Getting your business ready for sale - Smith & Gesteland Webinar

Preparing to Sell Your

Business? It Takes

More Than You Think

Martha Sullivan

Theresa Zeidler-Shonat

Heather Schommer

July 22, 2014

About the Presenters

• Martha Sullivan– Martha is a partner and the Chief Operating

Officer with Smith & Gesteland, LLP.

– Martha began her career as a systems

consultant with a regional CPA firm.

Throughout her nine-year term with this firm,

she performed numerous operational/process

improvement reviews, systems selection

projects, and policy/procedure review

engagements. Additionally, she facilitated

strategic planning initiatives and played a key

role in developing the firm’s own inaugural

strategic plan.

– Martha leveraged her consulting experience

by then moving into industry into the controller

and CFO roles. After 13 years in industry,

Martha returned to her CPA firm roots

performing transaction support/due diligence

and Sarbanes-Oxley services for its clients.

She enjoyed the energetic pace of mergers

and acquisitions and assisting client’s ready

their company for sale. The depth of her

understanding of her clients’ businesses

facilitates timely and prompt completion of

these time-pressured engagements.2

About the Presenters

• Theresa Zeidler-Shonat– Theresa specializes in business valuations;

valuing the invested capital in the business,

business equity, and intangible assets,

depending on the client’s needs. Theresa’s

valuations assist business owners with

understanding the value of their business, and

what drives that value, as well as what

differences exist between the way a business

owner perceives their business and the way a

potential buyer perceives the business.

– Theresa has performed valuations for

companies across a wide variety of industries

from traditional manufacturing and service

industries to rapidly-changing industries such

as high-tech, ethanol/alternative fuels and

photovoltaic cell production and for

companies across a wide range of sizes, from

family-owned business with just a few

employees to middle-market firms with

thousands of employees, and has a deep

understanding, drawn from extensive

experience, of the factors that impact the

value of your business.

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About the Presenters• Heather Schommer

– Heather is a Strategic Advisor in the Profit

Enhancement Solutions group and is a key

player in analyzing products, customers,

services and divisions to guide companies in

achieving profitable market share growth.

Heather works closely with members of the

management team to employ various tools

from the 80/20 toolbox, including zero up

analysis, which helps companies identify the

true profitability of their business segments,

and segmented financial reporting, which

provides a focused approach to financial

management. Heather is a trusted advisor,

and companies seek her input in monthly

operations meetings to identify processes and

improvements used to drive 80/20 through

organizations.

– Prior to Smith & Gesteland, Heather spent

nearly seven years in the banking industry

working closely with small to medium sized

businesses across a variety of industries, and

this experience gave her a deep

understanding of small business needs.

Heather is an expert in working with business

owners to understand their organization’s

financial and strategic goals. 4

Learning Objectives

• Understand why there is often a

disconnect between buyer and seller

expectations

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Learning Objectives

• Learn what drives buyers to pay

more or less for your business

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Learning Objectives

• Learn how you can increase the

value of your business

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Learning Objectives

• Learn how to get your business

ready for sale

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Deal Related Statistics

• 30 million small businesses in the US (Bureau of

Labor Statistics)

• Approximately 60% of today’s small business

owners were born before 1964

• Turning 65 at a rate of one every 57

seconds which will continue for the next

16 years

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Know Why You Are Doing This

Why do you want to do sell?

What is your desired result? What you hope to

gain and/or achieve?

What will you do post-close?

What is negotiable? What is not?

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Fail to Close

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Top 3 Reasons M&A Deals Fail

1. Valuation gap

2. Unreasonable seller or buyer demand

3. Economic uncertainty

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Buyer and Seller Disconnect

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Valuing The Business

Price Paid for the

Business

The part of the

purchase price that

goes in your pocket

Debt has

seniority

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Valuation Gap

• Valuation Methods

• Emotion

• M&A Experience

• Retirement Cash Flow Needs – Rule of

25x

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Market Vs. Investment Value

Intrinisic Value vs. Market Value Over Time

Investment Value

Market Value

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Valuation Methods

• Rule of Thumbs

• Discounted cash flow (DCF)

• Guideline Transactions

• EBITDA and Revenue Multiples (most

prevalent in M&A)

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EBITDA Definition

• Earnings Before Interest, Taxes, Depreciation and Amortization

S Corporation or LLC Example:

Net income $1,000,000

Add back:

