This document provides an overview of advising clients on buying or selling a small-to-medium sized business. It discusses assembling an advisory team, performing due diligence, creating letters of intent, and financing options. Business valuation methods like rules of thumb, income, asset-based, and market approaches are also covered. The goal is to guide clients through the process and structure deals to bridge valuation gaps.
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Part of the webinar series: Valuation 2021
Valuation Issues in Developing and Executing Buy-Sell AgreementsSkoda Minotti
A buy-sell agreement is one of the most common tools utilized by lawyers and business advisors in protecting their business owner clients. In this presentation, you will learn about valuation issues that are critical to buy-sell agreements, such as the use of formulas and valuation discounts, which can significantly impact the parties to the agreement if and when it is triggered.
Early Valuation for Entrepreneurs by John ShumatePlatform Houston
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John Shumate is CEO of ValuLogik and has focused his career on working closely with venture-backed companies. He has worked with hundreds of early- and growth-stage companies across many industries, many of them dealing with highly-technical products or business models. He believes strongly in the use of carefully-applied rigor to rationalize financial models, business plans, valuations, and other quantification tools. He has over a decade of financial experience, including buy-side and sell-side mergers and acquisitions; debt and equity capital raises; strategic consulting; complex financial modeling; business plan development; equity and derivative valuation; and venture incubation. John recently served as Vice President at Blue Equity, a growth-stage private equity firm, and Chief Financial Officer at BellaNovus, an early-stage medical device development company. He was a Senior Associate at bCatalyst, a business incubator and financial services provider to early-stage companies. He has also held analytical roles for Ethicon-Endo Surgery, a division of Johnson & Johnson, and Hilliard-Lyons, a regional brokerage house. John attended the Wharton School at the University of Pennsylvania, where he received a B.S. in Economics and dual concentrations in Finance and Management
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As the buying journey has become more complex, dynamic, and iterative, sales professionals often find themselves in a daily state of crisis — reacting to customer changes and competitor moves.
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If you are an owner of an investment management firm and have not reviewed your buy-sell agreement recently, you’re not alone. Buy-sell agreements are frequently the most forgotten corporate document in the file. No one thinks about buy-sell agreements until a triggering event, and then it becomes the only thing they think about. Partners are often surprised by the language in the contract they signed many years before, and too often a serious dispute breaks out between partners over what the words in the agreement mean, or were intended to mean. The purpose of this whitepaper is to equip ownership to understand the consequences of their buy-sell agreements before a controversy arises, and to make informed decisions about the drafting or re-drafting of the agreement that promote the financial health and sustainability of their firm.
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Helping Your Client Buy or Sell a Small-To-Medium Sized Business
1. A Global Reach with a Local Perspective
Helping Your Client Buy or Sell
a Small-To-Medium Sized
Business
www.decosimo.com
Mike Costello – mikecostello@decosimo.com
2. Today’s Presentation Will Include:
A tentative guide to advising buyers/sellers at the
outset of the process
An overview of relevant business valuation methods
A discussion of your client’s various financing
options
3. A Global Reach with a Local Perspective
www.decosimo.com
Part One: A Tentative Guide to Advising
Buyers/Sellers at the Outset of the Process
4. Preliminary Steps
1. Assembling an Advisory Team
2. Business-For-Sale Market Analysis
3. Performing Due Diligence
4. Creating a Non-Disclosure Agreement
5. Structuring the Transaction
6. Drafting the Letters of Intent for the Stock and Asset
Purchase Agreements
7. Selecting and Using a Transaction Advisor
5. Assembling a Professional Advisory Team
An effective transaction team requires many types of
expertise and knowledge.
• Knowledge of the client’s Circumstances and
Objectives
• Business Growth
• Sales or Mergers of the Business
• Tax Planning
• Business Valuation
6. Business-For-Sale Market Analysis
Impartial assessment of the business is necessary
Income Approach
Market Approach
Determine reasonable expectations
Determine potential buyers of the business
Identify what is hindering the company’s value?
List the strengths of the business
• What does it do well?
7. Performing Due Diligence
The seller is nearly always more informed about the
property being transferred than the buyer.
Information has a cost
Examples include Legal, Financial, and Operational Costs
Focus on the key issues
Set up an appropriate scope of work
• In context of the budget and areas of focus
Close portions of the information gap between buyer
and seller
Locate deficiencies in the information provided
8. Creating a Non-Disclosure Agreement
Primary purpose of a “NDA”
Keep out of a competitor’s hands
Remedies for breaching the agreement
Establish limits
Tailor it to your specific circumstance
9. Structuring the Transaction
Bridge the “Valuation Gap”
Noncash Payments
• Earnouts
• Seller Notes
• Rollover Common Equity
Employment Agreements
Non-Compete Agreements
Is the considered value consistent (or better than)
expectations for the business?
