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BUYING A BUSINESS- 101

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BUYING A BUSINESS- 101

Some startups grow organically but many identify a complementary product or service that customers want, produced by a target company that seems to offer potential synergies through acquisition. Sometimes the companies’ Founders or executives know each other well and other times they require introduction. What is the best way to approach the target company? What are the steps needed to fully evaluate the target? Do you need audited financials? Are there key employees, relationships, or customers you must make sure stay in place? What is the appropriate negotiating strategy? How do you integrate the culture, products, processes and people to achieve the potential synergies? What are the most common areas of failure and how do you mitigate these risks? This webinar will help you be ready for your first (or next) acquisition.


Part of the webinar series: Business Law Review 2022

See more at https://www.financialpoise.com/webinars/

Some startups grow organically but many identify a complementary product or service that customers want, produced by a target company that seems to offer potential synergies through acquisition. Sometimes the companies’ Founders or executives know each other well and other times they require introduction. What is the best way to approach the target company? What are the steps needed to fully evaluate the target? Do you need audited financials? Are there key employees, relationships, or customers you must make sure stay in place? What is the appropriate negotiating strategy? How do you integrate the culture, products, processes and people to achieve the potential synergies? What are the most common areas of failure and how do you mitigate these risks? This webinar will help you be ready for your first (or next) acquisition.


