m&a for executives
TRANSCRIPT
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Fall 2016
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Before We Begin: Smartphones
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Introduction: Bill Snow
Investment banker
SpeakerAuthor
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Today’s Agenda Part I• What is investment banking?• Buying and selling companies • Misconceptions • Hiring an investment banker
Part II• The M&A process
Part III• Valuation
Part IV• The team• Documents• Negotiating
Part V• Managing expectations• Report card• Are you prepared?
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Special bonus: A liberal sprinkling of anecdotes
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Part IWhat is investment banking?MisconceptionsBuy and selling companies Hiring an investment banker
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–Prepare–Control –Frame –Define
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Understanding the M&A Process
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What is Investment Banking?
Broker?Role reversal Shopping cart Thesis
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M&A is not nebulous
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A huge universe of business owners
Retaining i-bankers, you know, just in
case
Buyer
Buyer
Buyer
Buyer
BuyerBuye
r
Buyer
Something
happens
Done deal!
Investment banker
Hanging around, waiting for a fee if
something happens
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Jordan,Knauff & CompanyINVESTMENT BANKERS
M&A is a Process
Business owner
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Investment bankerHandles the process, the materials, business terms
Private equity firm
Corporate buyer
PE backed company
Typical consultants include:LawyerLegal termsAccountant/auditorInventory, Quality of Earnings, Bank Reconciliation
The Client The QB The Buyers
The buyer is the new owner, makes all decisions.
The investment banker is persona non grata
The Sudden Stop
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Common Misconceptions
Easy Knowing buyers Industry experience Magic words Ask price Commodity work Realtor
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Buying and Selling – Often Counterintuitive Typical misconceptions
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Selling is difficult Buying is easy!
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Jordan,Knauff & CompanyINVESTMENT BANKERS
The Reality of Buying & Selling
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Easy, Straightforward Selling a companyContacting buyersReally easyFinding a buyer “interested” in doing a deal
DifficultBuying a companyContacting sellers
DifficultBuying a company
Really, Really DifficultClosing a deal that makes sense for the seller
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Buyers – What Not To Do! The perfect
target…for me
Harvard Seal
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Let’s take a look an example - Exhibit 1
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Pushing a Deal Packaging
company New Years Eve Pay off letter Sideways
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Picking an M&A Investment Banker
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What we think is important
Knowing a lot of buyers
Industry experience
“Magic words”
Determining the right “ask” price
Low cost provider
What is actually important
How the buyers list is created
What is actually important
How the buyers list is created
Ability to “clear the market”
What is actually important
How the buyers list is created
Ability to “clear the market”
Techniques to enhance value
What is actually important
How the buyers list is created
Ability to “clear the market”
Techniques to enhance value
Handling the “ask” price question
What is actually important
How the buyers list is created
Ability to “clear the market”
Techniques to enhance value
Handling the “ask” price question
Negotiating prowess
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Anecdote – Are you experienced? Really?
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LOST BROKER
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An Investment Banker is not a Realtor
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Fees• Monthly
retainer• Success fee Expenses
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Warning! – Willingness to work without a monthly retainer
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Techniques to Pick the Right Advisor Chemistry Negotiating
prowess The process Enhancing
valuation Check references
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Checking References
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Remember: Ask questions that give you usable data
Instead of asking“What did they charge?”
“How long did it take?”
“Do they know a lot of buyers?”
“Did they get the highest price?”
“Did they do a good job?”
You should ask“Based on the end result, was their work worth what you paid?”
You should ask“Based on the end result, was their work worth what you paid?”“Did they do what they said they’d do?”
You should ask“Based on the end result, was their work worth what you paid?”“Did they do what they said they’d do?”“Did they attend all meetings with buyers? If not, why?”
You should ask“Based on the end result, was their work worth what you paid?”“Did they do what they said they’d do?”“Did they attend all meetings with buyers? If not, why?”“Did the buyer try to re-trade the deal? How did your banker handle it?”
You should ask“Based on the end result, was their work worth what you paid?”“Did they do what they said they’d do?”“Did they attend all meetings with buyers? If not, why?”“Did the buyer try to re-trade the deal? How did your banker handle it?”“Could you have done this without them, on your own?”
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Efficacy of QuestionsHow many miles to the nearest Blockbuster?
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Lurking Problems Quality of Earnings Inventory The “ask price” question Owner succession Rent and accrued vacation Absent key team members Deal “re-trade” Working capital adjustment -
Exhibit 2
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Working Capital• Packaging distributor• Just-in-Time (JIT)• Sales • Working capital
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How to calculate average working capital?
