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Business Exit, The Owner's Perspective - Doug Smith

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Doug Smith a partner in B2B CFO talks about exiting a business from the perspective of the owner.

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Business Exit, The Owner's Perspective - Doug Smith

  1. 1. Presentation to [list audience here] Doug Smith, Partner B2B CFO® Mmm dd, yyyy Business Exit:The Owner’s Perspective
  2. 2. What Is B2B CFO® ?Established: Founded in 1987National : 200 Partners in 39 states, 5700 years of experienceFocused: Privately-held companies with sales between $1 - $75MAffordable: Part-time CFO services, as needed
  3. 3. We are Specialists In:Banking and Lending Gross ProfitRelationships OptimizationProfit Improvement Expense ReductionFinancial and Timely & AccurateStrategic Planning Financial StatementsCash Flow Increased SalesProjectionsWorking Capital Exit StrategiesImprovement
  4. 4. Who Am I?• 33 Years in Operations, Finance, Administration• COO, CFO, CAO• Government Contracting, IT, Healthcare• M&A experience (seller, buyer)• American Management Systems, MITRE, other small and mid-market businesses• BS Engineering (Princeton), MBA (Harvard)
  5. 5. Some of Today’s Content is From…• John Leonetti is the Managing Director of Pinnacle Equity Solutions• Pinnacle Equity Solutions is a B2B CFO® partner Copyright 2008 by John M. Leonetti, Published by John Wiley & Sons, Inc.
  6. 6. What We Don’t Have Time for Today• Details of deal structuring• Asset vs. stock acquisitions• Multiple owner issues (e.g., buy/sell agreements)• Handling the proceeds – Estate planning – Investment – Tax planning/avoidance
  7. 7. The Exit Environment• 70% of private business owners report that their business is their primary source of income• Only 5% of privately-owned businesses successfully sell to an outside buyer – Only 25% of private businesses are offered up for sale – Only 20% of those successfully sell• 27 million U.S. businesses (2009) – 99.9% have less than 500 employees – 21 million have no employees – 18,000 large businesses• Firm survival – 70% survive at least 2 years – Half survive at least 5 years – One-third survive at least 10 years – One-fourth survive 15 years Source: SBA
  8. 8. Exit Environment (cont’d)• Much Baby Boomer wealth tied up in 12 million privately-owned businesses – 70% of these owners will exit in the next 15 years – $3-4 trillion in wealth will change hands
  9. 9. Public vs. Private Markets Public Markets (Wall Street) Private Markets (Main Street)C Corporation C, S, LLC, etc.Value established by market at any Value established at a point in timepoint in timeReady access to public capital No access to public capitalShareholders have limited liability Shareholder(s) have unlimited liabilityShareholder holdings are diversified Shareholder earnings not diversifiedProfessional management Owner managementCompany has long life Company life typically < one generationLiquid securities, efficiently traded Illiquid securities, inefficiently tradedProfit maximization goal Personal wealth creation goal ©2010, Pinnacle Equity Solutions
  10. 10. 10-Year Transfer Cycle Deal Recession Prime Selling Time Almost (Buyer’s (Seller’s Market) Recession Market) (Neutral Market)1980 198 1988 19901990 3 1998 20002000 199 2008 20102010 3 2018 2020 200 3 201 3 Exiting Your Business, Protecting Your Wealth by John M. Leonetti, ©2008, p. 19
  11. 11. Exit ≠ Sale• Exit definition: Transferring some or all of your business’ value to someone else, in exchange for more liquid assets
  12. 12. What are the Exit Options?• Sale to an outsider• Recapitalization (e.g., Private Equity investment)• Employee Stock Ownership Plan (ESOP)• Management Buyout• Gifting (to family, to charity)
  13. 13. What are the Exit Options?• Sale to an outsider• Recapitalization (e.g., Private Equity investment)• Employee Stock Ownership Plan (ESOP)• Management Buyout• Gifting (to family, to charity)• [Status Quo] Stay and (ideally) grow• Initial Public Offering (IPO)• Close down the business and liquidate assets• Bankruptcy• Death
  14. 14. Why Do Owners Exit TheirBusiness?Why Do Buyers Acquire ABusiness?
