The Art Before The Deal

Understanding and Maximizing Business ValueMichael F. Coyle, CBIPrincipal/Exit Planning Advisor, CenterPoint Business AdvisorsSponsored by:Connecticut River Bank, NA

Michael F. Coyle, CBI

Principal, CenterPoint Business Advisors, Inc.Exit Planning Advisor, Business Enterprise InstituteCertified Business Intermediary (CBI) Awarded by the International Business Brokers AssociationMBA Boston College, Carroll Graduate School of ManagementSerial Entrepreneur

Center Point Business Advisors, Inc. assists the owners of small to mid-sized businesses in planning for and executing the most important financial event of their lives...the inevitable exit from their business.

Advisory Market Valuations Certified Business Appraisals Machinery & Equipment Appraisals Value Drivers & Detractors Strategic & Project SpecificSale to 3rd Parties Transfer to Family, Employees or Partners Recapitalization with Private EquityDuring This Session You Will Learn:

What is the Underlying Purpose of your BusinessWhat is the Reality for Most Small Business OwnersWhat are the Components of Business ValueWhat are Common Value Drivers & DetractorsKey Strategies for Improving Business ValueExiting Your Business is Inevitable, Plan for It

The True Purpose of Your BusinessIs to Give You LifeMichael Gerber, The E-myth Revisited, other E-myth BooksThe Entrepreneur * The Manager * The TechnicianRun your business to exit it, realize value to support your lifes objectivesImportance of creating systems & extracting the business owner from the day-to-dayWorking ON and not IN your businessThe Reality For Business OwnersExiting your business is Inevitable and the largest value detractor is often what the owner IS or IS NOT doing.80% of business owners exit their business to retire, they are not serial entrepreneurs

Their principal fear is will I have enough money so that I can fund my retirement lifestyle without running out of money

Other considerations may includewealth transfer to the next generation, charitable giving,and minimizing taxes

The Reality For Small Business Owners (2)Typically 50-75% of a business owners net worth is in their business assets. The balance is in their personal real estate & financial investments

Business owners typicallyonly have ONE chanceto monetize their largest asset

EquitiesReal EstateBusinessThe Reality For Business Owners (3)Most business owners have only an anecdotal perception of the value of their business

My brother in law knew a guy who had a business like mine that sold for

Relying on this type of perception can leadto large gaps in future wealth and quality of life"Paper or Plastic"

The Reality For Business Owners (4)

85% of all small business owners do not have an exit plan, a wealth management plan, and/or an advisory team to assist them

Very few start the process early enough to achieve the maximum benefit of valuation and exit planning

Typical Business Owner ConcernsWho should I transfer my business to?Family, Employees, Partners, a 3rd PartyWhen is the right time to leave my business?What is my business really worth?What is the right deal structure?Tax avoidance vs. future riskHow do I ensure that I meet all of my future goals and expectations?

There Are Only 4 Places Your Money Can GoAn Exit Plan will let YOU decide where your hard earned assets end up!

The Exit Planning Process

Why Value Your Business?Business & Financial PlanningEstate & Trust PlanningEmployee Stock Ownership Plans (ESOP)Partnership AgreementsLitigation & DisputesCreating an Exit Strategy

Value is in the Eye of the BeholderIndividual/LifestyleFinancialIndustryStrategicRelated Parties (KEG or Family)

Business Value Components

Value Drivers & DetractorsDriversPositive Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)Excellent Customer ListProduct DifferentiationDefensible Market PositioningDominant Market ShareTechnology and Proprietary ProcessesLocationFranchise / DealershipValue Drivers & DetractorsDriversPositive Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)Excellent Customer ListProduct DifferentiationDefensible Market PositioningDominant Market ShareTechnology and Proprietary ProcessesLocationFranchise / DealershipDetractorsLawsuits for Previous Acts, Products Produced or Services RenderedLoss of CustomersOutdated Technology, Products, etc.Labor Force/Employment IssuesVendor RelationshipsGovernment/Tax IssuesIndustry ChangesInternational, National and Local EconomiesCompetitionValue = CF * MSimple Right?The Complexity is in the Subscripts

