Preparing Your Company For Sale

Preparing Your Company for Sale
March 23, 2010

Agenda
7:15 – 7:45 – Breakfast and Networking
7:45 – Introduction and Welcome
Merritt Green, Managing Partner, General Counsel, P.C.
7:50 – 8:45 – Program Panel
Braun Jones, Partner, WWC Capital Group, LLC
Kevin Learned, Chair, Corporate Practice Group, General Counsel, P.C.
8:45 – 9:00 – Q&A

Contents
The Essence of Value
Maximizing Value
Preparing for Due Diligence
M&A Process

I. The Essence of Value

Four Primary Valuation Methods
Asset-Based Methods
(unusual in M&A, unless liquidation)
Marketplace Methods
M&A methods (comparable transactions)
Guideline public companies
Income Methods
Discounted (or capitalization of) cash flows
Rules of Thumb

Value
Benefit
Risk
=
Value Defined
Value can be defined as a
risk-adjusted benefit

Value
Cash Flows
Expected Return
=
Value Defined (cont.)
Forward looking
Time Value of Money plus Risk

Value Creation
The key to value creation is to identify those strategies that most effectively:
improve net cash flows and/or
reduce risk
Value creation is a function of the company’s growth potential (revenues, profits, and capital base) and its ability to earn a return on invested capital above its cost of capital

Multiples, ROI, and Risk
Risk quantifies the likelihood of achieving less than expected returns.
It can also be thought of as the time you are willing to wait to get your investment back

Buyer’s Perspective
Buyers evaluate businesses as to their risk factors and expectations of future earnings
Historical earnings
Growth prospects for business and industry
Depth of management
Employee stability
Terms of sale
Competition
Location and facilities

Perspectives on Value
Fair Market Value: An appraiser’s formal valuation (normally for legal or IRS purposes)
Investment or strategic value (beauty is in the eye of the beholder)
Dynamic valuation (effective auctions)

Normalization Adjustments
Track adjustments and present them clearly
Main types of normalization adjustments:
Non-recurring revenues/expenses
Discretionary/personal expenses
Owners salaries (if not indicative of market rates)
Unusual accounting methods
Rent (if not indicative of market rates)
Have back-up schedules where needed

How Do You Normalize Earnings?

What about the Balance Sheet?
Company A
$10M Revenue
$1M Earnings
5x Earnings Multiple
$5M Valuation
No Debt
Sales Price = $5M
Equity Value = $5M
Company B
$10M Revenue
$1M Earnings
5x Earnings Multiple
$5M Valuation
$1M Debt
Sales Price = $4M
Equity Value = $4M
“Enterprise Value” is $5 million for both

II. How to Maximize Value

Value Drivers
What Drives Business Value?
Quality of Revenues
Financial Performance
A Strong Balance Sheet
Management Team’s Depth and Experience
Quality of Assets (tangible and intangible)
Intellectual Property
Proprietary Information and Processes (competitive advantage)
Growth History and Potential (business / market)
Quality and Uniqueness of People, Products, & Services
Favorable Economic & Industry Conditions

Risk Drivers
What Drives Business Risk?
Lack of Customer Diversification
Contingent Liabilities
Inexperienced Management Team
Lack of Management Depth
Poorly Maintained Assets
High Operating Costs
Frequent Contract Renewals (bidding)
High employee turnover
High Financing Costs
Weak Accounting Systems, Record Keeping, and Controls
Poor Visibility, Small Backlog
Litigation Exposure (Health Hazards, Environmental, Tax, Compliance, etc.)

The Value Enhancement Process
Value Building Map

The Value Enhancement Process
Strategic and Process Initiatives – Track and Improve
Sales
Sales lead and pipeline tracking
Improve customer satisfaction
CRM or other automation
Proprietary methods (e.g., training programs, follow-up, etc.)
Order processing automation
Problem resolution
Supervision
Marketing
ROI analysis
Customer surveys
Market driven product development, refinement
Build corporate identity/brand
Public relations
Social network marketing initiatives
Proposal development
Market segmentation or other research

Finance
Improve reporting systems
Financial dashboard
Improve cash flow, liquidity
Reduce operating, overhead costs
Detailed projections with backlog and pipeline
Improve collections
Proprietary procurement procedures
Improve ROIC

Human Resources
Lower turnover
Develop job descriptions
Conduct regular performance reviews
Create effective incentive programs
Proprietary recruiting methods
Training
Compensation reviews, committees
Formal grievance process

