Randy Rua, Rua Associates

Haans Mulder, Cunningham Dalman

Buying or Selling a Business

The Agenda

The Two Choice Dilemma• Your Big Goal• Why Transactions Typically Fail

The Components of A Successful Transaction• The First Three Components

• Vision• Right Team• Business Assessment

The Two Choice Dilemma

Grow• Organic• Acquisit

ion

Sell• Internal

Sale• Externa

l Sale

Before we begin….

What is your BIG goal?

Two criteria

Five years out

Only one thing

80% of Business owners that try to

sell fail

Of those that are able to sell, 75% report regretting selling their business because their goals weren’t met

Only 5% of Businesses are Successfully Sold

The Success Rate of Selling a Business

75% of business acquisitions fail after a Letter of Intent is signed

Of those that are able to purchase a business, 80% report their acquisition goals were not met

Only 5% of Businesses are Successfully Purchased

The Success Rate of Buying a Business

So why is the success rate so low?

Lack of planning

Lack of a team approach

Lack of focus on the vision

The Two Choice Dilemma

Plan to Grow or Sell, Have a Team Approach and Focus on the VisionReact to

Growth or Sale, Don’t Have a Team Approach and Ignore the Vision

The Components of a Successful Transaction

Successful

Transaction

Vision

Right Team

Business Assessment

Alternatives Analysis

Market Creation

Process

Our Focus Today

Vision

Right Team

Business Assessment

Vision

Vision• 8 Questions• Same Page

The 8 Questions

Values

Core Reason

5-10 Year Goal

Prospect Selection

Transaction Picture

1 Year Post-Transaction Goals

90 Day Pre-Transaction Goals

Issues List

The 8 Questions

The 8 Questions

The 8 Questions

The 8 Questions

Values

Core Reason

5-10 Year Goal

Prospect Selection

Transaction Picture

1 Year Post-Transaction Goals

90 Day Pre-Transaction Goals

Issues List

How to Get on the Same Page

Realistic and Achievable Goals for Seller

Business Goals

Other Stakeholde

r Goals

Owner’s Goals

Realistic and Achievable Goals for Buyer

Business Goals

Other Stakeholde

r Goals

Owner’s Goals

Typical Goals of a Seller

Seller Business Goals

Seller Personal Goals

Other Stakeholder Goals

Typical Goals of a Buyer

Buyer Business Goals

Buyer Personal Goals

Other Stakeholder Goals

Right Team

Right Team• Right Seat• Right People

Team Leader

Financial

Other Stakeholders

Decision Maker

LegalIntermediary

Right Seat

Right People

Transaction Type Focus

Transaction Size Focus

Experience Passion Time

Person 1 Y Y Y Y Y

Person 2 N Y Y Y Y

Person 3 Y Y Y Y Y

Team Lead Y Y N Y Y

BAR 3 Y’s and 1 N

Team Roles

Intermediary

FinancialLegal

Team Lead

The Components of a Successful Transaction

Business Assessment

• Valuation• Viability

Valuation

Income approach

• Discount future earnings to present value

Market approach

• Cash flow times market multiple

Asset approach

• Liquidation or going concern- what your assets are worth

Focuses primarily on the businesses’ financials through three approaches:

Tool Example

The Market Approach

Price/Gross Sales Method 1,065,000$ 20% 213,000$

Price/DE Method 2,486,000$ 20% 497,200$

The Income Approach

Capitalization Method 2,136,000$

Illiquidity Discount (213,600)$ 10%Indicated Value 1,922,400$ 50% 961,200$

Discounted Future Benefits Method 2,725,000$

Illiquidity Discount (272,500)$ 10%Indicated Value 2,452,500$ 10% 245,250$

Value Conclusion - 100% Interest in Company 100% 1,916,650$

Value Conclusion - 100% Interest in Company (Rounded) 1,917,000$

Indicated Value

Discount/Premium

RateConfidence

LevelWeighted Estimate

100% Controlling, Non-Marketable Interest in Consulting Company

Valuation Method

Valuation Metrics

• Public Company Industry PE Ratio - 3 year trend• Private Company EBITDA Multiples - 3 year trend• EBITDA Multiple• Revenue Multiple• Capitalization Rate• Required Working Capital

Median EBITDA Multiples for Buyouts

The median valuation-to-EBITDA multiple has exploded to a decade high of 10.7x

* Through 9/30/13 Source: PitchBook

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013x

2x

4x

6x

8x

10x

12x

4x5.1x 5.6x 5.8x 5.7x

3.9x4.6x 4.7x 5.3x

6.2x

2.2x

3x3.4x 3.3x 3.8x

3.9x3.5x

3.8x 3.2x

4.5x

6.2x

8.1x9x 9.1x

9.5x

7.7x 8.1x8.5x 8.5x

10.7x

Debt/EBITDA Equity/EBITDA Valuation/EBITDA

*

Median EBITDA multiples rose for large deals but fell to just 2.5x for transactions of less than $25M

West Michigan – Selling Multiples (3 year history)

