Download - Succession Planning Webinar - Key
Is Your Business Exit Ready? Most Aren’t, but Here’s How to Get There
Forbes Insights Webinar
January 31, 2019
• What steps should middle-market business owners and their families be taking in order to become more retirement “aware”?
• How do buyers determine the value—the price they will pay—for your business?
• How does the market measure “risk,” and why is this such a critical factor in valuation?
• What steps should you be taking now to ensure that when the time comes to exit, your business will be “transaction ready”?
Key Questions We’re Going to Pose
ContributorForbes Insights
SVP, Director Family Wealth Consulting
Key Private Bank Family Wealth
Managing Director Family Wealth Consulting
Key Private Bank Family Wealth
Panelists
Director, M&A
KeyBanc Capital Markets
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Planning: If You’re Not Transaction Ready, You’re at the Back of the Line
250,000 U.S. companies ($5M-$100M sales) will
try to exit by 2030
Only 50,000 will be deemed "market ready"
Only 30,000 will actually transact
16,000 will sell with concessions
14k will sell at desired value
Middle-Market Inefficiency
That leaves 22,000 businesses worth $1 trillion waiting for a shot at going to market
ASSESSING THE SITUATION • Can I afford to exit my business today?
• Do I know what my company is worth?
• Do I know the transition structure that will help me get paid?
• What will I pay in taxes?
• What can I expect to earn on net proceeds and other income?
Can you answer these questions?
PLANNING: WHAT KIND
OF OWNER ARE YOU?
Well-off but
choose to workRich and ready
to go
Stay and growGet me out at the
highest price
Low High
Low
High
7
Financial
Readiness
Mental Readiness
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BUSINESS VALUATION:
REALITY CHECK
• How many believe you know the value of your company?
• How many believe you could sell your company today for the expected value?
• How many believe you are objective in assessing your company?
• How many would invest 100% of their proceeds back into the company you just sold?
2.5% 13.5% 34% 34% 13.5% 2.5%
How attractive is your company?
Sort of
Cute
Sort of
Pretty PrettyNot So
Pretty
Greatly
Lacking
Beauty Beautiful
-3 -2 -1 0 1 2 3
STANDARD DEVIATIONS
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BUSINESS VALUATION:
REALITY CHECK
Cute
Comparable Companies
Company Age
Product
Sales
EBITDA
Market Growth
BUSINESS VALUATION: A TALE OF TWO COMPANIES
Company A
25 Years Old
Niche Consumer Product
#30M
#3M
Nominal
Company B
25 Years Old
Niche Consumer Product
#30M
#3M
Nominal
Should These Two Firms Have the Same Value?
Minimal Product Development Program Robust
Original and Worn Equipment Condition New, State-of-the-Art
Thin and Weak Management Team Deep and Experienced
5-Year-Old Plan Strategic Planning Highly Developed
Old, Antiquated Information Systems State-of-the-Art
Unsophisticated Financial Reporting Highly Disciplined
None Lean Initiatives Fully Implemented
At Risk Sustainability Industry Leader
Haphazard Training Regular and Formal
Historical cash flow = distributions + amounts reinvested in business
Benefit Stream
X Multiple
= Value
Highest possible based on “rosy” risk assessment
Amount equivalent to satisfy ego or justify
effort for last 20-30 years
Sustainable & realistic bottom-line
future cash flows
Lowest possible based on “realistic”
risk assessment
Amount that achieves desired rate of return
SELLER’S VIEW
Value is a function of quality and risk
vs.
vs.
vs.
BUSINESS VALUATION: VIEW OF SELLER VERSUS BUYER
BUYER’S VIEW
Business Valuation: Simple Valuation Formula
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cost of capital-aka-“RISK”
Cash flow next period
growth
valueV
=CF1
_____________
k - g
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Transaction Value Based on:
• Economic conditions
• Industry dynamics/timing
• Comparable transactions
• Can I sell for higher?
• Can I buy for lower?
• Negotiating strategy
• Deal structure and terms
• Legal documentation
• Creating auction processes
What do these items have to do with fundamental value?
Business Valuation: The Seller Perspective
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Transaction Value Based on:
Business Valuation: Buyer Focus
• Strategic plan
• Quality of operations
• Transferability of IP
• Sustainability of profits
• Depth of management
• Customer relationships
• Market leadership position
• Competitive tension
• Working capital management
• Cyclical exposure
• Ability to achieve projections
• Operating synergies
• Sales growth potential
• Long-term ROI
• Ability to finance
• Quality of reporting
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$15 million
THE DREADED “VALUE GAP”
BUSINESS VALUATION: IMPACT TO SELLER
Retirement portfolio needs
$15 millionOwner assessment of business value
$11 millionMarket assessment of business value
$4 millionValue Gap
Action required: Grow your company!
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Many owners believe that the most
effective strategy to build business value is to:
BUSINESS VALUATION:
OWNER MISCONCEPTIONS TO BUILDING VALUE
INCREASE
REVENUE
DECREASE
COSTS
ACQUIRE
OTHER FIRMS
Or some combination of the above
|
V
A
L
U
E
| ----------REVENUE---------->
Consumes capital
Strains organization
Increases business risk
Damages
reputation
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COMMON UNINTENDED
CONSEQUENCES:
PURSUING REVENUE STRATEGY
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|
V
A
L
U
E
| ---------COST CUTS-------->
Quality suffers
Service weakens
Relationships break
Morale
deterioratesCOMMON UNINTENDED
CONSEQUENCES:
PURSUING EXPENSE
REDUCTION STRATEGY
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|
V
A
L
U
E
| --------ACQUISITIONS------->
Pressure exposes
weaknesses
Cultures don’t mesh
Customers defect
Synergies aren’t
realizedCOMMON UNINTENDED
CONSEQUENCES:
PURSUING ACQUISITION
STRATEGY
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The Cycle of Building Value
External Value Drivers Create Opportunity
Internal Value Drivers Create Capacity
Continuous Improvement
Products Services
RelationshipsIndustry Positioning
Branding Barriers Competition
Distribution Demand
Mission Vision Planning Leadership
Strategy Structure Organization
Management Systems Processes
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Business Valuation: Setting Priorities/Selecting Projects
De-Risking
Strategy
Efficiency
Growth
Culture
1
2
3
4
5
Time / Effort / $ Invested
Valu
e (
$)
SETTING PRIORITIES
In Summary
You need
to understand
the role of risk
in valuation—
and take steps
to reduce risks;
maximize
intangible value
You need
to understand
your goals
You need an
objective
assessment of
your business
and personal
situation
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