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Exit Planning + Maximizing The Value Of Your Business: A Primer

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This is a presentation that will help business owners (and their advisors) who are thinking about a potential future sale event assess their readiness and better understand the market.

Along with covering the topics listed below, there are also some practical tips to implement prior to a sale that will help make the transaction a success, because taking the right steps now to prepare for a future transaction will pay dividends down the road.

Topics include:
1. Business Liquidity Planning + Goals- Kaz Unalan, Director, Tax & Business Advisory Services, GBQ Partners
Kaz gives an introduction to liquidity planning and goals, talking about assembling a team of advisors, timing, and liquidity options.

2. Market Dynamics- John Herubin, Managing Director, Edgepoint Capital
In John's part of the presentation, he discusses Valuation + the Current State of the Market.

3. Getting Your House in Order – Eric Duffee, Co-Chair, Mergers + Acquisitions Practice, Kegler, Brown Hill + Ritter
In Eric's presentation he discusses common pitfalls as well as organizational and operational strategies to adopt prior to engaging in sale process.

4. Tools and Resources - Charles Jarrett, CFP, CPWA, CRPC, Sr. Vice President, Merrill Lynch Private Wealth Management
Charles closes out the presentation will a few tools and resources to keep in mind following the presentation.

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Exit Planning + Maximizing The Value Of Your Business: A Primer

