Ceuallys Approach On Selling Off A Business


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The presentation covers the following areas

1. Should you sell your company? Why? When?
2. Why do buyers buy? What do they buy?
3. Is your company positioned to sell?
4. What do buyers read into financials?
5. What is a fair valuation?
6. How do you go about selling? Can you do it alone?
7. How is life after an acquisition different?

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Ceuallys Approach On Selling Off A Business

  1. 1. “To Sell or Not to Sell” – That is the Question! TiE - Mumbai Girish Godbole February 26, 2009
  2. 2. What will we cover today ♦ Should you sell your company? Why? When? Agenda ♦ Why do buyers buy? What do they buy? ♦ Is your company positioned to sell? ♦ What do buyers read into financials? ♦ What is a fair valuation? ♦ How do you go about selling? Can you do it alone? ♦ How is life after an acquisition different?
  3. 3. Should you sell your company ♦ “To Sell or Not to Objectives Picture has been removed for Sell” – That is the condensing of file format Question! ♦ Personal Reasons to Sell ♦ Business Reasons to Sell ♦ Timing is Everything in Life!
  4. 4. “To Sell or Not to Sell” ♦ Traditional conservative mentality is NEVER to sell….considered a losing proposition or surrender mentality ♦ Is it always a good idea in today’s fast-changing world? ♦ What growth, stability and profits can you forecast realistically for the next 3 to 5 years? ♦ What are your personal goals?
  5. 5. “To Sell or Not to Sell”
  6. 6. Personal Reasons to sell ♦ Personal non-financial reasons – Retirement - age/health/enjoyment – Boredom! – repetitive work, no challenge – Freedom! – from work, stress, long hours – Partnership issues / break up ♦ Personal financial reasons – Need money for other businesses or investments – Divorce settlement – Risk management (take money off the table)
  7. 7. Business Reasons to sell ♦ Problems-driven – High debt – Stagnation or decline (need to reinvent every 5 years!) – Market changes forcing realignment – Stale/Obsolete Products forcing new direction ♦ Opportunity-driven – Synergy with complimentary / larger company – Investment for growth (smaller portion of a bigger pie) – Need for management expertise or market expansion – Early Investors (typically, VC’s) desire “Liquidity Event”
  8. 8. Timing is everything in life! ♦ Compelling Problems (health, debt, sudden changes in market conditions, etc) can force a quick sell ♦ … so can Compelling Opportunities (partnership synergies, eager buyer with investment potential) ♦ Planned Selling – always keep options open….there is a right price for every company at any time ♦ Plan sell strategy for game-changing trends that can have huge impact on your company’s valuation
  9. 9. Why and what do buyers buy ♦ Types of Objectives Buyers/Investors Picture has been removed for condensing of file format ♦ Reasons to Buy ♦ What Do They Buy? ♦ The Buyer’s Perspective ♦ Beauty is in the Eye of the Beholder
  10. 10. Types of Buyers/Investors ♦ Financial – Venture Capitalists, Private Equity Groups – Hedge Funds, International Funds – Roll-up Strategists ♦ Strategic – Competitors / Suppliers / Customers – Companies with complimentary products/services – International companies – Current Management Team
  11. 11. Reasons to Buy ♦ Financial Buyers – Value-driven (cheap, good ROI by fixing/integrating) ♦ Strategic – New products (acquire v/s develop) – Entry into new markets (Geographical, industry vertical, technological, specialty) – Client acquisition (accelerated growth / market share) – Cross-selling of products / leveraging products for services – Acquire management expertise – Pressure to show Growth in Revenues – Increased Profitability through synergistic eliminations
  12. 12. What do they Buy ♦ Turn-around or Roll up Target Companies have – Good product/service , stifling due to lack of capital – Stagnant/declining/loss-making due to poor management – Quick to integrate established product or service – Offers some other “leverage opportunity” – e.g. offshoring ♦ Strategic Target Companies have – Proven products with track record, I/P, bright future – Proven services with strong client relationships – Strong management team that can be integrated – Growth Potential – Market / Technology recognition
  13. 13. The Buyer’s Perspective ♦ Typical expectation is to get 3 to 5 year payback ♦ Financial buyers: 20% to 40% annualized return on capital ♦ Risk Mitigation is very important to all buyers – Track record of growth – Proof of responsible financial management – Good business ethics – Predictable revenue streams and profitability – Stable and committed seller and management team ♦ “Deal Structure” is the tool used by the buyers to achieve the above goals
  14. 14. The Buyer’s Perspective ♦ Beauty is in the Eye of the Beholder ♦ Buyers don’t have to buy unless they find it attractive ♦ Cultural Fit can make or break the deal ♦ Win-Win is the key ♦ Deal Structure is very important to any successful transaction – both during and after acquisition
  15. 15. Is your co positioned to sell ♦ The Soul Searching Objectives Picture has been removed for condensing of file format ♦ Plan Strategy to Sell ♦ Getting the House in Order ♦ Business Plan ♦ Management Structure ♦ Parallel Paths
  16. 16. The Soul Searching ♦ Understand the reasons why you would like to sell – (Problem-driven v/s opportunity driven) ♦ What is your time horizon? Are you under pressure? ♦ How long and why do you want to stay after acquisition? ♦ What should your realistic valuation be? ♦ What will you do after the acquisition and the transition?
