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Selling Your Business: Prepare Now for What Lies Ahead. 3/21/2007. Welcome! . Preparing to Sell Your Business and The Sale Process. John Vanarthos. Selling Your Business: The Twelve-Steps to Tahiti. Adopting the Right Mindset Internal Preparation and Valuation

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selling your business the twelve steps to tahiti
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!

step 1 adopting the right mindset to sell your business
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.
step 2 internal preparation
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
step 2 internal preparation13
Step 2: Internal Preparation
  • What Are You Selling?
      • Assets
        • Any Excluded Assets?
      • Liabilities
        • Any Excluded Liabilities?
step 2 internal preparation14
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?
step 2 internal preparation15
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
step 2 internal preparation16
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
step 3 presentation materials confidentiality
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
step 3 presentation materials confidentiality18
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?
step 3 presentation materials confidentiality19
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?
step 4 finding potential buyers
Step 4: Finding Potential Buyers
  • Strategic Buyers
      • Employees/MBO
      • Competitors
      • Vendors and Customers
  • Financial (Non-Strategic) Buyers
      • Private Equity Funds
step 5 the initial sale process
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.
step 6 buyer s assessment and decision to buy
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.
step 7 negotiating and structuring your deal
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
step 8 letter of intent
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)
step 9 buyer s full due diligence
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.
step 10 contract of sale
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
step 10 contract of sale27
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
step 10 contract of sale28
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)
slide29

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

step 11 period between contract and closing
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
step 12 closing and post closing items
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!

so what can you do now
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
role of investment banker
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
identifying your objectives
Identifying Your Objectives
  • Complete Sale
  • Partial Sale
  • Non-Family Executives / Management
  • Employees
  • Timing
  • Family Considerations
  • Top Price vs. Other Considerations
preparation for sale
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?
actual sale
Actual Sale
  • Method of Sale
    • Negotiated
    • Competitive
  • Parties
    • Non-Family Management
    • Strategics
    • Financial Buyers
  • Timeline
valuation considerations
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
common valuation methodologies for private businesses
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
more on relative valuation
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
enterprise value ebitda
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?
representative example overview
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%
representative example looking at the industry

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
representative example comparables
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 ***

representative example reviewing earnings
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

due diligence

Due Diligence

Scott Baach

preparing for due diligence
Preparing for Due Diligence
  • In advance of decision to sell
  • Get ready / Gather data (sample checklist)
  • Disclosure decisions
  • Provide data
  • Interaction with Buyer
  • Disclose (as part of Agreement)
provide data
Provide Data
  • Online Data Rooms
  • Email
  • Conference Room
  • Hotel
what will the potential buyer want to see
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
what will the potential buyer want to see54
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
what will the potential buyer want to see55
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
what will the potential buyer want to see56
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
contracts
Contracts
  • Active or Inactive?
  • Prohibition on Disclosure?
  • Prohibition on Assignment?
  • Change of Control Provisions?
  • Termination Rights?
  • Notice Requirements?
  • Other Rights / Obligations Triggered upon Sale?
what will the potential buyer want to see58
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
what will the potential buyer want to see59
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
what will the potential buyer want to see60
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
what will the potential buyer want to see61
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
what will the potential buyer want to see62
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
what will the potential buyer want to see63
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
what will the potential buyer want to see64
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
what will the potential buyer want to see65
What will the Potential Buyer want to see?
  • Corporate Status & Structure
  • Financial
  • Contracts
  • Licenses / Permits / Authorizations
  • Real Property; Personal Property
  • Intellectual Property
  • Environmental, Health and Safety (Martha Donovan)
  • Insurance
  • Product Liability
  • Employees; Benefits Issues (Charles Bruder)
  • Litigation and Claims Involving the Company – Criminal, Civil and/or Administrative
what a seller wants
What a Seller Wants
  • To collect his/her money and fly to Tahiti without any lingering concerns about, among other things, environmental liabilities.
what a buyer wants
What a Buyer Wants
  • Complete comfort that there are no environmental liabilities with which it needs to be concerned, either for the real estate it is acquiring or for the business it is acquiring; representations and warranties from the seller that there are no such environmental liabilities; an escrow of a portion of the purchase price to cover any environmental liabilities and an indemnification and hold harmless agreement from the seller if there are any environmental liabilities, just in case the escrow is insufficient to cover everything.
slide69

Two Areas of Concern for Both the Seller and the Buyer

  • The real estate on which the seller operates or has operated; and
  • The ongoing business operations.
slide70

What Affects Both 1 and 2?

  • Transfer statutes that impose obligations on the seller to cleanup all contamination located on the real estate on which it currently or formerly operated.
slide71

Do Such Statutes Exist?

  • Yes. We have one in New Jersey—The Industrial Site Recovery Act or ISRA.
slide72

What Does ISRA Do?

