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Succession Planning and Valuation                   Mike Upah
Statistics - USA25,000,000 businesses in the US20% for sale at any one time25% of the 20% (5%) actually sell• “Testing the...
StatisticsBaby Boomer Businesses for Sale in Next 2 Decades?  • One business owner turns 65 every 57 seconds  • People 55+...
Statistics    75% of Owners Have no Exit Plan    Selling within 6 months of deciding to do so can    reduce the business’s...
Are You Ready to Sell?Why Selling?       Retirement, Health, Relocation, New Competitor, Bored?What are you going to do ne...
30,000 Foot View Business’s Financial Position – 3 Categories1. Business earns more than a reasonable salary for owners…  ...
Who to Sell to … ?   Existing Partner   Another Business   • Strategic Buyer   • Competitor   Stranger   Employee   Employ...
Conditions of SaleConsulting Agreement? Paid or Unpaid ?Non-Disclosure / Non-Compete ?Earn-Out ?Owner Financing ?Trusted E...
Team                                                       Due Diligence                                                  ...
Process  Build Team  Adjusting Financial Statements, Pricing  Marketing  Confidentiality Agreement   Buyer Interview / Qua...
Adjusting Financial Statements  Net Income  + Salaries to non-working family members  + Payments on the condo in Vail  + P...
Marketing FSBO        Ads in Local Newspaper; Networking Broker      ~ 10% commission Directory   BizBuySell.com; business...
Valuation            Certified Business Appraiser
From Buyer’s Perspective          Can I Afford to Buy ?
From Buyer’s Bank’s Perspective Turn Key Purchase Cost                      Price       Collateral Assets (FMV)       500,...
Seller Financing Usually Needed       $4,246                         $1,559   Monthly Payment                Monthly Payme...
Buyer Homework …      Max Purchase Price Method
Valuation Methods Multipliers • Owner’s Cash Flow • Monthly or Annual Revenue Industry Rules of Thumb – e.g., $13,000 per ...
Multipliers
Discounted Cash FlowToday                                   1 Year$1.00                                  $1.03$1.00       ...
Discounted Cash Flow                  30% discount Rate Today       Year 1     Year 2        Year 3$23,077      $30,000$22...
Price Agreement…Once You’ve Agreed on Price…,            The Negotiations are still not finished…
Seller vs. Buyer Tax Preferences Stock Sale    Seller gets capital Gains Treatment               Buyer looses ability to d...
Asset Price AllocationAsset Sale - $1,000,000 Sale Price                               Seller                      Buyer  ...
Questions            Mike Upah            515.296.7828            mjupah@iastate.edu
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Business Succession and Valuation

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Transcript of "Business Succession and Valuation"

  1. 1. Succession Planning and Valuation Mike Upah
  2. 2. Statistics - USA25,000,000 businesses in the US20% for sale at any one time25% of the 20% (5%) actually sell• “Testing the Water”• Over Priced• Solve the Issue Causing the Need to Sell – Divorce, Health, Etc.3% of “Buyers” making a purchase inquiry actually buy
  3. 3. StatisticsBaby Boomer Businesses for Sale in Next 2 Decades? • One business owner turns 65 every 57 seconds • People 55+ own 50% of all businesses • 50% want to sell in next decade • Children less likely to want to take over businessNumber of Gen Xers in a Financial Position to Buy???
  4. 4. Statistics 75% of Owners Have no Exit Plan Selling within 6 months of deciding to do so can reduce the business’s value by 50% to 70%.
  5. 5. Are You Ready to Sell?Why Selling? Retirement, Health, Relocation, New Competitor, Bored?What are you going to do next ? (especially important with a family buyer)Selling What ?• Partnership Position – Buy/Sell Agreement in Place?• Business – Stock or Assets• Building ?Ship Shape ?• Financials - Accurate, Growth, Debts• Brand Reputation, Market Position, Pending Competition• Employees – Disgruntled, Loyal to Business?• Customers – Loyalty, Diversity• Pending Capital Improvements – Equipment, Facilities, etc.