Business Owner Considerations
What else is important to enhance value?
Plan for exit
How important is the CEO/owner
Who are the key employees – are they properly incentivized
Who has the key relationships with customers
Are there management gaps
Value-based strategy
Insurance, risk exposure
Tax, investment, and estate planning (business and personal)

Top 10 Seller Mistakes
Overestimating or underestimating value
Trying to time the market or selling at the peak
Failing to plan for taxes and estate
Focusing on price and not terms
Failing to take a buyer’s perspective
Failing to lock-in key personnel
Keeping poor accounting records
Failing to seek professional assistance
Underestimating the required time and complexity of issues
Waiting too long – not selling into positive momentum

IV. Preparing for Due Diligence

Don’t Wait for the Buyer
Accounting
Taxes
State Registrations
Ownership
Governance
Contracts
Affiliated Transactions
Employees/Contractors

Accounting
Balance the Books
Accounting Systems and Controls
Audited Financials
Buyers Will Require
Identify and Resolve Issues
Through Recent Calendar Quarter
Consider Auditing Up to Three Years Back
Be Prepared for Recent Financials to be Reviewed
Track Normalization Adjustments

Taxes
Get Current with Uncle Sam
Income
Sales and Use
Employee/Payroll
Property
Franchise

State Registrations
Are You Qualified?
Obtain a Good Standing Certificate
Place of Formation
Other States Where Qualified
Qualify Where Doing Business
Location of Contract Performance
Generating Sales/Income
Generally, Not Mere Solicitation

Ownership
Avoid Loose Ends
Update Stock Ledger and Capitalization Table
Document All Equity Issuances and Transfers
Document All Incentive Compensation
Clean-up Unwanted Transactions
Transfers in Violation of S Corp Restrictions
Issuances with Negative Tax Implications
Transfers/Issuances in Violation of 51% Ownership Requirements

Governance
You are Selling a Real Company
Make Sure Your Organizational Documents are Updated
Conduct Regular Board Meetings
Conduct Annual Shareholder Meetings
Adopt Current Resolutions Appointing Directors and Officers

Contracts
Is Everything Updated?
Are Expired Contracts Continuing?
Amendments, Work Orders, etc.
Identify Contracts That Require Notice or Consent
Identify Contracts with Other Transfer Restrictions
Set-aside Restrictions
Contracts Currently Being Negotiated
Look Ahead to a Sale
Terminated Contracts

Affiliated Transactions
Keep Everything Separate
Document Agreements Between the Company and Owners or Affiliates
Loans
Leases/Subleases
Shared Services
Intercompany Transfers
De-Personalize the Company

Employees/Contractors
Lock Down Your Team
Employment Agreements with Key Employees
Non-competition and Non-solicitation provisions
Change of Control Bonuses
Incentivize Employees to Stay with the Company
Limit Concerns with Transition
Keep Focus on Business Operations
Well-drafted Independent Contractor Agreements
Human Resources/Immigration Audit

Do You Own It?
Work for Hire
Assignment of Inventions
Patents
Trademarks
IP Audit

Resolve Disputes
Pending or Threatened Litigation
Engage Competent Counsel
Determine Amount in Dispute

IV. The M&A Process

Assembling the Team
Owners and key managers
Attorneys (w/ specific M&A experience)
Accountants (before-the-fact clean-up and after-the-fact compliance, tax specialists)
Investment bankers (valuation, marketing, process, and negotiation experts)
Estate planning and/or financial planning professionals

The M&A Deal Process
Establish transaction objectives and parameters
Create a potential
acquirer/partner list
Draft Confidential
Information Memorandum
Contact prospective acquirers/ partners
Narrow the potential acquirer/ partner list
Answer initial information requests
Schedule management presentations
Solicit 1st round indications of interest
Preliminary due diligence deliveries
Provide additional financial and operational information, as appropriate
Request best and final offers
Evaluate offers and select acquirer / partner
Negotiate letters of intent
Complete due diligence deliveries
Facilitate completion of the documentation
Close transaction
Assist with financial risk minimization

Seller
Buyer
Multiple Offers
Closing
Management
Presentation
LOI Negotiations
Exclusivity to Buyer
Seller’s Advantage Curve

Questions?
Kevin R. Learned
General Counsel, P.C.
6862 Elm Street, Suite 800
McLean, Virginia 22101
p: (703) 226-2713
e: klearned@generalcounsellaw.com
Wm. Braun Jones, III
WWC Capital Group, LLC
11911 Freedom Drive, Suite 1010
Reston, Virginia 20190
p: (703) 995 2175
e: bjones@wwccapital.com

Preparing Your Company For Sale

by klearned

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