  • It imposes obligations on certain industrial establishments (primarily manufacturing operations), which use more than minor quantities of hazardous substances to investigate and remediate any contamination at the real property (leased or owned) on which this company operated if the contamination was caused by a discharge at that real property (as opposed to migrating onto the real property from an off-site location).
  • Note! ISRA is retroactive, forcing the seller to cleanup contamination at that site no matter who caused it (provided it was caused by an on-site discharge).
slide73

Bottom Line

  • Sellers need to know, before they enter into sales agreements whether or not they are subject to ISRA or some other transfer statute. It is too late once the agreement is signed. The exposure could be in the hundreds of thousands, if not millions, of dollars.
slide74

In the Sales Agreement

  • Buyer demands due diligence before closing (a buyer must do this or face liability itself under various state and federal environmental laws).
slide76

Real Estate

  • Acquiring and reviewing all publicly available information concerning that real property (currently or previously owned or leased) and any possible contamination issues and resolution, if any, of same; and
  • Performing a visual and then an intrusive (soil and groundwater) investigation to determine (on currently owned or leased property) if there is soil/groundwater contamination and if so, if it is coming from an on-site or an off-site source.
the business operations
The Business Operations
  • Does seller have and is seller abiding by the proper permits for air, solid and hazardous waste and water issues?
  • Are there any outstanding violations or enforcement actions by federal or state agencies?
  • Is seller in compliance with OSHA worker safety regulations?
problem with the buyer s necessary due diligence
Problem With the Buyer’s Necessary Due Diligence

What the seller knows can definitely hurt it—Why do I say that?

  • Once a seller knows it has (a) soil or groundwater contamination or (b) is operating without the proper permits or discharging illegally to the local sewerage authority, it has reporting obligations to federal, state and possibly local agencies.
why does the seller care
Why Does the Seller Care?
  • It can receive hefty penalties or even be shut down;
  • To add injury to insult, buyer may walk away from the deal leaving seller with no transaction/no money in its pocket/ and governmental agencies ready to pounce.
one possible solution
One Possible Solution
  • Fashion an agreement with the buyer, as part of the due diligence provision of the sales contract, that it can perform its due diligence both on the real estate and within the facility where operations are conducted, but it must agree not to share the results of its due diligence investigation with the seller no matter what. If buyer decides to back out of the deal, it must never say it was for environmental reasons and must never share the report(s) with any third-parties, including governmental agencies (unless seller decides, in its sole discretion, to ask for all of the reports).
do i just let the buyer into my facility and onto my property willy nilly
Do I Just Let the Buyer Into My Facility and Onto My Property Willy Nilly?
  • No. There must be an access agreement negotiated setting forth particulars of the entrance onto the property (for example on weekends if you don’t want your employees to know that the company is being sold)—containing indemnification and hold harmless provisions running to seller/provisions requiring liability insurance/ provisions requiring the buyer to restore all as they found it/provisions providing notice to the seller when the due diligence will occur and whatever other protections a seller may need to protect itself.
if the buyer decides to proceed with the transaction under the terms of the contract what next
If the Buyer Decides to Proceed with the Transaction Under the Terms of the Contract, What Next?
  • Be prepared to have the buyer attempt to negotiate down the purchase price based on alleged environmental concerns associated with the real estate or business. (You need to decide at this point if you want the reports from buyer or not—of course, the same reporting obligations would apply, but you would at least have an enforceable contract of sale.) I think this one depends on the amount of the discount buyer is proposing.
slide83

Consider purchasing cost cap or environmental impairment liability insurance to cover costs above what is “known” through buyer’s due diligence, rather than providing an indemnity and a hold harmless or an escrow.

  • Attempt To Have Buyer Assume As Much Of The Liability As Possible.
what can you do as a seller to prepare to sell your company
What Can You Do as a Seller to Prepare to Sell Your Company?
  • Organize and keep good records regarding all business-related environmental and OSHA issues including any violations and resolution of same;
  • Retain an expert to examine your facilities and advise whether you have and are operating in compliance with the proper permits before a buyer conducts any due diligence;
slide85

Have that expert conduct a visual inspection (nothing intrusive) related to the real property you own or lease, as well as a review of historical records, to determine whether there is a low or high likelihood of contamination.

what happens to the company s employees
What Happens to the Company’s Employees?
  • What do YOU want to happen to your employees?
    • The structure of the sales transaction may dictate the future of the employees.
    • What are the employee expectations?
    • Once a determination is made, how do you communicate with the employees?
employee issues asset sales
Employee Issues – Asset Sales
  • What happens to the employees?
    • If the buyer agrees, the employees may become employees of the new company
      • Needs to be addressed in the sales agreement
      • Employees now have a new employer
        • Employment Agreements
        • Employee benefits structures
        • Duties, responsibilities and terms of employment
      • Effect on employee benefits arrangements
employee issues asset sales89
Employee Issues – Asset Sales
  • What if the buyer does not agree to hire your employees?
    • Transitional needs
    • Related companies/retained lines of business
    • Employment contracts/severance agreements
    • Special circumstances
      • Collective bargaining agreements
      • Early retirement packages
employee benefits issues asset sales
Employee Benefits Issues - Asset Sales
  • What do you do with your employee benefits plans?
    • Group health plans
      • Termination
      • Coverage continuation issues
      • “Cut-off” dates
    • Qualified Employee Benefits Plans
      • Termination issues
      • Notice requirements
employee issues stock sales
Employee Issues – Stock Sales
  • What happens to the company’s employees?
    • Continued employment for all employees?
      • Transitional employees
      • “Guaranteed” employment periods
    • Sales contract provisions
      • Transition of employee benefits plans/arrangements
      • Employment terms and conditions
employee benefits issues stock sales
Employee Benefits Issues -Stock Sales
  • Employee Benefits Plans/Arrangements
    • Is the buyer assuming the current employee benefits arrangements?
      • Due diligence issues
    • When is the transition date?
    • Who is responsible for the funding of the currently “unfunded” amounts?
    • What about reporting requirements?
      • IRS, DOL, etc.
related employee issues
Related Employee Issues
  • Consulting Agreements
    • Potential income tax issues
  • Non-Qualified deferred compensation arrangements
  • Employee communications
    • WARN notice
    • Other required notices