Interest expense 300,000

Taxes -0-

Depreciation expense 500,000

Amortization expense 200,000

Equals: EBITDA $2,000,000

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Simple Valuation Example

EBITDA $2,000,000

Market Multiple X 5.0

Value of Invested Capital $10,000,000

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Valuation Gap

• Valuation Methods

• Measurement Period

• M&A Experience

• Retirement Cash Flow Needs – Rule of

25x

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Unreasonable Buyer or

Seller Demand

• Emotion

• Compensation plans outside of

market range for certain

employees

• Representation and warranties

• Seller financing

• Earn outs

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Economic Uncertainty

• Economic Uncertainty – 2008 through 2012

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• Lack of Capital to Finance – Nationally

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Economy’s Impact on M&A

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Median Sale Price Deal Count

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Median Sale Price/EBITDA Deal Count

Distressed Companies

Selling

Multiples Have Stayed

Low Because of

Investor Uncertainty –

Market Perception

Lags Data

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• Lack of Capital to Finance – Locally

• Banks are ready but are looking for

1. Sufficient cash flow to service the debt

2. Management quality – experience in the industry

3. Collateral – most banks discount values

20% to 25% and will lend on the balance

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Valuation Drivers

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Factors That Affect Business Value

Factors that Affect Business

Value

External

Business owner can't really

change these

Internal

Business owner can change

these and impact business value

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External Factors

INCREASE VALUE DECREASE VALUE

Access to Capital Capital Markets Shrinking

Strong Barriers to Entry Lack of Barriers to Entry

Expanding Industry Contracting Industry

Expanding Economy Contracting Economy

Shift in Consumer Preference to

Your Product

Shift in Consumer Preference

Away from Company Product

Access to Good Labor Pool Lack of Qualified Labor Pool

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Internal Qualitative Factors


Experienced Management Weak Management

Strong Sales Culture Weak Sales Culture

Cross Trained Employees Lack of Cross Training

Systems and Processes Weak Infrastructure

Intellectual Property Lack of IP

Organized Up to Date Financials Poor Accounting

Good Location / Appearance Poor location/ Appearance

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Internal Quantitative Factors


Annual Increasing Sales Declining Sales

Strong Gross Margin Declining GM or Below Industry

Diversified Customer Base High Concentration

Strong Financial Ratios Weak Financial Ratios

Good “ISOTIF” Poor “ISOTIF”

Low Employee Turnover Rate High Employee Turnover Rate

Recurring Revenue Stream Non-recurring Revenue Stream

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Increase the Value!

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Internal Qualitative Factors


Experienced Management Weak Management

Strong Sales Culture Weak Sales Culture

Cross Trained Employees Lack of Cross Training

Systems and Processes Weak Infrastructure

Intellectual Property Lack of IP

Organized Up to Date Financials Poor Accounting

Good Location / Appearance Poor location/ Appearance

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Keep Score!

• That which gets

measured gets

better!

• Manage to the

numbers

– USE A BUDGET!

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Keep Score!

• Remember you don’t take percentages to

the bank, you take dollars

• Use a simple scorecard to track high level

metrics

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Actual Forecast Delta Prev Yr Delta Actual Plan Delta Prior YTD Delta

Total Revenue 1,321,847 959,180 362,667 1,087,529 234,318 13,277,115 12,737,074 540,041 13,170,405 106,710

Direct Material 760,213 538,986 221,227 542,191 218,022 5,960,569 5,500,347 460,222 5,187,284 773,285

Direct Material % 57.51% 56.19% 49.86% 44.89% 43.18% 39.39%

Material Margin 561,634 420,194 141,440 545,338 16,296 7,316,546 7,236,727 79,819 7,983,121 (666,575)

Material Margin % 42.49% 43.81% 50.14% 55.11% 56.82% 60.61%

Direct Labor 82,227 73,519 8,708 140,023 (57,796) 1,014,840 899,184 115,656 1,392,765 (377,925)

Direct Labor % 6.22% 7.66% 12.88% 7.64% 7.06% 10.57%

Overhead 254,088 148,204 105,884 374,731 (120,643) 3,034,263 3,109,028 (74,765) 3,687,379 (653,116)

Overhead % 19.22% 15.45% 34.46% 22.85% 24.41% 28.00%

COGS 1,096,528 760,709 335,819 1,056,945 39,583 10,009,672 9,508,559 501,113 10,267,428 (257,756)

