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Succession Planning and Valuing/Buying/Selling/Merging rep firms

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If you don’t have a plan to sell your company some day, you’re missing out on capturing the value you created as you grew your firm. Get the information you need to help you plan to sell your company …

If you don’t have a plan to sell your company some day, you’re missing out on capturing the value you created as you grew your firm. Get the information you need to help you plan to sell your company from MANA CEO and President, Charles Cohon. One of the best ways to sell your company is to sell to your employees so we also cover key points on recruiting new salespeople to your rep company.

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  • 1. Succession Planning andValuing/Buying/Selling/Merging Rep Firms Attracting and Retaining New Sales People Charles M. Cohon, CEO & President © 2013 Manufacturers’ Agents Nat’l Assn. www.manaonline.org
  • 2. Welcome MANA Members• Business Telephone Counseling• Legal Telephone Counseling• Agency Sales print and online• iToolbox• Updated Special Reports• Webinars & Teleforums
  • 3. Welcome MANA Members• Agreement Guidelines• Commission Protection Act Library• Mentor Program• Discounted Sales Training• Manufacturer Training• RepFinder & LineFinder
  • 4. Succession Planning andValuing/Buying/Selling/Merging Rep Firms
  • 5. DisclaimerThe following is not legal or taxadvice. MANA offers the followingsolely as a guide for possible topicsfor discussion between you andyour legal and/or tax advisors.
  • 6. Rep Valuation Stories I have worn out computers, tired desks,and a customer list. Howdo I value that?
  • 7. Rep Succession Planning Stories I took over from my dad. The biggest difficulty isfinding qualified successor youcan trust. It’s a big investment inmoney and time to find theright person.
  • 8. Rep Succession Planning StoriesI bought business 12 years ago fromfounder. The price was “make me an offer.”Now I am 56 looking at 65, and myfinancial advisors want me to havesuccession planning in place.It will give our principals continuity and it’sgood for your employees in casesomething happens.
  • 9. Rep Succession Planning StoriesWe sold our companyto our employeesthrough an ESOP. Noweveryone has a piece.One problem we hadwas that people whowere giving it upthought it was worth five times more than the peoplewho are buying it. When they reach retirement theycash out their shares in. Employees set aside 10-25% oftheir salary to go into company stock or mutual funds.The lawyers were really expensive.
  • 10. Rep Succession Planning StoriesWe bought ourcompany fromprevious ownerwho was 65.We’ve got to getsome young guys in, get them apiece of the pie, and get theminterested in buying the rest.
  • 11. One Rep’s Guidance:Your best sourcefor a buyer maybe a directsalesperson froma principal, but don’t exposeyourself to an unfriendlytakeover.
  • 12. Rep Valuation StoriesAnother rep group wanted to move intothis area, they approached me aboutmerger, then changed to buyout, offer forbusiness and long term employment.Multipliers and numbers based onEarnings Before Interest, Taxes,Depreciation and Amortization EBITDAand revenue.
  • 13. Rep Valuation StoriesIncome for first yearspread over 7 years(14.3%),
  • 14. Rep Valuation StoriesI had a valuation done, my lawyer andaccountant looked at similar firms(comparables). We ended up at 3-4Xrevenues. Whole bunch of factors. Wedo a lot of buy and resell, for examplewe stock and sell filters and filtermedia. Some we own and some is onconsignment from our principals.
  • 15. Mel DaskalRule of thumb: Sell youragency _ years before youreally want to be 100%retired, because ____________________________________________________
  • 16. Mel DaskalRule of thumb: Sell youragency 5 years before youreally want to be 100%retired, because you willhave to “stay around” afterthe sale.
  • 17. Mel Daskal“Your principle problemis the _______ problem”and you will risk ________________ if you leaveabruptly.
  • 18. Mel Daskal“Your principle problemis the principal problem”and you will risk losingyour lines if you leaveabruptly.
  • 19. Mel DaskalVisit all the ___________.