  17. 17. Plan Strategy to Sell ♦ Why is your company attractive to others? ♦ Who will find your company attractive? ♦ What is your realistic valuation range? How can you get maximum amount? ♦ How are you going to market it? Can you do it yourself? ♦ Who should / shouldn’t be involved in the process?
  18. 18. Getting the House in order ♦ Financials – prepare last 3 years Profit & Loss, Balance Sheet, Cash Flow Stmt, tax returns….observe trends ♦ Understand your Revenue and Profitability by customer / geography / product / vertical….observe strengths and weaknesses ♦ Customer contracts / vendor contracts….get renewed / extended ♦ Are there any legal cases /issues?... resolve/document ♦ I/P (patents, trademarks, product documentation)… file/document ♦ Assets (improve A/R, appraise/prepare fixed assets, cash… make B/S strong) ♦ Liabilities (pay overdue A/P, shareholder loans, Reduce debt , leases and risks)
  19. 19. Business Plan ♦ Minimum 3 years, perhaps 5 years financial forecast – realistic growth and profitability with and w/o M&A ♦ Product development plans, with investment/synergy ♦ Sales and Marketing plans, with investment/synergy ♦ Delivery plans, with investment/synergy ♦ Competitive landscape… your strengths / weaknesses
  20. 20. Management Structure ♦ Is the company professionally managed? Can it function well without you? Who has sales relationships? Who has technical vision and know-how? ♦ Organization chart clearly showing management responsibilities for Sales, Delivery, R&D, F&A, Legal, HR ♦ Team stability, track record, future commitment, drive ♦ Systems and Processes – Plan, Document, Deliver ♦ Budgetary process – planning and tracking
  21. 21. Parallel Paths ♦ M&A can take 6 to 12 months… and may not work out ♦ Must not lose focus on business and cause distraction ♦ Confidentiality is very important ♦ Parallel execution and patience is essential ♦ Strategize….Prepare….Explore….Execute
  22. 22. How do buyers read financials ♦ Which financial documents Objectives Picture has been removed for condensing of file format ♦ What does a P&L statement say ♦ How to read a historical P&L ♦ How does a B/S relate to health ♦ How does a CF bridge the P&L and B/S
  23. 23. Which financial documents ♦ Profit and Loss accounts with clarity on – Revenue mix – COGS components Thought Presented – Gross Profit A summary of what happened in the period – Expense components – EBITDA – Adjustments and rationale A snapshot of how it ♦ Balance sheet looks today – Assets with classification (current, fixed) – Liabilities with classification (current, short term, long term) – Equity An narrative of the ♦ Cash flow statement changes in the period – Operating – Financing – Investing
  24. 24. What does a P&L say ♦ Revenues (Income) – An indicator of all the money that flowed into a business from ops – Dependent on customer invoicing for product and service sales Thought Presented – Not an indicator of the performance of the business ♦ Cost of Goods Sold (Direct Expenses) – Money expended directly for the generation of revenues – Varies in proportion with the cost of labor resources and materials – Impacted by operational efficiency of a business ♦ Gross Profit – Profit generated before accounting for indirect expenses ♦ Expenses (Indirect Expenses or SG&A) – Money expended on sales, administration and management – Control over expenses is a good indicator of how a business is run ♦ EBITDA (Earnings before Interest, Taxes, Deprn. & Amortzn.) – Indicator of how much cash a business could generate with a stable B/S – Key metric used by most business is establishing value of a business ♦ Adjustments to EBITDA – Expense additions and subtractions to reflect a steady professionally run business
  25. 25. How to read a historical P&L ♦ Thought Presented Demand for products and Why has growth services been variable Is future growth How well run is the business realistic What is the basis What is the value of Synergy potential for improved GP future year profits Value to company Why don’t expenses increase with revenues
  26. 26. How does a B/S relate to health Thought Presented Operating comfort Customer quality and control over customers Investments in the business Quality of the business as a pay master Always a problem if not current Cash management and generation ability Investment into the business Owner draws Money left in the business the business Value of
