Are You Maximizing the Value of Your Business?

Presented by:Richard Jackim

The CHRISTMAN Group LLC

Contents excerpted from “The $10 Trillion Opportunity:

Designing Successful Exit Strategies for Middle Market Business Owners” by Richard E. Jackim and Peter G. Christman,

available at www.exit-planning-institute.org and major on-line booksellers.

Triggering Event

What’s the Number One driver of business transitions each year?

Retirementsource: American Family Business Survey – MassMutual 2002

Timing

That means that business owners have some control over at least the timing of their exit.

But will that exit be successful?

What’s Success?

How Would You Define a Successful Exit Highest sales price? Fastest sales process? Accomplish personal goals? Highest net proceeds? Best strategic fit?

Would You Be Surprised to Learn

For 80% of business owners, maximizing sales price was NOT their top priority?

Just Like Gambling

In effect Owners play the exit slot machine … but the rules are different.

Getting three in a row means you lose, not win!

BUSINESS BUSINESS BUSINESS

LOSE!!!

Credit: Thanks to Rob Slee for this powerful analogy!

75% of business owners report regretting selling their business 12 months after the closing. WHY?

They failed to line up the three spinning wheels.

To win you must get the three different issues to line up perfectly at the same time.

PERSONAL BUSINESS MARKET

WINNER!!!

This requires a great deal of planning or a great deal of luck!

We’ll explore each topic in detail

Let’s start with Personal Issues

Personal Issues

PERSONAL BUSINESS MARKETPERSONAL PERSONAL PERSONAL

The Macro Picture

77.7 million baby boomers in the United States are now between the ages of 41 and 60 years old.

That’s 27.5% of the total U.S. population.

28.3% of all businesses are owned by baby boomers – that’s 4 million privately owned companies.

Retirement is the number one reason that business owners exit their companies.

The Macro Picture

Personal Situation

Studies by PriceWaterhouseCoopers, MassMutual, Marquette University and others show that 1 out of every 2 businesses will experience a change in ownership over the next 15 years.

75% of these business owners do not have any idea how they will exit from their businesses when they do decide to retire.

25% have no formal estate plan in place.

Where do your clients fit?

Personal Goals

Create family legacy Reward loyal employees Maintain community presence Stay involved in business Benefit charitable interests Fund retirement lifestyle Enjoy more spare time Reduce stress

Exit Options

1. Transfer Ownership to Family Members2. Sell to Other Shareholders3. Sell to Management (“MBO” or “LBO”)4. Sell to an Employee Stock Ownership Plan

(“ESOP”)5. Sell to a Third Party6. Refinance or Recapitalize the Business7. Go Public8. Liquidate the Business

Business Issues

PERSONAL BUSINESS MARKETBUSINESS BUSINESS BUSINESS

Business Valuation

Retirement/Financial planning

Estate tax

Gift tax

Life insurance

Shareholder agreements

Buying or selling a business

Corporate finance

What Type of Valuation is Necessary?

Rough Estimate

Valuation Opinion

Market Valuation

IRS Sec. 59-60 Valuation

Definition of Value

Fair Market Value

Market Value

Investment Value

Liquidation Value

Different Values for the Same Company

ExitChannel

Exit Option

ValuationAuthority

Value Standard

Resulting Value

Family Gifting/GRAT IRS Fair Market Valuewith discounts

$6,500,000

Owners Buy-SellAgreement

Owners Negotiated value orFair Market Value

$9,000,000

Third-Party Buyer

ControlledAuction

Buyer,Seller andtheiradvisors

Investment Value orMarket Value

$10,250,000

Business Issues

Increase profitability Reduce customer concentration Groom management successor Increase revenues Expand market share Reduce cyclicality

Value Factor Analysis

•Attitude of Owner •Market Position

•Family/Partner Consensus •Corporate Structure

•Barriers to Entry •Lawsuits

•Historical Performance •Taxes

•Products/Services •Environmental

•Management Team •OSHA

•Sales and Marketing Literature •Intellectual Property

•Customer Base •Track Record

•Product/Service Quality •Operating Margins

•Employees •Shareholder’s Equity

•Fixed Assets •Economy

A fundamental analysis of a company’s strengths and weaknesses from a buyer’s perspective

Value Enhancement Opportunities

High

Value

Low

High Value, Low Importance

High Value, High Importance

Low Value, Low Importance

Low Value, High Importance

Low Importance High

Keeping Valuable Employees

Determine who is key or essential to the business and who is not. Look at impact on Sales and profits Potential exposure of trade secrets and

loss of employees to competitors Plans for expansion Operations Morale/loyalty of other employees Mentoring of successor managers Customer relations

Keeping Key Employees

Cash compensation Non-cash Benefits Stay Bonuses Stock Incentives Restricted Stock Phantom Stock

Measurement Tools

Financial benchmarks Operational benchmarks Marketing benchmarks Other

Make sure they are significant,relevant and measurable.

Market Issues

PERSONAL BUSINESS MARKETMARKET MARKET MARKET

Current Market Conditions

U.S. M&A Deals Value vs. Volume

0

2000

4000

6000

8000

10000

12000

14000

1995 1996 1997 19981999 2000 20012002 2003 2004 2005

Nu

mb

er o

f D

eals

0

2000

4000

6000

8000

10000

12000

14000

To

tal

Val

ue

($b

illi

on

s)

Total Value Number of Deals

Why Is the Market Hot?

