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The Art of Buying & Selling a Small Business
Tom Marx, CEO September 26, 2012
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 1 22nd Annual Convention
Who We Are
2
Over 25 years’ experience in the Automotive and Commercial Vehicle Aftermarket
Consulting services Brokerage: Buy-Sell-Merge
Equity and debt financing
Marx Group Advisors
TOM MARX • Business growth &
marketing focus • 25+ years industry
experience
3
PAUL COOPERSTEIN • Venture capitalist &
investment banker • Business lawyer &
mediation specialist
DAVE BARBEAU • Parts distributor &
aftermarket executive • Industry management
consultant
CHRISTINE LEMAy • Business development
manager • International specialist
Support Staff + 10-Member Nationwide Advisory Board
Buying/Selling a Small Business
• How buying/selling a business fits in your succession plan
• Basic understanding of terms and deals • Better idea of the value of your business • Knowledge of how deals are structured • Best way to market your business for the price
you want • Understanding of the closing and transition process
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 4
When we finish today, you will learn:
What is Your Situation?
• Are you a baby boomer ready to retire?
• Are you tired after a decade of consolidations, business cycles, banking hassles – and the recession?
• Are you a young lion hungry to grow? • Do you want to eliminate competitors
or expand your footprint?
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 5
Understand Your Short, Mid and Long Term Goals
and Your Options For Exit Strategies
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 6
Timeless Questions
• Will my business survive me? • How do I get my equity out and gain liquidity
when I want to? • How can I get a fair price when I sell? • How do I value the business?
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 7
When Do You Know it is
Time to SELL?
• You are tired of the hassles – not having fun! • You want to do something else in life • Nostalgia – “It ain’t like it used to be” • You aren’t sleeping at night • After work…you don’t want to talk with your
spouse – or even your dog!
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 8
When Do You Know it is
Time to BUY?
• You cannot achieve your goals with organic growth
• Opening new stores takes too long • One of your competitors is low price
leader • You have excess cash • You have investors that want higher
rate of return • Your long term exit strategy requires
significantly more revenue and EBITDA
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 9
TAKE CHARGE OF YOUR FUTURE
• What will happen if you don’t have a plan in place?
• Are you really taking care of your family?
• Are you really taking care of yourself?
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 10
Are You Getting
Ready to Retire?
• Succession plan must be in place
• Decide if you are going to transfer the business to a family member(s) or key employee(s)
• Considering selling the business
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 11
70% of All Small and Midsized Businesses Don’t Sell After They are Put on the Market
Selling a business is not like selling a piece of real estate or any other asset
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 12
Buyers and Sellers Need to Position Themselves
• Be financially stable – show good valuations
• Have strong management and staff willing to stay on
• Sustain a diverse and loyal customer base
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 13
Buyers and Sellers Need to Position Themselves
• Develop differentiating value proposition – superior product, services and customer support
• Invest in IT, processes, infrastructure, people skills
• Have strategic plan in place • Identify target profile
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 14
VALUATION: How to Sell Your Company for
What it’s Worth
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 15
Plan Ahead: Begin to Prepare at Least 3 Years
Before You Want to Sell
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 16
Preparing to Go to Market
• 3 years tax returns • 3 years profit & loss statements • 3 years balance sheets • Current YTD financial statements,
projection through YE and projection for following year
• Write a “Book” on the opportunity
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 17
Seller’s “Book”
• Company overview and history • Key investment highlights • Management and ownership • Industry overview • Facilities • Competitive analysis • Call to action, offering price and
next steps for interested parties
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 18
Preliminary Due
Diligence
All the above PLUS • Business strategy • Products and services • Customers and suppliers • Market research • Sales & marketing teams • Management and ownership • Facilities, property, assets • Legal / accounting issues • Contracts • Capital • SWOT analysis • And more…
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 19
Three Fundamental Valuation Methods
• Cost approach – valuation based on the cost of purchasing or reproducing the assets of the business
• Income approach -- valuation based on ability of company to generate income and risk reflected by current and predicted market conditions
• Market approach – valuation based on sales price for similar businesses
In this industry, the market approach is most commonly used – and understood
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 20
What is EBITDA? EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization • Some call is “normalizing the P&L” • Some call it “recasting the P&L”
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 21
Why is EBITDA the Standard?
