Selling Your Business: Prepare Now for What Lies Ahead

1. Selling Your Business: Prepare Now for What Lies Ahead 3/21/2007

2. Welcome!

8. Preparing to Sell Your Business and TheSale Process John Vanarthos

9. Selling Your Business:The Twelve-Steps to Tahiti • Adopting the Right Mindset • Internal Preparation and Valuation • Presentation Materials/Confidentiality • Finding Potential Buyers • Initial Sale Process • Buyer’s Assessment/Decision to Buy • Negotiating and Structuring Your Deal • Letter of Intent (and more negotiation) • Buyer’s Full Due Diligence • Contract of Sale (still more negotiation) • Period between Contract and Closing • Closing and Post-Closing Items TAHITI HERE I COME!

10. Possible Time Lines

11. Step 1: Adopting the Right Mindset to Sell Your Business • Are you ready to sell? • Be prepared to take on another job. • Be prepared to be intruded upon and be accountable. • Decide what is critical to you – be flexible on the rest. • Be objective…match your expectations with reality. • Be patient.

12. Step 2: Internal Preparation • What Do You Want? • Purchase Price • Cash • Deferred Payments/Earn-Outs/Buyer’s Stock? • Risk Tolerance? • Activities Post-Sale • Within the Business • Outside the Business • Other Considerations • Family • Employees

13. Step 2: Internal Preparation • What Are You Selling? • Assets • Any Excluded Assets? • Liabilities • Any Excluded Liabilities?

14. Step 2: Internal Preparation • Valuation of Your Business • Different Methods of Valuation • Identifying Where the Value Is • Brand Name/Product? • Customer Base? • Technology/Know-How? • Plant/Facilities? • Your People? • You?

15. Step 2: Internal Preparation • Pick your team • Internal Team • Financial Officer • Operations Officer • Human Resources • Regulatory • External Team • Investment Banker/Broker • Attorney • Accountant • Others: • Insurance Agent • Regulatory Consultants

16. Step 2: Internal Preparation • Positioning Your Company for Sale • Updated Business Plan • Historical and Projected Financials • Business and Market Information • Compliance Plan • Business and Legal Records • Systems and Operations • Issue Identification and Remediation

17. Step 3: Presentation Materials/ Confidentiality • Presentation Materials to Buyers • Information Memo / Business Plan • The Essentials of What a Buyer Needs to See • In a Format the Buyer Understands • Tell Your Story • What is Your Business? • Where Has It Been? • Where Is It Now? • Where Is It Going? • Flattering But Fair Disclosure

18. Step 3: Presentation Materials/ Confidentiality • Confidentiality • Confidentiality Agreements • You Need Them • But Have Limited Value • Disclosure/Buyer Access • What Are You Willing To Disclose? • When Are You Willing To Disclose It?

19. Step 3: Presentation Materials/ Confidentiality Are you willing to disclose • Pricing Information? • Costs/Profit Margins? • Strategic Plans? • Customers and Customer Agreements? • Supply Sources and Terms? • Manufacturing Process?

20. Step 4: Finding Potential Buyers • Strategic Buyers • Employees/MBO • Competitors • Vendors and Customers • Financial (Non-Strategic) Buyers • Private Equity Funds

21. Step 5: The Initial Sale Process • Approach to Selling • Targeted vs. Shot Gun • Structured/Auction • Presentations to Buyers • Your Role as a Salesperson • First Impressions Count • Buyer’s Preliminary Due Diligence • Anticipate the questions – know the answers.

22. Step 6: Buyer’s Assessment and Decision to Buy It is at this point that buyer typically decides to GO or NO GO. Step 7: Negotiating and Structuring Your Deal • Here’s where the fun really begins. • The more you’ve prepared up to this point, the better your result.

23. Step 7: Negotiating and Structuring Your Deal • Legal Structure of Your Sale • Structure • Asset sale • Stock sale • Merger • Tax Implications • Capital gains tax • Certain tax-free transactions

24. Step 8: Letter of Intent Elements of Letter of Intent • Summarizes Deal • Question of How Much Detail • Non-binding • Shows That Parties Are Serious • Standstill Agreement (binding)

25. Step 9: Buyer’s Full Due Diligence • This is a process to confirm what the buyer already knows. • There should be no surprises. • The deal negotiations continue.