  27. 27. How a CF bridges a P&L and B/S Baseline cash generated ♦ Thought Presented Increased AR means cash is consumed Increased AP means cash is produced Cash generation potential of the business New investments consume cash Growing capital intensive businesses will consume cash Cash taken by shareholders as yield from the business New debt / loans add cash, repayment reduces cash New loans personal or commercial will add cash Cumulative impact of all cash flows during the year End cash is the same as cash on the B/S
  28. 28. What’s a fair valuation ♦ How are public Objectives companies valued Picture has been removed for condensing of file format ♦ How does this translate to a private company ♦ Will my valuation be above or below market ♦ How are valuations done ♦ What are possible deal structures ♦ How do I get what I want
  29. 29. What’s the link to public cos ♦ How are public companies valued Thought Presented ♦ How does this translate to a private company ♦ Will my valuation be above or below market ♦ What are market comparables ♦ What is a DCF valuation ♦ What are other types of valuation
  30. 30. How are public cos valued ♦ Valuations are based on future returns driven by Thought Presented – Product and service demand – Competitive advantage – Quality of management – Impact of perception creates swings ♦ Impact of perception is limited with private cos – The opinion that matters is that of sellers / investors / buyers – Other valuation principles are broadly similar ♦ Small private co valuations are governed by – Risk discount – Unlisted discount
  31. 31. How to compare public / private ♦ Valuations are still based on future projections Thought Presented ♦ Credibility of future projections matters – Are relationships with current customers strong – Will there be repeat business or will new customers be needed – Size of the potentially addressable market – The extent of investments required to realize projections – Synergies with buyer’s current product / service portfolio ♦ Public valuations drive valuation approach – Comparables based on similar companies – Revolutionary companies are harder to benchmark
  32. 32. How is a valuation exercise done ♦ Net Asset Value (NAV) Thought Presented – Based on historical / provisional financial statements – Generally represents the minimum breakup value of a transaction – Relates to the shareholders funds or net assets owned by the business ♦ Discounted Cash Flow (DCF) – Concentrates on a businesses future cash generation potential – Uses future free cash flow as a basis for estimating value – Based on summing the discounted value of future cash flow + the terminal value of the business
  33. 33. How is a valuation exercise done ♦ Market Comparables Thought Presented – Based on identifying similar publicly traded firms to act as benchmarks – Benchmark P/E or P/S ratios are used to determine valuation ♦ Comparable Transaction – Based on the assumption that similar transactions form relevant benchmarks – Comparable transactions together with key financial ratios are used to establish valuation ♦ Aggregating All Inputs – A typical valuation exercise uses a minimum of 3 and possibly all methods – Each method provides a data point in establishing a valuation range – Buyers will aim to a provide a valuation and structure that provides payback in under 3 years
  34. 34. Examples of Market Comps COMPANY P/E Market Cap* Thought Presented Infosys 13.4 747,583 TCS 10.0 501,000 Wipro 9.7 338,267 Tech Mahindra 5.5 28,978 Patni 3.3 15,831 Zensar 2.3 1,678 * INR Million P/E ratios and Market Cap as of Jan 31, 2009
  35. 35. What are possible deal structures ♦ Partial or complete sale of assets or stock Thought Presented ♦ Consideration provided as cash or stock or both ♦ Guaranteed component of valuation – Paid either fully at closing or over time ♦ Contingent component of valuation (Earn out) tied to – Revenues – Profitability – Management / employee retention – Integration ♦ Structures can be complex – reverse merger, triangular merger, etc. to minimize risk, mitigate taxation, etc.
