Download - Buying & Selling events gintowt
Intention:SUCCESSFULLY
Buying and Selling a Business in the
Endurance Market
Have been a Buyer (18x)Seller (3x)
Important to Learn from Mistakes But you only get one shot
Since Buyers generally have more experience and resources Rooting for the underdog – most of material is for Seller
Will provide more Practical than Theoretical or Idealistic
Easy and Best Way
Informed & Prepared
Seller
Informed & Prepared
Buyer
How much a business is worthIS NOT
How much will it will sell for.
WORTH:
Sum of Future Cash Flows Discounted at some rate $200,000 in perpetuity at 8% is $1.6M
Market Forces should PUSH PRICE HIGHER
PRICE
Sales Price includes Market Forces
WORTH
Most Common Sale Benchmark: Multiple of Earnings
What did you sell for?How much did you pay?
WHAT’S THE AVERAGE MULTIPLE?
Difficulty in Calculating “Average” or Market Multiple
Everybody LiesSpeculators are LoudMost transactions are PrivateAmbiguous Definition
Six Different “Earnings”
Historic: Trailing 12 mos.
Future: Forward 12 mos.
Reported Earnings
Pro-Forma
With Synergies
Four + Different Prices
Closing Price With Wipeout of Loans From OwnerWith Earnouts (paid from future
growth)With Multi-Year Services Contract
Observed Multiples
Range: 3.0x to 10x+ (and ∞)
Most in the 5x Range +/- 2x
How to Get the Highest Multiple
Factors that Affect the Multiple
Condition of your BusinessGrowth Rate of your BusinessType of Buyer: Strategic or Financial Type of Sale: Auction or Private PlacementCompetitive and Growth of Industry
Your Preparation makes a HUGE differenceYour knowledge and control. Negotiate from
Knowledge
Buyer can gain confidence in what they’re buyingLack of Clarity = Riskier Business = Lower ValuationLack of Organization = More Diligence Effort =
More Cost (Legal & Accounting Fees)Distracted Management. Lost selling time
Type of Buyer: Strategic or Financial
PROS Can pay higher because of
Synergies Understand the business. Faster
discussions You know them or know of them
Cons “Synergies” can be “No Job for you
or Staff” Direction of Business may change May not have the Cash
PROS Need you to run ongoing operations Generally have financing available Have done this before. Faster
Cons Generally lower multiple than
Strategic May not Understand Business Playing on their Home Court Are going to exit sometime
Type of Process: Auction or Private Placement
PROS Potentially Higher Multiple from
created Scarcity and Ego Diversity of Interested Parties is
Surprising
Cons You competition will know you plan Requires multiple presentations.
More complicated, expensive, and distracting. External resources likely needed
Hard to keep quiet in the market –affecting employees, sponsors, governments.
PROS Faster Less distraction to staff, stakeholders May get Premium for Exclusivity
Cons May miss the highest paying buyer
What you can do to Maximize the Multiple
Pre-Sale Preparation AreasAccountingPro-Forma AdjustmentsRecordsEmployee Items Legal ItemsOther Information & Metrics
Accounting See “Financial Management for Event Businesses” for explanation of Cash
versus Accrual versus Full GAAP accounting and which you should use. You definitely need
1. Profitability by Event by year.
2. Overhead either direct or allocated
3. Owner expenses clearly identified
4. One-Time items clearly identified
5. Capital equipment purchases identified
Make sure they’re complete. Net Income on Income Statement = Net Income on Balance Sheet = Net Income
on Tax Return.
Tax Returns
Carry a lot of importance You wouldn’t lie to “The Man”
Bank Reconciliations
You Can’t Fool Cash
Contracts Have available and organized.
Bonus for Summary Tables
Permits: Even though they’re generally annual
Contractors Business Insurance Leases Loans
Sponsorship Municipal Key Vendors Employment
Employee Items
Rosters & Org Charts Benefits Plans & Handbooks
Medical Paid Time Off Layoff
Retirement Plans Exempt / Nonexempt Workers Comp categorization.
Legal Items
Articles of Incorporation Bylaws Shareholder Certs Board Minutes Certificate of Good Standing All the other ignored stuff
Other Legal & Intellectual Property
Lawsuits (Current & Settled) Databases URLs Trademarks Investments IT system Software
Other Items
Registration trends: Return Runners?Economic Impact Studies Industry and competitive researchDigital trafficCourse Maps
Pro-Formas Things you want extra credit for Unusual expenses that Buyer won’t incur
Start up expenses for new products, courses New events just gaining traction Asset Purchases that were expensed Owner Expenses
Costs reductions identified but not implemented Sponsorship deals signed but not received
Have a MULTIPLE impact
Summary
The More you have ready in advancethe better your company looksThe faster the processThe stronger your negotiation position
Type of Sales: Stock Sale or Asset Sale
Sell Shares or LLC Interest Capital Gains Entire Company and Pre-
Sale Period Risk goes to Seller
Seller buys the assets but not the Company.
