GROWING INTO YOUR BUSINESS EXIT

Pinnacle Equity SolutionsMarch 6, 2012

Lee A. Dahmer CPA, CM&AAldahmer@b2bcfo.com

847-812-1407

Jerry has a Value GapFACT : Market value is $6,000,000

FACT: Post-exit lifestyle need is $9,000,000

VALUE GAP IS $3,000,000

Jerry’s Options …• Reduce post-exit lifestyle

• Increase savings / return on investments

• Increase the value of the business

The Four Types of Exiting Owners

Step #3: Identify Type of Exiting Owner

© 2012, Pinnacle Equity Solutions www.pinnacleequitysolutions.com

Provided by Rob Slee

Sales of businesses occur in cycles

Page 98

The Marketplace for Exit Strategies

© 2012, Pinnacle Equity Solutions www.pinnacleequitysolutions.com

American Coatings Financial Management

• Tax returns and Bank external reporting only

• Management reports – how do you know where you are making money?o By Marketo By Customero By Product

American Coatings Financial Management

Monthly financial statementsIncome StatementBalance SheetCash Flow StatementCurrent period and Y-T-D vs. Last year

Accurate, timely, GAAPo Accrual basis – not Cash basis!o 5 days after month end – max 10 days

American Coatings Financial Management

• Annual Operating Budget by montho Actual vs. Plan, variance analysis

• Two year rolling Forecasto IS, BS, CFo Story to support the numbers

Budget/ Forecast/ Last Year

ACCEPTABLE TOLERANCE LEVEL

FOR VARIANCES

American Coatings Financial Management

Financial statements

Compiled

Reviewed

Audited

American CoatingsSales $10,0

00100%

Cost of Goods Sold $6,000

60%

Gross Profit $4,000

40%

Marketing & Sales $1,000

10%

General & Administrative

$1,800

18%

Total Operating Expenses

$2,800

28%

Operating Profit $1,200

12%

Add D & A $300 3%

EBITDA $1,500

15%

EBITDA2011 Actual - Trailing twelve months

EBITDA Multiple Value

$1,500,000 4.0 X $6,000,000

EBITDA2011 Actual - TTMEBITDA Multiple Value$1,500,000 4.0 X $6,000,000

TargetEBITDA Multiple Value$2,000,000 4.5 X $9,000,000

Enterprise ValueENTERPRISE VALUE (EV)EV = Earnings (E) X Multiple

• Multiple of Seller’s Discretionary Earnings (SDE)

• Multiple of Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA)

• Multiple of Earnings Before Interest & Taxes (EBIT)

Capitalization of Earnings

IRV formula: I / R-g = V

V – Invested Capital I – Cash flows

R – Risk (Discount rate) g – Long term growth R-g = Capitalization rate

American Coatings IRV formula: I / R-g = V

I = $1,300,000R= 25%g= 3%

V= $5,900,000

Discovery

Understand the business model, processes, products/services, management, supply chain

Complete diagnostic of the business

Diagnostic of the business

Deep dive into the numbers – Due diligence I/S

Where do they make money? Volume and $ Product/Service line, Customers, Markets Variable and Fixed Costs structure Incremental sales profitability Working capital / Debt

Diagnostic of the business

Comparison to Industry Metrics

• Understand company performance vs. industry

• Focus management improvement goals

• Industry metrics are resource to help set company metrics

Detailed ProfitCents® Report

Increase SalesORGANICo More sales to existing customerso New customers with existing productso New customers with new products

ACQUISITIONo Buy another business o Buy another product line

Increase Sales

Jerry is the Finder

• Key sales & relationship manager in the company• Brought the volume but margins deteriorating• Go visit top 10 customers• Customer satisfaction survey

Customer SatisfactionBain and SatmetrixNet Promoter Score Methodology

Predicting the likelihood of a customer either purchasing from you again or referring your company to someone

o Used by many Fortune 500 companies

o PEGS to measure their portfolio companies and acqusition targets

Customer SatisfactionCustomer SatisfactionNet Promoter Score

“On a scale of 0 to 10, how likely are you to refer American Coatings to a friend or colleague?”