  • 20. Mel DaskalVisit all the key principals.
  • 21. Mel DaskalVisit all the key principals.Introduce ____________.
  • 22. Mel DaskalVisit all the key principals.Introduce the buyer.
  • 23. Mel DaskalVisit all the key principals.Introduce the buyer.Get the principals’________.
  • 24. Mel DaskalVisit all the key principals.Introduce the buyer.Get the principals’blessing.
  • 25. Mel DaskalPrincipals need to know• The buyers ___________ __________.
  • 26. Mel DaskalPrincipals need to know• The buyers are strong managers.
  • 27. Mel DaskalPrincipals need to know• The buyers are strong managers.• There will be _________
  • 28. Mel DaskalPrincipals need to know• The buyers are strong managers.• There will be continuity.
  • 29. Mel DaskalPrincipals need to know• The buyers are strong managers• There will be continuity• Prospect of ____________.
  • 30. Mel DaskalPrincipals need to know• The buyers are strong managers• There will be continuity• Prospect of increased sales.
  • 31. Mel DaskalThe message: You are stillthere and the buyer feelsstrongly enough about theprospects for success to________________________________________.
  • 32. Mel DaskalThe message: You are stillthere and the buyer feelsstrongly enough about theprospects for success toput his own money into thecompany.
  • 33. Mel DaskalYour income comesfrom ______________.You have to safeguard___________________to get paid.
  • 34. Mel DaskalYour income comesfrom future earnings.You have to safeguardthose future earningsto get paid.
  • 35. Mel DaskalSet payments that willlet the buyer make thepayments and still___________________________________
  • 36. Mel DaskalSet payments that willlet the buyer make thepayments and stillbe liquid enough to runthe company.
  • 37. Mel Daskal30-60 Day Repossession Trigger:If the buyer stops makingpayments you must be able totake the firm back quickly,otherwise _______________________________________________________________.
  • 38. Mel Daskal30-60 Day Repossession Trigger:If the buyer stops makingpayments you must be able totake the firm back quickly,otherwise the buyer may runthe firm into the ground beforeyou can salvage it.
  • 39. Mel DaskalRevisit the buyout price at sixmonths because ______________________________________________. In that case,fairness and pragmatism dictateadjusting the sales priceaccordingly.
  • 40. Mel DaskalRevisit the buyout price at sixmonths because any lines lost inthe first six months werealready shaky. In that case,fairness and pragmatism dictateadjusting the sales priceaccordingly.
  • 41. Mel DaskalBecause the buyer and sellerrely heavily on the otherduring this process, it is veryimportant to buy ________________ on both of theparties.
  • 42. Mel DaskalBecause the buyer and sellerrely heavily on the otherduring this process, it is veryimportant to buy lifeinsurance on both of theparties.
  • 43. Mel Daskal Typical Valuation• ________ times a year’s gross commission income paid over __ to __ years.
  • 44. Mel Daskal Typical Valuation• 1 to 1.5 times a year’s gross commission income paid over 5 to 10 years.
  • 45. Mel Daskal Typical Valuation• 1 to 1.5 times a year’s gross commission income paid over 5 to 10 years.• Longer payout = ___________ –Risk of ________ –Implied ________
  • 46. Mel Daskal Typical Valuation• 1 to 1.5 times a year’s gross commission income paid over 5 to 10 years.• Longer payout = larger amount –Risk of default –Implied interest
  • 47. Mel Daskal Typical ValuationAdjust typical valuation for:• ____ security
  • 48. Mel Daskal Typical ValuationAdjust typical valuation for:• Line security
  • 49. Mel Daskal Typical ValuationAdjust typical valuation for:• Line security• Value of ________ and __________
  • 50. Mel Daskal Typical ValuationAdjust typical valuation for:• Line security• Value of equipment and inventory
  • 51. Mel Daskal Typical ValuationAdjust typical valuation for:• Line security• Value of equipment and inventory• Orders secured with __________________.