Allows for consistent comparison of companies in the same industries, with terms such as “This business will sell between 5x to 7x” • After recasting the P&L, apply multiple to
EBITDA number • Adjust this number based on other factors • Adjust this number on whether this is a financial or
strategic buyer…strategic buyers often pay higher price
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 22
Recast Your P&L Pay attention to: • Balance sheet items (dividends, real estate) • Accelerated deductions, amortization etc. • One-time expenses • Owner(s) expenses
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 23
Recast Your P&L
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 24
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 25
Determining the
• Operating earnings averaged over a period of years times a multiple
• Consistency in earnings (margin & growth) = fewer years needed
• Typical average is prior 3 years
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 26
What Does the Seller Consider
When Valuing the Business?
• Looks at brighter future and diminishes historical performance, including those caused by The Great Recession
• Promotes strengths for higher price
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 27
What Does the Buyer Consider When Valuing the Business?
Looks at the same financial statements from a buyer’s perspective • Looks at historical performance and does not value possible
potential upside • Finds vulnerabilities that substantiate lowering of the price • Points out weaknesses so they can present lower offer • Questions the true value of assets, inventory and
collectability of receivables • There are exceptions when the buyer is HIGHLY motivated!
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 28
Value Lays in the Eye of the Beholder
• Context Dependent – Are you a Buyer or a Seller – Sale to company management – Passing down to family member – Sale to PE (Private Equity) firm – Sales publicly held company – Industry standards, benchmarks, trends
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 29
Other Factors Taken into Consideration:
• Comparable Sales • Margin • Barriers to entry and
competitive positioning • Regional differences &
Market Saturation • Debt Capacity • Volatility/Stability • Discounted Cash Flow
• Buyers’/Sellers’ Motivation • Customer Base • Special Conditions • Technology • Projected Cash Flows • Personnel • Revenue & operating trends:
Past, Current & Future • Strength of balance sheet
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 30
Potential Factors That Increase the Value • Strong revenue & profit growth = higher multiple • Above average margins= higher multiple • Strong buyer marketplace = higher multiple • Valuable assets = higher value
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 31
Potential Factors
that Reduce
the Value
• Long term debt • High level of goodwill compared
to assets and net income • High percentage of aged
receivables • Dominance of a few customers • Lower operating margin than that
of buyer
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 32
How to Increase the Value of Your Business
• Keep revenues & profits growing • Have credible successor management • Have a broad customer base • Pay attention to your balance sheet: quality of
assets, inventory, old equipment, cores, level of debt, working capital reserve
• Other strategic assets (real estate, life insurance policies etc.)
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 33
The Impact of Financing
• Despite some loosening of credit, financing poses an obstacle in the deal making process
• Impacts both sellers and buyers
• Sellers and buyers need to think about how this deal will look through the eyes of a banker
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 34
Valuation is often book value and goodwill to founder via premium or deferred compensation
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 35
Sale to Company Management
Selling Options Typical Deal Structures
Transfer to Family • Valuation is more complex • Estate and gift tax considerations significantly
impact these transactions
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 36
Selling Options Typical Deal Structures
Sell to Publicly Held Company • Some valuation components more important
to privately-held buyers • Due diligence and discovery even more
critical • Regulatory agencies and guidelines
complicate the transaction © 2012 Marx Group advisors - The Art of Buying & Selling a Business 37
Selling Options Typical Deal Structures
Sell to Privately Held Company • Valuation is determined by the marketplace
or the buyer • Seller’s representatives can and should
influence buyer’s valuation
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 38
Selling Options Typical Deal Structures
PE Firms • PE firms have funds that need to be invested • Auto and commercial vehicle aftermarkets are
key industries due to steady growth and low risk (less sexy than technology – adds good balance to portfolio)
• Tend to buy where regional locations fill in gaps • Tend to buy based on multiples and less sweat
of the details – once deal is done, site usually must conform to the brand and its products. © 2012 Marx Group advisors - The Art of Buying & Selling a Business 39
Selling Options Typical Deal Structures
Individual Investor or Operator • Often a financial buy – numbers must pencil • Generally investor wants to add value with smarter
management or procurement…looks for healthy companies where buyer can significantly improve results
• Tough negotiators, especially those already in the industry looking to pick up market share
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 40
Payout Structure
• Additional payments over 2 – 5 years based on meeting profit targets
• A kicker for revenue growth • A hold-back if key customer is lost; key
metric is missed; or if accounts receivable is uncollectible
• Seller financing
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 41
Getting Equity Out Other Options for Owners
• Management Buyout • ESOP • Equity Partner • Deferred Compensation Payment
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 42
Cashing in Does Not Always Mean Selling Out
Stay on in some fashion (if you choose) • Employee • Consultant • Run the business for a defined period of time • Grow the business with someone else’s investment
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 43
Selling Process
Your biggest challenges: • Keeping it all confidential -- internally and
externally • Keeping your eye on your business so sales and
profits are not eroded • Getting the transaction done as quickly as practical
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 44
Confidentiality Agreements (NDA’s)
• Needs to be well drafted • Term is from the date of signing or last exchange of
Confidential Information • Employee poaching clause • Non-compete provisions
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 45
Be Smart from the Beginning Understand what truly makes a difference • Clean up your balance sheet and P&L • Clean up assets and inventory • Valuation determination • Thorough and engaging offering package • Prospects search • Letter of Intent • Due Diligence • Definitive Purchase Agreement or Asset Sale Agreement • Closing • Transfer of assets
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 46
What Do You Need to Do During the Sales Process?
