Download - Understanding and Maximizing Business Value
Understanding and Maximizing Business Value
Michael F. Coyle, CBIPrincipal/Exit Planning Advisor, CenterPoint Business Advisors
Michael F. Coyle, CBIPrincipal, CenterPoint Business Advisors, Inc.Exit Planning Advisor, Business Enterprise InstituteCertified Business Intermediary (CBI) Awarded by
the International Business Brokers AssociationMBA – Boston College, Carroll Graduate School of
ManagementSerial Entrepreneur
Center Point Business Advisors, Inc. assists the owners of small to mid-sized businesses in planning for and executing the most important financial event of their lives...the inevitable exit from their business.
• Advisory Market Valuations• Certified Business Appraisals• Machinery & Equipment Appraisals
• Value Drivers & Detractors• Strategic & Project Specific
•Sale to 3rd Parties• Transfer to Family, Employees or Partners• Recapitalization with Private Equity
During This Session You Will Learn:What is the Underlying Purpose of your BusinessWhat is the Reality for Most Small Business OwnersWhat are the Components of Business ValueWhat are Common Value Drivers & DetractorsKey Strategies for Improving Business ValueExiting Your Business is Inevitable, Plan for It
The True Purpose of Your BusinessIs to Give You LifeMichael Gerber, The E-myth Revisited, other E-
myth BooksThe Entrepreneur * The Manager * The
TechnicianRun your business to exit it, realize value to
support your life’s objectives Importance of creating systems & extracting
the business owner from the day-to-dayWorking “ON” and not “IN” your business
The Reality For Business OwnersExiting your business is Inevitable and the largest
value detractor is often what the owner IS or IS NOT doing.
80% of business owners exit their business to retire, they are not serial entrepreneurs
Their principal fear is “will I have enough money so that I can fund my retirement lifestyle without running out of money”
Other considerations may includewealth transfer to the next generation, charitable giving,and minimizing taxes
The Reality For Small Business Owners (2)Typically 50-75% of a business owner’s net worth is
in their business assets. The balance is in their personal real estate & financial investments
Business owners typicallyonly have ONE chanceto monetize their largest asset
Equities
Real Estate
Business
The Reality For Business Owners (3) Most business owners have only an anecdotal perception
of the value of their business
“My brother in law knew a guy who had a business like mine that sold for…”
Relying on this type of perception can leadto large gaps in future wealth and quality of life
The Reality For Business Owners (4)
85% of all small business owners do not have an exit plan, a wealth management plan, and/or an advisory team to assist them
Very few start the process early enough to achieve the maximum benefit of valuation and exit planning
Typical Business Owner ConcernsWho should I transfer my business to?
Family, Employees, Partners, a 3rd PartyWhen is the right time to leave my business?What is my business really worth?What is the right deal structure?
Tax avoidance vs. future riskHow do I ensure that I meet all of my future goals and
expectations?
There Are Only 4 Places Your Money Can Go
An Exit Plan will let YOU decide where your hard earned assets end up!
The Exit Planning Process
Why Value Your Business?Business & Financial PlanningEstate & Trust PlanningEmployee Stock Ownership Plans (ESOP)Partnership AgreementsLitigation & DisputesCreating an Exit Strategy
Value is in the Eye of the Beholder Individual/LifestyleFinancial IndustryStrategicRelated Parties (KEG or Family)
Business Value Components
Value Drivers & Detractors
Value Drivers & Detractors
Value = CF * MSimple Right?The Complexity is in the Subscripts
Value = CF (s), (t) * MSustainableTransferable
What Is A Business Valuation?Both a Product and a Process
Business valuation vs. a real estate appraisal
Significant value is in the Process
What Is A Business Valuation? (2)Process is a multi dimensional analysis of your business from the
Buyer’s Perspective
Financial, lifestyle, asset, risk & growth attributes Identifies what adds to and what detracts from valueUsually this leads to a handful of items that could greatly
improve value
Form of limited scope appraisal that determines a “Most Probable Selling Price” at a point in time (vs. “Fair Market Value” standard)
What Is A Business Valuation? (3)Determines economic benefit of ownership and not
tax value Goals are to minimize taxes and maximize economic
benefit
Measures your business against the industryTool for improving the business and maximizing value
What Is Valued?Tangible Assets
Leasehold Improvements Equipment, Furniture &
Vehicles Inventory, Accounts Receivable
Intangibles Goodwill (vs. “Blue Sky”) Patents & Copyrights Controlled Territories,
Product/Service Niche Customer & Supplier Contracts
What Are The Benefits of A Valuation?
Demystifies the value of your business Establishes a baseline for comparison in the futureMeasures returns on equity, assets, & timeProvides valuable data for an Exit Planning ProcessProvides tools to control where your
investment is going
What Kind of Valuation is Appropriate?
