exit planning presentation thg...

© 2013 Exit Planning Institutewww.exit-planning-institute.org

Presented by

October 27, 2016

Investment Banking services are provided by Chaffe Securities Inc., member FINRA/SIPC

© 2016 Exit Planning Institutewww.exit-planning-institute.org2

Vanessa Brown Claiborne President & CEO, Chaffe & [email protected]

Frank deVay Senior VP, Chaffe & [email protected]


Introduction

I. Not Ready for Exit

II. Value Acceleration

III. Business Valuation

IV. Market for Exit Planning

V. Mission Focused Team


Exit Planning addresses the

business, personal, financial, legal

and tax questions involved in

transitioning a privately owned

business.

It includes contingencies for illness,

burnout, divorce, death.

Purpose:

◦ Maximize the value of the business

◦ Minimize taxes

◦ Ensure the owner is able to accomplish all his or her personal and financial goals in the process.


Maximizes the value of the business

Ensures you are personally and financially prepared

Ensures you have planned for the third act of your life

- Peter Christman

Cofounder of the Exit Planning Institute


Exit Strategy focuses on the client/business owner

Regardless of control 80-90% of their wealth is tied up in a single stock with a high level of risk

Begins with maximizing Enterprise Value of the business ◦ Increasing value by de- risking the business

◦ Integrating best in class business practices into daily operations

◦ Maximizing valuation throughout the business cycle making exit timing irrelevant???

◦ Helping the owner figure out their “third-act”.

Building a team of trusted advisors to professionalize the process and improve the experience for owners.


70%-80% of businesses put on the market don’t sell.

Only 30% of all family-owned businesses survive into the second generation; 12% survive into the third generation; and only 3% operate at the fourth generation and beyond

12 months after selling, 3 out of 4 business owners surveyed “profoundly regretted” the decision.


2/3rds are not familiar with all exit options

78% have no formal transition team; 83% have no written transition plan; 49% have done no planning at all

93% have no formal life after plan

1/2 feel ownership transition plans require the company to remain profitable for plans to be properly executed, yet 86% have not taken on a strategic review or a value enhancement project

56% felt they had a good idea of what their business is worth yet only 18% have had a formal valuation in the last two years.

Source: Exit Planning Institute’s State of Owner Readiness Survey 2013


40% have no plans in place to cover illness, death or forced exit

50% of exits are not voluntary due to 5 Ds◦ Death

◦ Disability

◦ Divorce

◦ Distress

◦ Disagreement


Tom Hagen, Consigliere, Corleone Family Business


“YOU HAVE VALUE AS A PERSON AND NOT JUST AS A BUSINESS.”

“Although business owners intellectually understand their identity is not their business, it can be hard to separate the emotional attachment.”

-Bob Berk – Master Vistage Chair, Chicago, IL.

Long term◦ No goals or objectives◦ No consideration of life after business◦ Business personal identity fusion

Risk◦ No contingency plans◦ No advisory board or formal transition team◦ Dated buy-sell agreements◦ Shareholders and/or family members not on same page◦ Forced generational transfers


Financial Planning◦ Financial plan that is not aligned with personal plan

◦ Income requirements post transaction not quantified

◦ Inadequate estate and tax planning

◦ Inappropriate portfolio allocation

Business as an asset◦ Financial plan does not properly consider valuation of

the business. (Over or understated valuation)

◦ After tax proceeds of potential transaction not analyzed

◦ Transition options not adequately considered


80% of companies below $50MM in sales never sell

Owners don’t realize their cost of capital is between 20-30%◦ Most are not making returns greater than this to

cover the risk of ownership

Personal guarantees on debt


Key valuation drivers◦ People- Strong management team with deep bench◦ Sector/ Economic Factors◦ Growth opportunities exist, business scalable, growth

strategy well planned & clearly articulated◦ Diverse customer base (no one customer > 25%)◦ Earnings/ EBITDA

Key business attributes◦ Accurate financial statements that drive management

decisions. (Interim statements)◦ Scalable asset, personnel and systems infrastructure◦ Strong, adequately capitalized balance sheet


