Selling Your Family or Entrepreneurial Business

Selling Your Family or
Entrepreneurial Business
Positioning and Preparing Your Company for a Successful Exit
Copyright © Tractus Asia Ltd. 2018
Presented by
Richard J. Smith
Head of Corporate Finance
Tractus Asia
June 14, 2018

2
Reasons for Selling a Business
No Succession
Business Peak
Business Down
Non-core Business
Bored
Other Opportunities

3
What is Your Business Worth?
A business is only worth what a buyer is
willing to pay for it……
…a Transaction only occurs when there is
both a willing buyer and willing seller.
and….

4
Factors Affecting Firm Value
• Revenue (size)
• Profitability
• Cash flow
• Growth
• Track record
• Reliability of revenue stream
• Continuity of management
• Diverse customer base
• Positive macro economic / industry outlook
• Barriers-to-entry
• Strong corporate governance and financial
controls/reporting

5
Key Valuation Methodologies
• Discounted Cash Flow (DCF)
• Market or Comparable Company Approach
• Public company
• Transactions
• Buy or Build / Replacement Cost

6
DCF uses future cash flow projections and discounts them to arrive
at a present value estimate.
Example: What is the present value (PV) of $100 over each of
the next 5 years with a discount rate of 10%?
The discount rate reflects the cost-of-capital (funding) and the
risk of the investment to quantify the time value of money.
The biggest problem with DCF analysis for smaller private
companies is that it is difficult to accurately project future cash flows
and determine an appropriate discount rate
Discounted Cash Flow (DCF)
Year 1 Year 2 Year 3 Year 4 Year 5 Total
Cash Flow ($) 100.0 100.0 100.0 100.0 100.0 500.0
Present Value ($) 90.9 82.6 75.1 68.3 62.1 379.1

7
Market or Comparable Company Approach
Evaluates the value of a company using the metrics of other businesses of
similar size in the same industry on the assumption that similar companies
will have similar valuation multiples.
Valuations are usually expressed as a multiple of key metrics such as
price/earnings (PE ratio), price/book, etc.
If earnings = $100 and PE Ratio = 15 (15 times earnings)
Value = 15 X $100 = $1,500
Common metrics for assessing firm value include:
• EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization)
• EBIT (Earnings before Interest and Tax)
• Revenue
• Earnings
• Book Value

8
Public Market Multiples for Selected Industries
Industry Global Emerging Market
Net
Margin
EV/
Sales
EV/
EBITDA
Net
Margin
EV/
Sales
EV/
EBITDA
Advertising 4.51% 1.57 9.48 4.00% 1.76 15.04
Apparel 5.75% 2.04 12.02 3.88% 1.35 13.81
Beverage (Soft) 8.62% 3.19 16.08 7.01% 1.71 10.93
Business & Consumer Services 5.02% 1.76 12.98 5.24% 1.87 18.58
Drugs (Pharmaceutical) 11.37% 3.94 13.96 10.38% 3.67 20.47
Electronics (Consumer & Office) 1.95% 0.76 8.63 1.53% 0.65 10.95
Food Processing 5.49% 1.69 13.01 4.44% 1.44 12.97
Furn/Home Furnishings 6.56% 1.41 11.95 7.37% 1.53 13.19
Healthcare Products 9.29% 4.10 17.21 9.64% 4.64 22.27
Household Products 10.86% 3.07 16.24 8.23% 2.81 23.30
Packaging & Container 5.03% 1.53 10.25 5.23% 1.67 11.73
Paper/Forest Products 5.28% 1.42 9.25 6.29% 1.99 10.69
Retail (Distributors) 2.87% 0.80 12.16 0.82% 0.61 12.46
Retail (General) 2.35% 0.82 9.72 3.59% 1.16 11.54
Retail (Special Lines) 3.67% 1.05 9.01 2.77% 1.13 11.88
Total Market (without financials) 6.11% 1.87 11.18 6.37% 1.75 10.84
Source: http://www.damodaran.com
January 5, 2018

9
Discounts and Premiums on Public Market Multiples
Most buyers will discount the
“comparable value” due to a
lack of liquidity as the shares
in a private company are not
publicly traded and the
business is usually smaller
than listed companies.
The illiquidity discount for a
private firm is typically
between 20-30% and does not
vary across private firms.
Buyers are often willing to pay over
the current market price of a
publicly traded company in order to
acquire a controlling share in that
company on the basis that they
can manage the business better
and extract more value.
The control premium for a public
firm is typically between 30-50%.
Discount for Lack of
Marketability (DLOM)
Control Premium

10
Build or Buy / Replacement Cost
• The buyer weighs the cost of acquiring an existing business compared to the
cost of starting up from scratch
• Used by Strategic buyers
• Key market entry strategy decision
• Buyer must estimate:
✓ Investment costs
✓ Operating costs
✓ Revenue and timing of revenue
Sellers need to be aware that buyer will almost always UNDERESTIMATE the
cost of entering a market
✓ Over optimism
✓ Lack of knowledge
✓ Need to please upper management / sell plans internally
✓ Personal objectives

11
Size Matters: Bigger is Better
EBITDA Size
US$ 0K –
US$ 999K
US$ 1M –
US$ 4.99M
US$ 5M –
US$ 9.99M
US$10M –
US$ 24.99M
US$ 25M –
US$ 49.99M
Number of investments 18 48 55 27 4
Average size of investment
(US$ million)
2 3.5 15 25 70
Expected time to exit (years) 3 5 5 5 5
Average EBITDA multiple 5.0 6.5 7.0 7.5 8.5
Median total expected returns 27.5% 25% 23% 21% 20%
Source: Pepperdine Private Capital Markets Project, Private Capital Markets Report – 2016
General Characteristics – Buyout Transactions

