Building Value to Power Your Exit Strategy How to prepare your company for a profitable exit Brandon Jacob Comfortech Baltimore 2006
Objectives To pass on to participants a general understanding of preparing an exit strategy (exit strategy steps) How to make your exit strategy profitable Discuss in detail the three generally accepted methods of valuation and how these may be applied to your business Answer specific questions on buying and or selling a service/retrofit air conditioning company
Who can Benefit from this Course? A shareholder who is preparing to sell his business immediately A shareholder who wants to prepare a long-term exit strategy (is not immediately prepared to sell) Shareholders who are interested in gaining a better understanding of the value of their business Shareholders who are in the process of buying or selling shares to/from a partner Interested parties in purchasing an HVAC service business
Brandon Jacob Actively engaged in valuing, analyzing, buying, selling and consulting with privately held plumbing and HVAC businesses since 1996 Owns and operates Contractors Financial Opportunity a financial consulting firm specifically focused to serve as the CFO of small to mid sized privately held plumbing and HVAC businesses Former Acquisition Specialist/Valuation Analyst with ARS/ServiceMaster Certified Public Accountant (CPA) Certified Valuation Analyst (CVA) Aggie
Exit Strategy A plan for you to successfully relieve yourself from the ownership of your business. An exit strategy consists of understanding the reasons for exiting, establishing a time frame, understanding the value of your business, understanding the market and potential buyers, preparing your business to maximize the sale price, setting realistic expectations and building your advisory team An exit strategy does not have a specific time frame, however generally speaking a longer time-frame often equates to greater success
Exit Strategy Steps 1. Define reason for your exit 2. Establish time frame to exit 3. Understand market and potential buyers 4. Set realistic expectations 5. Understand value of your business 6. Prepare business to maximize sales price 7. Build advisory team
Reasons for Selling Cash out Retirement Failing health Burnout Business problems Partnership problems Divorce Catastrophic event You won the lottery
Time Frame Rule #1 the longer you have to plan and prepare, the better off you will be Rule #2 do not pass on an opportunity just because you have set a longer time frame
Potential Buyers The list of potential buyers as it exists today Consolidators? Strategic Buyers Utility/Corporation Local Competitor Regional Competitor Employee(s) Family Member(s) Private Individual/Group
Set Realistic Expectations Do not set expectations based upon arbitrary wants or needs Avoid setting expectations based upon assets Do not expect a buyer to purchase your business twice - no double dipping How do you want to be paid? All Cash Notes Buyer s s stock Earn-out Combination
Build Value and Maximize the Sale Price Clean consistent financial statements (avoid adjustments) Personal/non-business expense Extraordinary/non-reoccurring reoccurring Profitable financials Positive trends Organized records Consider reviewed financials
Valuation Fair Market Value As defined by Internal Revenue Service Revenue Ruling 59/60, the term fair market value is defined by the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties have reasonable knowledge of relevant facts.
Valuation Three Approaches Three Generally Accepted Approaches Market Approach Asset Approach Earnings Approach
Earnings Approach The approach that you want to be used when a potential buyer is valuing your business because: Places a value on the goodwill Places a value on the intangible assets Typically returns the highest value
Goodwill The collection of intangible assets represented in dollars by the difference between the total purchase price for the business and the net value of the tangible assets being purchased/sold.
Earnings Approach Applied Enterprise Value = Earnings Stream x Multiple Common Earnings Streams Pre-Tax Net Income After-Tax Net Income EBITDA EBITA Enterprise value does not equal fair market value!
Multiple of Earnings Stream the multiple Determined by the risk factor associated with the earnings stream Higher the risk = Higher the expected return (stock market example) Higher the risk = Lower the multiple Determination can be very subjective Historically loosely determined
Risk Factors/Value Drivers 1. Size of business 2. Historical profitability 3. Demonstrated growth 4. Fleet/Asset condition 5. Established pricing 6. Work mix 7. Customers/Service Agreements 8. Employees 9. Age of business 10. Geographic market
Most Important Value Driver The single most important value driver is for your business to demonstrate historical profitability - after taking into consideration personal, non- business, non-reoccurring and extraordinary adjustments
Building Your Team Certified Public Accountant (CPA) Professional Advisor (intermediary) Business Valuation Professional Industry Expert/Consultant Legal Attorney Tax Attorney/Tax Accountant Financial/Estate Planner/Real Estate Peers
What I Have Learned Run your business like it is a publicly traded business Pay down company debt Network with local and regional industry people (competitors, distributors, peers) Be suspicious of rules of thumb valuations Face reality there are limited all cash buyers out there Buyers do not pay for potential! Buyers care mostly about the recent years of results Negotiate through a letter of intent Be prepared to stay for the transition, but also be prepared to be dismissed by the buyer
Other Points to Understand Selling stock or assets the difference C Corporations and asset sales Debt you can not make money from the sale of your business if you do not own your business Inventory what is the real value Buyer s s working capital expectations Payment terms and buyers
Getting Right With It Understand that the process will be an emotional roller coaster. Commit to the goal and stick with it. Build your advisory team to help you understand and recognize a good deal Understand and then get over the concept of if I keep it
Conclusions Preparing a Profitable Exit Strategy Involves Identify the reasons you want to sell Identify potential buyers Understand the market Set a realistic time frame Begin preparing your business for sale today Establish a benchmark valuation Understand the three methods of valuation Set realistic expectations Establish and understand your team Build a strong company Prepare a plan as far in advance as possible
Questions? Brandon Jacob, CPA, CVA Contractors Financial Opportunity (713) 426-4041 4041 www.contractorscfo.com Brandon@contractorscfo.com