Part of the webinar series: Business Law Review 2022

See more at https://www.financialpoise.com/webinars/

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BUYING A BUSINESS- 101

  1. 1. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  2. 2. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 4
  3. 3. Meet the Faculty MODERATOR: Jason W. Rubin - Goldberg, Miller, & Rubin PANELISTS: Jonathan Friedland - Sugar Felsenthal Grais & Helsinger LLP Lance Meilech- Fox & Fin/IBG Rick Rosenbloom- Fuel Break Capital Partners 5
  4. 4. About This Webinar: Buying a Business- 101 Some startups grow organically but many identify a complementary product or service that customers want, produced by a target company that seems to offer potential synergies through acquisition. Sometimes the companies’ Founders or executives know each other well and other times they require introduction. What is the best way to approach the target company? What are the steps needed to fully evaluate the target? Do you need audited financials? Are there key employees, relationships, or customers you must make sure stay in place? What is the appropriate negotiating strategy? How do you integrate the culture, products, processes and people to achieve the potential synergies? What are the most common areas of failure and how do you mitigate these risks? This webinar will help you be ready for your first (or next) acquisition. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and other seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 6
  5. 5. About This Series: Business Law Review 2022 While law school provides a great foundation, there are so many things it does not teach. Looking to strengthen and condition your cross-disciplinary skills? Develop your flexibility by increasing your familiarity with issues affecting a vast array of businesses? This series delves into cutting edge issues in dynamic fields to help lawyers, business professionals, or anyone interested in the law, with some specialized learning in seven distinct areas of law. As with every Financial Poise Webinar, each episode is delivered in Plain English so that you do not have to be a Business Law specialist to understand and benefit from them. And, as with every Financial Poise Webinar, each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 7
  6. 6. Episodes in this Series #1: Buying a Business- 101 Premiere date: 2/10/22 #2: Construction Defect Litigation-101 Premiere date: 4/7/22 #3: Defending White Collar Crime-101 Premiere date: 6/9/22 #4: Doing Business Abroad-101 Premiere date: 7/21/22 8
  7. 7. Episodes in this Series #5: Immigration Law for Business-101 Premiere date: 10/06/22 #6: Selling a Business-101 Premiere date: 11/10/22 #7: Zoning & Land Use 101 Premiere date: 12/8/22 9
  8. 8. Episode #1 Buying a Business - 101 10
  9. 9. Reasons to Buy a Business • There are many reasons to purchase a operating business ✓ Impatient or Lack start up expertise ✓ You can improve its performance ✓ To acquire critical relationships (vendors, customers, etc.) ✓ Product or Service is complementary to your existing business (leverage manufacturing or sales expertise; buy IP) ✓ Reduce Overhead via integration (synergies)
  10. 10. Reasons Not to Buy a Business • There are also (potentially) bad reasons to buy a business ✓ You are a substantial customer ✓ You have free time & home equity to invest ✓ You are inexperienced but have great ideas for improvements to the product / menu 12
  11. 11. Self-Evaluation • Carefully consider what you can risk / lose ✓ Your money (savings, IRA, 401(k), home equity) ✓ Your friends and family’s money ✓ Existing career (how marketable are you?) ✓ Time away from family, friends, studies, and relationships 13
  12. 12. Threshold Questions • Think about the following: ✓ Why is the business for sale? ✓ What has changed (competitors, employees, costs, customers)? ✓ Is the product a want or a need? ✓ Technology likely to replace the product? ✓ Barriers to entry? ✓ Does the business need your area of proven expertise, is training provided (i.e. a franchise), or does this a stretch your skills? 14
  13. 13. Threshold Questions • More things to investigate and analyze ✓ How many competitors are there / market leader? ✓ Cost to improve / “fix” it? ✓ Key customers (volume or strategic) a strength or weakness? ✓ Are there irreplaceable employees (sales or manufacturing)? ✓ Current owner fill a critical operational role? ✓ Will you be teaching or learning? 15
  14. 14. Advantages of Buying • Buying an existing business may provide advantages: ✓ Existing customers / brand loyalty ✓ Employees hired and trained ✓ Critical vendors in place, with credit terms (verify) ✓ Required equipment installed and operating ✓ Financing easier 16
  15. 15. The Traditional Sale Process • The 7 Steps ✓ Review Teaser and Confidential Information Memorandum (NDA signed) ✓ Prepare Offer Term Sheet or LOI, negotiate and execute ✓ Analyze Data Room contents & Prepare Supplemental Document Request List ✓ Participate in Management meetings ✓ Negotiate and Execute Definitive Purchase and Sale Agreement (Step 1) ✓ Seek Regulatory Approvals and Consents (Step 2 – if necessary) ✓ Post-closing matters (e.g. true up balance sheet, working capital adjustment) 17
  16. 16. Diligence Items to Consider • Diligence is broad and deep – don’t miss the basics: ✓ Stable operations & customer base? ✓ Buying salable or seasonal / stale inventory? ✓ WIP current year items readily salable? ✓ Growth potential? ✓ EBITDA add backs – are they overstated ✓ Cost to run business as you envision it 18
  17. 17. Standard Diligence Topics • Financial Performance ✓ Balance Sheet – annual (at least) for a couple years ✓ Income Statement – monthly, for at least 3 years ✓ Cash Flow Statement (examine unusual items) ✓ Tax Returns • Corporate Governance ✓ Current filings (tax, regulatory, etc.) ✓ Litigation Search & Pre-litigation searches (EEO, etc.) 19
  18. 18. Two Types of Diligence • More Information ✓ Customer concentrations, stability & quality ✓ AR quality & AP terms / history ✓ Detailed trends in financial statement line items • Veracity of the Information ✓ Is the information fairly presented? ✓ Is the information complete? ✓ What is risk if picture isn’t that rosy? 20
  19. 19. Diligence into Advantages • Verify perceived advantages exist ✓ Employees – are key employees staying? ✓ Customers happy? Indications of unrest (decreasing orders)? ✓ Vendor contracts at market rates? ✓ Lease terms favorable or neutral? ✓ Equipment appropriate or obsolete? 21