  1. 1. EXIT PLANNING + Maximizing the Value of Your Business: A Primer
  2. 2. Business Liquidity Planning Exit Planning + Maximizing the Value of Your Business: A Primer April 30, 2019
  3. 3. Director, Tax & Business Advisory Services Member of the senior leadership team of GBQ Partners Partner in GBQ’s Tax Practice and leads Succession Planning Services. Member of GBQ’s Transaction Advisory Services group. Serves closely held middle-market companies with a focus on partnerships, S-Corps and high net worth individuals. Industries include real estate, restaurants, manufacturing, distribution and service 614.947.5309 kunalan@gbq.com Kaz Unalan, CPA, CEPA 3
  4. 4. GBQ By The Numbers 4
  5. 5. GBQ Transaction Advisory Services 5
  6. 6. • Often referred to as a Transition Plan, Succession Plan or Exit Plan – Liquidity Planning asks and answers all the business, personal, financial, legal and tax questions involved in transitioning a privately owned business • It includes contingencies for illness, burnout, divorce or death • Its purpose is to maximize the value of the business at the time of exit, minimize taxes and ensure the owner is able to accomplish all of his or her personal and financial goals in the process What is Business Liquidity Planning? 6
  7. 7. • Maximize the value of the business • Ensure the owner is personally and financially prepared • Ensure that the owner has planned for life after the business Key Objectives of Liquidity Planning 7
  8. 8. “Age Wave” is here • First boomers turned 65 in 2011; 10,000 turn 65 everyday; the youngest are now 55 • Own > 50% of the private businesses in U.S. • 80-90% of their wealth is tied up in their businesses • Represents a transfer of 4,500,000 businesses and over $10 trillion of wealth M&A Market is strong • High valuations • Relatively low interest rates • Lots of capital available 100% of all businesses change hands 8 Liquidity Planning Headwinds
  9. 9. • Owners leave money on the table as they are focused on income generation and not enterprise value – income does not automatically translate into value – many are “lifestyle” business • Unreasonable valuation expectations • Many businesses are not salable or do not make it to the 2nd generation • Very emotional, difficult to get owners to plan for their exit and create additional value through proper planning and execution Challenges of Liquidity Planning 9
  10. 10. • Over 50% of exits are not voluntary • Death • Disability • Divorce • Distress • Disagreement Challenges of Liquidity Planning 10
  11. 11. Select Transaction Team • CPA – tax/financial/consulting • Investment Bank/Valuation Consultant • Financial Planner/Investment Advisor • Attorney 11 Keys to Success
  12. 12. Define your goals for a transaction • Maximize Value • Reduce Risk • Family Legacy • Philanthropy Keys to Success 12
  13. 13. Personal Timing • Owners energy level • Owners age • Owners personal involvement • Owners health • Owners passion about the business • Owners willingness to stay on after the sale Business Timing • Growth stage • Historic trends • Future prospects Market Timing • State of M&A Market/Strength of the economy • Tax environment • Availability of debt/financing Evaluate Is there a right time to transition? 13
  14. 14. Evaluate Is there a right time to transition? (continued) 14
  15. 15. “Inside” transition • Family transfer • Sale to employee (ESOP) • Management buyout • Partner buyout “Outside” transition • Sale to third party | Strategic buyer | Private equity sale • Recapitalization • Orderly liquidation Evaluate Assessment of Exit Options 15
  16. 16. Family Transfer Pros: • Business legacy preservation • Planned • Lower cost • More control • Less disruption Cons: • Family dynamics • Illiquid buyers / lack of funding • Lower sale price • Key employee flight risk • Tradition may outstrip good strategy • Path of least resistance – but not always the path to growth or success Evaluate Assessment of Exit Options – Inside Transactions 16
  17. 17. Management Buyout Pros: • Business continuity • Highly motivated buyers (pent-up desire) • Preserves key human capital • Planned • Can be combined with private equity to access additional capital and resources for growth Cons: • Distraction • Threat of flight (coercion of owner) • Illiquid buyers • Lower price and generally heavy seller financing (increases risk) Evaluate Assessment of Exit Options – Inside Transactions (continued) 17
  18. 18. ESOP Pros: • Business stays in the “extended family” • Shares purchased with pre-tax dollars by the ESOP • Taxable gain on the shares sold to the ESOP by the owner may sometimes be deferred (1042 rollover) • ESOP is an employee benefit and may cause employees to act like owners Cons: • Can be complicated and expensive • May not work for some entities (culture) • Company compelled to buy-back shares from departing employees (repurchase obligation) • Generally will not maximize proceeds (Fair Market Value standard) Evaluate Assessment of Exit Options – Inside Transactions (continued) 18
  19. 19. Sale to Third Party/Strategic Buyer/Private Equity Pros: • Higher price (generally highest of all options) • More cash up front • Walk away faster • Stability of deal terms Cons: • Long process • Distraction or loss of focus • Privacy concerns • Emotional for owner • Complex Evaluate Assessment of Exit Options – Outside Transactions 19
  20. 20. • Contingencies for unplanned events • Maximize value in good times and bad • Harvest wealth tied up in the business • Smooth transition to next generation, employees or management • Minimize, defer or eliminate capital gains, estate and income taxes • Family legacy • Time to consider post transition life after activities • More control over how and when you exit Importance of Planning Benefits of Transition Planning 20
  21. 21. M&A Market Dynamics EdgePoint Capital 800-217-7139 www.edgepoint.com
