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Succession by Design

Bob Ward – WARDden LLC

A blueprint for wealth creation and business continuity

Succession – One After the Other

When businesses are built to endure, everyone wins:

Retiring Owners

Successor Buyers

Employees

Customers

Communities

Every Business Needs a Plan

Family Wealth Preservation

Business Continuity

Intentional Results vs. Chaotic Consequences

Realization of Enterprise Value

A Rewarding Legacy

Reasons to Get it Done Now

Your business survives even if you don’t

Provides for your spouse and family’s security

Reduces employee turnover

Increases profitability

Your business is always ready for sale

Time is an asset – let it work for you

Business Continuity

Activation

Operational Authority

Employee Retention

Financial Stability

System Operations

Professional Resources

What is Your Business Worth?

Assets at FMV+

(Enterprise Value x Market Multiple)

= Sale Value

Assets at Fair Market Value

Accounts Receivable: Percent collectable

Inventory: Cash return parts @100%, balance will be discounted to marketability

Furniture, Fixtures, Equipment: Value at auction

Any business debt assumed by a buyer will be subtracted from assets value to arrive at Net Assets being purchased

Enterprise Value

Enterprise value is the cash flow generated by your people, utilizing the assets, and represents

an investor’s Return On Investment

Cash Flow = Net Income + Adjustments

Compelling Inspiration

“The growth and development of people is the highest calling of leadership.”

“It is only as we develop others that we permanently succeed.”

Harvey Firestone

Adjustments to Cash Flow

1. Interest, Taxes, Depreciation, Amortization

2. Personal items expensed to the business

3. Non-recurring extraordinary items

4. Owner lease payments above or below market rate

5. Owner’s salary & benefits above or below replacement rate

Owner’s Pay Normalization

1. Owner ($50,000) is NOT REQUIRED for the successful operation of the business – No replacement required:

Add $50,000 to Cash Flow

2. Owner ($36,000) is REQUIRED for the successful operation of the business – Market rate for replacement is $50,000:

Subtract $14,000 from Cash Flow

Summary - Enterprise Value

Net Profit – As Reported $80,000

Interest Expense $5,000

Depreciation $10,000

Owner Underpaid (required staff) -$14,000

Personal Gas, Maintenance, Insurance, Cellphones, Cable $10,000

Lease Payment in Excess of Market $9,000

Net Profit – As Adjusted (True Cash Flow) Enterprise Value $100,000

Cash Flow = Net income + Adjustments

Market Multiple

A multiple (premium) of enterprise value (cash flow) that a buyer would pay in exchange for

the required risk-adjusted return on invested capital

Security and consistency of cash flow drives the multiple (e.g. 0 – 4 x $100,000)

$000,000 - $400,000

Lower Risk Influences a Higher Multiple

Market Multiple – Key Influencers

Site Security: Lease Terms; Option to Purchase; FROP; FROR

Revenue Trend: Company and Industry Comparable (3 years)

Profit Margin Trend: Company and Industry Comparable

Employee Stability: Key Employee Tenure and Responsibility

Owner Autonomy: Operational Independence from Owner

Audience Reality Exercise - A

Site Security: Lease 3y + 5y; P-Option(N), FROP/FROR(N)

Revenue Trend: +2% -7% +4% +3%

Profit Margin Trend:-4% -6% +9% +1%

Employee Stability:

8 EE’s: Average Tenure = 3.5 years

Top 2 positions: #1 = 2 years and #2 = 4 years

Owner Autonomy: Works 50 hours week as Manager

Audience Reality Exercise - B

Site Security: Lease 3y + 15y; P-Option(N), FROP/FROR(Y)

Revenue Trend: +5% +9% +9% +12%

Profit Margin Trend: +7% +8% +12% +10%

Employee Stability:

