What is Your Business Worth ?

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Did you know that typically a business is a owner\’s largest source of wealth creation? Did you know however that only 20% of all businesses are eventially sold? Do you have an exit strategy? Do you know how to capture and build the value of your business? We can help.

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  • Begin Seminar Prepare: Give your resume to the host for presenting you Set up computer and projection Test computer and projector on all slides in file Test lighting with these slides Test pointer or other electronic items Test sound system for clarity in back of room Items needed in seminar: Small pad of lined paper and pen for each student Student guidebook Murphy Business materials selected for this program Easel with pad of large paper and several color markers Introduction: Say: Good Morning. I am _______ of Murphy Business and Financial Services in Clearwater, Florida. Today, I am going to act as your guide through the most fascinating and frustrating episodes of our business lives. Specifically, the selling or buying of your business. We thank you very much for joining us today. We are going to discuss the process of selling and buying a closely held business. We will provide the tour guide and I hope that you will offer some particular questions and observations of this process as well. To begin, lets discuss the typical situation you might find if you could listen in to a business owner and an individual who is trying to buy a business.
  • Introduce the Firm Time: __________ Slide opens with first click Point: Read slide. Add one comment per point Point: Credentials: Identify Murphy Business brokerage and valuation credentials by name: Certified Business Intermediaries in the firm Member of: Business Brokers of Florida, charter membership Institute of Business Appraisers International Business Brokers Association M&A Source mid-market intermediaries Business Brokers Network Time: __________
  • Buyers’ Worries Time: __________ 1. Click each point down one at a time. 2. Have Fun with this one too. Point: Typical issues with most small companies REGARDLESS of industry Point: End with reference to Sellers same worries. ASK: Aren’t both worrying about the same general things?
  • Why People Sell a Business Time: __________ 1. Click each point down one at a time. Point:: Say each point and add ONE comment on each reason. Point:: Most common reasons for sale 1) Burnout 2) Retirement SAY: Financial problems are far down the list. Therefore “good” businesses sell all the time.
  • The Small Business Market in US Time: __________ Point: Review size categories by revenue- Read from slide Click to open % of Businesses column Say: Please note, small companies make up a huge percentage of the US market. Time: __________
  • How Many Businesses Sell Time: __________ 1. Slide opens partial data on click Say: These are figures from throughout the U.S. Point: Review size categories by revenue- Read from slide Say: Let’s note the total number of business sold by each size category. Time: __________
  • How Many Businesses Sell Time: __________ Point: 2. Click to open right two columns of data: Actual sales and % sold. Say: Please note, many more small companies are for sell than larger ones, yet fewer available actually do sell. Say: Now let us look at all these numbers in a more helpful graph. Time: __________
  • How Many Businesses Sell Time: __________ 1. Slide opens all data on click Point: Review size categories by revenue- Read from slide Point: SAY: As a percentage of those available for sale, larger businesses are twice as likely to sell than smaller ones. Point: SAY: There is an old saying in finance, “The trend is your friend.” If you are thinking that you might sell your business “one day”, this major trend is very important to you. Time: __________
  • The Optimal Business Transfer Process Time: __________ 1. Slide opens first question. Click to open each point and briefly discuss as appropriate. READ SLIDE and discuss. SAY: last point on slide: Problem. Time: ___________
  • Using Easy Rules of Thumb Time: __________ Slide opens Chart of Companies A & B. SAY: Many industries know general “rules of thumb” that tradition says determine the value of those companies in that industry. Let’s look at one of these rules of thumb. Review case study data briefly. Compare and contrast Company A with Company B. WRITE ON EASEL: For example, Same revenue x .25 (example multiple) = $ 3,000,000 estimated value for both A and B. Click to open question at bottom of slide. READ SLIDE and discuss. POINT: Rules of Thumb are true, unless they are not. Easy is many times just that, easy; not right. Take survey of participants and record on easel. Time: ___________