  • 52. Mel Daskal Typical ValuationAdjust typical valuation for:• Line security• Value of equipment and inventory• Orders secured with commission pending.
  • 53. Mel Daskal Typical ValuationInclude a factor for dropping_________ lines.
  • 54. Mel Daskal Typical ValuationInclude a factor for droppingcompeting lines.
  • 55. Mel Daskal Typical ValuationInclude a factor for droppingcompeting lines.Consider not only the incomefrom each line, but also:• How solid __________.• How solid ______________ ______________________.
  • 56. Mel Daskal Typical ValuationInclude a factor for droppingcompeting lines.Consider not only the incomefrom each line, but also:• How solid the principal is.• How solid the relationship is with rep company.
  • 57. Daskal: Discuss With Your AccountantCan you structure payments toseller are “commissions” to old repcompany? Typically 10-15% ofmonthly cash receipts. More than15% tends to strain the newcompany. 15% paid for 6.6 yearsequals 1X earnings.
  • 58. Daskal: Discuss With Your AccountantEstablish a floor, and if they can’t paythe floor you may have to take backthe company. You set the floor toprotect _______________, not___________.
  • 59. Daskal: Discuss With Your AccountantEstablish a floor, and if they can’t paythe floor you may have to take backthe company. You set the floor toprotect the company, notyour payments.
  • 60. Daskal: Discuss With Your AccountantEstablish a floor, and if they can’t paythe floor you may have to take backthe company. You set the floor toprotect the company, not yourpayments. A floor might be 50% ofcurrent commissions for 90 days. Waitlonger and ________________________________________________________________.
  • 61. Daskal: Discuss With Your AccountantEstablish a floor, and if they can’t paythe floor you may have to take backthe company. You set the floor toprotect the company, not yourpayments. A floor might be 50% ofcurrent commissions for 90 days. Waitlonger and the business you repossessmay not be viable.
  • 62. If there is a floor, is there a ceiling?If the price is a fixed amount, i.e. 1Xearnings at the time of the sale,there is no need for a ceiling, theyjust pay you back faster.If the price is monthly percentage,then set a ceiling and a floor, say 15% up to “X dollars” and nothingmore per month.
  • 63. Mel Daskal Typical Valuation IIRolling average couldbe 15% of the averageyearly commissions forthe last 3 years.
  • 64. Mel Daskal “Trial Marriage”Trial period for merger: 3-6months. Temporary joint bankaccount or each just pays prorata share of expenses. Be surebefore you mix the twoirrevocably. Back out provisions,no fault.
  • 65. Consult Your Tax Professional About IRS Section 197When no services are rendered,payments are only tax deductibleover a 15 year period.Bad for the buyer, but also bad forthe seller if the cash-strappedbuyer can’t keep up the payments.
  • 66. Mel Daskal On IRS Section 197“Goodwill” or “Going Concern Value” wascompletely and permanently non-tax-deductible by the buyers until August 10,1993.So goodwill calculations were very biasedtoward achieving near-zero payments forgoodwill.Skewed toward _____________________________________________________________
  • 67. Mel Daskal On IRS Section 197“Goodwill” or “Going Concern Value” wascompletely and permanently non-tax-deductible by the buyers until August 10,1993.So goodwill calculations were very biasedtoward achieving near-zero payments forgoodwill.Skewed toward consulting fees, non-competeagreements, commissions, customer lists.
  • 68. Mel Daskal On IRS Section 197Now goodwill and otherintangibles are deductible evenlyover 15 years. Covenants not tocompete, regardless of the lengthof the covenant, are deductibleover 15 years as well.
  • 69. Daskal SuggestionFor Discussion With Your Tax Professional This is not tax or legal advice• Buyer forms a new corporation• No assets of the seller are sold to the buyer.• Seller’s corporation –Keeps the lines –Collects the commissions –Pays the buyers corporation 85% to 95% of commissions for servicing the lines.