Liabilities for pre-sale period stay with Seller
Buyer gets tax-deductible amortization on Purchased Assets – NOT on Stock Bought
Asset Sale has VALUE to Buyer. Get something for it
What’s the Process Like: Auction1. “Teaser” deck – little info2. NDA: Non-Disclosure Agreement3. CIM: Confidential Information Memorandum4. Get some kind of LOI, value range5. In person meetings6. Revised value range7. Due Diligence8. Final Offers, Definitive Docs
What’s the Process Like: Private1. “Teaser” deck 2. NDA: Non-Disclosure Agreement3. CIM: Confidential Info Memo
Light Financials4. LOI, value range5. In person meetings6. Revised value range7. Due Diligence8. Final Offers, Definitive Docs
Due Diligence
The LOI figure is the HIGHEST you will see.It’s all downward from there.Some Buyers excel at this.Downward Adjustments are rationalized
via Due Diligence
What Buyers Look For in Financial Due Diligence
Consistent Earnings
Overstated Earnings = Reduce Price Understated Earnings = Silence
Understated Expenses = Reduced Price Overstated Expenses = Silence
One time / non-recurring
What Buyers Look For in Legal Due Diligence
Permit Expirations Contract Expirations Oral or Poorly Documented
Agreements Contingent Liabilities Staffing and Plan Liabilities
Maximize Your Value
Consider “Carving Out”Undervalued Products, Events, Lines
Timing BusinessEquipment Undervalued Races
Nobody has ever shown the Lifetime Value of a Participant
Why Deals “Go Bad”Common Mistakes
Misunderstanding of Closing Mechanics
Working Capital Cutoff Aged A/R, aged Inventory = no credit Deferred Revenue Less Prepaid Expenses Missing accruals for payroll and taxes Credit Card cutoff can be tedious - negotiate
away
Seller is Responsible for Taxes and Payroll up to Closing
Expenses: Who Pays?
Each party pays their own Buyer Generally Writes the Documents
Can be 5% to 10% of the Transaction
Try to Negotiate a Non-Refundable Deposit / Breakup Fee
Very Important Things to Know About BuyerAbility to Close / Knowing the sources of
financingHow they are Pricing the deal (multiple of
earnings)Who has final approval
Know the sources of financing
Assess the Ability to Close. Some are just Fishing or Shopping your LOI
Funding Sources Bank loans - even more due diligence Seller Financing
“Rollover” equity in new entity (make sure its tax free)Notes Receivable Earnouts
The Rollover Discount Requires you be able to value the New Company
And you lock up your cash (you exit when they exit) with limited control
Buyer Determined Multiple of Combined Company 5x 6x 7x 8x 9xMultiple on Your Company 5x 5x 5x 5x 5x Discount on Your Rollover 0% -17% -29% -38% -44%
Typical Deal Structure Includes
Cash At CloseIndemnity Escrows - up to 10%Earnouts or Holdbacks if a higher
multiple is paid on “contingency”Services Contract
Indemnity Baskets Up to 10% of Sales Price Usually 1 year or until next audit / tax filing
Baskets: For efficiency, up to some amount ($50k) Buyer pays any claims up to Basket Amount without recourse Once Full, the Basket Amount comes out of indemnity escrow
Common Items: Late Invoices, Credit Cards, Understated Vacation Accruals (Or other once-a-
year items)
Make Sure You Get
All the Positive Adjustments in Sellers think in ½ Multiple Increments Every Item is Multiple Times Important
Get Professional Advice as Necessary Can have a HUGE impact on multiple and sale price
Get “Tail Insurance” to cover yourself after sale for later claims
Summary: What are Buyers Looking for
Accurate Reports Consistent over Time Showing the ongoing earnings of the company.
Pro-Forma outOwner ExpensesCapital EquipmentOne time gains / expenses
Balance Sheet without a lot of aged items
Advice for Buyers
Why you will pay more Market Conditions
Landscape scraped a few times. More buyers than sellers. Emotion plays as much a role as Financial Financial Buyers: Belief that you have deep pockets Strategic Buyers: Ongoing Seller role is diminished or
eliminated
Human Nature: Sellers overvalue their business. Higher growth, better future than can be proven
Dealing with Sellers
What is their Legacy?Ongoing role?Continued security for staffOngoing reputation of business
Need for over-communication
Multiple Ways to Close a Deal
Cash at CloseDeferred Cash
Seller notesEarnouts is business performs as plannedHoldbacks if risks do not materialize
Rollover Services Contracts
Make it Fast
Seller remorseBusiness Growth DelayedSeller reducing spendingHard to get / keep customers in uncertain
environmentHard to hire talent
Deal Fatigue
Summary: Top Practical Points Be Informed & Prepared Avoid the drama of “Multiples”. Focus on Cash. Now & Total Select the Process that works for you Get Everything ready well in advance Get Professional Assistance. Specific expertise Exclusivity has Value. Sale Type has Value. Get Value for Them Keep undervalued assets Consider Deposits / Breakup Fees for long processes Understand the Derailing Issues: Working Capital, Indemnities,
Rollover