9-10 = Promoters7-8 = Passive0-6 = Detractors

Customer SatisfactionNet Promoter Score

9-10 = Promoters 45%7-8 = Passive 20%0-6 = Detractors 35%

45%-35% = 10%o AVERAGE OF 10% TO 15%o ABOVE AVERAGE 15% PLUSo WORLD CLASS = >50%

Increase Sales

Top Line Review

• Customers, Product/Service, Suppliers, Channels• Sales less variable costs – understand margins• Rationalize your customer base

Increase Sales

Does Jerry need help?

• Bring in Marketing / Sales consultant• Develop market, product, pricing growth plan• Any help from current management team?• Jerry’s direct relationship with customers big risk

factor

Increase SalesSALES & GROSS MARGIN GOALS $250,000

VOLUME GROWTH 2.5% - $250K 40% GM - $100,000

PRICING 2.0% increase on proprietary line - $50,000

MATERIAL COSTS $100.000 reduction – vendor management & consolidation

Decrease ExpensesInternal

• Process maps• Is this adding value? Keep doing it? Outsource it?• Zero build – justify each line item• % across the board reductions

Decrease ExpensesExternal• Managed IT• Freight in & out (UPS, FedEX, carriers)• Telephone• Energy• HR / Payroll / Group Health / Benefits• Sales and Use taxes / Property taxes• Professional service providers• Building lease

Decrease ExpensesOPERATING EXPENSE SAVINGS $250,000

SALES $100,000 Revamp internal sales – CSR - $70,000 Move mfg. rep to house account over 2 yrs - $30,000

G&A $150,000 Internal & External – yield 8% savings

American Coatings2011 Actual 2013 Target

Sales $10,000

100%

Cost of Goods Sold

$6,000 60%

Gross Profit $4,000 40%

Marketing & Sales

$1,000 10%

General & Admin.

$1,800 18%

Total Op. Expenses

$2,800 28%

Operating Profit $1,200 12%

Add D & A $300 3%

EBITDA $1,500

15%

Sales $10,300

100%

Cost of Goods Sold

$6,050 59%

Gross Profit $4,250 41%

Marketing & Sales

$900 9%

General & Admin.

$1,650 16%

Total Op. Expenses

$2,550 25%

Operating Profit $1,700 16%

Add D & A $300 3%

EBITDA $2,000

19%

MARKET SEGMENTATION

VALUE DRIVERS 0-3 TIMES 4-6 TIMES 7+ TIMES1. Profitability Erratic Steady High

2. Business Type Commodities Competitive Technical3. Business Growth Low Moderate High4. Customers Transient Steady Large5. Management OK Good Very Good6. Market Share Tiny Measurable Large7. Financials Compiled Reviewed Audited8. ROE 10% 20% 30%9. Size <$10M $10-$25M

$25M +

VALUE DRIVERSMANAGEMENT DECISIONS

OPERATING

FINANCIAL

INVESTMENT

INTANGIBLE

VALUE DRIVERSOPERATING1. Repeat Customers – Customer List2. Proprietary Products3. Market share4. Diversified Products, Customers, Geographic5. Industry Specialization6. Trained and Knowledgeable Workforce7. ISO 9000 Registered Vendor

VALUE DRIVERSFINANCIAL1. High Margins due to efficiencies2. Operating cash positive3. Key Management have incentive

compensation plans4. Purchasing power5. Internal controls are well defined6. Budgeting system controls costs7. Strong liquidity position

VALUE DRIVERSINVESTMENT1. Additional capacity for growth (space, people,

etc.)2. Commitment to human capital3. State of the art technology4. On-going investment in information

technology 5. Well maintained capital equipment6. Working Capital turnover7. Commitment to R&D

VALUE DRIVERSINTANGIBLES1. Management bench strength2. Growing industry3. Financial literacy of entire company4. Motivated and dependable workforce5. Special niche market6. Long history, reputation and name

recognition7. Management focus on Growth and Value

Creation

VALUE DRIVERS OPERATING

FINANCIAL

INVESTMENT

INTANGIBLE

Privately held

Small-Midsized Businesses (SMB)