• Keep making profit • Maintain adequate inventory, fill rates and margins • Retain key people • Keep customers happy
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 47
Reducing the Stress
• Get all skeletons out of the closet—eventually they will be discovered anyway
• Full disclosure of all positives and negatives • Timely review and response • Carefully think through all responses so they are
complete and accurate • Have an intermediary do the heavy lifting
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 48
When Do You Know the Deal is Not Going Well?
• LONG delays in response • Every deal results in a new detail • When every paragraph of the LOI ends with “BUT” • When the legal bills are double and triple what you
were originally estimated
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 49
The Closing Process
• Post LOI Due Diligence • Definitive Purchase Agreement Negotiated and
Signed • Post Agreement (Pre-Closing) Due Diligence • Determining any hold backs • Closing and transfer of funds from escrow • Post-closing settlement issues
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 50
When Do You Know the Deal Is Going Well?
When the deal closes and money is transferred!
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 51
What Do You Need to Do During the Sales Process?
• Keep making profit • Maintain adequate inventory, fill rates
and margins • Retain key people • Keep customers happy
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 52
Why Hire an Intermediary?
Comments we heard from those that completed or attempted a self-brokered sale: • “I did not know what my business was really worth” • “I spent so much time on this that my business
suffered and at the end the sales price was reduced”
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 53
Why Hire an Intermediary?
Comments we heard from those that completed or attempted a self-brokered sale: • “This was a very painful and expensive process. I
ended up in countless meetings and spent a LOT of money on legal and accounting fees”
• “I would never sell my own home without an agent and I will never again sell a business without an agent”
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 54
What to Look for When Hiring a Broker or M&A Consultant
• Industry knowledge • M&A experience • References • Intelligent strategy • Trust
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 55
Fees Paid to Broker or M&A Consultant
Depends on size of potential deal and specific complications • Expect to pay some level of retainer, varying from
$10K to $100K. Both you and your broker/consultant must have skin in the game.
• Lehman Formula, depending on size of transaction, will equal 3-7% of the total value of the deal
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 56
Fees Paid to Broker or M&A Consultant
Typical Lehman Formula • 1st $2 million = 7-8% • 2nd $2 million = 5% • 3rd $2 million = 4% • 4th $2 million = 3% • 5th $2 million = 2%
• Above = 1%
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 57
Summary
• Preparation = Increased ROI and success • Buyers & Sellers need to understand each other’s
perceptions • Make sure you understand the process • Don’t do this alone – get the support of
professionals WHO HAVE EXPERIENCE and KNOW YOUR INDUSTRY
© 2012 Marx Group advisors - The Art of Buying & Selling a Business 58
© Marx Group Advisors – Northwood University: Heavy Duty Leadership: July 11, 2012
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TOM MARX 415.453.0844 ext. 106
tmarx@marxgroupadvisors.com
www.marxgroupadvisors.com
BOSTON SAN RAFAEL HOUSTON OHIO NEW
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Marx Group Advisors are located nationwide:
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© 2012 Marx Group advisors - The Art of Buying & Selling a Business 60
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