Value = CF (s), (t) * MSustainableTransferable

What Is A Business Valuation?Both a Product and a ProcessBusiness valuation vs. a real estate appraisal

Significant value is in the Process

What Is A Business Valuation? (2)Process is a multi dimensional analysis of your business from the Buyers Perspective

Financial, lifestyle, asset, risk & growth attributesIdentifies what adds to and what detracts from valueUsually this leads to a handful of items that could greatly improve value

Form of limited scope appraisal that determines a Most Probable Selling Price at a point in time (vs. Fair Market Value standard)

What Is A Business Valuation? (3)Determines economic benefit of ownership and not tax valueGoals are to minimize taxes and maximize economic benefit

Measures your business against the industryTool for improving the business and maximizing value

What Is Valued?Tangible AssetsLeasehold ImprovementsEquipment, Furniture & VehiclesInventory, Accounts Receivable

IntangiblesGoodwill (vs. Blue Sky)Patents & CopyrightsControlled Territories, Product/Service NicheCustomer & Supplier Contracts

What Are The Benefits of A Valuation?Demystifies the value of your business Establishes a baseline for comparison in the futureMeasures returns on equity, assets, & timeProvides valuable data for an Exit Planning ProcessProvides tools to control where yourinvestment is going

What Kind of Valuation is Appropriate?Price OpinionBased upon broad rules of thumbFor the curiosity seekerBusiness ValuationMost Probable Selling PriceMulti dimensional analysisInformation for planning andcontrol & decision makingFair Market Value AppraisalTax, litigation, refinance

Who to Select for the Business Valuation Process?Accountant/CPACertified Business Broker/Valuation ProfessionalLicensed Commercial Appraiser

With the proper training all can do the work. Select a professional who can best understand the industry and find the value builders and detractors

Business ValuationExit AvenueMethodAuthorityStandardEmployees or FamilyESOPTrustGiftingIRSFair Market Value with discounts for marketability & minority shareManagersMBOBuy/Sell AgreementsManagersMarket ValueorInvestment ValueUnrelated 3rd PartyIndividual orStrategicDirect AssetorStock SaleBuyer&SellerMarket ValuationStrategic & SynergisticValue AppliedExit Planning: Key to Value RealizationDemographics are changing Aging population of baby boomer business ownersMore than 8.4 Million Business owners will seek to exit their business in the next 10-12 years. (70%)Many businesses are still based in an old economy modelNext generation of buyers want new economy modelsSupply of Businesses for sale will outstrip DemandOnly those business owners that Plan will be successfulThe Exit Planning Process

From The Endless Focused Work in Building Your Business

...To Achieving Your Lifes Next Goals

Takes A Cohesive Team ApproachYour Legal & Tax TeamYour Wealth Planning TeamYour Business Advisory TeamYour Business Intermediary TeamYou!

The Exit Planning Process

Step One: Identify Exit ObjectivesWhen a man does not know which harbor he is heading for, no wind is the right wind. - Seneca

Step One: Identify Exit ObjectivesUniversal ObjectivesHow much longer does the owner want to work in the business before retiring or moving on? _________ yearsWhat annual after-tax income does the owner want during retirement (in todays dollars)? $_________To whom does the owner want to transfer the business?Family?Co-Owner?Key Employee(s)?Outside party?ESOP?

Step One: Identify Exit ObjectivesWorking with a Team of AdvisorsNo one professional has all the answers.Diverse skills and talents are necessary.Team approach minimizes time and cost.If properly facilitated and led.

Step One: Identify Exit ObjectivesWho is on the Advisor Team?Valuation SpecialistBusiness IntermediaryInvestment BankerBusiness or Management ConsultantBankerExit Planning AdvisorFinancial PlannerInsurance AdvisorInvestment AdvisorBusiness AttorneyEstate Planning AttorneyCPA/AccountantStep Two: Quantify Business and Personal Financial ResourcesBeauty is in the eye of the buyer.