COGS % 82.95% 79.31% 97.19% 75.39% 74.65% 77.96%

Gross Margin 225,319 198,471 26,848 30,584 194,735 3,267,443 3,228,515 38,928 2,902,977 364,466

Gross Margin % 17.05% 20.69% 2.81% 24.61% 25.35% 22.04%

SG&A 124,399 123,970 429 121,253 3,146 1,146,916 1,261,190 (114,274) 999,389 147,527

SG&A % 9.41% 12.92% 11.15% 8.64% 9.90% 7.59%

Operating Income 100,920 74,501 26,419 (90,669) 191,589 2,120,527 1,967,325 153,202 1,903,588 216,939

Operating Income % 7.63% 7.77% -8.34% 15.97% 15.45% 14.45%

Net Inc 130,592 108,839 21,753 (86,599) 217,191 2,125,527 2,000,078 125,449 1,923,589 201,938

Net Income % 9.88% 11.35% -7.96% 16.01% 15.70% 14.61%

For the Month of December 2013 Year to Date

Financial Scorecard

Division Financials for: XYZ

Keep Score!

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ITW Acquisition Criteria

1. Do they have a great brand?

2. Do they have a great product that

we can improve?

3. Do they have good management

talent?

4. Single digit operating income with

material margin greater than 40%?

5. Is it “80/20-able”?

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What is “80/20-able”

• Pareto Principle

• ITW’s fundamental principle

• Four Steps to 80/20

– Simplify Your Business

– Separate Unlike Divisions

– Align the Minimum Resources for each

division

– Streamline the Processes (get really good)

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Simplify Your Business

Most businesses have too many…

Customers

Products

People

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Know Your Business

Quartile Customers % of Revenue

1 1-25

2 26-50

3 51-75

4 76-100

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Know Your Business

Quartile Customers % of Revenue

1 1-25 89%

2 26-50 7%

3 51-75 3%

4 76-100 1%

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Business is Out of Balance

Quartile Customers % of Revenue Effort / Overhead

1 1-25 89% 25%

2 26-50 7% 25%

3 51-75 3% 25%

4 76-100 1% 25%

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Separate Unlike Businesses

• Segment the business to understand

where you make money and where you

lose money

• Hire champions for each segment and

incentivize them

• Create strategic plans around each

segment

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Align Minimum Resources

• Direct resources to growth segments

• Only give the segments what they need

• Consider ways to expand your capacity

without adding resources. Remember:

EBITDA x the multiple = Price

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Now Get Really Good!

• Streamline processes and systems

• Lean

• Six Sigma

• Kaizen Blitzes

• USa

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Get the Business Ready For Sale

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Top Deal Killer - The Gap

• Understand your numbers

– What you would like

– What you think your business is worth

– What the market suggests your

business is worth (baseline business

valuation)

– The value drivers you should focus on

to build value

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Assemble Your Team

• M&A expert

• Tax accountant / CPA

• M&A Attorney

• Owner / CFO / HR Director

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Get Your Books In Order

• Accurate Monthly Closings

• Clean up your inventory

• Collect or write off past due accounts

• Identify unrecorded liabilities

• Level of Financial Reporting

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Prepare for an Emotional

Roller-Coaster

• Six month to 18 month process

• Timelines

• Try to keep emotion out of the process

• Run your business!

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Protect the Fort

• Can’t take your eye off the ball

• Over-serve your best customers

• Protect your intellectual property including

your best employees (non-compete

agreements)

• Be careful with new equipment

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Keep it Confidential

• Only key members of the transaction team

should know

• Use non-disclosure agreements

• Rumors of the sale can impact your

business negatively

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Conclusion

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Summary

• It’s never too early to position your

company for a sale

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Summary

• Buyers will purchase your company

based on its ability to generate future cash

flows

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Summary

• Fix your business today because a buyer

will buy it for less and then fix the

business, you just won’t get paid for it

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Questions?

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Martha L. Sullivan, CPA, CM&AA

Partner, Chief Operating Officer

Smith & Gesteland, LLP

608.828.3121

[email protected]

Heather Schommer,

Strategic Advisor - Profit Enhancement

Solutions


608.828.3149

[email protected]

Theresa Zeidler-Shonat

Business Valuation Manager


608.828.3154

[email protected]

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NEXT WEBINAR

AUGUST 12, 2014

DIRECT COSTING TECHNIQUES

WWW.SGCPA.COM

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