how to get a business ready for sale

HOW TO GET YOUR BUSINESS READY FOR SALE

Part of the Business Transition and Exit Planning For 2015 Series

Premiere Date: May 21, 2015


©2015

Practical and entertaining education for business owners and executives, Accredited Investors, and their legal and financial advisors.

For more information, visit www.financialpoisewebinars.com

IMPORTANT NOTE: THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF PERSONAL ADVICE. YOU SHOULD

CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

2©2015


http://www.financialpoise.com/

Business Transition and Exit Planning.com (“B-TEP”), owned by DailyDAC, LLC, is an online plain-English

educational resource for business owners and their trusted advisors contemplating, or getting ready, to sell their businesses.

Visit us on line at http://www.businesstransitionandexitplanning

.com/


©2015

http://www.businesstransitionandexitplanning.com/

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MEET THE FACULTY• Bob Dekker, Insight Advisory Partners

• Jay Ehrlich, Ravinia Capital, LLC

• Bob Deprez, Deprez Leadership, Inc.

Moderator: Jonathan Brand,

Lakelaw

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ABOUT THIS EPISODE OF THE SERIES

Hundreds of thousands of businesses are bought and sold each year. Most sellers, while successful business owners, are not expert at the “art of the deal.” That is, while they know their business inside and out and are sophisticated on matters related to it, most simply don’t have experience in selling a business. From how to market a business (do you hire a business broker or I Banker?) to how to structure the ultimate deal (asset sale v. stock sale), and all the issues in between (how do you value your business? Explaining what an earn-out is and when to use one), this series will cover issues that ever business owners should understand before selling a business. As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes: think sitcom rather than soap opera.

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SUMMARY OF EPISODES

• EPISODE #1 Business Valuation Explored - PREMIER DATE: April 23, 2015

• EPISODE #2 How to get a business ready for sale - PREMIER DATE: May 21, 2015

• EPISODE #3 The Buying/Marketing Stage - PREMIER DATE: June 18,2015

• EPISODE #4 How to find a buyer - PREMIER DATE: July 16, 2015

• EPISODE #5 Purchase Offers - PREMIER DATE: August 20, 2015

• EPISODE #6 Letter of Intent Stage - PREMIER DATE: September 17, 2015

• EPISODE #7 Closing Stage - PREMIER DATE: October 15, 2015

• EPISODE #8 All About ESOPS - PREMIER DATE: November 19, 2015

• EPISODE #9 Post Sale Topics - PREMIER DATE: December 17, 2015

*ALL EPISODES ARE AVAILABLE ON DEMAND*


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TIMELINECrafting a timelineRole of motivation for sale in timelineImportance of preparation and attention to

detailsAssess resources you can devote to sale without

losing profitability


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TIMELINE CONSIDERATIONS Determine your objectives

Financial Personal/emotional

Consider timing issues When would be the best/worst times to sell While important, don’t let this be the driving force; retain flexibility

Evaluate alternative buyers and transaction structures Tax considerations Ongoing role in business

Manage your expectations Valuation Controlling the process

Plan ahead – It’s never too early to start

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SELLER’S MOTIVATIONWhy are you selling the business?

Retirement (e.g., no succession plan)Family membersKey Employees

Buyout of other shareholder, recap

Market Conditions (Beneficial) Liquidity Shareholder Dividend

Distressed


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REVIEW OF STRATEGIC ALERNATIVES

Status Quo

Strategic and Financial

Alternatives

Capital Raise

Sale of Company

Financial Buyer

FinancialInvestor

StrategicPartner

Strategic Buyer/Merger

Operational Focus

Family/Management/ESOP

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IDENTIFY PRIMARY & SECONDARY OBJECTIVES

Maximizing valueCash up-frontLong term consideration

Leaving a legacyKids/familyRetain corporate structure/identity

Playing an ongoing role with the companyContinue as CEO

Minority ownership position“Another bite at the apple?”

