Growing Your Business

I. Acquisitions II. New Locations III. Organic Growth

Acquisitions

“the purchase of known assets and cash flow”

Sellers Motivation

• Desire to retire.

• Loss of key executives.

• Inability of top management to keep up with competition.

• Loss of key personnel by death.

• Desire to be associated with a larger firm.

• Anticipation of decline in value.

Sellers Motivation

• Desire for greater diversification and marketability of investment holdings.

• Provide liquidity to the principal estate.

• To avoid investment of substantial capital for modernizing an older plant.

• To sell at a price that seems greater than the present value of business.

Buyers Motivation

• Greater economics of scale and productivity.

• Advertising • Insurance

• Increased profitability.

• Increased penetration of the market.

Buyers Motivation

• Elimination of a competitor.

• Possibly creates a situation where prices can be raised.

• Creation of cash through the sale of unneeded assets.

Tax Related Matters for Seller

• Capital gains vs. recapture or ordinary income.

• Asset evaluations / book value.

• Non compete income.

• Long term cash vs. carryback.

• Asset purchase vs. stock purchase.

Tax Related Matters for Buyer

• Interest paid on debt eats away at reported taxable income.

• Asset values are written up – thus increasing depreciation or amortization.

• Cash vs. carryback.

• Asset purchase vs. stock.

Steps in a Successful Acquisition

• Approach strategy theme of mutual benefits.

• Devise contact plan.

• Initial contact.

• Begin negotiations.

Reach Agreement on Price & Terms

Information Needed to Reach Final Agreement • Company data

• Description of product or services

• Company employee breakdown

• Equipment list (age & book value)

Information Needed to Reach Final Agreement • Facilities

• Marketing / Advertising

• Expansion plans

• Financial data

Information Needed to Reach Final Agreement • Leases

• Outstanding debt

• Tax information

• Insurance coverage

Information Needed to Reach Final Agreement • Contingent liabilities

• Litigation

• Contracts

Financial Evaluation

• What is MAX price that should be paid?

• What are principal areas of risk?

• What are the earnings cash flow and balance sheet implications?

• What is the best way to finance the acquisition?

Cash Flow Analysis

EBIDTA

The cash flow contribution of the to be acquired company by itself

may be less than the merged result. This is because the

acquisition may be able to achieve operating and managing

economics of scale.

EBITDA Acquired Company Before Merge CASH FLOW as presented by Owner

OPERATING INCOME $141,617.00

ADD BACK AMORTIZATION $40,000.00 DEPRECIATION $77,647.00

TOTAL CASH FLOW AVAILABLE TO SERVICE DEBT $259,264.00 CASH NEEDED TO SUPPORT PAYOFF OF $1,035,000.00 $230,810.00 CASH REMAINING $28,454.00

EBITDA Anticipated After One Year of Combined Operations

CASH FLOW PROJECTION AS ANTICIPATED FOR THE FIRST YEAR

OPERATING INCOME $178,841.00

AMORTIZATION $218,520.00 DEPRECIATION $100,320.00

TOTAL CASH FLOW $497,681.00 LESS DEBT SERVICE $230,810.00 POSITIVE CASH FLOW PRODUCED YEAR ONE $266,871.00

Asset Purchase Agreement

II. New Locations

• Lease a new location • Purchase an existing building • Purchase ground and build

New Location

• Demographic study.

• Competitive analysis.

• Market rent analysis.

Lease Issues

• Top dozen lease issues.

Lease Issues

• Terms / Options

• Percentage Rent

• Permitted Use / Exclusivity

• Calculation of Common Area Charges

Lease Issues

• Maintenance and Replacement Responsibility of the Landlord

• Security Deposit

• Late Charges

• Payment in a Marketing Fund

Lease Issues

• Waiver of Claims and Indemnification

• Casualty Damage or Taking By Condemnation (Eminent Domain)

• End of Lease Issues

• If Perc on Premises

Purchase Existing Building • Property + building Xray.

• Zoning restrictions.

• Architect.

• Lawyer.

• Contractor

• Estimated remodel costs.

• All studies similar to new locations (Demographic, competition, market).

• Financing

Purchase Ground & Build

Similar in all respects to purchasing building w/additional

complication of constructing complete facility.

Lease vs. Purchase

Financial Implications

III. Organic Growth

• Additional Services

• Marketing • Price increase • Community involvement