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Part II Coming Up!The M&A Process
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Part II: The Step by Step M&A Process
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Preparing For a Sale Owner…make thyself expendable Fix up the balance sheet
Cut dead weight Increase sales The add-back machine
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Avoid Serial for Breakfast Parallel, not serial Advisors Chain of command
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Process Overview 1. Create a Target List2. Make Contact 3. Send the Teaser4. Assure Confidentiality5. Send the Deal Book6. Obtain Indications of
Interest (IOI)
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7. Meet With Buyers8. Obtain Letters of Intent
(LOI) 9. Undertake Due Diligence10.Draft a Purchase
Agreement 11.Close the Deal12.Handle Post-Closing
Events
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Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 1: The Target List Sell Side• Suspects• Prospects • Collaborative Process• Approval
Buy Side•What does target get?• Criteria
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Step 2: Contact! Buyers want to be contacted!
Sellers, meh Auction?AlchemyScreeners
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Step 3: The Teaser Anonymous executive summary Just enough info to “tease” recipient
Be careful!
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Step 4: Confidentiality
Sign a Confidentiality Agreement (CA)Buyer agrees to keep quietNo harm
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Step 5: The “Book” Various namesSecurity Huge amount of info
Enough to make an offer
Staggered release
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Step 6: Indication of Interest Dating phase – can see others
Valuation rangeNon-bindingExclusivity? No
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Step 7: Management Meeting “Wizard of Oz”Seller provides update Facilities visitSandbox
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Step 8: Letter of Intent (LOI) Getting engagedFirm offerExclusivity? YesBinding? NoPick the “best” one
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Step 9: Due Diligence Kimono timeFull disclosure…mostly
Confirmatory only!
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Step 9: Due Diligence, cont. Send in the cavalcade of consultantsSecure online data room
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Step 10: Purchase Agreement Marriage licenseFinal documentBinding!FairnessSame time as due diligence
Red line ping-pong
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Step 11: Closing Wedding dayFlow of fundsSign this……and sign thatMere formality
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Step 12: Post Closing Stuff AnnouncementCollect final payments
IntegrationContinued involvement
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Coming up, Part IIIValuation
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Valuation is a complex mathematical formula…
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…that largely depends upon what side I’m representing
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What is Valuation?Confluence of cash flow and timeSome methods include–EBITDA basis–Contribution margin–Asset value–Multiple of gross profit–Multiple of revenue–Discounted cash flow
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Valuation = Multiple X EBITDA
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Business Owner POV
SimpleStraightforward…
…and not the full story!
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Form of Consideration• Marketer of medical data • Accepted $33M deal• Lower offers were better, why?
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Valuation = (Multiple X adjusted EBITDA)
+ cash – debt +/- working capital
adjustment
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Investment Banker POV
Obviously better
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Valuation = (Multiple X adjusted EBITDA)
+ cash – debt +/- working capital adjustment
+ enhancers - detractors
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Valuation – Fuller Perspective
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Revenue – bigger is betterGrowth – faster is betterProfits – $1M EBITDA, $3M
EBITDA, $5M EBITDA, $10M EBITDA
EBITDA margin – 10% usually very good, 15% outstanding
Minimal CAPEXStrong, capable management
team– “not going anywhere”
Customer relationships– Long term, no concentrations
Simple and understandable business model
Design skillsQuality accounting systems &
proceduresBuying/sourcing/pricing expertise © Jordan, Knauff & Company. Proprietary and Confidential. 50
Enhancers to Valuation Include:Inventory management– Just in TIME (JIT)– Presell orders
Fragmented industryLarge market ($1B+)Expansion opportunities– Geographic– Customers/markets– Products
Barriers to entryLimited cyclicalityLow regulatory riskUnique expertise– Intellectual Property (patents,
trade secrets)– Sales/marketing approach
Use of TechnologyFacilities/warehouse/
distribution center
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Jordan,Knauff & CompanyINVESTMENT BANKERS
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Detractors to Valuation Include:A “motivated” sellerOwner viewed as integral to
successManagement– Lack of bench strength/managers
about to retire– Lack of succession plan
Market is declining/out of favorLack of profitsLow marginsDeclining revenuesCustomers– Concentration– Financial weakness
Large CAPEX needs
Poor labor/union relationsUnproductive employeesPoor systemsExcessive bad debtUnsellable inventoryLow barriers to entryOverly complex productLong sales cycleSeasonalitySmall marketMarket dominated by large
player(s)Bad reputation for qualityDirty, unorganized facility/offices
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Valuation – Is That All There Is?
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Valuation = (Multiple X adjusted EBITDA)
+ cash – debt+/- working capital adjustment)
+ enhancers - detractors
+ pro-forma benefit of combined entities
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Pro-forma Valuation
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Is paying 15X for a $5M EBITDA company reasonable?