  • 70. Daskal SuggestionFor Discussion With Your Tax Professional This is not tax or legal advice• Covenants not to compete still mandatory 15 year write off.• After 5-10 years the seller’s corporation has no assets so it can be sold to the buyer for a nominal amount, avoiding termination on sale clauses in the rep agreements.
  • 71. Daskal Suggestion #2For Discussion With Your Tax Professional This is not tax or legal advice • Form a new partnership of Buyer Corporation and Seller Corporation • Partnership receives commissions due to Seller Company • Seller receives 10-15% of the proceeds of the partnership for 5-10 years
  • 72. Compensation Programs to Attract New Sales Representatives and Competing to Hire the Next Generation
  • 73. One Rep’s StoryIt’s hard to bringin young people.More successhiring 40-ishinstead of 30-ish. It’s hard to get anengineer to take a gamble oncommission. And I can’t get a recentcollege grad to work on commission.
  • 74. One Rep’s Story (continued)Everyone hasbeen with me25 plus years.Best luck with going back toalumni placement groups ofschools in our area.
  • 75. Why can’t BabyBoomers (Age 52-67) hire Generation X (Age 33-51) or Generation Y (Age 17-32)?
  • 76. Baby Boomers Born 1945-1960 Age 52-67• Invented the word “workaholic.”• Measure success by hours worked.• Started work when company loyalty was standard.
  • 77. Baby Boomers Born 1945-1960 Age 52-67• Expect loyalty from co-workers.• Security comes from seniority and promotion.• Status symbols are important.
  • 78. Generation X Born 1961-1979, Age 33-51• Work to live mentality.• They invented work/life balance.• Look for a person they can be loyal to, not a company.• Security comes from employability.
  • 79. Generation X Born 1961-1979, Age 33-51• Shorter term focus.• Motto is “look out for number one because you just never know.”• Want to be judged on output not input.
  • 80. Generation X Born 1961-1979, Age 33-51•Like regular 2 way feedback on performance.•Value control of their time.
  • 81. Gen X Workplace issues• Want open communication from management who are often Baby Boomers and don’t think it’s necessary.• Starting to take over the management of workplaces but the Boomers aren’t leaving quickly enough for them.
  • 82. Gen X Workplace issues• Don’t want to sacrifice their personal lives for the organization.• Respect production over tenure.
  • 83. How to attract and retain Gen X• Need to feel they are constantly adding to their skill sets.• Project work and self-managed teams• Move them sideways rather than up (or nowhere)
  • 84. How to attract and retain Gen X• Give them real flexibility in hours and remuneration packages.• Family friendly policies for women and men.
  • 85. How to attract and retain Gen X• Give them mentors from their own generation.
  • 86. Gen Y Born 1980 – 1995, Age 17-32 What They Think About Work• Sense of entitlement.• Want to feel like paid volunteers.• Need to have work with meaning.• Want personal satisfaction from work.
  • 87. Gen Y Born 1980 – 1995, Age 17-32 What They Think About Work• Big expectations of income.• Have more of a group/community focus.• No expectation of loyalty or a traditional 9-5 job.• Will have more than one income stream.
  • 88. Gen Y Workplace issues• Want constant open communication and positive reinforcement.• Want to reduce stress.• See work as an anywhere, anytime, wearing anything arrangement.• Believe age and experience are irrelevant, what matters is ability.
  • 89. How to Attract and Retain Gen Y• Need leaders they respect who will “talk their language.”• Make sure your marketing image matches your actual culture.• Get other Generation Ys involved in the recruitment process.
  • 90. How to Attract and Retain Gen Y• Provide a community environment at work.• Make starting at the bottom seem like the right thing to do.
  • 91. How to Attract and Retain Gen Y• Give them Baby Boomer mentors rather than Generation X.
  • 92. How to Attract and Retain Gen Y• Have the latest technology.
  • 93. How to Attract and Retain Gen Y• Realize they won’t stay long so make sure they leave on a good terms so they tell their friends about you.

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