  6. 6. 30,000 Foot View Business’s Financial Position – 3 Categories1. Business earns more than a reasonable salary for owners… • Provides Return on Investment • Valuation of Discretionary Cash Flow is Meaningful2. Business earns just a reasonable salary for owner • Make vs. Buy - FMV of assets ? • - How much “baggage” (bad employees, weak inventory, etc.) • + Value of one less competitor in the market?3. Business earns less than a reasonable salary for owners… • Risk = what significant discount on FMV of assets? • - Pain of “Gutting” (bad employees, weak inventory, etc.) • + Value of one less competitor in the market?
  7. 7. Who to Sell to … ? Existing Partner Another Business • Strategic Buyer • Competitor Stranger Employee Employees - ESOP Liquidator
  8. 8. Conditions of SaleConsulting Agreement? Paid or Unpaid ?Non-Disclosure / Non-Compete ?Earn-Out ?Owner Financing ?Trusted Employee(s) – What Happens to Them ?Competitor Purchase – What to Disclose ?Existing Debts – Who Pays ?Accounts Receivable – Who Collects ?Lease – If favorable, how much longer and can you sub-lease?
  9. 9. Team Due Diligence Negotiation Preparation Marketing Closing PricingYou x x x x x xAccountant / CPA x x x xAppraiser xAttorney x x x xBusiness Broker x x x x xConsultants x xYour Banker x x
  10. 10. Process Build Team Adjusting Financial Statements, Pricing Marketing Confidentiality Agreement Buyer Interview / Qualification Financial Disclosure – 3 years or more Negotiation Term Sheet / Letter of Intent Purchase Agreement Closing! Fulfill Consulting Agreement
  11. 11. Adjusting Financial Statements Net Income + Salaries to non-working family members + Payments on the condo in Vail + Payments on non-essential vehicles
  12. 12. Marketing FSBO Ads in Local Newspaper; Networking Broker ~ 10% commission Directory BizBuySell.com; businessbrokers.net
  13. 13. Valuation Certified Business Appraiser
  14. 14. From Buyer’s Perspective Can I Afford to Buy ?
  15. 15. From Buyer’s Bank’s Perspective Turn Key Purchase Cost Price Collateral Assets (FMV) 500,000 400,000 Goodwill 200,000 0 Improvements 150,000 80,000 Working Capital 75,000 0 Total 925,000 480,000 Equity (25%) 231,250
  16. 16. Seller Financing Usually Needed $4,246 $1,559 Monthly Payment Monthly Payment Seller Buyer Bank $500,000 $50,000 $100,000
  17. 17. Buyer Homework … Max Purchase Price Method
  18. 18. Valuation Methods Multipliers • Owner’s Cash Flow • Monthly or Annual Revenue Industry Rules of Thumb – e.g., $13,000 per Hotel Room Discounted Cash Flow
  19. 19. Multipliers
  20. 20. Discounted Cash FlowToday 1 Year$1.00 $1.03$1.00 3% discount Rate $1.03$29,126 3% discount rate $30,000$23,077 30% discount rate
  21. 21. Discounted Cash Flow 30% discount Rate Today Year 1 Year 2 Year 3$23,077 $30,000$22,485 $38,000$19,572 $43,000$160,207 $46,000 1% Growth$225,341 Business Value + Non Critical Assets
  22. 22. Price Agreement…Once You’ve Agreed on Price…, The Negotiations are still not finished…
  23. 23. Seller vs. Buyer Tax Preferences Stock Sale Seller gets capital Gains Treatment Buyer looses ability to depreciate assets Asset Sale Seller taxed at corp. level and then again at personal level Buyer gets to depreciate assets
  24. 24. Asset Price AllocationAsset Sale - $1,000,000 Sale Price Seller Buyer Building 600,0001 400,0001 Machinery 200,0001 150,0001 Inventory 40,0002 100,0002 Accounts Receivable 100,0002 200,0002 Consulting Agreements 60,0002 150,0002 1 Buyer get cap gains treatment Seller has long depreciation 2 Buyer has to recognize as income Seller gets immediate expense
  25. 25. Questions Mike Upah 515.296.7828 mjupah@iastate.edu
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