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Pro-forma Ice Bucket Challenge
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Combined
100,000$ 50,000 50,000 40,000 10,000$
Kate & Zuzu's Bait Shop & Sushi Imporium
Pro-forma Example
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If Kate acquired Zuzu, what multiple makes sense?
Kate's Bait Shop
Zuzu's Sushi Imporium
Rev 50,000$ 50,000$ COGS 25,000 25,000 GP 25,000 25,000 Expenses 20,000 20,000 EBITDA 5,000$ 5,000$
Pro-forma
105,000$ 48,000 57,000 37,000 20,000$
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Nurses’ Scrubs Pro-forma
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Seller• Sales decline• Marketing miscues• Losing money ($3M)
Buyer– PE backed – Profitable
Buyer paid $13M – why?
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Exhibit 3© Jordan, Knauff & Company. Proprietary and Confidential. 57
Valuation Presented In A Pitch
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EBITDA Multiple Risk Profile Characteristics
1 High Risk Business out of control / Failure likely. Crisis Management is the norm.
2 Risky Small margins, depends very much on owner relationships, owner not staying on. Not growing - status quo.
3 Acceptable RiskMarket risk but acceptable. Below average margins. Other risks concerning marketability, owner staying, no growth, etc. Gives market share and sustainable future cash flows.
4 Low Risk Growing, average profits, good client base and some management. Not dependent solely on owner. Management stays.
5 Minimal Risk Growing, above average profits, diverse client base, management plan, processes, procedures, etc. Management stays.
6 Slam Dunk Risk Profile 4 and 5 plus management has shown propensity to grow firm, good solid profits, lots of growth potential, and management stays
Quantifying Valuation – Buyer’s POV
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Facilities Enhanced Valuation
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Seller had (maybe) ~$2M EBITDA Buyer paid $17.5M Why?
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Anecdote – Systems Enhanced Valuation
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Seller less than $1M EBITDA Big concentration Buyer paid nearly 5X Why?
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Solving Valuation DifferencesEarn outSeller noteUsing stockLess than 100%
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Net Proceeds Calculator
Exhibit 4
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Part IV is next!
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The Team, Documents Negotiating
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Jordan,Knauff & CompanyINVESTMENT BANKERS
The Team
Typical consultants include–Legal–Accounting/auditing–Wealth management–Investment banker
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – The Wrong Advisor• Lawyer with no M&A experience.
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Benefits of an Intermediary
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Investment Banker vs Business Broker Deal size Business type Staff and resources Sophistication Involvement
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Sundry Team Members – depends on deal
– Marketing– IT/Database– Environmental
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Chain of CommandPoor communication Establish Chain of Command
Pick up the phone!
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M&A Documents
Indication of Interest IOI - Exhibit 5
Letter of Intent (LOI) - Exhibit 6
Purchase Agreement - Exhibit 7
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Keys to Negotiating Success
Weak or strong hand Remember the goal Decision maker Rollercoaster ride ABC – Always Be Closing
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Anecdote: How Strong is Your Hand?
Drink dispensing equipmentBuyer “re trade”Inventory$1.6M on due diligence
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What was the result?
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Negotiating Techniques
How do Buyers make a bid? Term sheet – Exhibit 8 What motivates/scares other
side?
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Find (the other side’s) Motivation Buyer• Made numerous offers
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Seller• Son-in-law - doubled
business• Liked his independence
What got the deal done?
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Negotiating Techniques (cont’d)
Successful tacticsCommon negotiating mistakes
Good faithSideways
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Part V - Concluding
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Managing expectations
Report cardAre you prepared?
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Managing Expectations• Tax preparation• Wealth planning• Hockey stick• Trust the process
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Where we are today
Where we know you can take
the business after you
buy it
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Anecdote – Bird in Hand; No Tax Plan
• Light industrial staffing• The “yeah yeah yeahs”
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Report Card for Your Business Are you prepared to
sell?• Revenue• Growth• EBITDA• Owner• Margin• Audits• CAPEX• Providing documents• Secret sauce
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Are you prepared to buy?• Money• Targets• Thesis
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Opportunity KnocksContacted by Buyer• Not unique• Meeting protocol• Proprietary – who benefits?
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Contacted by Seller• Good and bad• Bake off
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Last Anecdote – Your Reputation Buyer Unsuccessful acquisition attempts
Insular industry“Lookers but not serious.”
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Thank you!If you have any questions, please feel free to contact me at your convenience:
William R. SnowManaging DirectorJordan, Knauff & Company200 W. Madison St. Suite 980Chicago, IL [email protected]://www.linkedin.com/in/billsnow
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