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NTDA 2012: The Art of Buying & Selling a Small Business

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  • 1. The Art of Buying & Selling a Small Business Tom Marx, CEO September 26, 201222nd Annual Convention © 2012 Marx Group advisors - The Art of 1 Buying & Selling a Business
  • 2. Who We Are Over 25 years’ experience in the Automotive and Commercial Vehicle Aftermarket Brokerage: Equity and debtConsulting services Buy-Sell-Merge financing 2
  • 3. Marx Group AdvisorsTOM MARX DAVE BARBEAU• Business growth & • Parts distributor & marketing focus aftermarket executive• 25+ years industry • Industry management experience consultantPAUL COOPERSTEIN CHRISTINE LEMAy• Venture capitalist & • Business development investment banker manager• Business lawyer & mediation specialist • International specialist Support Staff + 10-Member Nationwide Advisory Board 3
  • 4. Buying/Selling a Small Business When we finish today, you will learn: • How buying/selling a business fits in your succession plan • Basic understanding of terms and deals • Better idea of the value of your business • Knowledge of how deals are structured • Best way to market your business for the price you want • Understanding of the closing and transition process © 2012 Marx Group advisors - The Art of Buying & Selling a Business 4
  • 5. What is Your Situation? • Are you a baby boomer ready to retire? • Are you tired after a decade of consolidations, business cycles, banking hassles – and the recession? • Are you a young lion hungry to grow? • Do you want to eliminate competitors or expand your footprint?© 2012 Marx Group advisors - The Art of Buying & Selling a Business 5
  • 6. UnderstandYour Short, Mid and Long Term Goals and Your Options For Exit Strategies © 2012 Marx Group advisors - The Art of Buying & Selling a Business 6
  • 7. Timeless Questions• Will my business survive me?• How do I get my equity out and gain liquidity when I want to?• How can I get a fair price when I sell?• How do I value the business? © 2012 Marx Group advisors - The Art of Buying & Selling a Business 7
  • 8. When Do You •• You are tired of the hassles – not having fun! You want to do something else in life Know it is • Nostalgia – “It ain’t like it used to be” You aren’t sleeping at nightTime to SELL? • • After work…you don’t want to talk with your spouse – or even your dog! © 2012 Marx Group advisors - The Art of Buying & Selling a Business 8
  • 9. • You cannot achieve your goals with organic growth • Opening new stores takes too longWhen Do You • One of your competitors is low price leader Know it is • You have excess cash • You have investors that want higherTime to BUY? rate of return • Your long term exit strategy requires significantly more revenue and EBITDA © 2012 Marx Group advisors - The Art of Buying & Selling a Business 9
  • 10. • What will happen if youTAKE CHARGE don’t have a plan in place? OF YOUR • Are you really taking care of your family? FUTURE • Are you really taking care of yourself? © 2012 Marx Group advisors - The Art of Buying & Selling a Business 10
  • 11. • Succession plan must be inAre You place Getting • Decide if you are going to transfer the business to aReady to family member(s) or key Retire? employee(s) • Considering selling the business © 2012 Marx Group advisors - The Art of Buying & Selling a Business 11
  • 12. 70% of All Small and MidsizedBusinesses Don’t Sell After Theyare Put on the MarketSelling a business is notlike selling a piece of realestate or any other asset © 2012 Marx Group advisors - The Art of Buying & Selling a Business 12
  • 13. Buyers and SellersNeed to Position Themselves • Be financially stable – show good valuations • Have strong management and staff willing to stay on • Sustain a diverse and loyal customer base © 2012 Marx Group advisors - The Art of Buying & Selling a Business 13
  • 14. Buyers and SellersNeed to Position Themselves • Develop differentiating value proposition – superior product, services and customer support • Invest in IT, processes, infrastructure, people skills • Have strategic plan in place • Identify target profile © 2012 Marx Group advisors - The Art of Buying & Selling a Business 14
  • 15. VALUATION:How to Sell Your Company for What it’s Worth © 2012 Marx Group advisors - The Art of Buying & Selling a Business 15
  • 16. Plan Ahead:Begin to Prepare at Least 3 Years Before You Want to Sell © 2012 Marx Group advisors - The Art of Buying & Selling a Business 16