ConsultantBrand ambassador

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ADVANCE PLANNING (1 – 2 YEARS)

Begin to evaluate transactional considerations

Strategic vs. financial buyer Cash vs. other consideration – Investigate recent industry

metrics Earn-out Non-compete Seller notes

Tax considerations Corporate structure Stock sale vs. asset sale

Platform vs. tuck-under acquisition candidate

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ADVANCE PLANNING (<12 MONTHS)

Begin the sale process

Engage professional advisors Sell-side, accounting, tax and legal Post-sale advisors

Review market and industry outlooks Reassess valuation expectations Compile list of most likely buyers Tie up any open issues:

Environmental Family/employment Confidentiality Due diligence logistics

Select optimal method of sale

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KNOW WHAT YOU’RE SELLINGAssets v. stockReview of tax differencesTransferability of assets


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CRAFTING THE STORYWhy would a buyer buy this business?History of businessTangible vs. intangible assetsEmployee loyaltyCompetitive advantagesLoyal customer base


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CONSIDER POTENTIAL BUYERS

Identifying Target MarketStrategic BuyersFinancial BuyersBusiness InsidersESOP


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Sale to family or

employees

Sale to PE firm or

individual buyer

Sale to strategic

buyerObjective

Maximize value

Leave a legacy

Play ongoing role with company

Structure and timing flexibility

Lower value Higher value

More likely Less likely

More likely Less likely

More flexibility Less flexibility

ANALYSIS OF STRATEGIC ALTERNATIVES

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MARSHALLING THE PLAYERS ~ OWNERS ~

Everyone wanting to sell?Issue of the dissident shareholder

Drag-along provision in shareholders agreement if people are not all on same page

Issue of contentious shareholder Squeeze-out

Retention of equityRole of relatives in the business


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REVIEW Of CORPORATE & SHAREHOLDER OBJECTIVES

Corporate Objectives

Review Strategic and Financial Alternatives

Grow the Company

Develop Bench

Strength (COO?)

Retain Corporate Identity

Maximize Shareholder

Value

Short Term Long Term

Shareholder Objectives

Long TermShort Term

Financial Stability

Increase Cash Flow

Review Organic and

External Growth

Opportunities

Diversify Portfolio

Provide Liquidity

Maximize Shareholder

Value

Access Working Capital

Improve Operating Margins

Diversify Customer Base/Sales Channels

Corporate and shareholder objectives ultimately align around maximizing the value of the enterprise, though the timing of liquidity and diversification objectives can sometimes create disparate views on long-term strategic decision making.

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MARSHALLING THE PLAYERS ~ EXECUTIVES ~Employment AgreementsRetention AgreementsBonus for Sale


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MARSHALLING THE PLAYERS~ EMPLOYEES ~

Retention of Employees Key employees New compensation agreements

Tradeoff of scaring employees off vs. locking them up

Ownership of Intellectual Property Agreement that assign all patents and other intellectual

property to company Role of independent contractors and intellectual

property Protection of trade secrets

Independent contractors vs. employees


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MARSHALLING THE PLAYERS~ RETENTION OF PROFESSIONALS ~Business Broker or Investment BankerLaw, Consulting or Accounting FirmActive or Retired Senior Executives


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MARSHALLING THE PLAYERSOUTSIDE PARTIES

Impact of news of sale on customersImpact of sale on competitorsImpact on consultants


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ENSURING YOU ARE READY TO SELL

Have your financial documents in order Historical financials – minimum of three years

Audited statements are ideal, but not required Compiled/reviewed statements are important

Tax returns Interim financials (YTD or latest quarter) Budgets and projections Annual MD&A

Make sure all of your professional advisors are informed of your objectives

Maintain good relationships with customers and suppliers

Ready access to corporate records (resolutions, meeting minutes, annual reports, operating/shareholder agreements, etc.)

Description of all financing arrangements Loan documents, leases List of shareholders and ownership (cap table)

Detailed listing and description of assets and liabilities

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RE-IMAGINING THE BALANCE SHEET

Manage for profit and not minimal taxTiming issues of revenues and expenses

Off-balance sheet assets such as real estateContingent Liabilities

E.g., lawsuits, lease-purchase optionsAccount for related party transactions

Formalizing related party relationshipsNormalize the costs of related party expenses

To audit or not to audit


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VALUATION DETERMINANTS

• Above-average growth outlook

• Recurring revenue streams

• Large universe of potential buyers – consolidating industry

• Highly cyclical• Large Cap X or working

capital requirements• Slow/no growth• Commodity products

• Distinct competitive advantages

• Good management depth• Consistent financial

performance• Scalability• Broad and diversified

customer base

• Uneven financial performance

• Customer concentration• Weak management bench• Lack of transparency

and/or detailed financial reporting

Industry

Company

Positive Influences

Negative Influences

A variety of industry and company-specific metrics will be considered by prospective buyers in determining an appropriate valuation for your company.