Price Opinion Based upon broad “rules of thumb” For the “curiosity seeker”
Business Valuation “Most Probable Selling Price” Multi dimensional analysis Information for planning and
control & decision making
Fair Market Value Appraisal Tax, litigation, refinance
Who to Select for the Business Valuation Process?Accountant/CPACertified Business Broker/Valuation
ProfessionalLicensed Commercial Appraiser
With the proper training all can do the work.
Select a professional who can best understand the industry and find the value builders and detractors
Business Valuation
Exit Planning: Key to Value Realization
Demographics are changing Aging population of baby boomer business ownersMore than 8.4 Million Business owners will seek to exit
their business in the next 10-12 years. (70%)Many businesses are still based in an “old economy model”Next generation of buyers want “new economy models’Supply of Businesses for sale will outstrip DemandOnly those business owners that Plan will be successful
The Exit Planning Process
From The Endless Focused Work in Building Your Business…
...To Achieving Your Life’s Next Goals
Takes A Cohesive Team Approach
Your Legal & Tax TeamYour Wealth Planning TeamYour Business Advisory
TeamYour Business Intermediary
Team
You!
The Exit Planning Process
Step One: Identify Exit Objectives“When a man does not know which harbor he is heading
for, no wind is the right wind.” - Seneca
Step One: Identify Exit ObjectivesUniversal ObjectivesHow much longer does the owner want to work in the
business before retiring or moving on? _________ yearsWhat annual after-tax income does the owner want
during retirement (in today’s dollars)? $_________To whom does the owner want to transfer the
business?Family?Co-Owner?Key Employee(s)?Outside party?ESOP?
Step One: Identify Exit ObjectivesWorking with a Team of AdvisorsNo one professional has all the answers.Diverse skills and talents are necessary.Team approach minimizes time and cost.
If properly facilitated and led.
Step One: Identify Exit ObjectivesWho is on the Advisor Team?
Valuation SpecialistBusiness Intermediary Investment BankerBusiness or Management
ConsultantBankerExit Planning Advisor
Financial Planner Insurance Advisor Investment AdvisorBusiness AttorneyEstate Planning AttorneyCPA/Accountant
Step Two: Quantify Business and Personal Financial Resources
“Beauty is in the eye of the buyer.”
Personal Wealth PlanHaving a Post Retirement Plan on How to Support Your
Lifestyle Delivers “Peace Of Mind”Personal Wealth Plan + Business Value = Retirement
Income Plan
Business ValuationBenefits to the OwnerProvides a baseline business value by
projecting cash flow.Measures business and personal resources
both today and as a basis for future projections.
Allows you to monitor progress toward your stated objectives.
Business Valuation (2) Identifies what is being sold
Inventory, Equipment, Real Estate, StockEstablishes profitabilityAssesses risk Identifies value driversScans marketplaceConsiders financing strategiesEstablishes relationship between earnings and valueShould be done Cyclically with business planning
Step Three: Maximize and Protect Business Value
“Making a silk purse from a sow’s ear.”
Step Three: Maximize and Protect Business Value
Benefits to the OwnerGrow business value and intangible value of the business.Reduce income taxes upon sale of business.Protect assets from potential business and personal
creditors.Create ability to sell the business.Motivate and keep key employees.
Step Three: Maximize and Protect Business Value
Promote Value Through Value Drivers
Focus on increasing cash flow.Develop operating systems that improve
sustainability of cash flows.Solidify and diversify customer base. Implement strategies to grow the company. Improve company performance as
measured by industry metrics.Build a solid management team and
groom a successor.
Business ValuationFinancial statements are key!
EBITDA multiples Discretionary income multiples Cash and non-cash add backs Value derived from market data
Strategies for Maximizing ValueValue your business early… and oftenFocus on implementing business
improvementsCreate and participate in your own
Exit Planning ProcessWealth Management TeamLegal & Tax TeamBusiness Advisory & Intermediary Team
Step Four: Ownership Transfer to Third Parties“Making a mountain out of a molehill.”
Step Four: Ownership Transfer to Third Parties
Benefits to the OwnerCash at closing.Eliminate financial risk.No family succession issues.Speed of exit.
Step Four: Ownership Transfer to Third Parties
Third Party Sales – Not Just About the BusinessAbility to sell and business value are determined by:
Intrinsic Value: the value drivers.Extrinsic Value: the value the market places on the
business.Effectiveness of the sale process.
Step Four: Ownership Transfer to Third Parties
Current M & A MarketplaceOf businesses with sales of less than $10 million per year,
20 percent are for sale, but only one out of four actually sells.
Businesses with sales of $10 million per year aren’t much better – only one-third sell.
Above $10 million per year, the odds improve to 50-50.
Step Five: Ownership Transfer to Insiders“Making a molehill out of a mountain.”
Step Five: Ownership Transfer to Insiders
Benefits to the OwnerAchieves Exit Objective of:
Selling to Key Employee Group (KEG). Transferring to a Family Member.
Motivates and retains key employees.Planning reduces risk and increases amount of money
received.