  • 17. Preparing • • 3 years tax returns 3 years profit & loss statements to Go to • • 3 years balance sheets Current YTD financial statements, Market projection through YE and projection for following year • Write a “Book” on the opportunity © 2012 Marx Group advisors - The Art of Buying & Selling a Business 17
  • 18. • Company overview and historySeller’s • • Key investment highlights Management and ownership“Book” • • Industry overview Facilities • Competitive analysis • Call to action, offering price and next steps for interested parties © 2012 Marx Group advisors - The Art of Buying & Selling a Business 18
  • 19. All the above PLUS • Business strategyPreliminary • Products and services • Customers and suppliers Due • Market research • Sales & marketing teams • Management and ownership Diligence • Facilities, property, assets • Legal / accounting issues • Contracts • Capital • SWOT analysis • And more… © 2012 Marx Group advisors - The Art of Buying & Selling a Business 19
  • 20. Three Fundamental Valuation Methods• Cost approach – valuation based on the cost of purchasing or reproducing the assets of the business• Income approach -- valuation based on ability of company to generate income and risk reflected by current and predicted market conditions• Market approach – valuation based on sales price for similar businessesIn this industry, the market approach is most commonly used – and understood © 2012 Marx Group advisors - The Art of Buying & Selling a Business 20
  • 21. What is EBITDA?EBITDA = Earnings Before Interest, Taxes,Depreciation and Amortization• Some call is “normalizing the P&L”• Some call it “recasting the P&L” © 2012 Marx Group advisors - The Art of Buying & Selling a Business 21
  • 22. Why is EBITDA the Standard?Allows for consistent comparison of companiesin the same industries, with terms such as“This business will sell between 5x to 7x”• After recasting the P&L, apply multiple to EBITDA number• Adjust this number based on other factors• Adjust this number on whether this is a financial or strategic buyer…strategic buyers often pay higher price © 2012 Marx Group advisors - The Art of Buying & Selling a Business 22
  • 23. Recast Your P&LPay attention to:• Balance sheet items (dividends, real estate)• Accelerated deductions, amortization etc.• One-time expenses• Owner(s) expenses © 2012 Marx Group advisors - The Art of Buying & Selling a Business 23
  • 24. Recast Your P&L© 2012 Marx Group advisors - The Art of Buying & Selling a Business 24
  • 25. © 2012 Marx Group advisors - The Art of Buying & Selling a Business 25
  • 26. Determining the• Operating earnings averaged over a period of years times a multiple• Consistency in earnings (margin & growth) = fewer years needed• Typical average is prior 3 years © 2012 Marx Group advisors - The Art of Buying & Selling a Business 26
  • 27. What Does • Looks at brighter future and diminishes historical the Seller performance, including Consider those caused by TheWhen Valuing Great Recession • Promotes strengths forthe Business? higher price © 2012 Marx Group advisors - The Art of Buying & Selling a Business 27
  • 28. What Does the Buyer Consider When Valuing the Business?Looks at the same financial statements from abuyer’s perspective• Looks at historical performance and does not value possible potential upside• Finds vulnerabilities that substantiate lowering of the price• Points out weaknesses so they can present lower offer• Questions the true value of assets, inventory and collectability of receivables• There are exceptions when the buyer is HIGHLY motivated! © 2012 Marx Group advisors - The Art of Buying & Selling a Business 28
  • 29. Value Lays in the Eye of the Beholder• Context Dependent – Are you a Buyer or a Seller – Sale to company management – Passing down to family member – Sale to PE (Private Equity) firm – Sales publicly held company – Industry standards, benchmarks, trends © 2012 Marx Group advisors - The Art of Buying & Selling a Business 29
  • 30. Other Factors Taken into Consideration:• Comparable Sales • Buyers’/Sellers’ Motivation• Margin • Customer Base• Barriers to entry and • Special Conditions competitive positioning • Technology• Regional differences & • Projected Cash Flows Market Saturation • Personnel• Debt Capacity • Revenue & operating trends:• Volatility/Stability Past, Current & Future• Discounted Cash Flow • Strength of balance sheet © 2012 Marx Group advisors - The Art of Buying & Selling a Business 30