  • The Optimal Business Transfer Process Time: __________ 1. Slide opens all data. SAY: Our data comes from three sources comprising over 10,000 recent, actual small business transactions. YELLOW: Business Brokers of Florida actual database BLUE: Sanders national studies of small businesses RED: Shannon Pratts national database of larger companies SAY: A solution to our problem is finding real market valuations. Here are current valuations we see in our markets. 1. Distribution companies 2.8 x Discretionary Earnings (DE) (PRESENTOR think DE is similar to SDCF) 2. Manufacturing companies averaged 3.3 x DE 3. Retail businesses averaged 2.1 x DE 4. Service companies averaged 2.3 x DE SAY: Notice how closely these new, sophisticated sources track within industry sectors. Good business brokerage firms now use this data to better value their clients’ businesses. I might mention that this information didn’t exist only a decade ago. Time: ___________
  • Definition of Good Business Time: __________ Slide opens first question. Click to open each point and briefly discuss. SAY: Both parties are negotiating to transfer a good business. If either doesn’t believe that, the transaction will stop abruptly. SAY: So what does the current market define as a “good business”? Let’s outline the results we see from over 1000 transactions we have completed in Florida. Click each point and read. Discuss as appropriate. Time: __________
  • Definition of Good Business Time: __________ Slide opens first question. Click to open each point and briefly discuss. SAY: Both parties are negotiating to transfer a good business. If either doesn’t believe that, the transaction will stop abruptly. SAY: So what does the current market define as a “good business”? Let’s outline the results we see from over 1000 transactions we have completed in Florida. Click each point and read. Discuss as appropriate. Time: __________
  • Definition of Good Business Time: __________ Slide opens first question. Click to open each point and briefly discuss. SAY: Both parties are negotiating to transfer a good business. If either doesn’t believe that, the transaction will stop abruptly. SAY: So what does the current market define as a “good business”? Let’s outline the results we see from over 1000 transactions we have completed in Florida. Click each point and read. Discuss as appropriate. Time: __________
  • Definition of Good Business Time: __________ Slide opens first question. Click to open each point and briefly discuss. SAY: Both parties are negotiating to transfer a good business. If either doesn’t believe that, the transaction will stop abruptly. SAY: So what does the current market define as a “good business”? Let’s outline the results we see from over 1000 transactions we have completed in Florida. Click each point and read. Discuss as appropriate. Time: __________
  • Definition of Good Business Time: __________ Slide opens first question. Click to open each point and briefly discuss. SAY: Both parties are negotiating to transfer a good business. If either doesn’t believe that, the transaction will stop abruptly. SAY: So what does the current market define as a “good business”? Let’s outline the results we see from over 1000 transactions we have completed in Florida. Click each point and read. Discuss as appropriate. Time: __________
  • Slide opens on click. Time: __________ SAY: I will finish with the hope that today you gained an idea or two that will help you in your businesses and the decisions that all private company owners and buyers must make someday. I have greatly enjoyed our discussion together. Be assured that I will take some of your ideas back to my business as well. I thank you for your interest and your time today. Close. Do any Housekeeping details Time: __________
  • What is Your Business Worth ?

    1. 1. How Much is My Business Worth? Murphy Business and Financial Corporation @2008, all rights reserved © Murphy Business & Financial Corporation, 2008
    2. 2. Scott A. Saunders <ul><li>Murphy Business and Financial </li></ul><ul><li>Consultant </li></ul><ul><li>Owned Multiple Companies </li></ul><ul><li>B.S. University of Delaware </li></ul><ul><li>MBA Virginia Tech </li></ul><ul><li>Thirty Years Small Business / Fortune 100 Company Experience </li></ul>
    3. 3. About Murphy <ul><li>Murphy Business and Financial Corporation </li></ul><ul><ul><li>Hundreds of Professional Intermediaries </li></ul></ul><ul><ul><ul><li>Most are former business owners, CEO’s, CFO’s, or CPA’s </li></ul></ul></ul><ul><ul><ul><li>Thousands of closed transactions </li></ul></ul></ul><ul><ul><ul><li>Most Professional transaction firm with offices throughout the U.S. </li></ul></ul></ul><ul><ul><ul><li>National brokerage and valuation certifications </li></ul></ul></ul>