Family Owned BusinessesKeeping the Family Peace while Growing Business Value“Many Hats” ProblemFewer than 50% transfer to 2nd Gen and less than 20% to
3rd GenSpecial Considerations
Estate PlanningLeadership DevelopmentChoosing AdvisorsCompensation & PerformanceStrategic Planning
Step Six: Business Continuity Planning“Making sure the business continues when the owner
doesn’t.”
Step Six: Business Continuity Planning
Benefits to the OwnerObjectives can still be achieved if you don’t survive your
exit.Retains ownership and control of company if co-owner
departs.Can force non-contributing owners to leave the business.Provides consistency between lifetime and death
objectives.Ensures survival of the business for the benefit of others.Results in family receiving value of owner’s interest, in
cash.
Step Seven: Personal Wealth and Estate Planning“When the ‘slings and arrows’ of outrageous
fortune befall you, fight back.” - William Shakespeare (Hamlet)
Step Seven: Personal Wealth and Estate Planning
Benefits to the OwnerPreserve wealth, minimize taxes using both
lifetime and death planning tools. Coordinates and integrates lifetime exit
objectives wishes with estate plan. In effect, estate planning becomes part of
business and exit planning.
Key StrategiesImproving Business Value
Manage Value as Seen By The MarketPositioning in the market place
Strategic buyersIndustry buyersFinancial buyers
Business continuityBalance short term and long term business needsEmployee development and mentoring
Key StrategiesImproving Business Value
Good Planning Eases AdversityOwner illnessDivorceDeathDisabilityLitigation
Key StrategiesImproving Business Value
Reduce Business Viability ConcernsPerformance relative to benchmarks
Revenues and revenue trendsIncome and cash flow trends
Expansion potentialCompetitive advantages
Core competenciesCompany Culture
Owner dependenceIs the owner the business?
Key StrategiesImproving Business Value (2)
Financial ConcernsNeed for good & accurate record keepingPositive cash flow and focus on value not tax
minimizationRealistic growth strategies
Valuation and Price justification3rd party valuationReturn on Investment to buyerPayback periods in years
Key StrategiesImproving Business Value (3)
Owner’s RoleDelegate more effectively
Reduce reliance on business ownerFormal employee training
Succession/Exit PlanIdentify and groom a successorDeveloping & Mentoring key personnel
Succession takes time and effortComplex mix of potentially conflicting issues
Key StrategiesImproving Business Value (4)
Partners and EmployeesExecute agreements with partners
Buy/sell and buyout agreementsEmployee dependency
Employee tenure/turnoverEmployee contracts401(k) plans to keep employees
Human resource documentationEmployee handbooksJob descriptionsPersonnel files
Key StrategiesImproving Business Value (5)
Operational ProcessPolicies and procedures
ProcessesCore activitiesSystems (consistency of quality, customer service)Equipment Maintenance
Technology and Web PresenceIT currentWeb links to the world
Key StrategiesImproving Business Value (6)
Operational Process (2)Streamline processes
Evaluate each product or service to verify contribution to bottom line
Outsource non-core activitiesAnalyze and outsource activities that can be obtained
cheaper on the outside Inventory Control
Inventory turnover relative to industry standardsReview methods (FIFO, LIFO, etc.)
Key StrategiesImproving Business Value (7)
SuppliersSupplier relations
Supplier/approval selection processLong-term contract benefitsOwner dependent relationships
Cost of input materialsReview frequentlyRenegotiate if necessary
Key StrategiesImproving Business Value (8)
CustomersRetention
Friends or relatives of ownerCustomer service and supportCustomer loyalty
Limit Customer Concentration80% of revenue concentrated around a small group of
customers20% of business concentrated with one customer
Reevaluate Marketing/SalesDirectReps & AgentsInternet – new channels
Key StrategiesImproving Business Value (9)
Marketing and AdvertisingEnhance marketing strategy/plans
AdvertisingTrade ShowsInternetBrand Awareness and P.R.Clear and consistent message/value propositionDifferentiation
Key StrategiesImproving Business Value (10)
CompetitionKnow your competition
Use industry groupsAsk your customers
Know what they do differentlyArticulate your advantages and disadvantagesPricing strategies
Learn from competitorsBenchmarkBorrow good ideas
Key StrategiesImproving Business Value (11)
Legal Issues Intellectual property…is it secure?
Patent, copyright and trademark applicationsLitigation issues
Settle all litigationResolve all product liability casesResolve all insurance claims
Form of incorporation pros & consC-Corp, S-CorpLLC, PartnershipProprietorship
Key StrategiesImproving Business Value (12)
Regulatory IssuesClear environmental complianceHave environmental review by reputable firmReview all permits and licensesOSHA issuesPending zoning issues
The vast majority of owners are unaware there is a specific planning and implementation process that can help ensure they achieve
their objectives.
Most business owners spend more time planning a family vacation than how to build value and exit
from their business.
This is not due to a lack of desire or intelligence. It is simply because they don’t know how or where to begin.
Get Started with Maximizing & Realizing the Full Value of Your Business
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Contact me for a FREE copy of How to Run Your Business So you Can Leave It In Style by John Brown
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