  • 31. Potential Factors That Increase the Value• Strong revenue & profit growth = higher multiple• Above average margins= higher multiple• Strong buyer marketplace = higher multiple• Valuable assets = higher value © 2012 Marx Group advisors - The Art of Buying & Selling a Business 31
  • 32. • Long term debtPotential • High level of goodwill compared Factors to assets and net income • High percentage of aged that receivables Reduce • Dominance of a few customersthe Value • Lower operating margin than that of buyer © 2012 Marx Group advisors - The Art of Buying & Selling a Business 32
  • 33. How to Increase the Value of Your Business• Keep revenues & profits growing• Have credible successor management• Have a broad customer base• Pay attention to your balance sheet: quality of assets, inventory, old equipment, cores, level of debt, working capital reserve• Other strategic assets (real estate, life insurance policies etc.) © 2012 Marx Group advisors - The Art of Buying & Selling a Business 33
  • 34. • Despite some loosening of credit, financing poses an obstacle in the deal making processThe Impact of • Impacts both sellers and Financing buyers • Sellers and buyers need to think about how this deal will look through the eyes of a banker © 2012 Marx Group advisors - The Art of Buying & Selling a Business 34
  • 35. Sale to Company ManagementValuation is often book value and goodwill tofounder via premium or deferredcompensation © 2012 Marx Group advisors - The Art of Buying & Selling a Business 35
  • 36. Selling Options Typical Deal StructuresTransfer to Family• Valuation is more complex• Estate and gift tax considerations significantly impact these transactions © 2012 Marx Group advisors - The Art of Buying & Selling a Business 36
  • 37. Selling Options Typical Deal StructuresSell to Publicly Held Company• Some valuation components more important to privately-held buyers• Due diligence and discovery even more critical• Regulatory agencies and guidelines complicate the transaction © 2012 Marx Group advisors - The Art of Buying & Selling a Business 37
  • 38. Selling Options Typical Deal StructuresSell to Privately Held Company• Valuation is determined by the marketplace or the buyer• Seller’s representatives can and should influence buyer’s valuation © 2012 Marx Group advisors - The Art of Buying & Selling a Business 38
  • 39. Selling Options Typical Deal StructuresPE Firms• PE firms have funds that need to be invested• Auto and commercial vehicle aftermarkets are key industries due to steady growth and low risk (less sexy than technology – adds good balance to portfolio)• Tend to buy where regional locations fill in gaps• Tend to buy based on multiples and less sweat of the details – once deal is done, site usually must conform to the brand and its products. © 2012 Marx Group advisors - The Art of Buying & Selling a Business 39
  • 40. Selling Options Typical Deal StructuresIndividual Investor or Operator• Often a financial buy – numbers must pencil• Generally investor wants to add value with smarter management or procurement…looks for healthy companies where buyer can significantly improve results• Tough negotiators, especially those already in the industry looking to pick up market share © 2012 Marx Group advisors - The Art of Buying & Selling a Business 40
  • 41. Payout • Additional payments over 2 – 5 years based on meeting profit targets • A kicker for revenue growthStructure • A hold-back if key customer is lost; key metric is missed; or if accounts receivable is uncollectible • Seller financing © 2012 Marx Group advisors - The Art of Buying & Selling a Business 41
  • 42. Getting Equity Out Other Options for Owners• Management Buyout• ESOP• Equity Partner• Deferred Compensation Payment © 2012 Marx Group advisors - The Art of Buying & Selling a Business 42
  • 43. Cashing in Does Not Always Mean Selling OutStay on in some fashion (if you choose)• Employee• Consultant• Run the business for a defined period of time• Grow the business with someone else’s investment © 2012 Marx Group advisors - The Art of Buying & Selling a Business 43
  • 44. Selling ProcessYour biggest challenges:• Keeping it all confidential -- internally and externally• Keeping your eye on your business so sales and profits are not eroded• Getting the transaction done as quickly as practical © 2012 Marx Group advisors - The Art of Buying & Selling a Business 44
  • 45. Confidentiality Agreements (NDA’s)• Needs to be well drafted• Term is from the date of signing or last exchange of Confidential Information• Employee poaching clause• Non-compete provisions © 2012 Marx Group advisors - The Art of Buying & Selling a Business 45