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CLEANING UP LOOSE ENDS~ BASIC HOUSEKEEPING ~

Organization of Documents and FinancialsTax Returns validReview or audit of financial statements,

Consistency- apples to applesInventoryOwnership compensationRelated party payments

Cosmetic ChangesSettlement of Lawsuits / Satisfaction of Liens


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CLEANING UP LOOSE ENDSQualifications to do business Software AuditUpdating licensesClearing ownership titleAvoiding zoning issuesFormalization of oral agreements


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DUE DILIGENCEDocuments likely to be requested by a potential

purchaser include: Profit-and-loss statements

Detail of adjustments to EBITDA Balance sheets Tax returns List of hard assets (e.g., furniture, fixtures, equipment) List of inventory, analyzed as to usability in the business Commercial property appraisal or lease agreement Material contracts Software and other IP Licenses Aged list of receivables Aged list of payables


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OTHER RELATED TOPICSWhat areas do many owners overlook? Contingent liabilities and proper accounting for leases Intellectual property ownership Appropriate add-back of owner’s comp/expenses

What do buyers look for ? Consistency of financial performance Growth potential and scalability Management depth Accurate and transparent reporting

What can you do to make sure you get a premium price? Operate best practices as much as possible Hire an experienced advisor to run a process that makes sense for your company Sell into a hot market


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OTHER RELATED TOPICS, cont.What types of businesses are easier and more difficult to sell (e.g., a B2B manufacturer vs. a B2C service business)? Hard to generalize

B2B generally considered less volatile, therefore have a lower discount rate

Do you always need a business broker if you can’t find an interested buyer on your own? Best to use an intermediary (real estate agent analogy)

Can sometimes use lawyer or accountant

Why should a business owner consider selling their business several years prior to retirement (assuming the business’ long term prospects are good and most private businesses typically command a 3-6x EBITDA multiple) Hard to time the market, but there are better/worse times to sell

Stay flexible about timing if possible Not always purely a financial decision

Financial and management dynamics of specific business will dictate if/when to sell and at what price Competent management team in place Consistency of cash flows (annuity) vs. lump sum Value of selling vs. holding


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MORE ABOUT THE FACULTYJONATHAN BRAND

Jonathan Brand is a managing attorney at Lakelaw (www.lakelaw.com). Jonathan provides expert advice and counsel in the areas of bankruptcy, chapter 11 reorganizations, commercial litigation, and related transactional matters, and regularly represents debtors, trustees, and creditors in a variety of complex insolvency matters in State and Federal courts. He also assists clients with out-of-court workouts, assignments for the benefit of creditors, and structured liquidations.Jonathan is board-certified in Business Bankruptcy by the American Board of Certification, rated AV® Preeminent™ by Martindale-Hubbell’s peer review process and earned a 10.0/10.0 rating on Avvo.com. Illinois Super Lawyers recognized Jonathan as a Rising Star in the area of Bankruptcy & Creditor/Debtor Rights in 2012, through 2015.Jonathan volunteers his time with American Bankruptcy Institute’s Credit Abuse Resistance Education (C.A.R.E.) Program and has provided pro bono representation through the Volunteer Attorney Panel for the Bankruptcy Court for the Northern District of Illinois. Jonathan also served as the Co-Chair of the Liaison Committee for United States Bankruptcy Court for the Northern District of Illinois.Prior to joining Lakelaw, Jonathan served as a law clerk to the United States Bankruptcy Court for the Northern District of Illinois and the Honorable John S. Dalis, United States Bankruptcy Judge for the Southern District of Georgia.

