Transcript of "Helping Your Client Buy or Sell a Small-To-Medium Sized Business"
A Global Reach with a Local Perspective Helping Your Client Buy or Sell a Small-To-Medium Sized Business www.decosimo.comMike Costello – email@example.com
Today’s Presentation Will Include: A tentative guide to advising buyers/sellers at the outset of the process An overview of relevant business valuation methods A discussion of your client’s various financing options
A Global Reach with a Local Perspective www.decosimo.com Part One: A Tentative Guide to AdvisingBuyers/Sellers at the Outset of the Process
Preliminary Steps1. Assembling an Advisory Team2. Business-For-Sale Market Analysis3. Performing Due Diligence4. Creating a Non-Disclosure Agreement5. Structuring the Transaction6. Drafting the Letters of Intent for the Stock and Asset Purchase Agreements7. Selecting and Using a Transaction Advisor
Assembling a Professional Advisory Team An effective transaction team requires many types of expertise and knowledge. • Knowledge of the client’s Circumstances and Objectives • Business Growth • Sales or Mergers of the Business • Tax Planning • Business Valuation
Business-For-Sale Market Analysis Impartial assessment of the business is necessary Income Approach Market Approach Determine reasonable expectations Determine potential buyers of the business Identify what is hindering the company’s value? List the strengths of the business • What does it do well?
Performing Due Diligence The seller is nearly always more informed about the property being transferred than the buyer. Information has a cost Examples include Legal, Financial, and Operational Costs Focus on the key issues Set up an appropriate scope of work • In context of the budget and areas of focus Close portions of the information gap between buyer and seller Locate deficiencies in the information provided
Creating a Non-Disclosure Agreement Primary purpose of a “NDA” Keep out of a competitor’s hands Remedies for breaching the agreement Establish limits Tailor it to your specific circumstance
Structuring the Transaction Bridge the “Valuation Gap” Noncash Payments • Earnouts • Seller Notes • Rollover Common Equity Employment Agreements Non-Compete Agreements Is the considered value consistent (or better than) expectations for the business?
Drafting the Letters of Intent for the Stock and Asset Purchase Agreements Lay out the intended terms of the potential transaction Stock or asset exchanged Expected Purchase Price Remaining Considerations Duration of Exclusivity Describe the obligations and promises assumed
Selecting and Using a Transaction Advisor Step 1: Determine what sort of professional will best meet the company’s needs • Make your inquiries • Cultural Fit and Comfort with Banker • Fees Sellers: Compensate with Value Added 10% to 15% of total transaction Buyers: Decrease Percentage Fee as Transaction Size Gets Larger Retainers
A Global Reach with a Local Perspective www.decosimo.comPart Two: Business Valuation Methods
Methods of Valuation Rules of Thumb Asset-Based Methods Income Methods Market-Based Methods Identifying and Obtaining the Necessary Documents Maximize Your Use of the Business Appraiser
Rules of Thumb Simple and convenient way to estimate a company’s value Tests the reasonableness of other methods of valuation Multiple-of-Revenue Method Applies a multiple to a company’s revenue, such that the result is a value comparable to a typical transaction price. Limitations Ex. Different sources providing different rules of thumb
Asset-Based Methods: “Asset Approach” Principle of Substitution Net Asset Value Method • Book Value vs. Current Economic Value Illustrates contribution of each line item
Income Methods of Valuation Foundation = Present Value Mathematics Two basic inputs: Stream of Expected Future Benefits Conversion Factors from Future to Present Value Economic Income (Gross or Net) May be Grouped Into One of Three Categories: 1) Payouts 2) Cash Flow 3) Some Measure of Accounting Earnings Discounted Cash Flow
Market-Based Methods of Valuation Compares the subject to similar businesses that have been sold 3 Market-Based Methods Guideline Public Company Method Merger-and-Acquisition Method Same-Company-Transaction Method
Identifying and Obtaining the Necessary Documents The Goal = Transparency Any document withheld could caution the buyer Coordinate one comprehensive request at the beginning of the engagement Categories of documents to request include: • Financial Records of the Seller • Legal Documents • Information on the Business That is Related Directly to Operations
Maximize Use of Business Appraiser Hire a quality expert and early in the process Characteristics of a quality appraiser: • Estimate the value of the selling enterprise • Assess current risks involved in company operations, finances, and managerial organization • Provide suggestions for reducing or eliminating risks prior to the transaction
A Global Reach with a Local Perspective www.decosimo.comPart Three: Know Your Client’s Options For Financing the Deal
Financing the Deal Sources of Financing Seller Financing Dos and Don’ts The “Ins and Outs” of Asset-Based Lending Working With the SBA and Other Nonprofit Sources Venture Capital and Other Alternative Financing Methods
Sources of Financing Banks have recently decreased the percentage of a capital structure that they are willing to lend Best way to combat decreased lending: Increase Value Reduce riskiness of the business • Reduce customer/supplier concentration • Non-compete agreements with key employees • Sufficient debt coverage ratios and strong margins Traditional Equity Financing has its advantages and disadvantages
Seller Financing Dos and Don’ts Do: Understand your client’s objectives and preferences before analyzing the value of the arrangement Ask the client questions concerning their perception of the value of cash today in comparison to other financing Consider the proposed terms of seller notes and the value of the notes Don’t: Base earnouts on subjective matters Leads to costly litigation and blurred expectations
The “Ins and Outs” of Asset-Based Lending Alternative to traditional debt financing arrangements Company borrows a loan that is backed by specific assets Advisors often participate in these processes • Investment Bankers, Loan Services, Attorneys, Independent Accountants, Trustees, Underwriters, Rating Agencies, and Guarantors Can be created using any business asset • Leads to a high quality loan which increases lending opportunities
Working With SBA & Nonprofit Sources SBA- Established to assist small businesses in obtaining the capital they need to grow Three main categories of programs that SBA provides: Debt Financing Surety Bonds Equity Financing Non-profit Examples: Women’s Venture Fund Operation HOPE FAME Renaissance Minority Business Development Agency
Venture Capital and Other Alternative Financing Methods Traditional sources of financing may not provide sufficient capital at manageable rates to every company Alternative Options Include: Venture Capital Mezzanine Debt Debt Private Placement Private Equity Financing Equity Private Placement Recapitalizations Strategic Sales
Contact Information Mike Costello CPA, ABV, CFE firstname.lastname@example.org On LinkedIn: www.linkedin.com/in/mikecostelloThe contents and opinions contained in this article are for informational purposes only. The information isnot intended to be a substitute for professional accounting counsel. Always seek the advice of youraccountant or other financial planner with any questions you may have regarding your financial goals orspecific situations.