10. Drafting the Letters of Intent for the Stock
and Asset Purchase Agreements
Lay out the intended terms of the potential transaction
Stock or asset exchanged
Expected Purchase Price
Remaining Considerations
Duration of Exclusivity
Describe the obligations and promises assumed
11. Selecting and Using a Transaction Advisor
Step 1: Determine what sort of professional will best meet
the company’s needs
• Make your inquiries
• Cultural Fit and Comfort with Banker
• Fees
Sellers: Compensate with Value Added
10% to 15% of total transaction
Buyers: Decrease Percentage Fee as Transaction Size
Gets Larger
Retainers
12. A Global Reach with a Local Perspective
www.decosimo.com
Part Two: Business Valuation Methods
13. Methods of Valuation
Rules of Thumb
Asset-Based Methods
Income Methods
Market-Based Methods
Identifying and Obtaining the Necessary Documents
Maximize Your Use of the Business Appraiser
14. Rules of Thumb
Simple and convenient way to estimate a company’s
value
Tests the reasonableness of other methods of valuation
Multiple-of-Revenue Method
Applies a multiple to a company’s revenue, such that the
result is a value comparable to a typical transaction price.
Limitations
Ex. Different sources providing different rules of thumb
15. Asset-Based Methods: “Asset Approach”
Principle of Substitution
Net Asset Value Method
• Book Value vs. Current Economic Value
Illustrates contribution of each line item
16. Income Methods of Valuation
Foundation = Present Value Mathematics
Two basic inputs:
Stream of Expected Future Benefits
Conversion Factors from Future to Present Value
Economic Income (Gross or Net) May be Grouped
Into One of Three Categories:
1) Payouts
2) Cash Flow
3) Some Measure of Accounting Earnings
Discounted Cash Flow
17. Market-Based Methods of Valuation
Compares the subject to similar businesses that
have been sold
3 Market-Based Methods
Guideline Public Company Method
Merger-and-Acquisition Method
Same-Company-Transaction Method
18. Identifying and Obtaining the Necessary
Documents
The Goal = Transparency
Any document withheld could caution the buyer
Coordinate one comprehensive request at the
beginning of the engagement
Categories of documents to request include:
• Financial Records of the Seller
• Legal Documents
• Information on the Business That is Related Directly
to Operations
19. Maximize Use of Business Appraiser
Hire a quality expert and early in the process
Characteristics of a quality appraiser:
• Estimate the value of the selling enterprise
• Assess current risks involved in company operations,
finances, and managerial organization
• Provide suggestions for reducing or eliminating risks
prior to the transaction
20. A Global Reach with a Local Perspective
www.decosimo.com
Part Three: Know Your Client’s Options
For Financing the Deal
21. Financing the Deal
Sources of Financing
Seller Financing Dos and Don’ts
The “Ins and Outs” of Asset-Based Lending
Working With the SBA and Other Nonprofit Sources
Venture Capital and Other Alternative Financing
Methods
22. Sources of Financing
Banks have recently decreased the percentage of a
capital structure that they are willing to lend
Best way to combat decreased lending: Increase
Value
Reduce riskiness of the business
• Reduce customer/supplier concentration
• Non-compete agreements with key employees
• Sufficient debt coverage ratios and strong margins
Traditional Equity Financing has its advantages and
disadvantages
23. Seller Financing Dos and Don’ts
Do:
Understand your client’s objectives and preferences
before analyzing the value of the arrangement
Ask the client questions concerning their perception
of the value of cash today in comparison to other
financing
Consider the proposed terms of seller notes and the
value of the notes
Don’t:
Base earnouts on subjective matters
Leads to costly litigation and blurred expectations
24. The “Ins and Outs” of Asset-Based Lending
Alternative to traditional debt financing
arrangements
Company borrows a loan that is backed by specific
assets
Advisors often participate in these processes
• Investment Bankers, Loan Services, Attorneys,
Independent Accountants, Trustees, Underwriters,
Rating Agencies, and Guarantors
Can be created using any business asset
• Leads to a high quality loan which increases lending
opportunities
25. Working With SBA & Nonprofit Sources
SBA- Established to assist small businesses in obtaining
the capital they need to grow
Three main categories of programs that SBA provides:
Debt Financing
Surety Bonds
Equity Financing
Non-profit Examples:
Women’s Venture Fund
Operation HOPE
FAME Renaissance
Minority Business Development Agency
26. Venture Capital and Other Alternative
Financing Methods
Traditional sources of financing may not provide
sufficient capital at manageable rates to every
company
Alternative Options Include:
Venture Capital
Mezzanine Debt
Debt Private Placement
Private Equity Financing
Equity Private Placement
Recapitalizations
Strategic Sales
27. Contact Information
Mike Costello CPA, ABV, CFE
mikecostello@decosimo.com
On LinkedIn:
www.linkedin.com/in/mikecostello
The contents and opinions contained in this article are for informational purposes only. The information is
not intended to be a substitute for professional accounting counsel. Always seek the advice of your
accountant or other financial planner with any questions you may have regarding your financial goals or
specific situations.