1. Less than 10% of SMB use metrics

2. Less than 10% of SMB sell outside USA

3. Less than 10% of SMB are creating value

Rob Slee

Use Metrics as a tool to

Improve the business

1. Awareness

2. Understanding

3. Action

4. Accountability

“Begin with the end in mind”

Stephen Covey

You must have a PLAN You must determine the VALUE DRIVERS You must have an ACCURATE REPORTING SYSTEM You must educate your workers on performance

based METRICS You must have a BUDGET that supports the PLAN

Critical Success Factors CSFs

The big things that have to go right in order for the company value to meet target in 2014

1. Sales not dependent upon Jerry2. Sales and Gross profit growing3. Sales Expense and G&A expense reduced4. Customer satisfaction improving5. Key management and EEs know the score

Key Performance Indicators KPIs

The measurement of actions that drive the CSF’s

• Marketing / Sales

• Operational Effectiveness

• Financial Effectiveness

• Other Learning, etc.

Marketing / Sales• Customer satisfaction• Customer retention / Customer loyalty• New customers• % sales growth• Quotes to closing ratio• Jerry’s finder time % hours/week• Quotes to closing ratio

Operational Effectiveness Throughput per hours worked Cost variances Order processing cycle Effective lead times – wanted vs. promised Stock outs On time delivery Cost of Quality % outsourcing Return on plant Vendor rating

Financial Effectiveness Gross Profit $ and Margin

o by product, by customer, by segment Contribution $ and Margin

o by product, by customer, by segment Selling expense as % of sales General and administrative as % of sales EBITDA Revenue per employee Working capital turnover Z score Return on Assets Return on Equity

KPIs

Measure & Track Progress

SCORECARDPerformance measurement tool to focus the company on progress in major areas

KPIs reported on a Dashboard. Each KPI will have a drill down into detail of actual to target

Dashboard is a summarized performance in all areas Market / Customers Operational Financial Other

Measure & Track Progress

DASHBOARD

In each quadrant are 3-6 metrics. Updated daily, weekly, monthly. Focus on current performance

Red, Yellow, GreenEach metric has a target. If target is met, it’s green. If not, it’s red. If it’s close, it’s yellow

ASSETS – SALES – EARNINGS –

CASH FLOW

FINANCIAL MAP DECODER

(DuPont formula)

Scorecard & Dashboard Resources

CFO Scoreboard Software www.cfoscoreboard.com

Xllerate Consulting www.exllerate.com

Jet Reports www.jetreports.com

Services Wheel

What makes us unique?

Benefits

• A confidential meeting with the owner(s), then interview company staff

• Look at the company’s financial information, systems and processes

• Benchmark financial information against regional industry averages

• Create a confidential report of our findings with prioritized steps to improve

• Confidentially discuss the key findings from The Discover Analysis™

• Review The Strategy GamePlan™• Discuss a preliminary timeline for The Strategy GamePlan™• Agree on the proposed costs for The Strategy GamePlan™• Initiate a preliminary discussion about Finders, Minders &

GrindersSM

• Begin strategic planning process

• Begin the implementation of the items agreed upon in The Strategy GamePlan™

• Identify and train staff/others that will assist us with The Strategy Implementation™

• Meetings with the owner(s) to discuss the progress made• Continue the discussions about Finders, Minders &

GrindersSM

• Help get company-wide buy-in on the strategic plan

• Report the results of The Strategy Implementation™

• Discuss any non-numerical benefits achieved (Less stress, more free time, etc.)

• Plan the next steps – The Excel Experience™ and The Exit Strategy™

• An ongoing relationship with the company as a trusted long-term business advisor

• Assist your company with its goals to surpass, outclass and outrival key competitors

• Identify efficiencies and processes to increase profit and cash

• Help with financial & goal clarity

• Exit planning – Pinnacle 6 – step process• Stay & Grow strategy design & consulting• Growth thru acquisition consulting• Collaboration with exit team, quarterback

implementation where desired

Finding The Exit® (National)

8 quarter program to grow the business in preparation for sale

• Goal is rapid increase in growth and profitability for future sale

• Quarterback the implementation plan