Evolve (for UofC) Final 8-17-09 v1

8/14/2019 Evolve (for UofC) Final 8-17-09 v1

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Moving On:

Preparing to Sell and Transition Outof Your Business



• 77 million baby boomers age 41 to 60.

• 40% of businesses are owned by boomers.

• That’s 4.5 million privately owned businesses.

• 50% to 80% of owners plan to exit within the next10 years.

Business Owner Demographics:

Business owners indicate the mostimportant transition objectives include:

• Achieving personal financial security

• Maintaining harmony with the family

• Controlling how and when they leave

• Minimizing taxes



However;

• Only 1 in 10 owners receive a priceanywhere close to what they wanted.

• More than half of all deals fall apart in duediligence.

• 75% of business owners regret selling theirbusiness 12 months after the closing.

If 75% had regrets...

What went right for the other 25%?



How not to sell your business:

Step One:

Casual discussions.


Step One:

Casual discussions.

Ask for “how to” advice.




Step One:

Casual discussions.


Hire a Professional.

Step Two:

Get annoyed with peop le in Step One.


Step One:

Casual discussions.





Step Two:

Get annoyed with people in Step One.

Get surprised by any price offered.


Step One:

Casual discussions.



Step Two:

Get annoyed with people in Step One.

Get surprised by any price offered.

Get mad and w alk away.


Step One:

Casual discussions.





What’s the problem?

Improper or no planning!

• 58% no plan

• 33% yes, informal not written

• 9% yes, formal written

So what’s the point of planning:

The primary goal is to transition you out of your business.

Selling your business is an optional step in that process.



The 5 Steps to Business Owner Transition:

Step One… Visualize your Life

Step Two… Choose your Buyer

Step Three… Build your Value

Step Four… Harvest your Wealth

Step Five… Live your Life

Step One: Visualize your Life after business.

Your Mind

Your

Identity

Your

Security

You need a new mental construct.

For years you and your business have been

inseparable. You will get tripped-up trying to

leave your business unless you have a good

mental picture of yourself after you leaveyour business.



Hobbies and activities won’t be enoughto satisfy all your mental energy.

What will you engage in that will sufficiently

stimulate and challenge your mind, leverage

your experiences, and keep you around people

who give you as much energy as you give to

the relationship?


Your Mind

Your

Identity

Your

Security

We all need a tree house and acalling card.

• Where will you go?

• How will people find you?

• Whom will you say you are to new

acquaintances?

• What needs to occur with respect to your

family role or legacy?


Your Mind

Your

Identity

Your

Security



How much money do you need?

• How much money does your spouse think

you need?

• What expenses will no longer be paid for by

the business?

• How and where will you channel your insatiable

need to take risk?

• What kind of professional help will you need to

make your investments last?


Your Mind

Your

Identity

Your

Security

Step Two:Choose your Buyer that will achieve the result you most desire.

What I w ant most is:

• Reward my employees.

• Get the most money I can.

• Keep the business, lose the job.

• See my children continue what I started.

• See my management team gradually take over.

• Keep control as long as possible, diversify alongthe way.

• Sell to a third-party but maintain our corporatepresence in the community.

Third Party

Family

Employee

Co-Owner

Yourself



Options: Price:

Known third-party- Competitor $- Vendor / Supplier $- Customer $

Unknown third-party- Industry Player $$- Financial $$$

- Strategic $$$$


Third Party

Family

Employee

Co-Owner

Yourself

Source: Mergerstat / Thomson Financial

0

2000

4000

6000

8000

10000

12000

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1993199419951996199719981999200020012002 2003 2004 2005 2006 2007 2008

LTM

N u m b e r o f D e a l s

T r a n s a c t i o n V a l u e ( $ b n )

Value Deals

U.S. M&A Activity



Funded By:

