Financing, Purchase Price, And Warranties

ISBA Business and Securities Law, November 7, 2012William A. Price, Presenterwprice@growthlaw.com

By PresenterMedia.com

Financing OptionsBy Size And Type Of Deal

Finance, Purchase Price, And WarrantiesFor Small Business Buy, Sell, and Recapitalization

Purchase PriceValuation, Seller Financing, And Price Negotiation

WarrantiesIn Case Things Don’t Work Out

Post-Closing Discussion, Arbitration , or LitigationAvoid Unless Necessary

Phase 4

Phase 1

Phase 2

Phase 3

FINANCING OPTIONSPart I

$0-100,000.00Personal Assets, Microloans, Partners

Typical Finance SourcesBy Size Of Financing Need

Any Size, If Customer A/R AvailableFactoring or Other Cash Advance Lenders$0-5 MillionSBA 7(a) loans, 504 loans, Angel Capital, VC’s$5 Million Plus Private Equity, Non-SBA Loans

Typical Deals: Partner Buyout, Franchise Acquisition, Purchase Of A Competitor, Going Concern Buy-In

$0-100,000 DealsStartup Or Small Acquisition

$$: Yours And Others• Your Net Worth• Microloan of Up To $50k• Seller or Partners

Microloans

Accion Chicago, http://www.accionchicago.org/

Best Way In: Small Business Development Centers

The maximum loan amount is $50,000, but the average microloan is about $13,000.

Two companies in Illinois: This one for the Chicago area

Partnership Deals

Financing Sources Useful For Most Deals(Any Size – Bigger Ones Just Use More Paper)

Seller Financing

Factoring/Cash Advance Lenders

Supplier Terms And Distributor $$

Partnership Deals

Typical Deals:

• Mr. or Mrs. Money and Mr. or Mrs. Do The Work• Mr. or Ms. Inside and Mr. or Ms. Outside, both $$• Friends and Family Financing• Team Finances New Project(s) Together

Business Is A Team Sport

Seller FinancingWorks for all sizes of deal

You don’t know how to make money, so you buy a business that does.

You Giver The Seller Money Upfront, More If You Succeed

Seller gets boughtOut/Paid OverTime

Factoring And Cash Advance Deals

Big Benefit: Customer Credit Rating, Not YoursBig Problem: Collect Quickly, Or Lose $$ Fast

Any Amount of $$

Typical Factoring Terms Finance Charge About 1.5% Per Month About 70% of Invoice (less of Purchase Order)

available upfront, Remainder Less Charges To You You Must Guarantee Factor Collects The Invoice $$ Less than 90 Days To Cash needed More Than 25% Margin Over COGS needed

Factor Buys Invoice, or Purchase Order Financing

GET EXTENDED PAYMENT TERMSIf seller now Cash On Delivery, Try for 60, 90, or more days to pay, or pay on sale (partner with vendor)

Amazon Volume Seller Capital Deals :• 1-14% terms• Also pay their 6-15% stocking fees

$$ FROM DISTRIBUTORS

Use Supplier $$To Improve Volume Financing Ability, Or To Improve Bottom Line

Equipment Finance The Good: Low Upfront Costs The Bad: Interest Costs Over Life Of Equipment Sources: Vendors, Leasing Funds, “Asset Based”

Lenders Your Equipment As A Separate Line Of Business

Suppliers or Outside Sources

SBA 7(A) AND 504 LOANS$0-5 Million Deals

SBA 7(A) Loans 70 Lenders In Illinois Contacts Are At SBA.GOV Two percent over prime, period and terms vary by

lender SBA guarantees 75% of loan repayment You pay the loan fees

Up to $5 million

Top Ten SBA 7(A) LendersLender Name Number of Loans Gross Approval Amount

Ridgestone Bank 29 $ 18,600,000

JPMorgan Chase Bank, National Association 107 $ 12,520,400

U.S. Bank National Association 25 $ 6,601,800

Village Bank and Trust 10 $ 5,205,000

First Community Bank of Plainfield 3 $ 4,950,000

Park Ridge Community Bank 1 $ 4,000,000

Rockford Bank and Trust Company 8 $ 3,298,100

The Foster Bank 10 $ 2,655,000

Associated Bank, National Association 15 $ 2,288,600

State Bank of Herscher 1 $ 2,000,000

Illinois, Q1 2012

Different Loans For Different 7(A) Lenders

JP Morgan Chase: Inventory Finance, some M&AHarris Bank: Mostly Current Clients (this may change)Wells Fargo: M&A, some “air balls” for great cash flow?5/3: Very reliable on closing if they say yes to your deal: M&A, RefinancingCommunity Banks: Often more ready to lend

Make Your Deal Look Like What They Do

504 Program Lenders 7 Certified Development Companies package 504

program loans in Illinois 504 can be combined with 7(A) loans for bigger

deal Long term, fixed rate financing SBA loan guarantees

Machinery & Equipment, Real Estate

You also need:• Good Credit Scores• Down Payment =

20% of Loan• Maybe More

Capital Than You Have

You Need Money To Borrow Money100% collateralization, 125% monthly EBITDA vs loan payment $

Friends, Family, and Fools

Sources of CapitalAll Deal Sizes

Angel Capital

Venture Capital

Private Equity

Friends, Family, And Fools

U of C Seminar Said $8-900,000

IIT MBA Class Said $5-600,000

COD Seminar Said $1-200,000

How Much Could You Raise?