    4. 4. “ Top 10 List” <ul><li>10. My buddy just sold his business for “X” </li></ul><ul><li>9. Another Franchisee just sold their business for “X” </li></ul><ul><li>8. That’s the amount I need to retire </li></ul><ul><li>7. That’s the amount I need to maintain my lifestyle and so my spouse can drive the BMW </li></ul><ul><li>6. That’s what I need to cover the debt and come out whole </li></ul>
    5. 5. “ Top 10 List” <ul><li>5.That’s what my CPA told me it was worth </li></ul><ul><li>4. A 25% return is a pretty damn good return – stock market math </li></ul><ul><li>3. All you have to do to grow the business is _____ </li></ul><ul><li>2. That feels like a good number </li></ul><ul><li>1. Because I’m the owner and that’s what I say it’s worth! </li></ul>
    6. 6. Why Know What Your Business is Worth? <ul><li>Sell </li></ul><ul><ul><li>Am I Getting a Fair Price </li></ul></ul><ul><li>Exit Strategy </li></ul><ul><ul><li>Is Now the Right Time </li></ul></ul><ul><li>Retirement </li></ul><ul><ul><li>Can I Sell for Enough Money </li></ul></ul><ul><li>Estate Planning </li></ul><ul><li>Loans/Financing </li></ul>
    7. 7. Why Do People Sell Their Business? <ul><li>Burn out </li></ul><ul><li>Illness </li></ul><ul><li>Divorce, disputes </li></ul><ul><li>Retirement – no heirs </li></ul><ul><li>Insufficient capital to grow </li></ul><ul><li>Achieve estate liquidity </li></ul><ul><li>Get discovered; receive an offer to buy </li></ul>
    8. 8. U. S. Small Business Market Source: International Business Brokers Association, used with permission Category Total Employees Revenues % of Total Businesses General Business <10 <750K 80 Larger Business <20 750K – 2mm 10 Mid Size Company <100 2mm – 30mm 9 The Larger Company >100 >30mm 1
    9. 9. How Many Sell? Source: International Business Brokers Association, used with permission Category Revenues # of Businesses Estimated # for Sale Actually Sell % General Business <750K 4,320,000 864,000 Larger General 750K – 2MM 594,000 173,000 Mid Size Company 2MM – 30MM 486,000 73,000 Larger Company >30MM 54,000 8,000
    10. 10. How Many Sell? Source: International Business Brokers Association, used with permission Category Revenues # of Businesses Estimated # for Sale Actually Sell % General Business <750K 4,320,000 864,000 157,000 18 Larger General 750K – 2MM 594,000 173,000 43,250 25 Mid Size Company 2MM – 30MM 486,000 73,000 21,000 29 Larger Company >30MM 54,000 8,000 2,500 31
    11. 11. Percentage Sold in US by size category - 2005 %
    12. 12. Why Deals Don’t Close
    13. 13. Murphy’s View of: Why Deals don’t close <ul><li>Sellers </li></ul><ul><ul><li>Not Prepared to Sell </li></ul></ul><ul><ul><li>Unrealistic Expectations of Sales Price </li></ul></ul><ul><ul><li>Proceeds of Sell do not match Exit Strategy </li></ul></ul><ul><ul><li>There is no Exit Strategy </li></ul></ul><ul><ul><li>Business is Overpriced </li></ul></ul><ul><ul><li>Not enough information about the business to attract a reasonable price </li></ul></ul>
    14. 14. Murphy’s View of: Why Deals don’t close <ul><li>Buyers </li></ul><ul><ul><li>Not Prepared to Purchase </li></ul></ul><ul><ul><li>Unrealistic Expectations of Purchase Price </li></ul></ul><ul><ul><li>Lack of funds to complete transaction </li></ul></ul><ul><ul><li>Lack of applicable Business Experience </li></ul></ul><ul><ul><li>Uneducated about the purchasing process </li></ul></ul>
    15. 15. How Do Valuations Help <ul><li>80% of businesses listed don’t sell </li></ul><ul><li>92% of businesses with a valuation sell </li></ul><ul><ul><ul><ul><ul><li>Why? </li></ul></ul></ul></ul></ul><ul><li>A Valuation bridges the information gap </li></ul><ul><li>A Valuation provides a starting point for negotiations </li></ul><ul><li>A valuation clearly states the economic value of a business </li></ul><ul><li>A buyer is more confident in the numbers and information, and </li></ul><ul><li>Is more willing to engage with an offer and due diligence </li></ul>
    16. 16. There are Typically “3” Parties Involved in the Sale of a Business Seller Bank Buyer
    17. 17. Three Basic Types of Buyers <ul><li>Individual </li></ul><ul><ul><li>40-60 years old </li></ul></ul><ul><ul><li>Exiting the Corporate World </li></ul></ul><ul><li>Financial </li></ul><ul><ul><li>Enormous Segment of the Buying Market </li></ul></ul><ul><ul><li>Cash Flow Covers the Debt </li></ul></ul><ul><li>Strategic </li></ul><ul><ul><li>Expecting synergies with their other holdings </li></ul></ul>
    18. 18. Three Standard Approaches to Valuations <ul><li>Market </li></ul><ul><li>Income </li></ul><ul><li>Asset </li></ul>
    19. 19. Valuation for Purposes of Sale <ul><li>Most small businesses are sold on the strength of earnings -- not assets </li></ul><ul><li>Today, the Market Method is the most effective way of valuing a small business </li></ul>