  20. 20. Value Diligence • Value ✓ How is the business valued (EBITDA, Gross Sales, IP, FF&E)? ✓ Is the seller “gaming” value by altering expenses or revenue to show positive trends? ✓ Do seller add backs materially alter value? ✓ Did seller’s delay of Cap Ex shift risk (will expenses achieve results)? ✓ Are there signs seller neglected the business? ✓ Marketing and sales trends consistent? 22
  21. 21. Corporate Formalities • Check to make sure there are no hidden problems: ✓ Corporate records: in order and up to date ✓ Taxes current (returns filed) at close (IRS, FTB, BOE, Payroll, etc.)? ✓ Benefit plans in place and fully funded (401(k) or pension liabilities)? ✓ Deferred maintenance: “wants” versus “needs” ✓ Pending litigation o Plaintiff – who gets proceeds awarded post-sale? o Defendant – who pays costs / damages? ✓ Union shop? 23
  22. 22. Insider Compensation • It is not unusual for an owner to run expenses through a company. Typically, owners pro forma reverse this expense to increase the value of the business. ✓ What is reasonable compensation? ✓ Are expenses being classified as personal in contradiction to the owner’s personal tax reporting? ✓ Relatives on payroll (salary and perks) – will you need to hire someone to perform that task? 24
  23. 23. Understand Seller’s Motivations • Acquisition Options ✓ Seller wants out: Buy it all ✓ Seller wants to diversify investments: Buy controlling interest • Transition Agreements ✓ Interim / Transition Management ✓ Earn out (portion of purchase price is paid if company performs) 25
  24. 24. Negotiate • Be thoughtful, strategic, and ask ✓ You never get what you don’t ask for ✓ Think about an earn out ✓ Will seller take back financing (putting their $ at risk) ✓ Pay less for A/R that is likely uncollectable ✓ Adjust for slow moving A/R ✓ Leave seller’s guarantees in place to keep “skin in the game” 26
  25. 25. Letter of Intent • Key Terms ✓ Price ✓ Exclusivity / Stand Still ✓ Assets Acquired ✓ Liabilities Assumed & Strategy ✓ Remaining Diligence ✓ Timing ✓ Contingencies 27
  26. 26. Better Protections • Several tools to protect value ✓ Covenant Not to Compete ✓ Cash hold back ✓ Releases / indemnity (scope) ✓ Earn Out 28
  27. 27. Getting Help • Professional Retention: ✓ Lawyers are critical part of diligence – don’t overlook them ✓ Accountants are needed to evaluate financial statements ✓ Business advisors help understand what is “customary” and identify when that is an excuse 29
  28. 28. About the Faculty 30
  29. 29. About The Faculty Jason W. Rubin- JRubin@gmrlawfirm.com Jason W. Rubin, a Goldberg, Miller & Rubin partner, concentrates his practice in products liability and toxic torts and has managed the firm’s well-regarded mass tort department for two decades. Jason represents several clients in their toxic tort matters filed in Pennsylvania, New Jersey, and New York and has tried several cases to verdict. His success has been recognized by Thomas Reuters which has designated him a Super Lawyer in products liability in 2016, 2017, 2018, and 2019. Jason devotes a portion of his practice to mediation, arbitration, and pro bono service and is on the Philadelphia Court’s Honor Roll for his pro bono service. He serves at least monthly as a Judge Pro Tempore for the Philadelphia Court of Common Pleas Civil Trial Division and volunteers with the Philadelphia Bar’s Fee Dispute Program as well. 31
  30. 30. Jonathan Friedland– jfriedland@sfgh.com Jonathan Friedland is a senior partner in Sugar Felsenthal Grais & Helsinger LLP’s Chicago office. He is ranked AV® Preeminent™ by Martindale.com, has been repeatedly recognized as a “SuperLawyer”, by Leading Lawyers Magazine, is rated 10/10 by AVVO, and has received numerous other accolades. He has been profiled, interviewed, and/or quoted in publications such as Buyouts Magazine; Smart Business Magazine; The M&A Journal; Inside Counsel; LAW360; Business Week.com; Dow Jones LBO Wire; and The Daily Deal. Jonathan graduated from the State University of New York at Albany, magna cum laude, in 1991 (after three years of study) and from the University of Pennsylvania Law School in 1994. Jonathan is also an active angel, venture capital, and private equity investor, and is the founder and publisher of DailyDAC and Financial Poise. Click here to see his full biography. 32
  31. 31. About The Faculty Lance Meilech– lance@ibgbusiness.com Lance Meilech is a Principal at Eaton Square and a Managing Director at IBG/Fox & Fin in the Phoenix Arizona office. His specialization is in the technology market and has many strong connections to Silicon Valley. He has been extremely successful in the Arizona market and has earned the reputation of being one of the top deal makers in the State. His in-depth practical experience in multiple aspects of business operations, financial background and educational credentials enables Lance to understand the concerns of business owners and buyers. This unique combination of experience and skills enables him to help clients through all aspects of the business transfer process. 33
  32. 32. About The Faculty Rick Rosenbloom– rick@fuelbreakcapital.com Rick Rosenbloom is the founding Partner of Fuel Break Capital Partners, LLC, a national special situations investment and advisory firm. Rick has over 25 years of debt capital markets advisory, bankruptcy and transactional law, restructuring and special situations investment experience. Rick has extensive capital markets, restructuring advisory, M&A, corporate finance, distressed investment and operational experience. Prior to Fuel Break Capital Partners, Rick served as General Counsel and Senior Vice President of The Hilco/Great American Group (now Hilco Global and B/Riley Advisory Services), C.O.O and head of M&A for an international brand marketing and specialty advertising firm, Principal, General Counsel and Head of Origination of Continental Plants, an industrial focused distressed debt investment firm, and as a Principal of and Head of Restructuring and Debt Capital Markets for Gemini Partners, a Los Angeles-based boutique merchant banking firm. Rick started his career in Chicago with Kirkland & Ellis and Schiff Hardin & Waite in their bankruptcy and restructuring practices. Mr. Rosenbloom holds JD and MBA degrees from UCLA and graduated With Distinction from the Honors Program of the University of Michigan. 34
  33. 33. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 35
  34. 34. About Financial Poise 36 DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. It’s websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

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