1. Succession Planning and Valuation Mike Upah

2. Statistics - USA25,000,000 businesses in the US20% for sale at any one time25% of the 20% (5%) actually sell Testing the Water Over Priced Solve the Issue Causing the Need to Sell Divorce, Health, Etc.3% of Buyers making a purchase inquiry actually buy 3. StatisticsBaby Boomer Businesses for Sale in Next 2 Decades? One business owner turns 65 every 57 seconds People 55+ own 50% of all businesses 50% want to sell in next decade Children less likely to want to take over businessNumber of Gen Xers in a Financial Position to Buy??? 4. Statistics75% of Owners Have no Exit PlanSelling within 6 months of deciding to do so canreduce the businesss value by 50% to 70%. 5. Are You Ready to Sell?Why Selling? Retirement, Health, Relocation, New Competitor, Bored?What are you going to do next ? (especially important with a family buyer)Selling What ? Partnership Position Buy/Sell Agreement in Place? Business Stock or Assets Building ?Ship Shape ? Financials - Accurate, Growth, Debts Brand Reputation, Market Position, Pending Competition Employees Disgruntled, Loyal to Business? Customers Loyalty, Diversity Pending Capital Improvements Equipment, Facilities, etc. 6. 30,000 Foot View Businesss Financial Position 3 Categories1. Business earns more than a reasonable salary for owners Provides Return on Investment Valuation of Discretionary Cash Flow is Meaningful2. Business earns just a reasonable salary for owner Make vs. Buy - FMV of assets ? - How much baggage (bad employees, weak inventory, etc.) + Value of one less competitor in the market?3. Business earns less than a reasonable salary for owners Risk = what significant discount on FMV of assets? - Pain of Gutting (bad employees, weak inventory, etc.) + Value of one less competitor in the market? 7. Who to Sell to ? Existing Partner Another Business Strategic Buyer Competitor Stranger Employee Employees - ESOP Liquidator 8. Conditions of SaleConsulting Agreement? Paid or Unpaid ?Non-Disclosure / Non-Compete ?Earn-Out ?Owner Financing ?Trusted Employee(s) What Happens to Them ?Competitor Purchase What to Disclose ?Existing Debts Who Pays ?Accounts Receivable Who Collects ?Lease If favorable, how much longer and can you sub-lease? 9. Team Due Diligence Negotiation Preparation Marketing Closing PricingYoux xxx x xAccountant / CPA x x x xAppraiserxAttorneyxxx xBusiness Broker x xxx xConsultantsxxYour Bankerxx 10. ProcessBuild TeamAdjusting Financial Statements, PricingMarketingConfidentiality Agreement Buyer Interview / Qualification Financial Disclosure 3 years or more NegotiationTerm Sheet / Letter of Intent Purchase Agreement Closing! Fulfill Consulting Agreement 11. Adjusting Financial StatementsNet Income+ Salaries to non-working family members+ Payments on the condo in Vail+ Payments on non-essential vehicles 12. Marketing FSBOAds in Local Newspaper; Networking Broker~ 10% commission Directory BizBuySell.com; businessbrokers.net 13. ValuationCertified Business Appraiser 14. From Buyers PerspectiveCan I Afford to Buy ? 15. From Buyers Banks Perspective Turn Key Purchase CostPrice Collateral Assets (FMV) 500,000400,000 Goodwill 200,000 0 Improvements 150,000 80,000 Working Capital 75,000 0 Total925,000480,000 Equity (25%) 231,250 16. Seller Financing Usually Needed $4,246 $1,559 Monthly PaymentMonthly PaymentSeller BuyerBank $500,000 $50,000 $100,000 17. Buyer Homework Max Purchase Price Method 18. Valuation Methods Multipliers Owners Cash Flow Monthly or Annual Revenue Industry Rules of Thumb e.g., $13,000 per Hotel Room Discounted Cash Flow 19. Multipliers 20. Discounted Cash FlowToday 1 Year$1.00$1.03$1.00 3% discount Rate $1.03$29,126 3% discount rate$30,000$23,077 30% discount rate 21. Discounted Cash Flow30% discount Rate Today Year 1 Year 2Year 3$23,077$30,000$22,485 $38,000$19,572 $43,000$160,207$46,0001% Growth$225,341 Business Value + Non Critical Assets 22. Price AgreementOnce Youve Agreed on Price,The Negotiations are still not finished 23. Seller vs. Buyer Tax Preferences Stock SaleSeller gets capital Gains Treatment Buyer looses ability to depreciate assets Asset SaleSeller taxed at corp. level and then again at personal level Buyer gets to depreciate assets 24. Asset Price AllocationAsset Sale - $1,000,000 Sale Price SellerBuyerBuilding600,0001 400,0001Machinery 200,0001 150,0001Inventory40,0002 100,0002Accounts Receivable 100,0002 200,0002Consulting Agreements60,0002 150,0002 1 Buyer get cap gains treatmentSeller has long depreciation 2 Buyer has to recognize as income Seller gets immediate expense 25. QuestionsMike Upah515.296.7828mjupah@iastate.edu