ntda 2012: the art of buying & selling a small business

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?


Understand Your Short, Mid and Long Term Goals

and Your Options For Exit Strategies


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?


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!


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


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?


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


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


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


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


VALUATION: How to Sell Your Company for

What it’s Worth


Plan Ahead: Begin to Prepare at Least 3 Years

Before You Want to Sell


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


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


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…


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


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”


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


Recast Your P&L Pay attention to: • Balance sheet items (dividends, real estate) • Accelerated deductions, amortization etc. • One-time expenses • Owner(s) expenses


Recast Your P&L


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


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


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!


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


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


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


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


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.)


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


Valuation is often book value and goodwill to founder via premium or deferred compensation


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



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


Sell to Privately Held Company • Valuation is determined by the marketplace

or the buyer • Seller’s representatives can and should

influence buyer’s valuation



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


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


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


Getting Equity Out Other Options for Owners

• Management Buyout • ESOP • Equity Partner • Deferred Compensation Payment


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


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


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


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


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


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


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


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


When Do You Know the Deal Is Going Well?

When the deal closes and money is transferred!


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


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”


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”


What to Look for When Hiring a Broker or M&A Consultant

• Industry knowledge • M&A experience • References • Intelligent strategy • Trust


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


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%


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


© Marx Group Advisors – Northwood University: Heavy Duty Leadership: July 11, 2012

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ntda 2012: the art of buying & selling a small business

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