Basics of Selling a Business. A Discussion of Tools and Strategies

Transcription

1 Basics of Selling a Business A Discussion of Tools and Strategies

2 Brought to you by:

3 Richard Stopa Founding principal of Bay Business Advisors, L.L.C. Been involved in mergers and acquisitions work as well as franchise sales for more than 20 years Advised on more than 100 transactions Over 30 years of owning businesses and working in senior level management, sales and marketing positions in the IT industry Current affiliations: ~Mid-Atlantic Business Intermediaries Association - Current President and Board Member ~International Business Brokers Association - Present Member ~Dulles Regional Chamber of Commerce Co-Chair Business Owner s Luncheon Series ~The American Small Business Coalition Current Affiliate Member

4 Frank Stitely Partner in the firm, Stitely & Karstetter, PLLC, located in Chantilly, VA Graduated Summa Cum Laude from Clarion University, where he received the Elijah Watt Sells certificate in recognition of his performance in the CPA Exam Serves small businesses and individuals in the areas of business valuation, taxation, financial reporting, and software support services Certified Public Accountant & Certified Valuation Analyst Previous President of the Association of Professional Accounting Software Consultants Member of the Safe Software Small Business Certified Consultants Steering Committee Formerly served as an officer of the Dulles Area Chamber of Commerce

5 Ted Lauer SVP, SBA Dept Mgr, Access National Bank Leads ANB s s SBA Dept, ranked #1 in loan origination for SBA s s FY ended 9/30/07 among Virginia community banks in Greater Washington Area 1999: Co-founded Access National Bank; Served on Board of Directors for National Association of Government Guaranteed Lenders ers (NAGGL); : Started and managed PNB s s SBA Lending Dept, ranked #1 SBA Lender in SBA s s Wash area 92 thru 97; 1989: Co-founded Patriot National Bank s: Loan Officer Nat'l Banking Div. Maryland National Bank Baltimore, MD; 1980 s: Commercial Credit Analyst Crestar Washington DC; BA (Economics) & MBA from Wake Forest University

6 Introducing Richard Stopa

7 Exit Planning: Some Facts to Consider Over the next 10 years at least 1/3 of all business owners will transfer ownership 75% of a business owner s s wealth is attributable to the business itself Only 15% of business owners have an exit plan When is the best time to develop an exit plan?

8 Begin with the end in mind Author: Stephen Covey Planning: Identify your exit goals soon after you begin your business Financial security upon retirement is important to sellers Meet with your advisors 3 years prior to exit: work on value drivers Remember the multiple game What are examples of purpose What is the purpose of your exit strategy

9 Options for Selling or Transferring Business Ownership Public stock offering Reward shareholders, owner and employees Third-party buyer Maximize price Management buy-out Reward them for prior service Other owners Buy-sell agreement Family Gift and maintain family business legacy ESOP (employee stock ownership plan) Motivate and retain employees Voluntary liquidation

10 Methods for Selling a Business 1. Seller and advisors establish a price 2. Controlled auction process targeted at strategic buyers 3. Seller allows the market to establish the price over time

11 What Buyers Are Looking For (aka: Value Drivers for Sellers) Actual verifiable financial results Sufficient cash flow Reputation Operational controls and IT infrastructure Management staff and trained employees Contracts and Novation Agreements Established customers and referral business Established suppliers and credit Existing licenses, permits and IP Training and support by the seller, post closing Seller Financing Existing Location

12 Typical Transaction Process Months 1-2: Planning Months 2-5: Searching Months 5-6: Deal Making Months 6-7: Closing

13 Why Plan Your Exit Strategy Now? Plan to create future value Playing the multiple game

14 Richard Stopa Principal Bay Business Advisors, LLC

15 Introducing Frank Stitely

16 Getting the right price What is the right price? The myth of fair market value -Definition of fair market value -Why fair market value isn t t the purchase price -How the identity of the buyer affects the purchase price ~Investor ~Competitor

