the benefit of others.
    • Results in family receiving value of owner’s interest, in cash.
  • Step Seven: Personal Wealth and Estate Planning
    • “ When the ‘slings and arrows’ of outrageous fortune befall you, fight back.” - William Shakespeare (Hamlet)
  • Step Seven: Personal Wealth and Estate Planning
    • Benefits to the Owner
    • Preserve wealth, minimize taxes using both lifetime and death planning tools.
    • Coordinates and integrates lifetime exit objectives wishes with estate plan.
    • In effect, estate planning becomes part of business and exit planning.
  • Key Strategies Improving Business Value
    • Manage Value as Seen By The Market
    • Positioning in the market place
      • Strategic buyers
      • Industry buyers
      • Financial buyers
    • Business continuity
      • Balance short term and long term business needs
      • Employee development and mentoring
  • Key Strategies Improving Business Value
    • Good Planning Eases Adversity
    • Owner illness
    • Divorce
    • Death
    • Disability
    • Litigation
  • Key Strategies Improving Business Value
    • Reduce Business Viability Concerns
    • Performance relative to benchmarks
      • Revenues and revenue trends
      • Income and cash flow trends
    • Expansion potential
    • Competitive advantages
      • Core competencies
      • Company Culture
    • Owner dependence
      • Is the owner the business?
  • Key Strategies Improving Business Value (2)
    • Financial Concerns
      • Need for good & accurate record keeping
      • Positive cash flow and focus on value not tax minimization
      • Realistic growth strategies
    • Valuation and Price justification
      • 3 rd party valuation
      • Return on Investment to buyer
      • Payback periods in years
  • Key Strategies Improving Business Value (3)
    • Owner’s Role
    • Delegate more effectively
      • Reduce reliance on business owner
      • Formal employee training
    • Succession/Exit Plan
      • Identify and groom a successor
      • Developing & Mentoring key personnel
    • Succession takes time and effort
      • Complex mix of potentially conflicting issues
  • Key Strategies Improving Business Value (4)
    • Partners and Employees
    • Execute agreements with partners
      • Buy/sell and buyout agreements
    • Employee dependency
      • Employee tenure/turnover
      • Employee contracts
      • 401(k) plans to keep employees
    • Human resource documentation
      • Employee handbooks
      • Job descriptions
      • Personnel files
  • Key Strategies Improving Business Value (5)
    • Operational Process
    • Policies and procedures
      • Processes
      • Core activities
      • Systems (consistency of quality, customer service)
      • Equipment Maintenance
    • Technology and Web Presence
      • IT current
      • Web links to the world
  • Key Strategies Improving Business Value (6)
    • Operational Process (2)
    • Streamline processes
      • Evaluate each product or service to verify contribution to bottom line
      • Outsource non-core activities
      • Analyze and outsource activities that can be obtained cheaper on the outside
    • Inventory Control
      • Inventory turnover relative to industry standards
      • Review methods (FIFO, LIFO, etc.)
  • Key Strategies Improving Business Value (7)
    • Suppliers
    • Supplier relations
      • Supplier/approval selection process
      • Long-term contract benefits
      • Owner dependent relationships
    • Cost of input materials
      • Review frequently
      • Renegotiate if necessary
  • Key Strategies Improving Business Value (8)
    • Customers
    • Retention
      • Friends or relatives of owner
      • Customer service and support
      • Customer loyalty
    • Limit Customer Concentration
      • 80% of revenue concentrated around a small group of customers
      • 20% of business concentrated with one customer
    • Reevaluate Marketing/Sales
      • Direct
      • Reps & Agents
      • Internet – new channels
  • Key Strategies Improving Business Value (9)
    • Marketing and Advertising
    • Enhance marketing strategy/plans
      • Advertising
      • Trade Shows
      • Internet
      • Brand Awareness and P.R.
      • Clear and consistent message/value proposition
      • Differentiation
  • Key Strategies Improving Business Value (10)
    • Competition
    • Know your competition
      • Use industry groups
      • Ask your customers
    • Know what they do differently
      • Articulate your advantages and disadvantages
      • Pricing strategies
    • Learn from competitors
      • Benchmark
      • Borrow good ideas
  • Key Strategies Improving Business Value (11)
    • Legal Issues
    • Intellectual property…is it secure?
      • Patent, copyright and trademark applications
    • Litigation issues
      • Settle all litigation
      • Resolve all product liability cases
      • Resolve all insurance claims
    • Form of incorporation pros & cons
      • C-Corp, S-Corp
      • LLC, Partnership
      • Proprietorship
  • Key Strategies Improving Business Value (12)
    • Regulatory Issues
      • Clear environmental compliance
      • Have environmental review by reputable firm
      • Review all permits and licenses
      • OSHA issues
      • Pending zoning issues
  • The vast majority of owners are unaware there is a specific planning and implementation process that can help ensure they achieve their objectives. Most business owners spend more time planning a family vacation than how to build value and exit from their business. This is not due to a lack of desire or intelligence. It is simply because they don’t know how or where to begin.
  • Get Started with Maximizing & Realizing the Full Value of Your Business
    • Read my Newsletter, Exit Planning Review on Value Building, Bi-monthly advertising-free subscription
    • Explore the handout materials and try out the questions in the Business Owner Exit Planning Checklist
    • Contact me for a FREE copy of How to Run Your Business So you Can Leave It In Style by John Brown
    • Read White Paper “Inevitabilities” and contact me for copies of other topics or FREE assessment.