12
A Note on Terms: Equity Value / Enterprise Value
Interest
Bearing
Debt
Equity /
Share
Value
Cash and
Equivalents
Enterprise
Value
(value of
business)
Net Debt
Quoted by:
Share Price or
Market Cap
Quoted in:
• Comparable Transactions
• DCF
Enterprise
Value
Debt
Cash & Cash
Equivalents
Equity (Share)
Value
Company A $1000 - $500 + $100 = $600
Company B $1000 - $0 + $100 = $1100

13
Who Are the Potential Buyers
Strategic Investors
• In the business or related segment
• Strategic and financial objectives
• Synergies
• Lower hurdle rates
• Better understand and can manage business risk
IPO
• Not a short-term exit option
Financial Investors
• Financial returns
• More concerned about risk
• Need management team
• Willing to work an asset
• Ultimately focused on Exit

14
Who is the Best Buyer?
If you are the seller of a private business, you will maximize value, if you can
sell to:
• A long term investor
✓ Places low value on liquidity
• Who is well diversified
✓ Lower cost-of-capital (lower discount rate)
• And does not think too highly of you (as a manager)
✓ Does not need to rely on you to manage the business
In Theory a Strategic Buyer should be willing to pay the most…
but…
…private equity/buyout funds compete with strategics and IPOs all the time
(by outbidding them)

15
Preparation for Due Diligence

16
Due Diligence
Due diligence is an investigation or audit of a
potential investment to confirm all facts, such as
reviewing all financial records, corporate records,
contracts, regulatory filings, customer information plus
anything else deemed material.

17
Due Diligence: Our Experience
This Guy’s Face Says it All!!

18
How the Private Placement Process Typically Works
Preparation Marketing
Negotiations,
Documentation, Closing
✓ Financial modeling and
valuation
✓ Information
memorandum
✓ Preliminary identification
of potential investors
✓ Contact potential buyers
✓ Roadshow
✓ Expression of interests
✓ Preliminary information
requests
✓ LOI, MOU, or Termsheet
✓ Negotiations
✓ Structuring
✓ Detailed due diligence
✓ Documentation
✓ Closing

19
What We Often See
Ad Hoc Contact Negotiations, Documentation, Closing
✓ Expression of interests
✓ Preliminary information requests
✓ LOI, MOU, or Termsheet
✓ Negotiations
✓ Structuring
✓ Detailed due diligence
✓ Documentation
✓ Closing
Seller and Buyer are Completely Unprepared for Due Diligence
Reality is a Big Divergence from Initial Expectations

20
Timeliness is Important
Marketing
Contact potential buyers
Roadshow
Expression of interests
Preliminary due diligence
LOI, MOU, or Termsheet
Negotiations, Documentation, Closing
Negotiations
Structuring
Detailed due diligence
Documentation
Closing
The longer the time between first contacting a buyer to
closing, the more chance something will go wrong and the
deal will fail

21
Why?
&%

22
Things we Typically See in Family Businesses
Lacking professional accounting,
financial control, and reporting
Highly dependent on
owner/entrepreneur
Creative and aggressive
tax planning
Mixing of personal and
business in accounts
Strong emotional
attachment to business

23
How the Private Placement Process Should Work
Pre-Preparation Preparation Marketing
Negotiations,
Documentation,
Closing
✓ Accounting
✓ Contracts
✓ Intellectual
property
✓ Corporate
secretarial
✓ Restructuring
✓ Tax Planning
✓ Financial
modeling and
valuation
✓ Information
memorandum
✓ Preliminary
identification of
potential
investors
✓ Contact potential
buyers
✓ Roadshow
✓ Expression of
interests
✓ Preliminary Due
Diligence
✓ LOI, MOU,
Termsheet
✓ Negotiations
✓ Detailed due
diligence
✓ Structuring
✓ Documentation
✓ Closing

24
…and improve the odds of closing the
deal
Preparation is Critical
Pre-Preparation Preparation Marketing
Negotiations,
The time spent up-front….
Preparation Marketing
Negotiations,
…should compress the time between
investor contact and closing…

25
• 70% of deals take more than 6 months to close
• Almost half will take 9 months or more to close
Timing: Not a Fast Process
Source: Pepperdine Private Capital Markets Project, Private Capital Markets Report – 2016

26
Consider……
The sale of your company is likely to be the
most important sale of your life!!!

27
Most Common Mistakes
• Poor understanding of accounting and finance
• Potential tax problems
• Failure to disclose problems
• Unrealistic expectations on firm value
✓ Misunderstanding “goodwill”
✓ Perception on “who” captures the value of synergies and value
creation post-acquisition
✓ Thinking your business is “different”
• Lack of understanding of the buyer
✓ Thinking big companies can afford big prices
✓ Thinking they “need to do a deal”
✓ Understanding that “this is just a job” for them
• Failure to run a proper sale process
✓ Ad hoc/one buyer at a time
▪ Serial monogamy may work in personal relations, but it is
not advantageous is a sale of a business
• Underestimating time and resources required to get a deal done,
particularly due diligence

28
Key Recommendations
Don’t Make The
Most Common
Mistakes

29
Key Recommendations
• Do your upfront work
✓ Clean up any problems
✓ Prepare for due diligence
• Run a proper private placement process to
maximize competition
✓ Bidding pressure
✓ Time pressure
• Be realistic in objectives
• Maintain focus on running the business during
the sale process
• Hire qualified accounting, tax, finance, and
legal advisors

30
Thank you
Shanghai
Hong Kong
Yangon
Bangkok
Ho Chi Minh City
Singapore
Jakarta
Chennai
New Delhi
Los Angeles
Member of the Socius Group
Richard Smith
Head of Corporate Finance
richard.smith@tractus-asia.com

Selling Your Family or Entrepreneurial Business

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