  15. 15. What Do Exiting Owners Do With Their Proceeds?• Provide for their own retirement• Provide for loved ones• Share rewards with others who helped them build their business• Contribute to charity• Invest – Diversified savings for growth and income – Start another business – Join angel or private equity investment groups
  16. 16. Owner Readiness to Exit HighFinancialReadiness Low Low High Mental Readiness Exiting Your Business, Protecting Your Wealth by John M. Leonetti, ©2008, p. 15
  17. 17. Financial Readiness• How much of my wealth is tied up in the business?• How much of the proceeds do I want/need to keep for myself?• Do I depend on the business to support my lifestyle?• Am I prepared for the loss of: – Salary – Benefits – Deductible Perks (travel, auto, meals)
  18. 18. Mental Readiness• How involved am I in the day-to-day running of the business? – Am I addicted to being a business owner – Will I know what to do with my time when I am no longer in the business?• Do I view my business as an investment? – Can I make dispassionate decisions, based on objective criteria, about the exit process?• Am I feeling burned out?
  19. 19. Owner Readiness to Exit HighFinancialReadiness Low Low High Mental Readiness Exiting Your Business, Protecting Your Wealth by John M. Leonetti, ©2008, p. 15
  20. 20. Four Types of Owners• Well off, but choose to work• Rich, and ready to go• Can stay and grow the business• Get me out right away at the highest possible price
  21. 21. Owner Type by Readiness Well off, but Rich, and ready High choose to work to goFinancialReadiness Low Get me out now Stay and grow at the highest possible price Low High Mental Readiness Exiting Your Business, Protecting Your Wealth by John M. Leonetti, ©2008, p. 15
  22. 22. What are the Exit Options?• Sale to an outsider• Recapitalization (e.g., Private Equity investment)• Employee Stock Ownership Plan (ESOP)• Management Buyout• Gifting (to family, to charity)• Stay and grow
  23. 23. Exit Options vs. Readiness Management High Gift, ESOP, Buyout, Sell ESOP,Financial GiftReadiness Low Recap, ESOP, Sell for the highest Stay and grow possible price Low High Mental Readiness Exiting Your Business, Protecting Your Wealth by John M. Leonetti, ©2008, p. 16
  24. 24. Putting It All Together Hig Well off, but Rich, and ready h choose to work to goFinancialReadiness Low Get me out now Stay and grow at the highest possible price Hig Management Low h High Buyout, Gift, ESOP, ESOP, Sell Mental Readiness Gift Financial Readiness Low Recap, ESOP, Sell for the highest Stay and grow possible price Low High Mental Readiness Exiting Your Business, Protecting Your Wealth by John M. Leonetti, ©2008, pp. 15-
  25. 25. Why Do Owners Exit TheirBusiness?Why Do Buyers Acquire ABusiness?
  26. 26. Sources of Capital IPORevenue PrivateGrowth Equity Angel Investors Venture Friends & Capital Family Time
  27. 27. What Do Buyers Buy?• People (management team, workers)• Reputation/Brand• Future cash stream• Intellectual property• Contracts• Customer/client relationships• Assets and Liabilities on the Balance Sheet – Cash (usually goes to the seller) – Fixed Assets (buildings, equipment, furniture, computers) – Inventory – Debt Obligations
  28. 28. What Can Prevent a Successful Exit?• Business cannot survive once the original owner no longer involved• Keeping family in the business is more important than selling to an outsider• Potential buyers can’t get the financing needed to acquire the business• Poor economy has reduced profitability• The owner’s price expectations are unrealistic
  29. 29. What is the Business’ Value?• Four types of value Strategic SV Sale – Liquidation value (LV) – Fair market value (FMV) Management IV – Investment value (IV) Buyout, Recap – Synergy value (SV)• FMV may be discounted FMV ESOP, Gift for partial transfers Discount – Lack of control – Lack of marketability LV Liquidation
  30. 30. Synergy Value (from the Buyer’s Perspective)• Removing competition• Reducing seasonal fluctuations• Critical mass• Expanded geographic reach• Increased prestige• Reduce indirect cost % through consolidation and elimination of duplication
