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Without an Exit Strategy You Have No Strategy. John Martinka - “ Partner ” On-Call Network. Statistics. How many medium sized businesses are predicted to sell in the next decade?. Statistics. How many of these businesses are prepared for sale?. Statistics.

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without an exit strategy you have no strategy
Without an Exit Strategy You Have No Strategy

John Martinka -

“Partner” On-Call Network

statistics
Statistics
  • How many medium sized businesses are predicted to sell in the next decade?
statistics1
Statistics
  • How many of these businesses are prepared for sale?
statistics2
Statistics
  • According to Kiplinger, those companies without an exit strategy will _________ _______ ____ __ ________.
statistics suntrust bank
Statistics – SunTrust Bank
  • 75% of business owners ultimately plan to sell or pass along their business as part of their exit plan
  • 23% of owners are looking to expand and/or acquire other businesses
  • 60% have delayed their exit plans by, on average, two years due to the Great Recession
  • 42% feel maximizing their business’s value is the most important part of their exit plan
statistics the disconnect
Statistics – The Disconnect
  • 11% of owners have lowered their expectations for the value of their business as a result of the current economy (SunTrust)
where does the financial professional fit
Where does the Financial Professional fit?
  • Financial Planning
  • Motivation
  • Team coordination
  • Protection and tax relief
  • Tax advantaged products
  • Compensation programs
  • Retirement plans
statistics3
Statistics
  • The number one mistake small businesses make is ____________________.
  • Those with a business plan have, on average, sales and profit growth ____% more than those without a plan?
decisions
Decisions
  • What is my business worth?
  • Is it even salable?
  • Do I sell all or part of my business?
  • When? Now, six months or six years?
  • Who do I sell to?
who do i sell to
Who Do I Sell To?
  • Outsiders
  • Insiders
  • Public Markets

And I get paid via:

  • Cash, Stock, Notes, Consulting Agreement, Employment Agreement, Earnout…
types of buyers
Types of Buyers
  • Financial
  • Strategic
  • Hybrid
    • Foreign
    • PEG
financial buyers
Financial Buyers
  • Individuals
  • Corporate refugees
  • Small business owners
  • Family
  • Employees
financial buyers look for
Financial Buyers Look For
  • Salary
  • Profits
  • Net worth increase
  • Salability in future
  • A job
  • Manageable risk
statistics4
Statistics
  • There are ______ more people in the baby boomer generation than Gen X
  • Rank the generations in terms of entrepreneurship
  • ___ Baby Boomer
  • ___ Gen X
  • ___ Gen Y
strategic buyers
Strategic Buyers
  • Rapid growth potential
  • Management structure
  • Gross margin
  • Employees
  • Synergy
  • Excess overhead
  • Systems in place
why do strategic buyers buy
Why do Strategic Buyers Buy?
  • People – Customers, Employees, Vendors
  • Geographic
  • Synergies, lower overhead, etc.
  • Equipment
  • Eliminate a competitor
  • To prove you can do it
  • Scaling = options & a higher selling price
hybrid buyers
Hybrid Buyers
  • Growth
  • Employees/Management
  • Solid practices
  • Stable, non-cyclical industry
  • A good “feel” (for the future)
  • Profit and salary
your situation
Your Situation

Who is your logical buyer?

Why me?

Why now?

What is their motivation?

insurance
Insurance

On the Seller

On the Buyer

Key Employee

Buy-Sell Agreement

Deferred Comp as part of the financing package

why sell
Why Sell?
  • The 3 D’s a buyer looks for
the 3 d s
The 3 D’s
  • Divorce
  • Death
  • Disability
reasons affecting the owner
Reasons affecting the owner

Divorce

Death

Disability

Burnout

Retirement

Family feud

Partnership dispute

Life

Earn a better return elsewhere

Company is part of larger firm

Company outgrows owner

Owner is an entrepreneur

reasons affecting the business
Reasons affecting the business

Owner dies without succession plan

Catastrophic natural event

Uninsured damage or legal claims

Large loss of sales

Governmental actions or seizures

Political decisions

Fraud or theft

Wrong business decision

Strike or labor disruption

Lender changes terms of financing

Involuntary bankruptcy possible

when to sell
When to sell?
  • Experts say get prepared ___ to ___ years before selling
  • Why?
  • ___% of owners have to tell a “story”
  • Sell one year _____ ___ ___ _____ ___
current conditions
Current Conditions
  • 2011 market conditions
    • Serious buyers, fewer in number though
    • Serious sellers, coming out from their shell
    • Willing banks???
      • What do they want?
      • What don’t they like?
    • Is this business “recession proof”
buy be bought or both
Buy, Be Bought or Both
  • More buyer options
  • Higher multiple
  • More profits along the journey
  • More control
  • More cash at closing
what s it worth
What’s it Worth?
  • It’s a function of profit (EBITDA, free cash flow, etc.)
  • If not, you better be attractive to bigger companies, or,
  • Your value is based on your net asset value (and you’re worth less than the value based on profit )
what s it worth1
What’s it Worth?