17 General Methods of Valuing a Business Asset Method 1. Rarely Used 2. Liquidation Value 3. Important if real estate is involved

18 General Methods of Valuing a Business - continued Valuation of Cash Flow -Defining Cash Flow of the Business 1. Adjusting Cash Flow ~Salaries ~Rent ~Perks ~Overhead 2. Valuing Cash Flow ~Evaluating Cash Flow as an investor ~Capitalization Rate ~Hurdle Rate in Setting Price

19 General Methods of Valuing a Business - continued Market Method -Using comparable sales ~Multiple of revenue ~Multiple of seller s discretionary earnings ~Multiple of EBITDA -Rules of thumb -Where the information comes from

20 Getting to the right terms How terms affect price - Seller transition period - Non-compete agreements - Timing of payment - Earn Outs Asset versus stock purchase - Stock Purchase - Asset Purchase - Why asset purchases are preferable

21 Preparing your business for sale Keep your focus on growing the business. Revenue and profit growth determine value. Lower revenue and profits mean lower selling price. Clean up the balance sheet. Pay off debts owed to and from the business to you. Convert notes payable to stock. Remove unproductive assets. Clean up old accounts receivable and payable. Run the business as an investor would run it.

22 Frank Stitely, CPA, CVA Member/Partner Stitely & Karstetter, PLLC D D Sullyfield Circle Chantilly, VA fstitely@skgcpa.com

23 Introducing Ted Lauer

24 Types of Financing OVERVIEW: Traditional Asset Based Loans SBA Loans ( 7a( 7a and 504 programs) Seller-Financing

25 Traditional Asset-Based Financing Line of Credit on a Borrowing Base : Borrower can borrow under a Line of Credit an amount up to xx% of its eligible A/R balances (and inventory too sometimes). The % is often 70% to 80% Eligible typically includes A/R up to 60 or 90 days old. If a significant amount of A/R from a client are past due, however, the entire client s s A/R may be deemed ineligible

26 Traditional Financing (cont d) BUSINESS INFORMATION REQUIREMENTS: Last 3 years financial statements ( f/s( f/s ); Last 3 years federal tax returns; Recent interim f/s and Agings of A/R & A/P; Contract Backlog Report (tying into ) Monthly cashflow projection for 12 months; Field Exam prepared by independent CPA (provides conclusions and recommendations);

27 SBA 7(a) Loans What is an SBA Loan? A loan made through a private sector lender (ex: Bank), that is partially guaranteed by the U.S. Small Business Administration ( SBA( SBA ). Section 7a of 1953 SBA Act authorized the program. (note: SBA generally does not directly lend money)

28 SBA 7(a) Loans Eligible Uses of Proceeds: ~Acquisition of a Business; ~Working Capital (ex: marketing/b&p exp.); ~Expansion or Conversion of Facilities; ~Debt Refinancing; ~Purchase Machinery or Equipment;

29 SBA 7(a) Loans Benefits of SBA Loans: Loan approvals even when past performance is not sufficient to repay proposed loan; Overcome a collateral shortfall; Longer repayment terms for smaller monthly payments

30 SBA 7(a) Loans Maturities Business acquisition up to 10 years; Working Capital up to 7 years Machinery and Equipment up to 10 years Repayment on a Monthly Basis of P&I Interest Rates Typically between Prime+1% and Prime+2.75% Bank Loan Points: NoneNone

31 SBA Express 7(a) Loans Can be revolving Line of Credit Maximum Loan Amount of $350,000 ($500,000 for Patriot Express) Typically receive SBA approval in 24 hours from time that the Lender s application is submitted to the SBA Only 50% Guaranteed by the SBA (75%- 85% for Patriot Express)