Owner/key man dependency

Transferrable sales relationships

Customer concentration

Poor internal controls and documentation that are not transferrable and scalable

Financial reporting that is inaccurate or superficial (internal financials acceptable with independent review)


Due Diligence - questionnaire

Valuation◦ Market based models- Public peer multiples & precedent

transactions◦ Income based models- Discounted Cash Flow (DCF) and

Leveraged Buyout Model

RMA Analysis – Comparison of subject company’s financial metrics to survey

Comprehensive/ integrated report

Triggering event –Team of advisors engaged


Business: ◦ Increase value by de-risking the company (denominator

effect)◦ Focused on Value Acceleration vs. Income◦ Starts with Assessment and Valuation

Personal de-risking:◦ Integrates the Three Legs – (puts owner and family at

center)Estate and contingency planning

Insurance, personal guarantees, other liability reduction

Address health issues

Financial planner engaged to implement plan


De-risking personal financial◦ Begin personal financial planning (net worth analysis)

◦ Understand and address liability issues associated with business

◦ Review personal insurance

◦ Family meeting- contingency & back-up plans

◦ Write or update will

◦ Begin or update estate planning

◦ Tax planning

Personal/ Financial◦ Personal goals and objectives for present and life after business

◦ Net worth analysis

◦ Exit options analysis


Increase value by de-risking the company (denominator effect)◦ Contingency/disaster plan

◦ Reduce owner dependence (key man discount)

◦ Buy sell agreements

◦ Insurance audits

◦ Management development & succession

◦ Documentation management

◦ Accounting, IT, HR, tax, and management systems

Longer term action items◦ Customer concentration

◦ Financial forecasts

◦ Metrics and dashboards

◦ Assets and capital expenditures


Immediately addresses reducing risk

Breaks big strategic programs into 90 day chunks (Sprints!) & connects daily activities to value.

Ensures the owner can CASH IN whether planned or unplanned

Integrates personal, financial AND business objectives into one Master Plan.

Ensures owner and owner family wealth are at the center of the business plan

Measureable at the micro AND macro level.

Aligns the team and establishes a rhythm or routine for continuous improvement.


Produces a higher quality lower risk company

More sustainable and profitable growth

Reduces owner stress and improves work balance

Improves customer, supplier and employee relations

Better access to capital

Maximizes transferrable Enterprise Value


A Buyer’s Perspective


Most strategic and private equity buyers seek companies with EV >$20MM

Integration, diligence costs level of sophistication

Market multiples reward larger businesses

Great variance on smaller transactions

95% of M&A professionals believe a business owners unrealistic expectations of company value are the biggest obstacle to sale or transfer


Source: GF Data


Baby boomers age wave

First boomers turned 65 in 2011

10,000 turn 65 everyday

Youngest boomers now 51.

They own 63% of private businesses in US

80-90% wealth tied up in their business

76% plan to transition in over next 10 years (48% in next 5 years)

Represents transfer of 4,500,000 businesses and over $10 trillion of wealth


Companies Sales

Sales Range (Thousands) % (Trillions $) %

Micro Market <$5MM 5,678 94% 3.57 12%

Lower Middle Market $5MM-$100MM 351 6% 5.84 20%

Upper Mid Mkt. & Above >$100MM 21 0% 20.33 68%

Total Employer Firms 6,050 100% 29.74 100%

Non-Employer Firms 21,708 0.99

Total All Firms 27,758 30.73

Source: MidMarket All iance 2013


What’s in it for me?


Owner

Specialists Attorney CPAFinancial

PlannerBanker

Family

BOA


A global community of advisors that help owners realize their dreams of not only succeeding in business but passing a legacy, protecting and maximizing

family values and wealth, and achieving a fulfilled life in their third act.


Owners Need Advice◦ Current and potential business value

◦ Impact of de-risking and qualitative improvements on value

◦ M&A transaction process and market dynamics

◦ Disciplined, methodical and prioritized approach

◦ Advisors whom they can trust as business experts

Advisors Need ◦ Education and awareness of current market trends

◦ Collaborative approach to facilitate an effective process

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