Buying and selling a business seminar part 1 slides

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  • Brandon to do intros on Haans and Brandon
  • Actively seeking is a small % of the market which is why you need an active process.
  • Buying and selling a business seminar part 1 slides

    1. 1. Buying or Selling a Business Randy Rua, Rua Associates Haans Mulder, Cunningham Dalman
    2. 2. The Agenda The Two Choice Dilemma • Your Big Goal • Why Transactions Typically Fail The Components of A Successful Transaction • The First Three Components • Vision • Right Team • Business Assessment
    3. 3. The Two Choice Dilemma Grow Sell • Organic • Acquisition • Internal Sale • External Sale
    4. 4. Before we begin…. What is your BIG goal? Two criteria Five years out Only one thing
    5. 5. The Success Rate of Selling a Business Only 5% of Businesses are Successfully Sold 80% of Business owners that try to sell fail Of those that are able to sell, 75% report regretting selling their business because their goals weren’t met
    6. 6. The Success Rate of Buying a Business Only 5% of Businesses are Successfully Purchased 75% of business acquisitions fail after a Letter of Intent is signed Of those that are able to purchase a business, 80% report their acquisition goals were not met
    7. 7. So why is the success rate so low? Lack of planning Lack of a team approach Lack of focus on the vision
    8. 8. The Two Choice Dilemma React to Growth or Sale, Don’t Have a Team Approach and Ignore the Vision Plan to Grow or Sell, Have a Team Approach and Focus on the Vision
    9. 9. The Components of a Successful Transaction Vision Right Team Process Successful Transaction Market Creation Business Assessment Alternatives Analysis
    10. 10. Our Focus Today Vision Right Team Business Assessment
    11. 11. Vision Vision • • 8 Questions Same Page
    12. 12. The 8 Questions Values Core Reason 5-10 Year Goal Prospect Selection Transaction Picture 1 Year Post-Transaction Goals 90 Day Pre-Transaction Goals Issues List
    13. 13. The 8 Questions
    14. 14. The 8 Questions
    15. 15. The 8 Questions
    16. 16. The 8 Questions Values Core Reason 5-10 Year Goal Prospect Selection Transaction Picture 1 Year Post-Transaction Goals 90 Day Pre-Transaction Goals Issues List
    17. 17. How to Get on the Same Page Other Stakeholder Goals Owner’s Goals Business Goals Other Stakeholder Goals Owner’s Goals Business Goals
    18. 18. Typical Goals of a Seller Seller Business Goals Seller Personal Goals Other Stakeholder Goals
    19. 19. Typical Goals of a Buyer Buyer Business Goals Buyer Personal Goals Other Stakeholder Goals
    20. 20. Right Team Right Team • Right Seat • Right People
    21. 21. Right Seat Decision Maker Other Stakeholders Team Leader Intermediary Financial Legal
    22. 22. Right People Transaction Type Focus Transaction Size Focus Experience Passion Time Person 1 Y Y Y Y Y Person 2 N Y Y Y Y Person 3 Y Y Y Y Y Team Lead Y Y N Y Y BAR 3 Y’s and 1 N
    23. 23. Team Roles Intermediary Team Lead Legal Financial
    24. 24. The Components of a Successful Transaction Business Assessment • Valuation • Viability
    25. 25. Valuation Focuses primarily on the businesses’ financials through three approaches: Income approach • Discount future earnings to present value Market approach • Cash flow times market multiple Asset approach • Liquidation or going concern- what your assets are worth
    26. 26. Tool Example 100% Controlling, Non-Marketable Interest in Consulting Company Discount/ Indicated Premium Confidence Value Rate Level Valuation Method The Market Approach Price/Gross Sales Method Price/DE Method The Income Approach Capitalization Method Illiquidity Discount Indicated Value Discounted Future Benefits Method Illiquidity Discount Indicated Value Weighted Estimate $ 1,065,000 20% $ 213,000 $ 2,486,000 20% $ 497,200 50% $ 961,200 10% $ 245,250 $ 2,136,000 $ (213,600) $ 1,922,400 10% $ 2,725,000 $ (272,500) $ 2,452,500 10% Value Conclusion - 100% Interest in Company Value Conclusion - 100% Interest in Company (Rounded) 100% $ 1,916,650 $ 1,917,000
    27. 27. Valuation Metrics • • • • • • Public Company Industry PE Ratio - 3 year trend Private Company EBITDA Multiples - 3 year trend EBITDA Multiple Revenue Multiple Capitalization Rate Required Working Capital
    28. 28. Median EBITDA Multiples for Buyouts The median valuation-to-EBITDA multiple has exploded to a decade high of 10.7x
    29. 29. Median EBITDA multiples rose for large deals but fell to just 2.5x for transactions of less than $25M
    30. 30. West Michigan – Selling Multiples (3 year history) 4.5 Other Transactions Rua Associates Transactions 4 3.5 3.94 2.96 3 2.5 2 1.5 1 0.98 0.54 0.5 0 Price to Revenue Ratio Price to Cash Flow Revenue: $1-15M Ownership: Privately Held Industry: Service, Manufacturing and Distribution Location: West Michigan Price to Revenue Ratio Price to Cash Flow
    31. 31. Viability The problem with just getting a valuation is it doesn’t answer many of the key questions regarding a transaction: What are my options? Will there be a market interest? What expectations does the market have? What type of structure(s) can be expected? Can the structure(s) be financed? Is the business saleable?