Personal Wealth PlanHaving a Post Retirement Plan on How to Support Your Lifestyle Delivers Peace Of MindPersonal Wealth Plan + Business Value = Retirement Income Plan

Business ValuationBenefits to the OwnerProvides a baseline business value by projecting cash flow.Measures business and personal resources both today and as a basis for future projections.Allows you to monitor progress toward your stated objectives.Business Valuation (2)Identifies what is being soldInventory, Equipment, Real Estate, StockEstablishes profitabilityAssesses riskIdentifies value driversScans marketplaceConsiders financing strategiesEstablishes relationship between earnings and valueShould be done Cyclically with business planning

Step Three: Maximize and Protect Business ValueMaking a silk purse from a sows ear.

41Step Three: Maximize and Protect Business ValueBenefits to the OwnerGrow business value and intangible value of the business.Reduce income taxes upon sale of business.Protect assets from potential business and personal creditors.Create ability to sell the business.Motivate and keep key employees.Step Three: Maximize and Protect Business ValuePromote Value Through Value DriversFocus on increasing cash flow.Develop operating systems that improve sustainability of cash flows.Solidify and diversify customer base.Implement strategies to grow the company.Improve company performance as measured by industry metrics.Build a solid management team and groom a successor.Business ValuationFinancial statements are key!EBITDA multiplesDiscretionary income multiplesCash and non-cash add backsValue derived from market dataStrategies for Maximizing ValueValue your business early and oftenFocus on implementing business improvementsCreate and participate in your ownExit Planning ProcessWealth Management TeamLegal & Tax TeamBusiness Advisory & Intermediary Team

Step Four: Ownership Transfer to Third PartiesMaking a mountain out of a molehill.

Step Four: Ownership Transfer to Third PartiesBenefits to the OwnerCash at closing.Eliminate financial risk.No family succession issues.Speed of exit.

Step Four: Ownership Transfer to Third Parties

Third Party Sales Not Just About the BusinessAbility to sell and business value are determined by:Intrinsic Value: the value drivers.Extrinsic Value: the value the market places on the business.Effectiveness of the sale process.

Step Four: Ownership Transfer to Third PartiesCurrent M & A MarketplaceOf businesses with sales of less than $10 million per year, 20 percent are for sale, but only one out of four actually sells.Businesses with sales of $10 million per year arent much better only one-third sell.Above $10 million per year, the odds improve to 50-50.

Step Five: Ownership Transfer to InsidersMaking a molehill out of a mountain.

Step Five: Ownership Transfer to InsidersBenefits to the OwnerAchieves Exit Objective of:Selling to Key Employee Group (KEG).Transferring to a Family Member.Motivates and retains key employees.Planning reduces risk and increases amount of money received.

Family Owned BusinessesKeeping the Family Peace while Growing Business ValueMany Hats ProblemFewer than 50% transfer to 2nd Gen and less than 20% to 3rd GenSpecial ConsiderationsEstate PlanningLeadership DevelopmentChoosing AdvisorsCompensation & PerformanceStrategic PlanningStep Six: Business Continuity PlanningMaking sure the business continues when the owner doesnt.

Step Six: Business Continuity PlanningBenefits to the OwnerObjectives can still be achieved if you dont survive your exit.Retains ownership and control of company if co-owner departs.Can force non-contributing owners to leave the business.Provides consistency between lifetime and death objectives.Ensures survival of the business for the benefit of others.Results in family receiving value of owners interest, in cash.Step Seven: Personal Wealth and Estate PlanningWhen the slings and arrows of outrageous fortune befall you, fight back. - William Shakespeare (Hamlet)

Step Seven: Personal Wealth and Estate PlanningBenefits to the OwnerPreserve wealth, minimize taxes using both lifetime and death planning tools. Coordinates and integrates lifetime exit objectives wishes with estate plan.In effect, estate planning becomes part of business and exit planning.