  22. 22. M&A ADVISORY 22  EdgePoint has closed 23 Cross-border M&A transactions  An active member of AICA with the ability to leverage a global network of international partners  Provides global insight from multiple firms, ability to overcome cultural barriers EDGEPOINT OVERVIEW Global Capabilities International Access Sell-Side Advisory Third Party Sale Sale to Management Recapitalization ESOP Buy-Side Advisory Retained Search Corporate Development Execution and Financing Management Buyouts Financing Advisory Senior & Sub Debt Asset Based Lending Mezzanine Debt Private Placements Firm Background  Principals with business ownership experience  International access  Middle market focus  Unbiased advice  Proven process  Senior level attention Unique Capabilities  Founded in 2000  Senior professionals average 24 yrs. of M&A experience  Twenty-One M&A professionals  FINRA registered broker dealer  Average 15 closings per year  Over 85% transaction closing rate Services Overview Recent Industry Awards Top 50 Award - Tom Zucker (Founder) Cross-Border M&A Firm of the Year 40 Countries 41 M&A Firms
  23. 23. M&A ADVISORY 23 INDUSTRY EXPERTISE AND EXPERIENCE The completion of more than 275 transactions over 18 years, combined with the multidisciplinary backgrounds of our professionals, has positioned EdgePoint with intimate knowledge of the dynamics driving trends in our chosen market focus. EDGEPOINT INDUSTRY COVERAGE Distribution • Industrial Products & Equipment • Consumer Products & Food • Building Products • Maintenance, Repair & Operations • Chemical Distribution Industrials • Engineered Products • Precision Manufacturing • Industrial Technology & Equipment • Polymers & Chemicals • Aerospace & Defense • Automotive & Truck Business Services • Business Process Outsourcing (BPO) • IT Services & Software • Commercial & Industrial Services • Printing & Packaging • Engineering & Construction • Healthcare Services • Home Health & Hospice Care • Medical Diagnostics • Medical Equipment • Healthcare Technology & Consulting Healthcare • Power and Gas Utilities • Renewables & Clean Tech • Oil & Gas • Energy & Infrastructure Services • Energy Equipment & Technology EnergyConsumer • Consumer Durables • Apparel & Accessories • Food & Beverage • Household Products • Pet and Outdoor Products • Hobby & Leisure
  24. 24. M&A ADVISORY 24 WHEN IS THE RIGHT TIME TO SELL YOUR BUSINESS? We often look to three critical factors when advising a business owner on whether the time is right to consider selling their business: Owner Ready? Market Ready? Business Ready?
  25. 25. 25M&A ADVISORY Is the Market Ready?
  26. 26. M&A ADVISORY 26 IS THE MARKET READY? Drivers of favorable selling environment • The terms of most PE funds require the money to be deployed to purchase companies or it is returned to investors. PE funds have a strong incentive to make acquisitions! • This dynamic, coupled with a shortage of quality targets, has resulted in premiums paid for high- quality businesses in the current “Sellers’ Market” Private Equity Overhang by VintagePrivate Equity Funds ($/#) • PE (Private Equity) fundraising remains vibrant and strong as investors seek yields from private equity investments • New fundraising in combination with prior undeployed capital is creating a much larger buyer pool than there are available quality sellers
  27. 27. M&A ADVISORY 27 IS THE MARKET READY? • Both publicly-traded and private companies retained cash during the recession, as reflected on their balance sheets • Growth through acquisition can be equally attractive as organic sales growth in today’s growing economy Drivers of favorable selling environment Financial Buyer Universe S&P 500 Cash Balances • Unlike many traditional PE buyers, family offices or individuals are generally not looking to “flip” or resell companies within a 5-10 year time frame • Many family offices or individuals are seeking returns through the purchase of businesses as traditional investment returns have become less attractive • Search funds offer business owners the opportunity to “hand over the keys” and walk away from the business, as search funds back an operator to run the business
  28. 28. M&A ADVISORY 28 IS THE MARKET READY? Drivers of favorable selling environment Debt Leverage • Debt leverage from senior and subordinated lenders is strong • Banks are aggressively leveraging transactions at favorable prices and terms Debt and Equity Contributions • Debt is the “fuel” for valuations • Debt continues to comprise more and more of typical deal structures as the lending environment expands, enabling equity contributions to stretch further and valuations to trend upwards • The availability of additional financing facilities, including seller notes and subordinated debt, has translated into higher purchase prices for sellers
  29. 29. M&A ADVISORY 29 IS THE MARKET READY? Drivers of favorable selling environment Capital Gains Rate • Capital gains tax rates remain historically low • Recent tax law changes would seem to indicate that capital gains tax rates will remain low for the foreseeable future • No impact from 2017 Tax Reform on capital gains rates • The price of borrowing is still at record lows. This provides cheap money for buyers in the market • Banks have stronger balance sheets and are lending under favorable terms Prime Interest Rates Richard Nixon Takes Office(1968) Ronald Reagan Takes Office (1980) Bill Clinton Signs Reduction in Capital Gains Tax from 28% to 20% (1997) Sunset Provision Expires (2012) George Bush Signs Economic Growth & Tax Relief
  30. 30. M&A ADVISORY 30 IS THE MARKET READY? U.S. Deal Volume & Value Closed • M&A deal volume ($) and number of deals completed continues to grow Drivers of favorable selling environment U.S. Annual Deal Multiples of EBITDA by Deal Size • M&A valuation multiples remain at historic highs as numbers of deals completed continues to grow • Be aware that size matters when analyzing multiples.