    32. 32. Options Analysis Grow Organically Grow Through Acquisitions Internal Sale External Sale New Products/Services Buy Suppliers Family Liquidation New Markets Buy Customers Shareholder Buyout 3rd Party Gain Market Share Buy Competitors Management Buyout Recapitalization Buy Complimentary Companies ESOP
    33. 33. Potential Prospects Actively Seeking 7% Current Sellers 7% Passively Receptive 24% Source: PWC Current Non – Sellers 62%
    34. 34. Prospecting Case Study Oil and Gas Mfg Tech Furniture Number of Prospects 116 326 152 362 Total Prospects Contacted 87 248 64 121 Willing to Discuss 34 39% 140 59% 28 44% 39 32% Interested Parties 12 14% 39 16% 13 20% 7 5%
    35. 35. Tool Example Market Test Summary • Contacted 20 Strategics and 20 Private Equity Firms • Received Feedback from 5 Strategics and 7 PE’s • 50% of Strategics were interested and 75% of PE’s Typical Structure: • Strategic: All Cash if long-term management team is in place besides ownership • PE: 70% Cash at Close, 30% Seller-Note, Rolled-Over Equity or Earn-Out Typical Multiple Range Strategic: 4-6 times EBITDA PE: 4-6 times EBITDA Drivers of Multiple and Structure: Strategic Top 3: • Location • Synergies • Service Type Private Equity Top 3: • Flexibility of Ownership • Customer Concentration • Strength of Management Team
    36. 36. Financing Metrics Seller Factors • Collateral Value • Required DSC • Goodwill Financing • Seller Financing Buyer Factors • Industry Experience • Liquidity • Net Worth • Down Payment
    37. 37. Tool Example Financing Feasibility Bank Industry Experience First National Very important along with the new owner being behind the Company and the capital injection that may be required. Huntington Most important - Not just manufacturing, but a competitor or someone with substantial knowledge of the field. Buyer Liquidity $150,000-$225,000 (10%-15% of outstanding debt) Buyer Equity 25% of purchase price should be equity in the form of cash or full stand-by seller note. 15% cash at close. Structure Other Comments Cash at close for equipment If SBA is involved, it must be with additional seller note a 100% acquisition. and full-standby seller note. Higher than 10% due to projection. If Goodwill > $500,000, SBA requires 25% of the purchase price. Financial structure proposed would fit under SBA guidelines. Chemical Bank Must have knowledge of the technology required. Depends on how SBA may not see it as an hungry a banker is for entirely "new business" if the deal. there is no major change in management team for 5 years 10% down at close. Fifth Third Less important than liquidity. Projection-basis requires 15% of debt outstanding. Management team would need to either sell their shares now to be part of the buyer group in 6 months, or they would have an employment contract for 12 months. It would be up to the buyer group to renew this contract after 12 months. be confident in Need to May be willing to lend 10% on inventory and 75% on AR equipment value. Bank will less than 90 days. Could need to order appraisal and refinance seller note as SBA specifiy SBA as a user. 7A after close, but bank would require subordination agreement. SBA requires 25% of purchase May be willing to bump up price. financing with a highlyliquid buyer.
    38. 38. Tool Example Sellability Report
    39. 39. Highest Multiple Offered To Companies With A Sellability Score of 80+ Q “What multiple of your earnings did the offer represent? Data from 6955 users of The Sellability Score between July 1, 2012 and December 31, 2013. 96.9% of business owners surveyed had revenue of less than $20,000,000. 3.55 Average multiple “The Sellability Premium” Comparing average multiple offered 6.1 80+ 0 SellabilityTracker Q4 2013. Copyright 2014 www.SellabilityScore.com 2 4 6 8
    40. 40. Tool Example Sellability Report Overall Score driven by a weighted algorithm made up of 32 questions in a total of 8 categories: 1. Financial Performance 2. Growth Potential 3. The Switzerland Structure 4. The Valuation Teeter Totter (i.e. See Saw) 5. The Hierarchy of Recurring Revenue 6. The Monopoly Control 7. Customer Satisfaction 8. Hub & Spoke
    41. 41. Factors Correlated to Getting a Premium Offer Copyright, 2013. Built to Sell Inc
    42. 42. Other Key Components of Business Assessment Management Team and Employees Sales Team and Customer Relationships Key Assets
    43. 43. Other Key Components of Business Assessment Management Team and Employees • • • • Strong/loyal management team Incentives aligned to motivations Risk of employees leaving At-will employment clear in documentation
    44. 44. Other Key Components of Business Assessment Sales Team and Customer Relationships • Protect confidential info/relationships • Agreements to lock in revenue streams • Assignment rights
    45. 45. Other Key Components of Business Assessment Key Assets • Tangible vs Intangible • Legal issues related to assets • Transferability
    46. 46. Conclusion The Two Choice Dilemma • Your Big Goal • Why Transactions Fail The Components of A Successful Transaction • Vision • Right Team • Business Assessment
    47. 47. Next Seminar Next Seminar Date: Monday, April 28 Process 8AM-10:30AM Same Location! Alternatives Analysis Market Creation
    48. 48. Questions?

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