From Rob Slee’s, “Midas Managers:”

  • $1-5MM in sales = 2-3 X EBITDA
  • $5-50MM in sales = 4-7 X EBITDA
  • You can bet a $40MM firm will get closer to 7X than a $5MM firm
  • Growth is the key
strategic buyers1
Strategic Buyers
  • Rapid growth potential
  • Management structure
  • Gross margin
  • Employees
  • Synergy
  • Excess overhead
  • Systems in place
action plan1
ACTION™ Plan
  • Arrange all the affairs of the company
  • C
  • T
  • I
  • O
  • N
action plan2
ACTION™ Plan
  • Arrange all the affairs of the company
  • Coach and counsel the company. Its people, process and systems
  • T
  • I
  • O
  • N
action plan3
ACTION™ Plan
  • Arrangeall the affairs of the company
  • Coach and counsel the company. Its people, process and systems
  • Transmit and teach all the good “things” about your firm
  • I
  • O
  • N
action plan4
ACTION™ Plan
  • Arrangeall the affairs of the company
  • Coach and counsel the company. Its people, process and systems
  • Transmit and teach all the good “things” about your firm
  • Intricacies that make your company special
  • O
  • N
action plan5
ACTION™ Plan
  • Arrangeall the affairs of the company
  • Coach and counsel the company. Its people, process and systems
  • Transmit and teach all the good “things” about your firm
  • Intricacies that make your company special
  • Operations and management systems in place that will make a transition smooth
  • N
action plan6
ACTION™ Plan
  • Arrangeall the affairs of the company
  • Coach and counsel the company. Its people, process and systems
  • Transmit and teach all the good “things” about your firm
  • Intricacies that make your company special
  • Operations and management systems in place that will make a transition smooth
  • Numbers, all the financials in understandable form, straightforward with no “tricks”
6 seller pitfalls1
6 Seller Pitfalls
  • No selling plan
  • Reason for selling
  • Weak non-financial factors
  • Not being prepared (tell a story)
  • Poor financial systems and records
  • Not properly screening buyers
slide40

CREATIVE FINANCING = LOW DOWN PAYMENT

Why? To get a deal done!

  • Savings & Investments
  • Private party loan to buyer
  • Buy excess assets and sell off
  • Buy inventory as needed
  • Sell shares to employees
  • Recruit equity partner
  • Buy cash and Accounts Receivable
  • Balloon payments, interest only loans, etc.
  • SBA guaranteed bank loan – current situation
  • 401k rollover (Guidant Financial, Bellevue)
  • Insurance
case study industry buyer
Case Study – Industry Buyer
  • Management structure
  • Protecting trade secrets
  • The buyer wants…?
  • Employees
  • Lease, etc.
  • Culture
  • The seller’s role post-sale
case study industry buyer1
Case Study – Industry Buyer
  • Service Business
  • Quasi competitors (different cities)
  • Buyer was 5-7X as big
  • Weak management structure (seller)
  • Lease, equipment, T1 lines, etc.
  • Culture differences
  • Seller to remain in a sales role
case study industry buyer2
Case Study – Industry Buyer
  • Background – the story
  • Planning yields benefits
  • Results
  • Industry offers
  • Seller’s next step
  • The return
  • A deal, a post-mortem
case study industry buyer3
Case Study – Industry Buyer
  • Insurance needs–Where do you see a need?
  • Buyer
  • Seller
  • Management
  • Pension
  • Benefits
case study family sale
Case Study – Family Sale
  • Who? Kids, one kid, management?
  • Do they want the business?
  • Do they want the responsibility?
  • Will they put any money in the deal?
  • Do they expect a gift?
  • What’s it worth?
  • How long do mom and/or dad stay on?
case study family sale distribution company
Case Study – Family SaleDistribution Company
  • Discussion issues:
    • Who?
    • When?
    • How?
    • Future success?
    • If one child, what about the others?
    • Payment (this is mom & dad’s retirement)
case study family sale distribution company1
Case Study – Family SaleDistribution Company
  • Dad bought company
  • Mom kept job, came on board later
  • Dad-CEO; Mom-CFO
  • Fast growth with both in management roles
  • Initial valuation
  • Business plan for growth
  • Family succession or outside buyer?
case study family sale distribution company2
Case Study – Family SaleDistribution Company
  • Son got outside experience
  • Hired son as salesperson
  • Promoted to sales manager
  • Gift of 10% of stock
  • Daughter-in-law hired as office manager
  • Second valuation
  • 20-year payment plan from son to parents
case study family buyer
Case Study – Family Buyer
  • Insurance needs–Where do you see a need?
  • Kids
  • Parents
  • Management
  • Pension
  • Benefits
keep in touch
Keep in touch
  • John Martinka
  • 425-576-1814
  • partneroncall/johnmartinka.com
  • john@johnmartinka.com
  • Blog: johnmartinka.com
  • Free e-mail newsletter “The Business Buy, Sell & Growth Advisor”