32 SBA 7(a) Loans GUARANTY FEES DUE TO SBA: Loans < $150,000: 2% * Guaranty amt. Loans > $150,000: 3% * Guaranty amt Loans > $700,000: 3.5% * Gty amt Loans > $1,000, % * Gty amt Example ~$125,000 Loan guaranteed at 85% -$125,000 x 85%=$106,250 Guaranteed Portion -$106,250 x 2%=$2,125 Guaranty Fee

33 SBA 7(a) Loans PLP: Preferred Lender Program provides Lender (ex: Bank) ability to approve SBA Loans without SBA first reviewing the application. PLP s s are audited periodically to assure they have been following SBA guidelines

34 Notable SBA financings. FedEx Mrs. Fields Cookies Nike AOL Allen Edmonds Shoes Calloway Golf Totino s Pizza Staples Outback Steakhouse Winnebago Gymboree Sun Microsystems Jenny Craig UnderArmour

35 SBA 504 Loans 90% 90%-financing on Commercial mortgages (incl. closing costs) for owner-user properties

36 SBA 504 Loans BASIC STRUCTURE for Owner Occupied (50%+) Real Estate Total Project $ 100% Including Closing Costs Ex: $1MM Comml Building ~$100M down by Borrower * ~$500M 1 st Trust by the Bank ~$400M 2 nd Trust CDC/SBA BANK 50% BORROWER 10% CDC/ SBA 40% - Equity can be done partially via seller financing or subordinated debt; - Extra 5% down for start ups and another 5% for special use properties - 50% + owner user properties only

37 SBA 504 Loans Highlights of the SBA 504 The First Trust is held by the bank, and typically has a 10 year Maturity, and 5 year fixed rate (currently approx 7.5% as of 4/07). The Second Trust is initially closed and funded by the bank, however, it is a bridge loan that gets paid off via a sale of bonds on Wall Street. 2 nd trust rate as of 4/07 was 6.2% fixed for 20 years.

38 Bank Approval/Closing Process Apply for loan (provide business and personal financial statements, etc ); Receive non-binding Proposal from Lender Accept Proposal Terms Lender underwrites transaction Receive Commitment Letter Open deposit accounts with Lender Provide pre-closing items (ex: insurance; bylaws, etc ) Loan closes and funds

39 INFORMATION REQUIREMENTS: Last 3 years business financial statements; Last 3 years business federal tax returns; Recent interim Financial statements and Agings of A/R & A/P; Contract Backlog Report (tying into monthly cashflow projections) Monthly cashflow projection for 12 months; Last 3 years personal federal tax returns; Personal financial statement Appraisal/Valuation of business (by the bank or 3 rd party)

40 4 Key Approval Issues Cash flow (from tax returns!) Management; Cash into the deal (i.e.: Equity); Collateral

41 Seller Financing Sometimes available; sometimes not; Generally more expensive than bank debt, if not in the stated interest rate, then in terms of lost leverage to negotiate sale price down; Can be the entire source of financing; or subordinate financing along with a senior-position Bank loan; SBA requirement: if seller financing is subordinate to a 1st lien bank loan, repayment terms on Seller Note can not be quicker or more expensive than the SBA loan; Possible tax benefits for Seller

42 Ted Lauer Senior Vice President Access National Bank 300 Fort Evans Road NE Leesburg, VA

43 Case Study

44 Case Study Software developer selling primarily to U.S. Govt has $3 Million Revenue & $300,000 EBITDA Competitor For Sale with $2 Million Revenue & $200,000 EBITDA Price is $2 Million Payable $1.25 Million at Closing Seller Take-Back Note of $750,000 Payable 8% Interest-Only for 5 Years Projected Combined EBITDA for the Two Companies is $600,000. Combined Balance Sheet: Accounts Receivable $1,000,000 Accounts Payable $400,000 LOC Balance $200,000 PP & E $200,000 Cash $400,000

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47 For a PDF copy of this seminar please visit Access National Bank s website: Resource Center Industry News & Articles Basics of Selling a Business