    20. 20. Market Approach <ul><li>Most Direct Approach </li></ul><ul><li>Uses Multiples Observed in the Sale of Similar Assets in the Market </li></ul><ul><ul><li>Price/Seller’s Discretionary Earnings </li></ul></ul><ul><ul><li>Price/Revenue </li></ul></ul><ul><ul><li>Price/EBITDA </li></ul></ul><ul><li>For Example, Value = (Price/SDE) X </li></ul><ul><li>Subject’s SDE </li></ul>
    21. 21. Seller’s Discretionary Earnings <ul><li>Most Small Business Owners Work to Maximize Lifestyle and Minimize Taxes! </li></ul><ul><li>Re-Cast Earnings to Reflect Owners True Benefit and Market Values </li></ul><ul><li>Remove Debt Service to Allow a Buyer to Evaluate Based on Their Financing Package </li></ul>
    22. 22. Determining Business Value     Seller's         Asking Discretionary Annual Multiple Multiple Business Price Income (SDE) Sales of Sales of SDE Cold Stone Orange County, CA $230,000 $80,000 $210,000 1.10 2.88 Cold Stone Orange, County, CA $270,000 $65,000 $210,000 1.29 4.15 Cold Stone Los Angeles, CA $450,000 $70,000 $395,000 1.14 6.43 Cold Stone Maricopa, AZ $350,000 $106,000 $432,000 0.81 3.30 Cold Stone Las Vegas, NV $475,000 $140,000 $415,313 1.14 3.39 TOTALS $1,775,000 $461,000 $1,662,313 1.07 3.85
    23. 23. Factors to Consider (Rev. Ruling 59-60) <ul><li>The nature of the business and the history of the enterprise from its inception </li></ul><ul><li>The economic outlook in general and the condition and outlook of the specific industry in particular </li></ul><ul><li>The book value of the stock/interest and the financial condition of the business </li></ul><ul><li>The earnings capacity of the company </li></ul><ul><li>The dividend-paying capacity </li></ul><ul><li>Whether or not there is goodwill or other intangible value </li></ul><ul><li>Prior Sales of the stock/interest and the size being valued </li></ul><ul><li>Sales of stocks/interests in similar businesses </li></ul>
    24. 24. Using Easy Rules of Thumb Do these two Companies Deserve Equal Market Value? Company A Company B Revenue: 2004 $ 6,000,000 $ 18,000,000 2005 8,000,000 15,000,000 2006 12,000,000 12,000,000 Debt 1,500,000 7,000,000 Equipment Age 3.5 years 20.0 years Owner’s Compensation 350,000 100,000 Owner’s Vacation 6 weeks None Similar industries, customers, and revenue Pre-tax Net Income = $1,500,000
    25. 25. Current Market Valuations Multiples of Discretionary Earnings ave. 2.8 ave. 3.3 ave. 2.1 ave. 2.3
    26. 26. The Market’s Definition of a Good Business <ul><li>Covers the debt service of acquisition and provides adequate working capital </li></ul><ul><li>Pays the owner/manager a reasonable salary </li></ul><ul><li>Provides a reasonable return on the cash invested </li></ul><ul><li>Creates a safety cushion of cash flow for unforeseen changes in the business </li></ul>
    27. 27. Debt Service Capability “Can I afford the business?” Discretionary Earning Annually Monthly Debt Service Coverage SDE (Net cash available to buyer) $115,665 $9,639 Less: Debt Service ($42,404) ($3,533.65) Less: Owners Salary ($50,000) $4,166 Less: Operating Capital ($10,361) ($4,167) 1.25% Coverage Ratio Excess Cash Flow to New Owner $12,900 $1,938 Total Buyer Cash Flow $73,261 $6,105.12 Net cash to buyer 109.59% % return on down payment
    28. 28. Your Preparation for a Valuation <ul><li>3-5 years of tax returns and financials </li></ul><ul><li>List of assets </li></ul><ul><li>Any appraisals done on the equipment </li></ul><ul><li>All lease agreements – equipment, facility etc. </li></ul><ul><li>Fair market value of rent is real estate is owned by the business or business owners </li></ul><ul><li>AR/AP aging report </li></ul><ul><li>Business plan and projections </li></ul>
    29. 29. Broker Opinion of Value vs. Certified Valuation <ul><li>BOV - One direct market data method plus a justification sanity check </li></ul><ul><li>Performed as a brokerage service and not a formal valuation </li></ul><ul><li>Frequently accepted by lending institutions </li></ul><ul><li>Certified Valuation – Performed by a certified valuation expert </li></ul><ul><li>Uniform standards of professional appraisal compliant </li></ul><ul><li>Multiple market data methods plus other approaches is applicable </li></ul>
    30. 30. Summary <ul><li>Most businesses are owner’s greatest source of wealth </li></ul><ul><li>Only a small percentage of businesses are sold </li></ul><ul><li>All businesses should have an exit strategy </li></ul><ul><li>Start now to prepare your business for a sale </li></ul><ul><li>Initial valuation starts the process </li></ul>
    31. 31. Next Steps <ul><li>Good books and records </li></ul><ul><li>Be ready to help recast </li></ul><ul><li>Call Scott Saunders at 704.996.0929 or email s.saunders@murphybusiness.com </li></ul>
    32. 32. Thank You for Coming Murphy Business and Financial Corporation @2008, all rights reserved

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