Discounted Stock

Future Cash Flows

Future Cash Flows

Discounted units of

Ownership

Options

Gifting

Installment Sale

Private annuities

Family Limited

Partnership


Third Party

Family

Employee

Co-Owner

Yourself

Negotiated Sale • Leveraged buy-out

• Installment note

• Earn out

• Cash

ESOP•

Bank financing• Un-taxed profits

Equity IncentivePlan

• Non-voting, non-marketable stock

• Phantom stock

• Stock appreciation rights

Funded By:Options


Third Party

Family

Employee

Co-Owner

Yourself



Negotiated Sale • Leveraged buy-out

Right of first refusal • Installment note

• Earn out

• Cash

Event driven sale • Life insurance proceeds

• Installment note

Funded By:Options


Third Party

Family

Employee

Co-Owner

Yourself

Become an

“investor” ‐owner

• Salary and benefits

• Profit distributions

Refinance or

Recapitalize

• Asset borrowing or

stock dilution

Liquidation • Asset auction/sale

Funded By:Options


Third Party

Family

Employee

Co-Owner

Yourself



Step Three:Building Your Value for the biggest most important sale of your life.

First understand w hat you have, thenenhance it.

Valuation Types:

• Rough estimate

• Valuation opinion

• Fair Market Value (study/report)

• Market value

Valuation

ValueDrivers

Pre-DueDiligence

Tax

Planning

AdvancedPlanning

ExitRoute

ExitOption

ValuationType

ResultingValue

Family Gifting/GRATFair Market Value

IRS 59-60$6,500,000

Owners Buy-SellAgreement Valuation Opinion $9,000,000

Third-PartyBuyer

ControlledAuction

Market Value $10,250,000

Different Values for the Same Company



Lower Middle Market EBITDA Multiples

6.2 5.95.5 5.3 5.3 5.5

6.1 6.2 6.26.7 6.8

5

0

1

2

3

4

5

6

7

8

9

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

E s t .

Value Drivers

• Stable & Motivated Management Team

• Steady, Sustainable Cash Flows

• Sound, Healthy Balance Sheet

• Diversified, Transferable Customers/Vendors

• Industry Standard Gross Margins or Better

• Documented, Protected Intellectual Property

• Brand Identity and Reputation


Valuation

ValueDrivers

Pre-DueDiligence

TaxPlanning

AdvancedPlanning



Value Factors

• Attitude of Owner

• Family/Partner Consensus

• Barriers to Entry

• Historical Performance

• Realistic Projections

• Marketing Literature

• Fixed Assets

• Co-mingled personal assets

• Employees

• Family Employees

• Inventory Condition

• Lawsuits

• Unpaid Taxes

• Environmental Issues

• Regulatory Issues


Valuation

ValueDrivers

Pre-DueDiligence

Tax

Planning

AdvancedPlanning

Document, Document, Document!

• Corporate

• Accounting

• Indebtedness

• Tax Records• Litigation

• Insurance

• Governmental Compliance

• Employee Matters

• Contracts & Arrangements

• Equipment

• Property• Intellectual Property

• Environmental


Valuation

ValueDrivers

Pre-DueDiligence

TaxPlanning

AdvancedPlanning



Company Structure & Deal Structure

• Company structure (S, C, LLC)

• Tax timing

• Asset vs. Stock sale

• Goodwill allocation

• Capital gain vs. ordinary income


Valuation

ValueDrivers

Pre-DueDiligence

Tax

Planning

AdvancedPlanning

Lowest Capital Gains Rates in History

0.005.00

10.0015.00

20.0025.0030.0035.0040.0045.00

C a p i t a l G a i n s R a t e

Capital Gains Tax Rates(Historic & Projected)



Advanced Planning

• Grantor Retained Annuity Trust (GRAT)

• Charitable Trusts (CRT, CLT)


Valuation

ValueDrivers

Pre-DueDiligence

Tax

Planning

AdvancedPlanning

You’re still in charge here!

Rely on your lead advisor but don’t leavehim alone. You want a collaborative, bestminds custom designed solution for you.

