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Thinking About Selling Your Business or Growing
Through Acquisition?
A Discussion of Things to Consider
Merger & Acquisition Consultants Group, LLC
BlueSkyThe
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
Agenda
• Current Situation • Buyers • Preparing to Sell • Valuation Methodology• Case Studies• The Acquisition Process• Growth Thru Acquisition• Question & Answers
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
Current Market Situation
• Market is Active – Industry Buyers– Private Equity
• Trends– Credit loosening?– “Overhang” of PE funding?– Threats to current value creation models– Aging of “Boomer” business owners– Expiration of current capital gains rates
• Valuations
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
Sunair/Middleton
• Offer of $2.75/share X 13.1 Million shares = $36.0 Million
• Debt as of 6/30 = $15.6 Million• Total consideration = $51.6 Million• Revenues TTM 6/30 = $52.6 Million (down 18%
from $64.0 on 9/30/07)• EBITDA YE 12/30/2008 - $6.3 Million (8.2X)
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
Types of Buyers & Motivations
Strategic Buyers • A cash flow stream• Customer density/fixed cost absorption• Improvement of overall profitability• Talent• Eliminate a competitor/keep from competitor• New market/geography entry • Improve their businessFinancial Buyers• An earnings stream• Industry entry
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
What Buyers Are Looking For?
Operating/Financial Characteristics – Revenues (Trailing 12; Booked)– Revenue per customer/service mix; clarity– Pricing– “Adjusted” EBITDA– Predictability in performance; trends; candor
Non-financial Characteristics– Stability/reputation in the marketplace– Talent within the organization; “turn key”
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
Preparing to Sell
“Always be prepared to sell your business, but operate it with the mindset that it will be yours forever”
•What are your objectives?•How do I achieve those objectives?
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
Preparing to Sell
• What’s the curb appeal of your business?• Target a purchaser • Improve key business fundamentals
– Adjusted EBITDA– Customer count growth– Improve customer retention– Revenue per customer
• Unique competence • Eliminate deal breakers• Increased transparency • Corporate form (C vs. S, LLC)
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
Issues With C Corp Acquisitions
• Most buyers prefer asset purchase– Avoid the perceived liability; unknown– Less complex due diligence; cost– Deductibility of goodwill (simple example, 1.0M, 500K goodwill, 100K tax benefit)– No governance required going forward; simply put the assets on the books
• C Corp shareholder prefer stock purchase– Dramatically more tax efficient for seller
• Intractable issues often prevent deals • In certain situations there are alternatives• Recommendation
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
How Buyers Value a Business
• Multiple of “Adjusted” Cash Flow (EBITDA or EBITA)– Transparency of information is critical– Risk adjustment for retention or other perceived material risk– Synergies
• Strategic/inducement premium• Treatment of debt • Communicate as multiple of revenues; most readily understood
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
External Factors
• Multiple buyers• Stability of potential buyers local operation• Legal/franchise conflicts• Strategic value of the marketplace• Macro-economic trends• Timing
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
Valuation Range
• Lower retention• Lower pricing• Stagnant growth• Lack of transparency• Low curb appeal• Higher risk• Market economics• Unpredictable revenues stream
• Solid fundamentals• Need a platform• High transparency• Integration ease• EBITDA• High curb appeal• Market economics• Competitive buyer dynamics• Solid personnel• Lower risk
Low Valuation Premium Valuation
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
Valuation Myths
• “It is worth that much to me ….”• “1.0 (or more) times revenue is the going rate”• “My business is unique……”• “I should be paid for the value of the synergies”
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
Case Study # 1
• $6.0 Million in revenues; 6 locations• Top 10 companies; 3rd generation enterprise• Market expansion & entry• $6.0 Million all in• 10-12% EBITDA, not transparent, synergies not clear• Complex IT integration• Unique selling model; emphasis on commercial• Customer information, business metrics unclear • Only strategic buyer
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BlueSkyThe
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Case Study # 2
• $3.0 Million in Revenues• Market entry - strategic• Complex timing• Complex deal structure and due diligence• $4.5 Million• Entry into the 2nd largest lawn care market• Ease of IT integration• Prospects of future business relationship
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Case Study # 3
• $2.0 Million in Revenue; 15%-20% EBITDA• One major buyer precluded from the market• Not an attractive market• One major buyer needed a platform so strategic motivation• Strategic buyer made offer in 2002 of $2.1 Million; • Despite competitive situation, market economics; buyer
makes a compelling offer• Owner rejected offer, no sense of a plan• 2003 buyer began servicing select areas with small satellite• Owner came back in late 2004; buyer offered $1.5 Million
which was rejected• 2006 seller again initiates discussion; 2006 buyer is no
longer interested
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Case Study # 4
• $2.1 Million in revenues in a solid market• Buyer made an attractive offer • Potential seller indifferent; no counter• The financial situation changed for the buyer• Seller wanted to re-engage in October• Buyer would no longer interested for two reasons;
perception of gamesmanship and change in market conditions
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
The Acquisition Process
• Confidentiality agreement• Worksheet & financial statements• Business analytics• First meeting • Term sheet, LOI, or other form of non-binding offer• Internal approval• Due diligence• Purchase document generation• Closing• Integration
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Employees
• Meeting as soon as possible• Buyer typically targets retaining customer level employees• MVR, drug screens, background checks• Compensation & benefits typically better• Career paths • Different expectations
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BlueSkyThe
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Growth Thru AcquisitionFundamental Questions
• How will acquiring another company improve your business
• What are you specifically trying to accomplish?
• How will you define and measure success?• Do you have an integration plan going in?• What is the degree of complexity?
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Understanding Key Metrics - Revenues
• Revenue mix; recurring vs. non-recurring• Service frequency and program design
similarity• Average annual revenue per customer• Pricing per service visit • Commercial vs. residential
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Understanding Key Metrics – Cash Flows
• Easily determined• Owner benefit• Market compensation package• Upside for improving current cash flow
without investment or major change to the business
• Financials transparent and format comparable
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Understanding Key Metrics – Retention
• Historical retention of the business• Are differences explainable and do they make sense?• What affect does pricing/service have? Low/low
model? Low/high model?• Service guarantees understandable, are they
important part of the value proposition, are they aligned, and impact of change?
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BlueSkyThe
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Integration ChallengesKey to Success
• Business model compatibility• Asset conversion• Ease of IT integration• Integration of previous years information• Brand integration/marketing & selling
processes
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BlueSkyThe
Group, LLCMerger & Acquisition Consultants
Integration ChallengesKey to Success
• Talent to deliver the level of quality of service and upside
• How are decisions made currently?• Compensation and incentive symmetry• Performance standards and measurements• Ability to handle the transition issues
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BlueSkyThe
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Summary
• Buyers• Preparing to Sell• Valuation• Case Studies• Process• Employees• Key metrics & integration