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Selling Your Business: Prepare Now for What Lies Ahead

Get ready to sell your business with this comprehensive guide. Learn how to adopt the right mindset, prepare internally, find potential buyers, negotiate deals, and more. Don't miss out on maximizing the value of your business before moving on to your next adventure.

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Selling Your Business: Prepare Now for What Lies Ahead

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

  2. Welcome!

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

  4. 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!

  5. Possible Time Lines

  6. 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.

  7. 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

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

  9. 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?

  10. 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

  11. 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

  12. 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

  13. 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?

  14. 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?

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

  16. 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.

  17. 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.

  18. 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

  19. 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)

  20. 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.

  21. 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

  22. 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

  23. 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)

  24. 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

  25. 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

  26. 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!

  27. 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

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

  29. 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

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

  31. 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?

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

  33. 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

  34. 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

  35. 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

  36. 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?

  37. 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%

  38. 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

  39. 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 ***

  40. 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

  41. Representative Example – Preliminary Valuation

  42. Due Diligence Scott Baach

  43. Buyer’s purpose?

  44. How does it feel?

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