  31. 31. M&A ADVISORY 31 IS THE MARKET READY? How Long Will This Last – Headwinds on the Horizon?  The “R” Word = Recession Question  Inevitable statistically?  Global recession?  Geopolitical Events  Tariffs  Brexit  Military Conflicts  ???  2020 Presidential Election  Likely to create uncertainty and “pause” the market - question will be length and depth Punchline: For a “ready” seller it’s likely better to be in market May/June/July of 2019 v 2020
  32. 32. 32M&A ADVISORY Is the Owner Ready?
  33. 33. M&A ADVISORY 33 What am I selling? core business | certain divisions | retain real estate | other (intellectual property, licensing, etc.) IS THE OWNER READY? WHAT HOW How should I sell? asset sale | stock sale | contingent payouts WHO Who do I want to sell to? strategic buyer | management | private equity ESOP | family office | international buyers | other WHEN When do I want to sell? market timing | owner readiness | pre-emptive offers Why am I selling? retire | cash out | industry consolidation increased competition | quality of life | other WHY Key Questions to Ask
  34. 34. M&A ADVISORY 34 What are your priorities? Every business owner has a different priority for their transition. What is important to you? “Keeping the sale of my business confidential is critical to me” “I have dedicated my life to building my company and I want the highest price” “The company is very important to my family’s legacy within the community” “My employees helped build the business. I want my employees to share in the success and preserve their jobs” Highest Price Employee Friendly Preserve Legacy Most Confidential IS THE OWNER READY?
  35. 35. M&A ADVISORY 35 IS THE OWNER READY? • Strong Opportunity to Grow Sales • Recurring Revenue • Capable Management Team • Proprietary/ Patented Technologies • Defensible Niche/ Segment • Long Term Contracts • Low Customer Concentration • Acquisition Opportunities • Buyer Competition from a Disciplined Process How do you get the highest price? What Pre-Sale Preparation Most Impacts A Premium Value In Today’s Market? Most Confidential Highest Price Employee Friendly Preserve Legacy Most Confidential
  36. 36. M&A ADVISORY 36 SALE PROCESS OVERVIEW Preparation Offering Docs Buyers List Recast Financials 10-20 Offers 1 Final Buyer (Best Price/Terms) 5 Letters of Intent 125 Potential Buyers Contacted 4 - 8 Buyer Visits Broad Competitive Process Example  Competition Drives Value: A broad outreach increases the likelihood of finding a premier “outlier” valuation, while preserving the ability to evaluate other important qualitative criteria; ensures sellers have “cleared the market”  Minimize Disruption to Business: Minimizes time disruption to management and shareholders and enables them to continue running the business  Access to Premium Buyers: A tailored “high-touch” process to keep buyers engaged, present opportunity as actionable – engaging strategic buyers who will not play in an “auction” process  Terms more important than price: Produces multiple actionable and well- diligenced LOI proposals; providing competitive leverage to negotiate market clearing price and terms  Timing and Certainty of Closing: Maintains momentum and ensures timely closing by holding buyers to pre-determined time schedule  Confidential: Limits exposure to “tire-kickers” by limiting confidential information distribution, requiring multiple bidding rounds and through rigorous validation of proposals and data room / due diligence activities Why hire an investment banker?
  37. 37. 37M&A ADVISORY QUESTIONS? A uniquely-focused investment banking firm serving the merger and acquisition needs of middle market businesses www.edgepoint.com John Herubin Managing Director (216) 342-5865 jherubin@edgepoint.com 2000 Auburn Drive, Suite 330 Beachwood, Ohio 44122
  38. 38. Presented by Eric DuffeeGetting Your House in Order
  39. 39. HISTORY
  40. 40. Project ODYSSEY Fragile relationships with disbursed group of employees, who in turn had all of the relationships with customers—all of them could literally just drive away Required significant and unpredictable interactions with third parties Deal team didn’t know all of the facts but weren’t comfortable bringing others into the circle of knowledge
  41. 41. Project WALRUS Inefficient tax structure Nobody knew who actually owned the company Significant delays to deal with issues that could have been addressed prior to the sale—by the time they were fixed, the 2008 recession hit
  42. 42. Project GAME OVER Software company but didn’t have any intellectual property protection or real business continuity plan Internal deal team didn’t have the bandwidth to keep up Compliance programs weren’t adequate for the scrutiny of a big, public buyer
  43. 43. Ugly Financials 1
  44. 44. Wrong, Convoluted, or Unknown Organizational Structure2
  45. 45. Uncertain Relationships with Customers, Suppliers + Employees3
  46. 46. Lack of Adequate Intellectual Property Protection4
  47. 47. Loose Lips Sink Ships 5
  48. 48. Cutting Corners 6
  49. 49. Third Parties 7
  50. 50. Unjustified Delays 8
  51. 51. Unwelcome Surprises 9
  52. 52. So what if my deal falls apart? I still have my business!
  53. 53. Yes, but you may be viewed as “damaged goods” by: Your customers and/or suppliers Investors and other financing sources Potential suitors Your employees There is also a physical and emotional toll
  54. 54. Buyer’s view: Transaction price depends largely on risk
  55. 55. All business have some warts! The key is how you address them
  56. 56. What can you do to minimize the chances of your deal going down in flames?
  57. 57. Think like a buyer! Choose an organizational structure that sets you up for success Financial clean-up: audits or quality of earnings (QoE) analysis Protect/incentivize key employees Pay attention to ownership issues now Identify and protect intellectual property assets (of all types) before a deal
  58. 58. Protect key customer/supplier relationships Control the flow of information Do your own due diligence review Prepare to do two full-time jobs: run and sell the business Strategically assess risks and address them Identify warts and determine how to strategically disclose them