All stakeholders need to be taken into

Consideration.

Your personal objectives should drive theprocess. Don’t let someone else’s bestintentions cloud your vision.

Step Four:Harvest Your Wealth, Be the Boss, Maintain Your Leadership.

FindBuyers

EvaluateOffers

DueDiligence

SaleAgreements

Close &Celebrate



Plan your Marketing Strategy:

• Prepare a Teaser

• Deal room development

• Identify and screen potential buyers

• Approach potential buyers & identify levelof interest

• Non-disclosure Agreement

• Confidential Information Memorandum(the Book)


FindBuyers

EvaluateOffers

DueDiligence

SaleAgreements

Close &Celebrate

Review Proposals

• Review letters of interest and rank offers

• Management meetings with vetted qualified

buyers.

• Evaluate formal Letters of Intent (LOI)

• Optional bidding auction to improve priceor terms among lead offers.


FindBuyers

EvaluateOffers

DueDiligence

SaleAgreements

Close &Celebrate



Due Diligence

• Manage and coordinate:

meetings information exchange buyers visits

• Prepare special reports

• Refine deal structure terms and conditions

• Maintain Transaction Momentum


FindBuyers

EvaluateOffers

DueDiligence

SaleAgreements

Close &Celebrate

Making the Deal Legal:

• Negotiate transaction details

• Separate the business deal from legal deal

• The importance of a Transaction Attorney

Reps & Warranties

• Other Important Agreements

Non-Compete Employment after closing Real estate owned/leased

• Keep Momentum

• Get the “right deal” to the closing table


FindBuyers

EvaluateOffers

DueDiligence

SaleAgreements

Close &Celebrate



The Finish Line

• Be prepared to be underwhelmed at the close

• This is a bad time to bring up a new issue

• Make sure you have removed all personal

guarantees

• Did you provide the correct wire instruction info?

• How will announcements be handled?• Party with the people that got you here


FindBuyers

EvaluateOffers

DueDiligence

SaleAgreements

Close &Celebrate

Be patient,

… Transition takes 1 to 3 years.

Step Five:Live Your Life!

CEO of You

Always AnEntrepreneur

Share Your

Story

LeadSomething

Hang Out w/Great People




CEO of You


Share YourStory

LeadSomething


…and COO, CFO & Janitor

• First things First: Set aside tax dollars Pay off debt Fund your envelops Update your estate documents

• Make written Plans: Willing to do/not willing to do What I believe Great adventures list

• Manage your Money: Income simulation programs Personal investing policy Financial advisor team

It’s in your DNA:

• Entrepreneurs love to build and create stuff

• Entrepreneurs like to take risk

• “you” Inc.

• e-money


CEO of You


Share Your

Story

LeadSomething




Real life Experience & Wisdom:

• Your story is a huge help to anothertransitioning owner

• Many young entrepreneurs would love tohang out with you

• Non-profits would benefit from your story

• Don’t underestimate the value and

importance of your story


CEO of You


Share YourStory

LeadSomething



CEO of You


Share Your

Story

LeadSomething


Turn your success into significance:

• Lead in your family

• Lead in your community

• Lead in a non-profit

• Lead your business colleagues




CEO of You


Share YourStory

LeadSomething


People matter:

• The Power of Community: Our relationships define us We are the average of the people we hang with

• Networking and learning should never cease

• Business owner mentoring is like grand-

parenting; you get to watch them mess upand then go home

The 5 Steps to Business Owner Transition:

Step One… Visualize your Life

Step Two… Choose your Buyer

Step Three… Build your Value

Step Four… Harvest your Wealth

Step Five… Live your Life



Questions & Answers

Moving On:Preparing to Sell and Transition Out

of Your Business

evolve is:

a community of business owners in transitionOn-line learning, sharing, connecting community

Monthly half-day peer group meetings

One-to-one mentoring

Quarterly networking gatherings



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Evolve (for UofC) Final 8-17-09 v1

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