26. Step 10: Contract of Sale • Price and Payment • Cash/Deferred Payments/Earn-outs • Price Adjustments • Working Capital Price Adjustment • Closing Inventory • Transfer Mechanism and Deliverables • Assignment and Assumption

27. Step 10: Contract of Sale • Risk Allocation • Seller’s Representations • Individual and Joint Responsibility • Known vs. Unknown Liabilities • Escrow and Other Hold Backs • Baskets and Caps on Liability

28. Step 10: Contract of Sale • Prerequisites to Closing • Key Employee Agreements • Third Party Consents • Government Filings/Approvals • Variety of Other Closing Conditions • No Material Adverse Change (OK) • Buyer’s Satisfactory Due Diligence (not OK)

29. Step 10: Contract of Sale • Seller’s Danger Zone The perfect storm leading up to contract signing *Beware Seller’s Trap: Pressure not to sign and not to walk away

30. Step 11: Period Between Contract and Closing • This period is used to satisfy all of the closing conditions. • Although your deal’s been cut—you are still at risk. • Pre-Closing Operations • Ordinary Course

31. Step 12: Closing andPost-Closing Items • Closing • The Lawyers Pilot You In • Logistics of Deliverables • Post-Closing Items • Post-Closing Transition and Integration • Post-Closing Covenants • Non-Compete • Non-Solicitation • Confidentiality ALL ABOARD TO TAHITI!

33. So What Can You Do Now? • Think About What You Want • Consider Your Structural Options • Pick Your Team • Compliance Plan/Issue Remediation • Identify Buyers • Sales Approach/Presentation Materials • Consider Closing Prerequisites • Risk Tolerance/Allocation

34. Company Valuation and Investment Banker Role in Sale Scott Magrane and Mike Pagano

35. Role of Investment Banker • Manage the Entire Sale Process • Identify Objectives • Determine Priorities • Prepare Company for Sale • Business Plan Review • Historic and Projected Financials • Marketing / Selling Information • Company Presentation • Valuation Estimation • Finding the Buyer • Strategic • Financial • Manage the Auction, if applicable • Negotiate Business Issues

36. Identifying Your Objectives • Complete Sale • Partial Sale • Non-Family Executives / Management • Employees • Timing • Family Considerations • Top Price vs. Other Considerations

37. Preparation for Sale • Is the Company in a position to be sold? • Business Plan • Financials • Operating Systems • Legal • Environmental • Marketing Information • Confidential Information Memorandum • Tour • Management Presentation • Can you speak their language?

38. Actual Sale • Method of Sale • Negotiated • Competitive • Parties • Non-Family Management • Strategics • Financial Buyers • Timeline

39. Valuation Considerations • Market Size • Revenue Growth • Control over Expenses • Fixed vs. Variable Mix • Operating Cash Flow (EBITDA) • Product “Quality” • Barriers to Entry • Management Quality • Selling Shareholders Objectives

40. Common Valuation Methodologies for Private Businesses • Discounted Cash Flow • Estimate future cash flows • Discount them based on a cost of capital associated with the business • Exit Valuation or LBO Valuation • Determine value based on a ‘required’ return from the purchaser • Relative Valuation • Compare financial results to price multiples determined by the market for comparable companies

41. More on Relative Valuation • Common Relative Valuation Principles • Earnings Multiples • Book Value Multiples • Revenues • Industry Specific Variables • Must Standardize Financial Results • Different Accounting Standards • Intermingling of Personal and Business Expense

42. Enterprise Value/EBITDA • ‘EBITDA’ is Earnings Before Interest, Taxes, Depreciation and Amortization • Reasons for Increased Use of EBITDA Multiple • EBITDA serves as a proxy for cash flows • Can be computed for companies reporting net losses • Allows for comparisons across companies with different financial leverage • Typical for private company EBITDA multiples to range from 4x - 9x • Why do EBITDA multiples differ?

43. Representative Example - Overview • Jersey Coach Inc. manufactures and sells motor homes and recreation vehicles • Owner wants liquidity event • Going public not an option • 2006 Sales of $60mm, Reported EBITDA of $4mm • Historical and projected revenue growth of 10%

44. CAGR 5.3% Selling Prices on the Rise Average Selling Price Representative Example – Looking at the Industry Understand the industry fundamentals through resident expertise and research • RV owning households are projected to rise 15% from 2001 to 2010 to approximately 8 million • Baby boomers should continue to fuel RV growth • Rising fuel prices may pressure industry growth • Interest rates have a significant impact on affordability

45. Representative Example – Comparables $’s inmillions except per share data • Public Market Comparables: • Recent Mergers: • Six applicable transactions in last two years: *** Financial Data has been modified for purposes of this example ***

46. Representative Example – Reviewing Earnings • Review the $3.9 million of EBITDA $3,900,000 • Owner-CEO salary of $1 million, industry average of $500 thousand Addback of $500,000 • Owner’s son is head of business development, $200 thousand a year Addback of $200,000 • $400 thousand on new company car Addback of $400,000 Actual EBITDA: $5,000,000

47. Representative Example – Preliminary Valuation

48. Due Diligence Scott Baach

49. Buyer’s purpose?

50. How does it feel?