  • 46. Be Smart from the BeginningUnderstand what truly makes a difference• Clean up your balance sheet and P&L• Clean up assets and inventory• Valuation determination• Thorough and engaging offering package• Prospects search• Letter of Intent• Due Diligence• Definitive Purchase Agreement or Asset Sale Agreement• Closing• Transfer of assets © 2012 Marx Group advisors - The Art of Buying & Selling a Business 46
  • 47. What Do You Need to Do During the Sales Process?• Keep making profit• Maintain adequate inventory, fill rates and margins• Retain key people• Keep customers happy © 2012 Marx Group advisors - The Art of Buying & Selling a Business 47
  • 48. Reducing the Stress• Get all skeletons out of the closet—eventually they will be discovered anyway• Full disclosure of all positives and negatives• Timely review and response• Carefully think through all responses so they are complete and accurate• Have an intermediary do the heavy lifting © 2012 Marx Group advisors - The Art of Buying & Selling a Business 48
  • 49. When Do You Know the Deal is Not Going Well?• LONG delays in response• Every deal results in a new detail• When every paragraph of the LOI ends with “BUT”• When the legal bills are double and triple what you were originally estimated © 2012 Marx Group advisors - The Art of Buying & Selling a Business 49
  • 50. The Closing Process• Post LOI Due Diligence• Definitive Purchase Agreement Negotiated and Signed• Post Agreement (Pre-Closing) Due Diligence• Determining any hold backs• Closing and transfer of funds from escrow• Post-closing settlement issues © 2012 Marx Group advisors - The Art of Buying & Selling a Business 50
  • 51. When Do You Know the Deal Is Going Well? When the deal closes and money is transferred! © 2012 Marx Group advisors - The Art of Buying & Selling a Business 51
  • 52. What Do You Need to Do During the Sales Process? • Keep making profit • Maintain adequate inventory, fill rates and margins • Retain key people • Keep customers happy © 2012 Marx Group advisors - The Art of Buying & Selling a Business 52
  • 53. Why Hire an Intermediary?Comments we heard from those thatcompleted or attempted a self-brokered sale:• “I did not know what my business was really worth”• “I spent so much time on this that my business suffered and at the end the sales price was reduced” © 2012 Marx Group advisors - The Art of Buying & Selling a Business 53
  • 54. Why Hire an Intermediary?Comments we heard from those thatcompleted or attempted a self-brokered sale:• “This was a very painful and expensive process. I ended up in countless meetings and spent a LOT of money on legal and accounting fees”• “I would never sell my own home without an agent and I will never again sell a business without an agent” © 2012 Marx Group advisors - The Art of Buying & Selling a Business 54
  • 55. What to Look for When Hiring a Broker or M&A Consultant• Industry knowledge• M&A experience• References• Intelligent strategy• Trust © 2012 Marx Group advisors - The Art of Buying & Selling a Business 55
  • 56. Fees Paid to Broker or M&A ConsultantDepends on size of potential deal and specificcomplications• Expect to pay some level of retainer, varying from $10K to $100K. Both you and your broker/consultant must have skin in the game.• Lehman Formula, depending on size of transaction, will equal 3-7% of the total value of the deal © 2012 Marx Group advisors - The Art of Buying & Selling a Business 56
  • 57. Fees Paid to Broker or M&A ConsultantTypical Lehman Formula• 1st $2 million = 7-8%• 2nd $2 million = 5%• 3rd $2 million = 4%• 4th $2 million = 3%• 5th $2 million = 2%• Above = 1% © 2012 Marx Group advisors - The Art of Buying & Selling a Business 57
  • 58. Summary• Preparation = Increased ROI and success• Buyers & Sellers need to understand each other’s perceptions• Make sure you understand the process• Don’t do this alone – get the support of professionals WHO HAVE EXPERIENCE and KNOW YOUR INDUSTRY © 2012 Marx Group advisors - The Art of Buying & Selling a Business 58
  • 59. Subscribe to our monthly eNewsletter today!http://www.marxgroupadvisors.com/resources © Marx Group Advisors – Northwood University: Heavy Duty Leadership: July 11, 2012 59
  • 60. Questions? TOM MARX 415.453.0844 ext. 106 tmarx@marxgroupadvisors.com Marx Group Advisors are located nationwide: SAN NEWBOSTON HOUSTON OHIO FLORIDA PHOENIX RAFAEL YORK www.marxgroupadvisors.com © 2012 Marx Group advisors - The Art of Buying & Selling a Business 60