  36. 36. What a deal could look like Could scale between $0 ♦ Deferral of Earn Out Valuation and $3M, may be higher $1.5M guaranteed valuation may Thought Presented – Help buyer close $3M financially $1M – Convince skeptics on the buyer’s side $0.5M ♦ Earn out valuation $1M – Shared risk reward Guaranteed Valuation – No growth means $1M little to no earn out $4M – Exceeding projections could yield a windfall $2M Seller financing – Relates to EBITDA or Gross Profit Closing 1 year 2 years 3 years
  37. 37. How do I get what I want ♦ Manage expectations Thought Presented – Try to understand parameters for similar deals in the past – Expectations way above market will lead to lots of effort with no result ♦ Think from a buyer’s point of view – The same story may not work for every buyer and every market – Most buyers will look for payback in 3 years or less ♦ Link value received to value delivered – Share in the risk / reward to leveraging projections ♦ Think about benefits of leveraging the buyer’s infrastructure – Achieving bigger and better goals – Realizing growth using the buyer’s strengths in addition to yours
  38. 38. How do I go about selling ♦ Prep yourself and the co Objectives Picture has been removed for ♦ Preparing a detailed memo condensing of file format ♦ Contacting buyers ♦ Evaluating buyers ♦ Getting serious / LOI ♦ Supporting due diligence ♦ Negotiating final docs ♦ Closing
  39. 39. What is an information memo ♦ A to the point description of your business and opportunities Thought Presented for a buyer ♦ An information memo is best customized to each buyer ♦ A memo should provide – An Executive Summary – A history and description of the business including products / services – Current perspective customers, resource model, org. structure, management profiles – Potential for growth based including market opportunity addressable – Historical financials and projections – Deal considerations – why a buyer would be interested in this business
  40. 40. How many buyers to contact ♦ The larger the buyer pool the better the chance of doing a Thought Presented deal – Your company will not be a fit for every buyer – You only need one buyer, but that’s probably not your friend or neighbor ♦ Confidentiality is paramount – Irreparable damage could be caused should employees / customers come to know a company is for sale – Buyers should be first contacted anonymously – Buyers should be screened to make sure they will maintain confidentiality ♦ Striking a balance – Contact as many buyers as possible without risking loss of business – Loss of business will lead to a lose-lose situation for you. You will lose your business and thus any hope of being acquired at a good price
  41. 41. Who would be a good buyer ♦ A long term vision for your business Thought Presented – Product / service offering synergies – Customer / geography synergies – Organizational synergies ♦ One that you could live with – Management / cultural rapport – What are the buyer’s stated acquisition drivers – Does the buyer create a win-win strategy ♦ The ability to pay – Strength of the buyer’s balance sheet and ability to fund immediate and future acquisition price commitments – Committed sources of external funds to enable deal funding
  42. 42. How an LOI is a mini-contract ♦ An LOI should document key deal terms that when fully built Thought Presented out will become the final contract ♦ Principal terms for a good LOI – Identity of the buyer and seller – Description of the business / assets to be bought and sold – Valuation and structure – Management retention and compensation – Exclusivity and confidentiality – Non compete and non solicitation guidelines – Due diligence support and back out penalties – Governing Law
  43. 43. Will due diligence wear me out ♦ Require significant time and resource commitment Thought Presented ♦ Typical data requirements – General business info, organization and ownership – Management and staff – Accounts and records including taxation and regulatory compliance – Historical and projected financials (P&L, B/S and CF) – Assets details including IP, real estate, equipment – Liability details including long and short term loans, leases – Current or threatened litigation ♦ Usually takes between 30 and 90 days (and a toll on mgmt)
  44. 44. What makes a good contract ♦ Captures everything in the LOI and more Thought Presented ♦ Provides clarity on issues and documents understandings ♦ Addresses items and issues discovered in DD ♦ Treats both sides fairly (unfair could equal unenforceable) ♦ Documents business and consideration transfer mechanisms ♦ One that a buyer and seller can live with ♦ Contract signing equals closing and funding is often immediate
  45. 45. Should I do it alone ♦ Should be able to run your business while you are selling it Thought Presented ♦ Bring enough qualified buyers to the table ♦ Ensure a business is not damaged due to time, effort and confidentiality impacts ♦ Run the process efficiently ♦ Secure the best deal for yourself ♦ Should you decide you need help – Work with some one you trust – Trust who you work with – Do not work with everyone
  46. 46. Will my life change after selling ♦ Did I do the right thing Objectives Picture has been removed for condensing of file format ♦ Losing your throne – fitting in ♦ Leveraging synergies ♦ Past reflections and future planning
  47. 47. Did I Do the Right Thing? ♦ Don’t second guess ….didn’t you plan it for a reason? ♦ Show Leadership – Your employees need it! – Your customers relationships depend on it! – Your vendors will appreciate it! – Your buyer paid for it and expects it! – You and your shareholders will benefit from it!
  48. 48. Losing Your Throne… Fitting In! ♦ You are no longer the ultimate boss… accept it happily ♦ Embrace your new role and follow the bigger vision ♦ Be a good team player. Stop saying “…but we always used to do it this way….” ♦ Learn new methods, systems and processes ♦ Make an effort to fit in - do not form a “clique” consisting only of your old colleagues
  49. 49. Leveraging Synergies ♦ Synergies – duplicated roles, systems (IT, HR, CRM, etc), office space, equipment, R&D plans, vendors ♦ This is the hardest, but most important part of selling ♦ Be honest, fair and just ♦ Study and Plan as much as possible before closing ♦ Move as swiftly as possible….sooner the better ♦ Communicate appropriately with all stakeholders
  50. 50. Past Reflections and Future Planning ♦ Unique opportunity to reflect and learn from the past ♦ Enjoy the success and nostalgic memories ♦ Spend more time with the family ♦ Slow down and Recharge! ... Good opportunity to invest some time on your health, hobbies, friends, social work ♦ Introspect, research, plan your next 5 years ♦ Congratulations! You may be an Unemployable Serial Entrepreneur!
  51. 51. What’s next Objectives Picture has been removed for condensing of file format