Without an Exit Strategy Without an Exit Strategy

You Have No StrategyYou Have No Strategy

John Martinka -

“Partner” On-Call Network

StatisticsStatistics

How many medium sized businesses are predicted to sell in the next decade?

StatisticsStatistics

How many of these businesses are prepared for sale?

StatisticsStatistics

According to Kiplinger, those companies without an exit strategy will _________ _______ ____ __ ________.

Statistics – SunTrust BankStatistics – SunTrust Bank75% 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 DisconnectStatistics – 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 Where does the Financial Professional fit?Professional fit?

Financial PlanningMotivationTeam coordinationProtection and tax reliefTax advantaged productsCompensation programsRetirement plans

StatisticsStatistics

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?

DecisionsDecisions

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?

OutsidersInsidersPublic Markets

And I get paid via:Cash, Stock, Notes, Consulting Agreement,

Employment Agreement, Earnout…

Types of BuyersTypes of Buyers

FinancialStrategicHybrid

– Foreign– PEG

Financial BuyersFinancial Buyers

• Individuals• Corporate refugees• Small business owners• Family• Employees

Financial Buyers Look ForFinancial Buyers Look For

SalaryProfitsNet worth increaseSalability in futureA jobManageable risk

StatisticsStatistics

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 BuyersStrategic Buyers

Rapid growth potentialManagement structureGross marginEmployeesSynergyExcess overheadSystems in place

Why do Strategic Buyers Buy?Why do Strategic Buyers Buy?

People – Customers, Employees, VendorsGeographic Synergies, lower overhead, etc.EquipmentEliminate a competitorTo prove you can do itScaling = options & a higher selling price

Hybrid BuyersHybrid Buyers

GrowthEmployees/ManagementSolid practicesStable, non-cyclical industryA 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?

InsuranceInsuranceOn the SellerOn the BuyerKey EmployeeBuy-Sell AgreementDeferred Comp as part of the

financing package

Why Sell a Why Sell a Profitable Business?Profitable Business?

Why Sell?Why Sell?

The 3 D’s a buyer looks for

The 3 DThe 3 D’’ss

DivorceDeath Disability

Reasons affecting the ownerReasons affecting the owner

DivorceDeathDisabilityBurnoutRetirementFamily feudPartnership disputeLife

Earn a better return elsewhere

Company is part of larger firm

Company outgrows owner

Owner is an entrepreneur

Reasons affecting the Reasons affecting the businessbusiness

Owner dies without succession plan

Catastrophic natural eventUninsured damage or legal

claimsLarge loss of salesGovernmental actions or

seizuresPolitical decisions

Fraud or theftWrong business

decisionStrike or labor

disruptionLender changes terms

of financingInvoluntary

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 ConditionsCurrent Conditions2011 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 BothBuy, Be Bought or Both

More buyer optionsHigher multipleMore profits along the journeyMore controlMore 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 Worth?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 firmGrowth is the key

Strategic BuyersStrategic Buyers

Rapid growth potentialManagement structureGross marginEmployeesSynergyExcess overheadSystems in place

ACTIONACTION™™ Plan Plan

A CTION

ACTIONACTION™™ Plan Plan

Arrange all the affairs of the company

CTION

ACTIONACTION™™ Plan Plan

Arrange all the affairs of the company

Coach and counsel the company. Its people, process and systems

TION

ACTIONACTION™™ Plan Plan

Arrange all 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

ION

ACTIONACTION™™ Plan Plan

Arrange all 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

ON

ACTIONACTION™™ Plan Plan

Arrange all 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

ACTIONACTION™™ Plan Plan

Arrange all 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 Pitfalls6 Seller Pitfalls

6 Seller Pitfalls6 Seller Pitfalls

No selling planReason for sellingWeak non-financial factorsNot being prepared (tell a story)Poor financial systems and recordsNot properly screening buyers

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 BuyerCase Study – Industry Buyer

Management structureProtecting trade secretsThe buyer wants…?EmployeesLease, etc.CultureThe seller’s role post-sale

Case Study – Industry BuyerCase Study – Industry Buyer

Service BusinessQuasi competitors (different cities)Buyer was 5-7X as bigWeak management structure (seller)Lease, equipment, T1 lines, etc.Culture differencesSeller to remain in a sales role

Case Study – Industry BuyerCase Study – Industry Buyer

Background – the story Planning yields benefitsResultsIndustry offersSeller’s next stepThe returnA deal, a post-mortem

Case Study – Industry BuyerCase Study – Industry Buyer

Insurance needs–Where do you see a need?BuyerSellerManagementPensionBenefits

Case Study – Family SaleCase 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 SaleCase Study – Family SaleDistribution CompanyDistribution 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 SaleCase Study – Family SaleDistribution CompanyDistribution Company

Dad bought companyMom kept job, came on board laterDad-CEO; Mom-CFOFast growth with both in management rolesInitial valuationBusiness plan for growthFamily succession or outside buyer?

Case Study – Family SaleCase Study – Family SaleDistribution CompanyDistribution Company

Son got outside experienceHired son as salespersonPromoted to sales managerGift of 10% of stockDaughter-in-law hired as office managerSecond valuation20-year payment plan from son to parents

Case Study – Family BuyerCase Study – Family Buyer

Insurance needs–Where do you see a need?KidsParentsManagementPensionBenefits

Keep in touchKeep in touch

John Martinka425-576-1814partneroncall/johnmartinka.comjohn@johnmartinka.comBlog: johnmartinka.com Free e-mail newsletter “The Business Buy,

Sell & Growth Advisor”