Exit Now or Exit Later

1
Exit Now or Exit Later

• PRESENTED BY
• Monte Pendleton, Silver Fox Advisor.
• Jim Griffing, Treasurer, Silver Fox Advisors.
• Howard London, President, Silver Fox Advisors.

2
Pendleton Background

• Monte Pendleton is a mentor to owners on how to
  improve sales and profits
• Founder of Sun-X International with over 700
  distributors in 69 countries.
• Past President of the Intl. Franchise Assn.,
• U. of Mo., B.S.C.E.

3
Griffing Background

• Jim Griffing is both a CPA and CFE.
• After years of experience as a Regional Tax
  Partner with another firm, he founded Griffing
  Company, P.C., a full service certified public
  accounting firm in 1987.
• MS in Taxation degree from Drexel University.

4
London Background

• Howard London is a business development expert
• Forty four years of hands on administrative,
  technical, creative, advertising, marketing and
  sales experience for start-up and growth
  companies
• Author of "Six Minute Business Plan".

5
Exit Objectives

• Maximize Value
• Reward Loyalty and
• Perpetuate the Business.

6
Potential Business Exit Strategies

• Sale
• Merger
• Buyout
• Liquidation of Assets
• IPO

7
Private Businesses

• 10 of family businesses survive to the third
  generation
• 10 of family business owners are financially
  independent from their business when they retire
• Grant Thornton data

8
Where Can Private Businesses Go?

• Go public
• Acquired by
• - Strategic buyer often a competitor
• - Financial buyer if income-producing
• Liquidated
• - Owner cashes out.
• - Bankruptcy.

9
Elements of Exit Vehicles
This index runs from 1 to 10, with 10
describing the exit vehicle with the greatest
potential value. The values reflect a subjective
opinion.
10
Dont Let the Transfer of Your Business be
Triggered by External Events

• Life surprises
• - Death
• - Disability
• - Divorce
• Business surprises
• - Adverse marketplace
• - Competitive challenges
• - Regulatory changes

11
Plan To Exit

• Sell to a competitor, corporation or individual
• My ideal buyer will be ___________________________
  ________
• The buyer will pay _______________________________
  ________
• I might sell in January 2011 or I might keep the
  business.

12
Plan To Exit

• Document 2 to 3 years profit
• Increase the value of your business
• Establish financial goals for 2010
• Establish management goals for 2010
• Establish marketing goals for 2010 and
• Produce and/or update Personnel, Policy
  Procedure Manuals.

13
Financial Goals for 2010

• Total Sales _________________
• Net Profit Before Taxes _________________
• Equity (Net Worth) _________________
• Credit (Bank Loans and Lines)
  _________________
• Number of Clients __________________
• Number of Employees ___________________

14
Management Goals for 2010

• Business Vision Statement by __________
• Business Mission Statement by __________
• Complete a Customer Satisfaction Survey
  by__________
• Annual Budget by__________
• Employment Contracts by __________
• Write Job Descriptions by __________

15
More Management Goals for 2010

• Employee Questionnaire by ________________________
  _____
• Monthly P L Statements by ______________________
  ______
• Monthly Balance Sheets by ________________________
  ______
• Monthly Budget Analysis by _______________________
  ______
• Daily Sales, Cash, Problems, etc. Reports by
  __________
• Weekly Proposals In Progress Reports by
  ____________
• Weekly Work In Progress Reports by
  __________________

16
Marketing Goals for 2010

• Produce a new website by _________________________
  ___
• Produce new marketing materials by _____________
• Update customer prospect database by __________
• Create Touch Marketing Program by
  ______________
• Create trade show program by _____________________
  __
• Create business network program by _______________

17
Personnel, Policy Procedures

• Produce or update Policy Manuals
• Personnel by ________________________
• Credit by ____________________________
• Audit by _____________________________
• Insurance by ________________________
• Safety by _____________________________

18
Personnel, Policy Procedures

• Produce or update Procedures Manuals
• Purchasing by ____________________________________
  __
• Selling by _______________________________________
  _____
• Order Processing by ______________________________
  __
• Hiring by ________________________________________
  _____
• Invoicing Accounting by ________________________
  __
• Customer Service by ______________________________
  ___
• Banking by _______________________________________
  _____