Price to Revenue Ratio

Price to Cash Flow Price to Revenue Ratio

Price to Cash Flow0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

0.54

2.96

0.98

3.94

Rua Associates TransactionsOther Transactions

Revenue: $1-15MOwnership: Privately HeldIndustry: Service, Manufacturing and DistributionLocation: West Michigan

Viability

The problem with just getting a valuation is it doesn’t answer many of the key questions regarding a transaction:

Options Analysis

Grow Organically

New Products/Services

New Markets

Gain Market Share

Current Non – Sellers

62%

Passively Receptive

24%

Actively Seeking

7%

Current Sellers

7%

Source: PWC

Potential Prospects

  Oil and Gas   Mfg   Tech   Furniture  

Number of Prospects 116   326   152   362  

Total Prospects Contacted 87   248   64   121  

Willing to Discuss 34 39% 140 59% 28 44% 39 32%

Interested Parties 12 14% 39 16% 13 20% 7 5%

Prospecting Case Study

Tool ExampleMarket Test

• Contacted 20 Strategics and 20 Private Equity Firms

• Received Feedback from 5 Strategics and 7 PE’s

• 50% of Strategics were

interested and 75% of PE’s

Strategic: 4-6 times EBITDA PE: 4-6 times EBITDA

Summary Typical Multiple Range

• Strategic: All Cash if long-term management team is in place besides ownership

• PE: 70% Cash at Close, 30% Seller-Note, Rolled-Over Equity or Earn-Out

Typical Structure:

Strategic Top 3:• Location• Synergies• Service Type

Private Equity Top 3:• Flexibility of Ownership• Customer Concentration• Strength of Management Team

Drivers of Multiple and Structure:

Financing Metrics

Seller Factors• Collateral Value• Required DSC• Goodwill Financing• Seller Financing

Buyer Factors• Industry Experience• Liquidity• Net Worth• Down Payment

Tool ExampleFinancing Feasibility

Bank Industry Experience Buyer Liquidity Buyer Equity Structure Other CommentsFirst National Very important along

with the new owner being behind the Company and the capital injection that may be required.

$150,000-$225,000 (10%-15% of outstanding debt)

25% of purchase price should be equity in the form of cash or full stand-by seller note. 15% cash at close.

Cash at close for equipment with additional seller note and full-standby seller note.

If SBA is involved, it must be a 100% acquisition.

Huntington Most important - Not just manufacturing, but a competitor or someone with substantial knowledge of the field.

Higher than 10% due to projection.

If Goodwill > $500,000, SBA requires 25% of the purchase price.

Financial structure proposed would fit under SBA guidelines.

Management team would need to either sell their shares now to be part of the buyer group in 6 months, or they would have an employment contract for 12 months. It would be up to the buyer group to renew this contract after 12 months.Chemical

BankMust have knowledge of the technology required.

Depends on how hungry a banker is for the deal.

SBA may not see it as an entirely "new business" if there is no major change in management team for 5 years - 10% down at close.

May be willing to lend 10% on inventory and 75% on AR less than 90 days. Could refinance seller note as SBA 7A after close, but bank would require subordination agreement.

Need to be confident in equipment value. Bank will need to order appraisal and specifiy SBA as a user.

Fifth Third Less important than liquidity.

Projection-basis requires 15% of debt outstanding.

SBA requires 25% of purchase price.

May be willing to bump up financing with a highly-liquid buyer.

Tool ExampleSellability Report

“What multiple of your earnings did the offer represent? Q

Comparing average multiple offered

SellabilityTracker Q4 2013. Copyright 2014 www.SellabilityScore.com

80+

Average multiple

0 1 2 3 4 5 6 7

6.1

3.55

“The Sellability Premium”

Highest Multiple Offered To Companies With A Sellability Score of 80+

Data from 6955 users of The Sellability Score between July 1, 2012 and December 31, 2013. 96.9% of business owners surveyed had revenue of less than $20,000,000.

Tool ExampleSellability Report

Overall Score driven by a weighted algorithm made up of 32 questions in a total of 8 categories:

1. Financial Performance2. Growth Potential3. The Switzerland Structure4. The Valuation Teeter Totter (i.e. See Saw)5. The Hierarchy of Recurring Revenue6. The Monopoly Control7. Customer Satisfaction8. Hub & Spoke

Copyright, 2013. Built to Sell Inc

Factors Correlated to Getting a Premium Offer

Other Key Components of Business Assessment

Management Team and Employees

Sales Team and Customer Relationships

Key Assets

Other Key Components of Business Assessment

Management Team and Employees

• Strong/loyal management team• Incentives aligned to motivations• Risk of employees leaving• At-will employment clear in documentation

Other Key Components of Business Assessment

Sales Team and Customer Relationships

• Protect confidential info/relationships• Agreements to lock in revenue streams• Assignment rights

Other Key Components of Business Assessment

Key Assets

• Tangible vs Intangible• Legal issues related to assets• Transferability

Conclusion

The Two Choice Dilemma

• Your Big Goal• Why Transactions Fail

The Components of A Successful Transaction

• Vision• Right Team• Business Assessment

Next Seminar

Market Creation

Alternatives Analysis

Process

Next Seminar Date:

Monday, April 28

8AM-10:30AM

Same Location!

Questions?