Angel Capital

o Startup or Revenue Stage Companieso 800,000 deals or more per year in USo 1-6 angels per deal, $50k+ eacho Terms Depend on the Angel’s interests: mentor or $

$ motivated investor?

Money From Strangers

Angel Capital Sources National Angel Capital Association (www.naca.com

) member groups of angels Local Business Owners: $500k EBITDA owner is a

millionaire Old Women and their $$ Advisers Professional and Nonprofessional Angels: They

like to flock together, unlike eagles

Illinois

Known Illinois Angel Associations

1. Hyde Park Angel Network (U of C)2. Wildcat Angels (Northwestern)3. Illinois Ventures (U of Illinois)4. Heartland Angels/Collar County Angel Network5. Cornerstone Angels6. Central Illinois Angels7. Stateline Angels8. Sustainable Local Food

Investment Group

Let Me Know If You Find More

Venture Capital

10x in 2 Years: and 3 of 4 investments fail

Try To Show You Fit With Their Portfolio Deals

They Need 1000% ReturnsProfessor

.

VC Businessman

Sources of Information On Venture Capital

National Venture Capital Associationwww.nvca.org

Pratt’s Guide to Private Equity And VC Sourceshttp://www.investmentbenchmarks.com/pratts_guide.html

Money Tree Survey, Quarterly Statistics https://www.pwcmoneytree.com/MTPublic/ns/index.jsp

Private Equity

More Than 4,500 Funds Active In 2011

Many Deal Sizes: SBIC $5 million plus, Biggest P/E $1 Billion plus deals

$5-25 Million Deals: Get A Growth Fund To Invest, Sell To A Mezzanine Fund or Strategic

$2 Million EBITDA And Up -- $10 Million Plus In Sales

P/E Deal Activity

2007 2009 20110

200400600800

1000

Number of Deals

Per Boston Consulting Group “Deal Book” Study, 2012

P/E Deal Sizes

Deal Sizes, 2007-2011:

76% less than $200 million51% less than $50 million

BCG 2012 Study

P/E Deal Types

Of Deals Less Than $200 Million:

24% VC54% Buyout15% Generalist P/E3% Mezzanine4% Other P/E

BCG 2012 Study

Midwestern Private Equity Deals Q2 2012

65 Deals In Midwest Q2 2012

21% of Q2 Deals In US

303 Deals All US Q2 2012

Source: PitchBook

Strong Sectors For P/E Activity, Q2 2012

• Business• IT• Healthcare

Source: PitchBook

Deal Terms And Multiples

Platform Deals (We Can Grow With You): 77%

Add-On Deals (You Fit Our Portfolio): 23%

Source: PitchBook 3Q 2012 Deal Terms and Multiples Survey

Enterprise Value Of P/E Deal Targets

$0-25 Milli

on

$25-50 Milli

on

$50-100 Milli

on

$100 Milli

on Plus0

2

4

Source: PitchBook 3Q Survey Of Deal Multiples and Terms

EBITDA Multiple Of P/E Target ValuesTarget Company Value Multiple of EBITDA

$0-25 Million 6 X

$25-50 Million 6.8 X

$50-100 Million 5.5 X

$100 Million Or More 8.6 X

Source: PitchBook 3Q 2012 Survey of Deal Terms & Multiples

P/E Exits VS New Investment, $$ Billions

P/E Investments

P/E Exits

0 10 20 30 40 50 60

2012 Q12012 Q2

Source: PE Council

PURCHASE PRICEPart II

Purchase Price Depends On Your Exit

Typical Deal Types And Multiples of EBITDA:

Professional Practice: 1 XLess than $1 Million Sales: 1-3 X$1 Million--$5 Million Sales: 3-5 X$5 Million Plus: See P/E Multiples

Varies With Economy

Know Your Buyer And Your Value Add

Purchase Size And Price Data Sources

Pratts Stats: Private Company Merger and Transaction Database: Mostly P/E Deals, Good for Comps

Inc. Magazine: Publishes Valuation Guides Some Years2010: http://www.inc.com/magazine/20101101/the-2010-business-valuation-guide.html

Bizbuysell.com: Valuation reportBy industry, 25,000 comps(very small deals)

WARRANTIESPart III

Warranties Guarantee The Deal WorksAlmost Everybody Lies

You Searched The World OverAnd ThoughtYou Found True Love

Was The Money There?

Typical Warranties

Authority To Sign The DealAccuracy of Representations Made To Induce DealTitle to All Assets To Be TransferredLack of Claims, Lawsuits, Or JudgmentsNo Taxes Are DueNo Material Facts Not Disclosed To BuyerWhere You Will Be Able To Find The Seller AfterThe Deal Is Signed

For More: IICLE Forms

You Still Need To Do Your Due Diligence

POST-CLOSING: DISCUSSION, ARBITRATION, OR LITIGATION

Part IV

Post-Closing Discussion, Arbitration, Or Litigation

Discussion Is Best: Seller Share In Future Profits

Arbitration May Save Discovery And Litigation Time

Litigation May Scare Liars Most, Especially WithAttorneys Fees, Costs, Etc… To Loser

Our GoalLet’s Hope We AllMake It