Favorable tax environment Available bank funding Aggressive buyers Strong economy Low inflation

$200 Billion in Available Funds

Private Equity Fund Raising

$-

$20

$40

$60

$80

$100

2000 2001 2002 2003 2004 2005

Fu

nd

s R

aise

d

($b

illi

on

s)

0

50

100

150

200

No

. o

f N

ew F

un

ds

$ Raised # Funds

Available Bank Debt

Senior Debt/EBITDA 3.8x  

Total Debt/EBITDA 4.2x

Requires 1 to 5 equity to total debt ratio

Current Market Conditions

Lower Middle Market EBITDA Multiples

6.2 5.95.5 5.3 5.3 5.5

6.1 6.2

0

1

2

3

4

5

6

7

8

9

1998 1999 2000 2001 2002 2003 2004 2005

Lowest Capital Gains Rates in History

Capital Gains Tax Rates (Historic & Projected)

0.00

10.00

20.00

30.00

40.00

50.00

19

34

19

39

19

44

19

49

19

54

19

59

19

64

19

69

19

74

19

79

19

84

19

89

19

94

19

99

20

04

20

09

Ca

pit

al G

ain

s R

ate

All Together…

Makes it a very favorable market for both buyers and sellers

But window is closing: Tax increases in 2010 Political and economic uncertainty

Exit Planning

Alter the Odds

PERSONAL BUSINESS MARKETPERSONAL BUSINESS MARKET

WINNER!!!

An Exit Plan helps Business Owners control the Spin of these wheels and reduce the element of chance in successfully exiting a business.

What is an Exit Plan?

A comprehensive road map to successfully exit a private business.

It asks and answers all of the business, personal, financial, legal and tax questions involved in selling a privately

owned business.

Assisting Business Owners with Goal Setting

The 3 basic personal goals to be defined:

Timing?

Financial security?

Defining ownership succession?

Who Should be Involved?

Shareholders (the owners) Spouse (or significant other) Children and grandchildren In-laws (spouses of children) Key employees Non-essential employees Customers/clients Vendors/suppliers The local community

Evaluating Goals

Specific Optimistic Realistic Short and long term Measurable Lifestyle-based Consistent Honest

Satisfaction Depends on …

Personal Identity Marital Status Financial Resources Involuntary vs. Voluntary Transition Contact with Others Having a Plan

Action Plans

Personal

Business

Market

Who

What

When

Verify

The Exit Planning Report

1. EXECUTIVE SUMMARY

2. YOUR GOALS AND OBJECTIVES

3. PERSONAL CONTINGENCY PLAN

4. YOUR BUSINESS: A BASELINE VALUATION

5. VALUE FACTOR ANALYSIS

6. VALUE ENHANCEMENT OPPORTUNITIES

7. EXIT OPTIONS AND CONSIDERATIONS

8. TAX ANALYSIS

9. RECOMMENDATIONS

10. ACTION PLANS

11. PROFESSIONAL ADVISORS

12. GLOSSARY

13. EXHIBIT A: PRESALE DUE DILIGENCE CHECK LIST

14. EXHIBIT B: LIMITED SCOPE BUSINESS VALUATION REPORT

Timing is Everything

Step Min. Period

1. Prepare exit plan 6 months – 1 year

2. Build value and complete tax planning 1 year or more

3. Investment banking/sales process 1 year

4. Transition process 1 year or more

Total Time 3.5 years or more

Multidisciplinary Approach

FinancialAdvisor

CPAInvestment

Banker

Attorney

The ROI of Exit Planning

Case Study

Stan owned a very successful financial services consulting company

o He was 62 years old o Owned business for 18 yearso No strategic business plano No exit plano No tax plan

Company Value

Before: Revenue $5.5MM EBITDA $.9MM

Baseline value estimated at $5.4MM

Strategic analysis showed that Stan neededto:

Developed a stronger mid-level management team

Increased formal sales training

Change reporting and accountability

“Productize” their services to capture market share

Maximizing Value

After 24 months:

Revenue increased to $11MM (from 5.5MM)

Cash flow increased to $2.4MM (from $0.9MM)

Company sold to a foreign strategic buyer for $15MM

A Case Study

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

2001 2003

EarningsRevenues

The Results:

Before: $5.4MMAfter: $15MM Value-added: $9.6MM

Professional planning and implementation almost tripled the value of this client’s company in 24 months!

A Case Study

During the Exit Planning Process Stan . . .

Saved $900,000 in capital gains taxes

Developed an estate plan that saved over $1 million in estate taxes

Dramatically increased the value of his company

The ROI of Exit Planning

Costs

Exit Plan $15,000

Estate Plan $15,000

Financial Plan $4,000

Valuation $12,000

Tax Plan $30,000

Total Costs $76,000

The ROI of Exit Planning

Returns

Capital Gains Tax Saving $900,000

Value Enhancement $9,600,000

Estate Tax Savings $1,000,000

Peace of Mind priceless

Total Return $11,500,000

That’s a 151 to 1 return on his investment!!!

Results Can Be Stunning … with Good Planning!

PERSONAL BUSINESS MARKET

WINNER!!!

Questions?

Learn more about Exit Planning

Get Your Copy Now!Available at

www.exit-planning-institute.org