The Anatomy of Selling Your Business

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The Anatomy of Selling Your Business

• Presented By
• Performance Industries, L.P.
• Phone [phone] Fax [phone]
• Web Site www.PerformanceIndustries.com

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Considerations for Selling Your Business

• When Why to Sell
• Who Are The Buyers
• Managing The Process
• Valuation

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When Why to Sell

• Sell on an Upswing
• Downward Trends Depress Prices or Scare Off
  Buyers
• Good Reasons
• Retirement/Relocation
• Too much growth to manage
• Capital needs for expansion
• Business Continuation

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When Why to Sell

• Bad Reasons
• Business downturn
• High maintenance
• Ownership dispute
• Death of partner/owner
• Burn-out

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Who Are The Buyers

• Corporate Strategic Buyers
• Financial Buyers
• Platforms
• Add-ons
• Turnaround/fixer-uppers

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Who Are The BuyersCorporate Strategic Buyers

• Synergistic Buyers
• Cost savings
• Product extensions
• Market extensions
• Market share
• Technology

• New Business Buyers
• Earnings accretion
• Public market
• Growth potential
• Profit potential
• Competitive leaders

Corporate buyers believe they acquire for the
long term. They do not buy with a subsequent
exit in mind.
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Who Are The BuyersFinancial BuyersSeeking
Platforms

• What They Want
• Clean company
• Strong management
• Scale and strong market share
• Growth potential internally or through acquisition

• Why They Want It
• No-problem ownership
• Managers who can grow the business
• Public market exit potential based on growth,
  size, share
• Strategic buyer exit available

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Who Are The BuyersPositioning for Exit

• Evaluate Your Company vs. Buyer Desires
• Strengths
• Shortcomings to address
• Problems to fix
• Identify Your Likely Buyers
• Establish The Timing For Exit
• Develop an Exit Action Plan

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When To SellIf The Time to Sell is NOW

• Address Potential Issues
• Clean up the company legally
• Clean up books, financial issues
• Identify and clean up environmental issues
• Give buildings, etc., a facelift
• Emphasize Fit With Your Target Market
• Expose and Plan to Manage Problem Areas

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When To SellIf You Have Years to Go

• Let Exit Plans Drive the Corporate Strategy
• Sell or Close Businesses That Dont Fit
• Attack Problems That Undercut Value
• Management capability or age, operational
  financial improvements, environmental or other
  contingencies
• Build Business in Areas Vital to Exit Story

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When It Is Time To Sell Management Issues

• Make Management Your Partner
• Stock ownership or sharing in the proceeds
• Gives management currency to invest in LBO
• Address Severance Fears
• Bonus for staying through sale, or parachute
• Seriously Support an MBOor Forbid It
• Financial buyers create MBO like opportunity
• Avoid loss of focus, conflict of interest

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When It Is Time To Sell Some Guidelines When
Selecting Investment Bankers

• Hire a Firm to Run Your Process
• Big deals may overwhelm small firms
• Big firms may not perform on smaller deals
• Hire Professionals, and Check References
• Hire the individuals not the brand name
• Dont get greedy hire realists who deliver
• Focus on execution

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Managing The ProcessDue Diligence

• Buyer
• Information about the business
• Desirability of acquisition
• Purchase price calculation
• Avoid post-closing surprises
• Do not rely solely on representations and
  warranties
• Surprises
• Lawsuits

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Managing The ProcessDue Diligence

• Seller
• Protect trade secrets and techniques of operation
• Avoid publicity and effect on employees,
  customers, suppliers, lenders, etc.
• May need to assess financial condition, business
  acumen of buyer in cases with deferred
  compensation or stock consideration

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Managing The ProcessConfidentiality Agreements

• No Disclosure of Financial Information, Trade
  Secrets, etc.
• Definition of Confidential Information
• Exceptions
• Time Period
• Return of Information
• Buyer generated analyses

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Managing The ProcessLetters of Intent

• After Confidentiality Agreements
• Confidentiality May be Included in Letter of
  Intent Where Due Diligence Subsequent or
  Continuing
• Basic Terms and Conditions of Transaction
• Level of detail move instead immediately to
  definitive agreement?
• Additional bargaining power on definitive
  agreement?
• Unwitting concessions?
• Social issues?

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Managing The ProcessLetters of Intent

• Disadvantages
• Any advantage to seller?
• Merely commits to deal with no assurance?
• Buyer
• Invite competing offers especially if disclosure
  by public company
• Advantages
• Parties may be unwilling to expend time, effort
  and money to investigate proposed transaction
  without at least a non-binding LOI
• Useful guide for future negotiations
• Identify no meeting of the minds

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Managing The ProcessAcquisition Agreements

• Timing
• Close simultaneously?
• Process
• Drafting responsibility

• Business Understandings
• Description of stock or assets
• General or specific
• Excluded assets
• Calculation of purchase price
• Payment terms
• Deferred payments
• Security
• Subordination
• Assumed liabilities
• Taxes
• Closing

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Managing The ProcessRepresentations and
Warranties

• Categories of Representations
• Legal matters as to seller
• Financial statements
• Historical
• Absence of changes
• Assets
• Condition
• Necessary assets
• Title
• Categories

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Managing The ProcessRepresentations and
Warranties

• Categories
• AR
• Collectibility
• Inventory
• Accounting method and resources
• ME
• Condition
• Real Estate
• Title
• Contracts
• Consents
• Intellectual Property
• Infringement

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Managing The ProcessRepresentations and
Warranties

• Employees
• Listing
• Compensation
• Benefits
• Customers
• Liabilities
• Litigation

• Environment
• Laws
• Tax
• ERISA
• Brokers
• 10b-5
• Schedules

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Managing The ProcessConditions Precedent

• Bring-Down
• Material Adverse Change
• Third Party Consents, Lien Releases, etc.
• Opinions
• Fairness Opinions, Comfort Letters, etc.
• Votes
• Financing
• Regulatory, etc. Approvals

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Managing The ProcessOther

• Closing
• Termination
• Drop dead date

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Managing The ProcessAncillary Agreements

• Employment/Consulting Agreements
• Condition to closing for either or both parties
• Induce principals of seller to remain involved
• Transition
• Promote relationships with customers and
  suppliers
• Induce key employees to remain
• Employee v. independent contractor
• Extent of required services, time, commitment,
  etc.

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Managing The ProcessAncillary Agreements

• Non-Competition Agreements
• May or may not be related to employment/consulting
  arrangements
• Time, geographic scope and activities
• Exceptions
• Non-solicitation
• Non-disclosure

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Managing The ProcessEarnouts

• Definition of Target
• Separate accounting
• Overhead
• Management fees
• Taxes
• Cost of capital and loans
• Degree of control
• Covenants
• Should be viewed as bonus if received

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