maximizing business value umpqua lunch and learn 072016

Index of slides:

Maximizing Business Value

Hosted by Umpqua Bank, North Bend (WGB)

Presented by Peter Busacca from Washington BBI

06/07/16 Washington BBI The brokers with an end-to-end solution! 1

1. Intro2. Maximizing Business Value3. Admin4. Which is true?5. Define Business Value6. Components of Value7. Measures of Income8. Why focus on Value?9. Exit Planning10. Why Buyers Buy11. What Buyers Buy12. What Buyers Pay For13. Today’s Market14. Today’s Market (cont.)15. Challenges16. It’s Time to Buy!17. How to Begin18. Summary19. Conclusions20. Contact Info

Index of slides:

Maximizing Business Value

Discussion topics:

• What is business value?

• What matters the most?

06/07/16Washington BBI

The brokers with an end-to-end solution!

1. Title2. Maximizing Business Value3. Admin4. Which is true?5. Define Business Value6. Components of Value7. Measures of Income8. Why focus on Value?9. Exit Planning10. Why Buyers Buy11. What Buyers Buy12. What Buyers Pay For13. Today’s Market14. Today’s Market (cont.)15. Challenges16. It’s Time to Buy!17. How to Begin18. Summary19. Conclusions20. Contact Info

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Admin

• Turn off cell phones

• Do you know where the facilities are in this facility?

• Ask questions. I’ll try to answer some of them.

• We have one hour to go over a lot of stuff.




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Which is true?

From a practical standpoint, business value is the price a ready, willing and able buyer would pay in an arm’s-length transaction.

Business value is an informal term that embraces both the tangible and intangible aspects of a firm.

Business value is the highest price that the market will bear.




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What is business value?

The real question is value to whom?

• Value to a prospective buyer

• Value to a lender

• Value to an ESOP

For our purposes today, we will assume that business value is the estimates (most likely) selling price




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How do appraisers assess value?

Three (main) Components of Value:

• Market Value (aka Comparable Value)

• Asset Value:• Acquisition value of comparable assets, or

• Disposal value of the assets?

• Income Value: • Value & consistency of past income streams

• Value of future income stream

• How accurate can this be in today’s market?




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Measures of Income

Aka “earnings” or “cash flow”:

• Net Income Mainly a tax figure

• EBIT Earnings before interest & taxes

• EBITDA EBIT + depreciation & amortization

• SDE EBITDA + sellers’ benefits –

benchmark general manager salary

EBIT and Sellers’ Discretionary Earnings (SDE) are widely used estimates of cash flow of the business. Most industry multiples are based upon either EBIT or SDE.




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Why focus on building value?

• Because it’s what matters!

• Bankers lend based on the value components

• especially earnings, but sometimes assets too

• Your retirement funds depend upon building value

• Both your current and future lifestyles are funded by earnings, so the higher the business value, the more comfortably you live.




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Exit Plan?

• Do you have a formal, written Exit Plan?

• Every business owner should develop a formal exit plan, and should measure and review it at least annually!

• The key variable in exit planning is business value.

Building business value matters!




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Why do buyers buy?

Some reasons that buyers purchase businesses?

• Capture future growth potential

• Add products, services, technology or IP to their portfolio

• Buy future revenue streams

• Purchase talent, territory or customers

• And some just want to buy a job

The higher the value, the more they will pay!

Focus on building value, not fire fighting.




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What do buyers buy?

• Established firm (typically 5+ years old)

• Skilled management team (continuity)

• Business Operations (process)

• Productive processes in place (capacity)

• Transferable customer base (clientele)

• Transferable vendor relationships

• Existing products and/or services

• Future (expected) revenue stream

• Chance for growth




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What do buyers pay for?

• Buyers buy based on perceived potential

• But what buyers actually pay for is your firm’s past performance*

• Market comparables (multiples)• Income streams (DCF Method)• Assets (and other balance sheet items)

* unless the buyer perceives strategic value




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Today’s Market

• Prime Lending Rate 3.5% (July 2016)

• Ballpark SBA loan rate 7.5% (usually prime + 4)

• WA unemployment rate 5.8% (May 2016)

• Fewer firms remain• Based on D&B information:

• WA HQ firms with est. revenues $.5M - $50M

• Manufacturers & distributors headquartered in WA

• We purchased this list in 2004 with 6,500 names

• 2010 ZapData lists 1,420 names




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Today’s Market (cont.)

• Those firms that survived the 4Q07 downturn are doing pretty well today

• Many failed and are gone

• Others consolidated to survive

• Banks were desperate to loan but afraid

• Transaction Activity:• Strong activity in the M&A market - $50M+

• Weak activity in Mid-cap

• Strong activity in Mainstreet




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Challenges to Growth

• Sales - generating revenues• Very difficult to grow organically

• Controlling operational costs • Downsizing causes loss of talent & efficiency

• Controlling volatile purchase costs• Especially petroleum related costs

• Expanding markets and market share• Best opportunity right now is growth through acquisitions

• Changing S&M methods• Friend’s daughter: “Does anyone even use email any more”?




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Take Advantage of Downturns

• Strategic Acquisitions – what to look for:

• Firms with “add-on” Products or Services• Cross-Sell opportunities

• Complementary clientele

• Opportunities to expand Markets or Territory

• Acquire Intellectual Property or Talent

• Increase Manufacturing/Distribution capacity

• Cost reductions in Purchased Materials




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Begin Building Value

• First assess current situation

• Then Exit Plan• Timing and goals

• Mission and LT Strategy

• SMART Goals (or how I will get from here to there)

• Professional Advisors:• Accountant: business & tax planning

• Valuators: annual measure of value (report card)

• Business Intermediary: preparing business for eventual sale




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Summary

• Components of Value • Market value, Assets and Income streams

• Measures of Income (aka earnings)• EBIT, EBITDA and SDE

• To build value over time, focus on strategy and execution

• Spend your time increasing earnings, not fighting fires

• You need to figure out what is causing the fires, not how to put them out

• Hold employees responsible for fighting the fires




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Conclusions

• It is a great time to buy!

• It is a great time to sell!

• Do a Business Health Checkup

• Use the BHC to create operational plans and an Exit Plan

• What are you the very best at in your market? Exploit that!

• The typical business’ value is determined by applying a multiple to last year’s earnings (EBIT)




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Contact Info

Peter Busacca [email protected]

Washington BBI 425/391-8720 www.WashingtonBBI.com

Mailing Address 400 NW Gilman Boulevard, Unit 2208

Issaquah, WA 98027

Office Address: 38579 River Street, Suite 14

Snoqualmie, WA 98065