  59. 59. Why not just wait to see what happens when the buyer shows up?
  60. 60. Maximize use of the seller’s leverage while you have it Preserving credibility Encouraging trust Sending a positive message about how you’ve run the business
  61. 61. Eric D. Duffee Kegler Brown Hill + Ritter eduffee@keglerbrown.com keglerbrown.com/duffee 614-462-5433
  62. 62. Exit Planning Books Exit Planning Books Walking to Destiny: 11 Actions An Owner MUST Take to Rapidly Grow Value & Unlock Wealth Christopher M. Snider For Business Owners. By a Business Owner. Walking to Destiny is not only your essential resource to understand what makes your business attractive and ready for transition; it is a business owner's handbook to know HOW TO rapidly grow value and ultimately unlock the personal wealth trapped in your most significant financial asset: Your Business. Finish Big: How Great Entrepreneurs Exit Their Companies on Top Bo Burlingham “No two exit experiences are exactly alike. Some people wind up happy with the process and satisfied with the way it turned out while others look back on it as a nightmare. The question I hope to answer in this book is why. What did the people with ‘good’ exits do differently from those who’d had ‘bad’ exits?” Burlingham interviewed dozens of entrepreneurs across a range of industries and identified eight key factors that determine whether owners are happy after leaving their businesses. His book showcases the insights, exit plans, and cautionary tales of entrepreneurs. Exiting Your Business, Protecting Your Wealth: A Strategic Guide For Owner's and Their Advisors John M. Leonetti Written by John Leonetti attorney, wealth manager, merger and acquisition associate, and fellow exiting business owner in his own right Exiting Your Business, Protecting Your Wealth will guide you in thoughtfully planning out your exit options as well as helping you analyze your financial and mental readiness for your business exit. Easy to follow and essential for every business owner, this guide reveals how to establish an exit strategy plan that is in harmony with your goals.
  63. 63. Exit Planning Books Exit Planning Books Built to Sell: Creating a Business That Can Thrive Without You John Warrilow Most business owners started their company because they wanted more freedom—to work on their own schedules, make the kind of money they deserve, and eventually retire on the fruits of their labor. Unfortunately, according to John Warrillow, most owners find that stepping out of the picture is extremely difficult because their business relies too heavily on their personal involvement. Without them, their company—no matter how big or profitable—is essentially worthless. But the good news is that entrepreneurs can take specific steps—no matter what stage a business is in—to create a valuable, sellable company. Warrillow shows exactly what it takes to create a solid business that can thrive long into the future. Mergers and Acquisitions Playbook: Lessons from the Middle-Market Trenches Mark J. Filippell The ultimate "tricks of the trade" guide to mergers and acquisitions Mergers and Acquisitions Playbook provides the practical tricks of the trade on how to get maximum value for a middle-market business. This book uniquely covers how to prepare for a sale, how to present the business most positively, and how to control the sale timetable. Filled with empirical examples of successful-and unsuccessful-techniques, this practical guide takes you through every step of the M&A process, from how to manage confidentiality, how to create competition (or the impression of competition), to what to do once the deal is closed. Family Business Succession: The Final Test of Greatness Craig Aronoff, Stephen McClure, John Ward Helps to prepare for passing the family business on to the next generation. Leaders will learn how to create a succession plan; how to develop opportunities for succession candidates; how to build consensus with the family and leaders on succession plans and finally leaders will learn when and how to let go of their own role in the business.
  64. 64. Exit Planning Books Organizations Aspen Family Business Group An international consulting resource, helping families successfully navigate change to achieve harmony and prosperity. We are a consortium of thought leaders and experts in the family business field with decades of local and international experience. Our expertise lies in our understanding of the complex dynamics of families who share businesses and other assets. Through our ability to foster a shared vision and build trust in the family, we guide our clients through a process of addressing challenges and building sustainability. We combine a professional approach to multigenerational planning with attention to the delicate issues that arise in families of wealth and families in business. We provide safe environments and tools for families and their advisors to assure effectiveness in succession planning and other transitions. Family Business Consulting Group We serve families and the enterprises that they have built by guiding them through the process of building structures, systems and skills for comprehensive strategy, better decision making, stronger competitive advantage, and continuity of enterprises for future generations. With over 2,500 client families in 70 countries, our consultant team has successfully led businesses across industries, family structures, and cultures through the issues, both common and uncommon, faced by families in business together. Family Firm Institute For its global network of professionals, educators, researchers, and family enterprise members, FFI provides opportunities to participate in multidisciplinary educational programs and earn professional designations; enables collaboration at conferences, seminars, and online; and creates a single space for cross-pollination of ideas, expertise, and perspectives to further the field of family enterprise.

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