financing, purchase price, and warranties
DESCRIPTION
Sources of financing for purchase, sale, and recapitalization deals, Illinois State Bar Association seminar, November 2012TRANSCRIPT
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Financing, Purchase Price, And Warranties
ISBA Business and Securities Law, November 7, 2012William A. Price, [email protected]
By PresenterMedia.com
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Financing OptionsBy Size And Type Of Deal
Finance, Purchase Price, And WarrantiesFor Small Business Buy, Sell, and Recapitalization
Purchase PriceValuation, Seller Financing, And Price Negotiation
WarrantiesIn Case Things Don’t Work Out
Post-Closing Discussion, Arbitration , or LitigationAvoid Unless Necessary
Phase 4
Phase 1
Phase 2
Phase 3
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FINANCING OPTIONSPart I
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$0-100,000.00Personal Assets, Microloans, Partners
Typical Finance SourcesBy Size Of Financing Need
Any Size, If Customer A/R AvailableFactoring or Other Cash Advance Lenders$0-5 MillionSBA 7(a) loans, 504 loans, Angel Capital, VC’s$5 Million Plus Private Equity, Non-SBA Loans
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Typical Deals: Partner Buyout, Franchise Acquisition, Purchase Of A Competitor, Going Concern Buy-In
$0-100,000 DealsStartup Or Small Acquisition
$$: Yours And Others• Your Net Worth• Microloan of Up To $50k• Seller or Partners
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Microloans
Accion Chicago, http://www.accionchicago.org/
Best Way In: Small Business Development Centers
The maximum loan amount is $50,000, but the average microloan is about $13,000.
Two companies in Illinois: This one for the Chicago area
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Partnership Deals
Financing Sources Useful For Most Deals(Any Size – Bigger Ones Just Use More Paper)
Seller Financing
Factoring/Cash Advance Lenders
Supplier Terms And Distributor $$
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Partnership Deals
Typical Deals:
• Mr. or Mrs. Money and Mr. or Mrs. Do The Work• Mr. or Ms. Inside and Mr. or Ms. Outside, both $$• Friends and Family Financing• Team Finances New Project(s) Together
Business Is A Team Sport
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Seller FinancingWorks for all sizes of deal
You don’t know how to make money, so you buy a business that does.
You Giver The Seller Money Upfront, More If You Succeed
Seller gets boughtOut/Paid OverTime
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Factoring And Cash Advance Deals
Big Benefit: Customer Credit Rating, Not YoursBig Problem: Collect Quickly, Or Lose $$ Fast
Any Amount of $$
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Typical Factoring Terms Finance Charge About 1.5% Per Month About 70% of Invoice (less of Purchase Order)
available upfront, Remainder Less Charges To You You Must Guarantee Factor Collects The Invoice $$ Less than 90 Days To Cash needed More Than 25% Margin Over COGS needed
Factor Buys Invoice, or Purchase Order Financing
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GET EXTENDED PAYMENT TERMSIf seller now Cash On Delivery, Try for 60, 90, or more days to pay, or pay on sale (partner with vendor)
Amazon Volume Seller Capital Deals :• 1-14% terms• Also pay their 6-15% stocking fees
$$ FROM DISTRIBUTORS
Use Supplier $$To Improve Volume Financing Ability, Or To Improve Bottom Line
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Equipment Finance The Good: Low Upfront Costs The Bad: Interest Costs Over Life Of Equipment Sources: Vendors, Leasing Funds, “Asset Based”
Lenders Your Equipment As A Separate Line Of Business
Suppliers or Outside Sources
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SBA 7(A) AND 504 LOANS$0-5 Million Deals
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SBA 7(A) Loans 70 Lenders In Illinois Contacts Are At SBA.GOV Two percent over prime, period and terms vary by
lender SBA guarantees 75% of loan repayment You pay the loan fees
Up to $5 million
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Top Ten SBA 7(A) LendersLender Name Number of Loans Gross Approval Amount
Ridgestone Bank 29 $ 18,600,000
JPMorgan Chase Bank, National Association 107 $ 12,520,400
U.S. Bank National Association 25 $ 6,601,800
Village Bank and Trust 10 $ 5,205,000
First Community Bank of Plainfield 3 $ 4,950,000
Park Ridge Community Bank 1 $ 4,000,000
Rockford Bank and Trust Company 8 $ 3,298,100
The Foster Bank 10 $ 2,655,000
Associated Bank, National Association 15 $ 2,288,600
State Bank of Herscher 1 $ 2,000,000
Illinois, Q1 2012
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Different Loans For Different 7(A) Lenders
JP Morgan Chase: Inventory Finance, some M&AHarris Bank: Mostly Current Clients (this may change)Wells Fargo: M&A, some “air balls” for great cash flow?5/3: Very reliable on closing if they say yes to your deal: M&A, RefinancingCommunity Banks: Often more ready to lend
Make Your Deal Look Like What They Do
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504 Program Lenders 7 Certified Development Companies package 504
program loans in Illinois 504 can be combined with 7(A) loans for bigger
deal Long term, fixed rate financing SBA loan guarantees
Machinery & Equipment, Real Estate
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You also need:• Good Credit Scores• Down Payment =
20% of Loan• Maybe More
Capital Than You Have
You Need Money To Borrow Money100% collateralization, 125% monthly EBITDA vs loan payment $
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Friends, Family, and Fools
Sources of CapitalAll Deal Sizes
Angel Capital
Venture Capital
Private Equity
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Friends, Family, And Fools
U of C Seminar Said $8-900,000
IIT MBA Class Said $5-600,000
COD Seminar Said $1-200,000
How Much Could You Raise?