19
What Is The Value?

• Revenue 2009 1,000,000 100
• Cost of Goods or Services 380,000 38
• G A Overhead .. 330,000 33
• Executive Salary .100,000 10
• Selling/Marketing Expenses ..150,000 15
• TOTAL 960,000
• EBITDA 40,000 04
• 5 x 40,000 (EBITDA) 200,000

20
Double The Value

• WHAT IF?
• Revenue 2009 1,050,000 100
• Cost of Goods or Services 378,000 36
• G A Overhead .. 336,000 32
• Executive Salary .100,000 9.5
• Selling/Marketing Expenses ..157,500 15
• TOTAL 971,500
• EBITDA 78,500 07.5
• 5 x 78,500 (EBITDA) 392,500

21
Triple The Value

• WHAT IF?
• Revenue 2009 1,100,000 100
• Cost of Goods or Services 385,000 35
• G A Overhead .. 330,000 30
• Executive Salary .100,000 9
• Selling/Marketing Expenses ..165,000 15
• TOTAL 980,000
• EBITDA 120,000 11
• 5 x 120,000 (EBITDA) 600,000

22
Triple The Value

• WHAT IF?
• Revenue 2009 11,000,000 100
• Cost of Goods or Services 3,850,000 35
• G A Overhead . 3,300,000 30
• Executive Salary . 200,000 0.2
• Selling/Marketing Expenses ..1,650,000 15
• TOTAL 9,000,000
• EBITDA 2,000,000 18
• 5 x 2,000,000 (EBITDA) 10,000,000

23
How Do Owners Successfully Transfer the Business
to Others?

• Recognize the transfer will be a complex process.
• Keep financial reports and tax filings current.
• Strive for accuracydo your due diligence now.
• Make yourself expendabledelegate success to
  your employees.

24
Negotiating and Closing

• Valuation methods
• The wide range of terms available
• Stock versus assets example
• Types of financing available
• Earn outs
• Protecting your escrow

25
Valuation Methods

• Multiple of Earnings or EBITDA
• Replacement Cost
• Liquidation Value
• Dividend Paying Capacity
• Comparable Market Value
• Discounted Future Earnings
• Discounted Cash Flows

26
Other Issues affecting Valuation

• Times net asset value
• Discounted increase in net worth
• Discounted free cash flow
• EBITDA (Earnings before interest, taxes,
  depreciation and amortization)
• Internal rate of return (IRR)

27
Strategic Buyers

• Beware of under-pricing your firm to a strategic
  buyer.
• Value of your firm is driven by their internal
  needs.
• Never be the first to mention price when
  dealing with a strategic buyer.

28
Terms

• All cash
• Cash down with installments
• - Recapturing hot assets
• - Personal guarantees of purchase
• All deferred
• - (discussion of earn outs to come)
• Stock for stock, cash and stock
• Using gifting when selling to family members

29
Types of Financing Terms
30
Financing Terms Available by Source
31
Earn Outs

• Only part of purchase price is paid at closing,
  rest due as earnings or revenue milestones are
  met in the future.
• Risk reduced to buyer.
• Seller has opportunity to get higher price.
• Complicated by
• - External economic or political issues
• - Creates a long-term relationship
• - Tax implications are tricky

32
After the Close

• Keep valuable employees by planning a
  well-communicated transition to the new ownerbe
  honest with them!
• If merging organizations, anticipate and manage
  cultural clashesespecially if theyll affect
  customers.
• New owners will need guidance in hands-on
  operational questionsanticipate wholl provide
  it previous owner or employees?

33
Whats the Worst and Best that can Happen?

• Top Ten Reasons Owners Dont Get the Best Deal
• Guidelines for keeping a business buy-able

34
Ten Top Reasons Owners Didnt Get Best Deal

• 10. Were first one to mention price.
• 9. Didnt plan to sell business.
• 8. Proper documentation was not demanded.
• 7. Didnt correctly position business for sale.
• 6. Assumed they knew the best buyer.

35
Ten Top Reasons Owner Didnt Get Best Deal

• 5. Tried to sell to the wrong people.
• 4. Didnt get proper counsel.
• 3. Didnt understand the buyers motive.
• 2. Were unrealistic about price.
• 1. Didnt understand the real value of the
  business.

36
A Buy-Able Business Stays in Top Condition

• Accurate and up-to-date financial statements.
• Owner can be replacedmethod of success is no
  mystery.
• Owner is glad to keep the business until the
  right buyer is found.

37

• Questions?