Key StrategiesImproving Business ValueManage Value as Seen By The MarketPositioning in the market placeStrategic buyersIndustry buyersFinancial buyersBusiness continuityBalance short term and long term business needsEmployee development and mentoringKey StrategiesImproving Business ValueGood Planning Eases AdversityOwner illnessDivorceDeathDisabilityLitigation

Key StrategiesImproving Business ValueReduce Business Viability ConcernsPerformance relative to benchmarksRevenues and revenue trendsIncome and cash flow trendsExpansion potentialCompetitive advantagesCore competenciesCompany CultureOwner dependenceIs the owner the business?

Key StrategiesImproving Business Value (2)Financial ConcernsNeed for good & accurate record keepingPositive cash flow and focus on value not tax minimizationRealistic growth strategiesValuation and Price justification3rd party valuationReturn on Investment to buyerPayback periods in yearsKey StrategiesImproving Business Value (3)Owners RoleDelegate more effectivelyReduce reliance on business ownerFormal employee trainingSuccession/Exit PlanIdentify and groom a successorDeveloping & Mentoring key personnelSuccession takes time and effortComplex mix of potentially conflicting issuesKey StrategiesImproving Business Value (4)Partners and EmployeesExecute agreements with partnersBuy/sell and buyout agreementsEmployee dependencyEmployee tenure/turnoverEmployee contracts401(k) plans to keep employeesHuman resource documentationEmployee handbooksJob descriptionsPersonnel filesKey StrategiesImproving Business Value (5)Operational ProcessPolicies and proceduresProcessesCore activitiesSystems (consistency of quality, customer service)Equipment MaintenanceTechnology and Web PresenceIT currentWeb links to the world

Key StrategiesImproving Business Value (6)Operational Process (2)Streamline processesEvaluate each product or service to verify contribution to bottom lineOutsource non-core activitiesAnalyze and outsource activities that can be obtained cheaper on the outsideInventory ControlInventory turnover relative to industry standardsReview methods (FIFO, LIFO, etc.)

Key StrategiesImproving Business Value (7)SuppliersSupplier relationsSupplier/approval selection processLong-term contract benefitsOwner dependent relationshipsCost of input materialsReview frequentlyRenegotiate if necessary

Key StrategiesImproving Business Value (8)CustomersRetentionFriends or relatives of ownerCustomer service and supportCustomer loyaltyLimit Customer Concentration80% of revenue concentrated around a small group of customers20% of business concentrated with one customerReevaluate Marketing/SalesDirectReps & AgentsInternet new channelsKey StrategiesImproving Business Value (9)Marketing and AdvertisingEnhance marketing strategy/plansAdvertisingTrade ShowsInternetBrand Awareness and P.R.Clear and consistent message/value propositionDifferentiationKey StrategiesImproving Business Value (10)CompetitionKnow your competitionUse industry groupsAsk your customersKnow what they do differentlyArticulate your advantages and disadvantagesPricing strategiesLearn from competitorsBenchmarkBorrow good ideasKey StrategiesImproving Business Value (11)Legal IssuesIntellectual propertyis it secure?Patent, copyright and trademark applicationsLitigation issuesSettle all litigationResolve all product liability casesResolve all insurance claimsForm of incorporation pros & consC-Corp, S-CorpLLC, PartnershipProprietorship

Key StrategiesImproving Business Value (12)Regulatory IssuesClear environmental complianceHave environmental review by reputable firmReview all permits and licensesOSHA issuesPending zoning issuesThe vast majority of owners are unaware there is a specific planning and implementation process that can help ensure they achieve their objectives.Most business owners spend more time planning a family vacation than how to build value and exit from their business.This is not due to a lack of desire or intelligence. It is simply because they dont know how or where to begin.

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