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Angel Capital
o Startup or Revenue Stage Companieso 800,000 deals or more per year in USo 1-6 angels per deal, $50k+ eacho Terms Depend on the Angel’s interests: mentor or $
$ motivated investor?
Money From Strangers
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Angel Capital Sources National Angel Capital Association (www.naca.com
) member groups of angels Local Business Owners: $500k EBITDA owner is a
millionaire Old Women and their $$ Advisers Professional and Nonprofessional Angels: They
like to flock together, unlike eagles
Illinois
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Known Illinois Angel Associations
1. Hyde Park Angel Network (U of C)2. Wildcat Angels (Northwestern)3. Illinois Ventures (U of Illinois)4. Heartland Angels/Collar County Angel Network5. Cornerstone Angels6. Central Illinois Angels7. Stateline Angels8. Sustainable Local Food
Investment Group
Let Me Know If You Find More
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Venture Capital
10x in 2 Years: and 3 of 4 investments fail
Try To Show You Fit With Their Portfolio Deals
They Need 1000% ReturnsProfessor
.
VC Businessman
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Sources of Information On Venture Capital
National Venture Capital Associationwww.nvca.org
Pratt’s Guide to Private Equity And VC Sourceshttp://www.investmentbenchmarks.com/pratts_guide.html
Money Tree Survey, Quarterly Statistics https://www.pwcmoneytree.com/MTPublic/ns/index.jsp
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Private Equity
More Than 4,500 Funds Active In 2011
Many Deal Sizes: SBIC $5 million plus, Biggest P/E $1 Billion plus deals
$5-25 Million Deals: Get A Growth Fund To Invest, Sell To A Mezzanine Fund or Strategic
$2 Million EBITDA And Up -- $10 Million Plus In Sales
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P/E Deal Activity
2007 2009 20110
200400600800
1000
Number of Deals
Per Boston Consulting Group “Deal Book” Study, 2012
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P/E Deal Sizes
Deal Sizes, 2007-2011:
76% less than $200 million51% less than $50 million
BCG 2012 Study
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P/E Deal Types
Of Deals Less Than $200 Million:
24% VC54% Buyout15% Generalist P/E3% Mezzanine4% Other P/E
BCG 2012 Study
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Midwestern Private Equity Deals Q2 2012
65 Deals In Midwest Q2 2012
21% of Q2 Deals In US
303 Deals All US Q2 2012
Source: PitchBook
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Strong Sectors For P/E Activity, Q2 2012
• Business• IT• Healthcare
Source: PitchBook
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Deal Terms And Multiples
Platform Deals (We Can Grow With You): 77%
Add-On Deals (You Fit Our Portfolio): 23%
Source: PitchBook 3Q 2012 Deal Terms and Multiples Survey
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Enterprise Value Of P/E Deal Targets
$0-25 Milli
on
$25-50 Milli
on
$50-100 Milli
on
$100 Milli
on Plus0
2
4
Source: PitchBook 3Q Survey Of Deal Multiples and Terms
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EBITDA Multiple Of P/E Target ValuesTarget Company Value Multiple of EBITDA
$0-25 Million 6 X
$25-50 Million 6.8 X
$50-100 Million 5.5 X
$100 Million Or More 8.6 X
Source: PitchBook 3Q 2012 Survey of Deal Terms & Multiples
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P/E Exits VS New Investment, $$ Billions
P/E Investments
P/E Exits
0 10 20 30 40 50 60
2012 Q12012 Q2
Source: PE Council
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PURCHASE PRICEPart II
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Purchase Price Depends On Your Exit
Typical Deal Types And Multiples of EBITDA:
Professional Practice: 1 XLess than $1 Million Sales: 1-3 X$1 Million--$5 Million Sales: 3-5 X$5 Million Plus: See P/E Multiples
Varies With Economy
Know Your Buyer And Your Value Add
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Purchase Size And Price Data Sources
Pratts Stats: Private Company Merger and Transaction Database: Mostly P/E Deals, Good for Comps
Inc. Magazine: Publishes Valuation Guides Some Years2010: http://www.inc.com/magazine/20101101/the-2010-business-valuation-guide.html
Bizbuysell.com: Valuation reportBy industry, 25,000 comps(very small deals)
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WARRANTIESPart III
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Warranties Guarantee The Deal WorksAlmost Everybody Lies
You Searched The World OverAnd ThoughtYou Found True Love
Was The Money There?
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Typical Warranties
Authority To Sign The DealAccuracy of Representations Made To Induce DealTitle to All Assets To Be TransferredLack of Claims, Lawsuits, Or JudgmentsNo Taxes Are DueNo Material Facts Not Disclosed To BuyerWhere You Will Be Able To Find The Seller AfterThe Deal Is Signed
For More: IICLE Forms
You Still Need To Do Your Due Diligence
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POST-CLOSING: DISCUSSION, ARBITRATION, OR LITIGATION
Part IV
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Post-Closing Discussion, Arbitration, Or Litigation
Discussion Is Best: Seller Share In Future Profits
Arbitration May Save Discovery And Litigation Time
Litigation May Scare Liars Most, Especially WithAttorneys Fees, Costs, Etc… To Loser
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Our GoalLet’s Hope We AllMake It