  31. 31. My Business as an Investment• People/organizations it worth what I invest it is?”) (“Why isn’t with money can think it different ways – Equities have returned, historically, 10%+ annually – Buying a small business is inherently a risky investment • Can it prosper without the current owner? • Business will still be illiquid after the sale – Greater risk = greater expected return – Buyers expect 20-40% annualized return• Generally speaking, buyers pay for a multiple of company’s cash flow (EBITDA), adjusted for their risk perception• For given cash flow, higher risk premium → lower price
  32. 32. How Do Owners Determine Their Business’ Value?• What is needed to sustain (or improve) my personal lifestyle after my exit – Salary – Benefits – Some previously-deductible business expenses now become personal (travel, meals, cars) Replacing The Company Car Car Lease $500 Annual Cost $10,200 Insurance $100 Marginal Tax Rate 40% Fuel $100 Annual Cost (pretax) $17,000 Maintenance $150 Investment Return 6% TOTAL $850 Annual Cost $10,200 Assets Needed $283,333
  33. 33. What is the Business’Value? Strategic SV Sale Management IV Buyout, Recap “Owner’s Lifestyle FMV ESOP,Preservation Gift Value” Discount LV Liquidation
  34. 34. What Does the Owner Net? (“How Much Do I Get to Keep?”)• Sale/Transfer Price• Plus – Liquid assets pulled out of business • Cash above that needed for Working Capital• Minus – Payoff of business debt – Transaction Fee (Double Lehman Formula) • M&A Broker or Investment Bank – Hourly Fees • Lawyers, Accountant, etc. – Taxes (Federal, State, Capital Gains, Ordinary Income, Estate) – Earn-Outs • Replacing non-competitively-won business • Achieving certain milestones (e.g., revenue growth, profitability)
  35. 35. Double Lehman Formula• 10% of the first $1,000,000 $100,000• 8% of the next $1,000,000 $ 80,000• 6% of the next $1,000,000 $ 60,000• 4% of the next $1,000,000 $ 40,000• 2% of the next $1,000,000 $ 20,000• 2% of each additional $1,000,000• Sale Price of $20,000,000 $600,000
  36. 36. Total Wealth in a Partial Exit + + Net Proceeds from Final Sale Annual of the Continuation of Business Assets Salary,Removed from Benefits, and the Business Perksand Reinvested – compoundannual growth
  37. 37. When Should an Owner Startto Plan the Exit?
  38. 38. When Should an Owner Start to Plan Their Exit? Now! (Even if the exit event is years away)(Exit Planning is a process, not a milestone)
  39. 39. Exit Strategy PlanLeonetti: “The written goals • Written goalsfor the succession of abusiness’ ownership and • Succession ofcontrol, derived from awell-thought-out and ownership andproperly-timed plan that controlconsiders all factors, allinterested parties, and the • Detailed planpersonal goals of theowners in a manner and • Considers needs oftime period that all interestedaccommodates thebusiness, its shareholders, partiesand potential successorsand/or buyers” Your Business, Protecting Your Wealth by John M. Leonetti, ©2008, p. 2 Exiting
  40. 40. Get Ready to Sell/Transfer• Increase the value of the business – Increase sales – Improve profit margin – Reduce internal costs through efficiency, streamlining, focus – Strengthen infrastructure (management, people, systems, process documentation) – “Lock In” key individuals with incentives – Diversify customers and contracts, if concentrated – Document and protect IP – Build a track record of good financial management (financials reviewed by CPA, correct tax returns)
  41. 41. Get Ready (cont’d)• Get mentally ready – See your business the way investors will look at it – Make decisions like an investor, not as an emotionally-invested owner – Be prepared to not live out of your business – Decide what you’ll do with your time after exiting• Line up advisors
  42. 42. Transactional Advisors $5M - $25M $25M -$2M - $5M 100M+Busines M&A Investmen s Specialis t
  43. 43. Relationship Advisors CPA AttorneyWealth Insuranc eValuatio Estate n Independent “Quarterback”
  44. 44. Understand Paperwork to be Signed• Letter of Intent (LOI) – Outlines fundamental deal points – Starts due diligence process – Often has an exclusivity clause• Purchase and Sale Agreement (a.k.a Definitive Purchase Agreement) – Includes representations and warranties – Include any negatives – Must be in writing, even if discussed verbally during due diligence• Non-Compete Agreement• Earn-Out Agreement• Seller-Financing Agreement
  45. 45. When Should an Owner Startto Plan Their Exit? Now!
  46. 46. Questions? Comments?Doug Smith, Partner, B2B CFO®e-mail: dougsmith@b2bcfo.comphone: 703.927.9823

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