8 EE’s: Average Tenure = 7 years

Top 2 positions: #1 = 12 years and #2 = 14 years

Owner Autonomy: Works 15 hours week Coaching Staff

Audience Reality Exercise - A

Site Security: Lease 3y + 5y; P-Option(N), FROP/FROR(N) 1

Revenue Trend: +2% -7% +4% +3% 1

Profit Margin Trend: -4% -6% +9% +1% 1

Employee Stability: 1

8 EE’s: Average Tenure = 2.5 years

Top 2 positions: #1 = 2 years and #2 = 4 years

Owner Autonomy: Works 50 hours week as Manager 0

Audience Reality Exercise - B

Site Security: Lease 3y + 15y; P-Option(N), FROP/FROR(Y) 3

Revenue Trend: +5% +9% +9% +12% 3

Profit Margin Trend: +7% +8% +12% +10% 3

Employee Stability: 4

8 EE’s: Average Tenure = 7 years

Top 2 positions: #1 = 12 years and #2 = 14 years

Owner Autonomy: Works 15 hours week Coaching Staff 4

Audience Reality - Results

Enterprise Value = $100,000 Business A Business B

Site Security 1 3

Revenue Trend 1 3

Profit Margin Trend 1 3

Employee Stability 1 4

Owner Autonomy 0 4

Indicated Market Multiple 4 / 5 = 0.8 18 / 5 = 3.6

Suggested Enterprise Value $80,000 $360,000

Compelling Inspiration

“Outstanding leaders go out of the way to boost the self-esteem of their personnel. If people believe in themselves, it’s amazing what they can accomplish.”

Sam Walton

What is Your Business Worth?

Assets at FMV+

(Cash Flow x Market Multiple)

= Suggested Value

Build a Valuable Enterprise

Define your objective – What do you want?

Work each day with the end in mind

Build the business to operate without you

Hire Partners Not Employees

Ensure Your Succession

Exit Options

Liquidation

Unsolicited Outside Buyer

Brokered Sale

Inside (Employee) Buyer

Financing Options

1. Purchaser Cash

2. Bank Financing: Assets x (75% - 85%)

3. Owner Financing

Cash / Equity Accumulation / Bank Financing

Succession Creativity

Comparing Two Options

$400,000 Cash Payment

– You invest @ 5% for 10 years = $200,000) = $600,000

Succession Creativity

Cash / Equity Accumulation / Bank Financing

– Sell 5% a year for 10 years; Bank assists balance financing

– $200,000 + $725,000 dividends + $200,000 cash out

– = $1,125,000 (plus earnings on payments)

Letter of Intent

“Formal Handshake”

Sale Terms

Conditions

Contingencies

Property Sale or Lease Terms

Succession Plan Killers

Losing focus of the goal

Procrastination

Unrealistic expectations

Business not ready for sale

Skepticism, mistrust, selfishness

Time – Progress too slow – Enthusiasm wanes

Succession in Real Life

Doug Knutzen

Long Beach, Washington

Millie Showers

Succession in Real Life

Steeleville, Illinois

Matt & Andrea Mevert

Homework Assignments

Decide what you really want in your life Maintain a Business Continuity Plan Maintain a Business Profile (Always ready for sale) Build your business to operate without you Don’t hire employees – cultivate Partners Plan your succession Have the essential conversation with your staff

The Essential Conversation

“Key Employee,

“I’m working on my plan for the future of (business) and my retirement one day. You’re an important part of that planning and I want to know what’s important to you and your family.

– Where do you want to be in the next 5 – 10 years?

– What are your aspirations?”

Compelling Inspiration

“The greatest good you can do for another is not just to share your riches, but to reveal to him his own.”

Benjamin Disraeli

It’s Time to Begin

Perpetuating Successful Small Business in America

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Your business, your future – We’ll help you get it done.

Compelling Inspiration

“The essence of competitiveness is

liberated when we make people

believe that what they think and do is

important – and then get out of their

way while they do it.”

“Giving people self-confidence is by far

the most important thing that I can do

because, then they will act.”Jack Welch

Thank You!

Succession by Design

Bob Ward – WARDden LLC

A blueprint for wealth creation and business continuity

Seminar Presentations Available for Download Until June 10, 2015

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