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http://www.lakelaw.com/

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MORE ABOUT THE FACULTYJAY ERHLICH

Jay has more than twenty five years of investment banking experience including sourcing acquisitions, divestitures, debt and equity sourcing, capital markets, workouts, distressed businesses, private equity and business operations. Jay is an Advisor with Ravinia Capital LLC. Jay has counseled clients in numerous transactions including restructuring of senior debt, MBOs, privatizations, 363 sales in bankruptcy court, sourcing capital and sale transactions. Prior to his investment banking career, Jay led turnarounds, operated businesses and had his own law practice focusing on insolvency, bankruptcy and acquisitions. Jay received a BS in Finance from the University of Texas and a JD from Washington University in St. Louis, Missouri. He has been active in the Turnaround Management Association and the Association for Corporate Growth.

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MORE ABOUT THE FACULTYBOB DEKKER

Bob Dekker is a career capital markets professional and entrepreneur with extensive experience working with start-up and emerging growth companies. Specialize in developing and implementing creative capital formation strategies and advising clients on alternative approaches for maximizing shareholder value in connection with merger and acquisition activities. Formerly a senior banker at ABN AMRO, Inc. and Prescott, Ball & Turben, Inc. (an affiliate of Kemper Insurance Company), arranged over $2 billion of private market transactions during his investment banking career. Holds FINRA series 62, 63 and 79 securities licenses and is a licensed real estate managing broker in the State of Illinois. Graduated with a BA in Economics from Denison University.

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MORE ABOUT THE FACULTYBOB DEPREZ

Robert W. Deprez is a senior operating and financial executive who has successfully led middle market companies as a CEO, CFO and owner. He has also served interim CEO, CFO and CRO, and led organizations through leadership and financial transitions. He has experience leading companies through strong growth periods, turnarounds and process realignments. His broad experience allows him to adapt easily to company dynamics. Mr. Deprez has a track record of focusing companies on generating greater profits and producing measurable results in a short period of time. He has experience leading industrial companies through out-of-court restructurings and recapitalizations and has produced results in as little as six months. He has experience working with family-owned, PE-owned and ESOP-owned businesses.For example, one company he led as CEO was generating $34 million in revenues and making $1.4 EBITDA. Mr. Deprez rebuilt the management team, refinanced bank debts, cut costs and shifted operations to better serve the international market. Today, the company's revenues are over $80 million with EBITDA of greater than 11%. As a result of the company’s newfound success, Mr. Deprez was awarded the Turnaround of the Year Award by the Turnaround Management Associations.

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MORE ABOUT THE FACULTYBOB DEPREZ cont.

For another company he owned and ran as the CEO which he acquired out of bankruptcy the team he led was able to achieved operating excellence by implementing lean principals and a customer-centric focus. Through training and focused initiative the company reduced direct labor expenses by 30%, improved on-time delivery from 75% to over 95%, reduced inventory and implemented the toughest quality program in the industry TS16949. The improved performance led to increased orders and business from it largest industrial customers. Mr. Deprez has substantial M&A and transaction experience. He is the founder and owner of Arbor Point Capital Holdings, a middle market buyout firm which completed, in 24 months, two platform and two add-on acquisitions of under-performing family-owned businesses. As CEO he built self directed senior leadership teams and the business were later sold with management teams in place. As an investment banker and a principal, he has refinanced bank lines, raised capital and sold businesses.Mr. Deprez fosters a culture of respect and continuous improvement that includes the development of leadership teams and the mentoring of junior executives. He developed an implementation methodology for organizing, focusing and crystallizing leadership teams so they may effectively execute their strategies through metrics, using weekly dash boards, tightly run meetings, functional budgets, and focused 90-day goals that are aligned with the company's values and long-term vision.

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About Financial Poise™

DailyDAC, LLC, d/b/a Financial Poise™ provides continuing education to business owners and executives, investors, and their respective trusted advisors. Its

websites, webinars, and books provide Plain English, sometimes entertaining, explanations about legal, financial, and other subjects of interest to these

audiences.

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The ChamberWise™ Education Consortium is a resource for Chambers of Commerce to provide its members with valuable member benefits by offering relevant business education webinars; and generate revenue for the Chamber as well.

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Visit www.chamberwise.org


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IMPORTANT NOTE:THE MATERIAL IN THIS PRESENTATION IS FOR

GENERAL EDUCATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL,

INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

©2015
