Without an Exit Strategy You Have No Strategy

1. Without an Exit Strategy You Have No Strategy John Martinka - “Partner” On-Call Network

2. Statistics • How many medium sized businesses are predicted to sell in the next decade?

3. Statistics • How many of these businesses are prepared for sale?

4. Statistics • According to Kiplinger, those companies without an exit strategy will _________ _______ ____ __ ________.

5. Statistics – SunTrust Bank • 75% of business owners ultimately plan to sell or pass along their business as part of their exit plan • 23% of owners are looking to expand and/or acquire other businesses • 60% have delayed their exit plans by, on average, two years due to the Great Recession • 42% feel maximizing their business’s value is the most important part of their exit plan

6. Statistics – The Disconnect • 11% of owners have lowered their expectations for the value of their business as a result of the current economy (SunTrust)

7. Where does the Financial Professional fit? • Financial Planning • Motivation • Team coordination • Protection and tax relief • Tax advantaged products • Compensation programs • Retirement plans

8. Statistics • The number one mistake small businesses make is ____________________. • Those with a business plan have, on average, sales and profit growth ____% more than those without a plan?

9. Decisions • What is my business worth? • Is it even salable? • Do I sell all or part of my business? • When? Now, six months or six years? • Who do I sell to?

10. Who Do I Sell To? • Outsiders • Insiders • Public Markets And I get paid via: • Cash, Stock, Notes, Consulting Agreement, Employment Agreement, Earnout…

11. Types of Buyers • Financial • Strategic • Hybrid • Foreign • PEG

12. Financial Buyers • Individuals • Corporate refugees • Small business owners • Family • Employees

13. Financial Buyers Look For • Salary • Profits • Net worth increase • Salability in future • A job • Manageable risk

14. Statistics • There are ______ more people in the baby boomer generation than Gen X • Rank the generations in terms of entrepreneurship • ___ Baby Boomer • ___ Gen X • ___ Gen Y

15. Strategic Buyers • Rapid growth potential • Management structure • Gross margin • Employees • Synergy • Excess overhead • Systems in place

16. Why do Strategic Buyers Buy? • People – Customers, Employees, Vendors • Geographic • Synergies, lower overhead, etc. • Equipment • Eliminate a competitor • To prove you can do it • Scaling = options & a higher selling price

17. Hybrid Buyers • Growth • Employees/Management • Solid practices • Stable, non-cyclical industry • A good “feel” (for the future) • Profit and salary

18. Your Situation Who is your logical buyer? Why me? Why now? What is their motivation?

19. Insurance On the Seller On the Buyer Key Employee Buy-Sell Agreement Deferred Comp as part of the financing package

20. Why Sell a Profitable Business?

21. Why Sell? • The 3 D’s a buyer looks for

22. The 3 D’s • Divorce • Death • Disability

23. Reasons affecting the owner Divorce Death Disability Burnout Retirement Family feud Partnership dispute Life Earn a better return elsewhere Company is part of larger firm Company outgrows owner Owner is an entrepreneur

24. Reasons affecting the business Owner dies without succession plan Catastrophic natural event Uninsured damage or legal claims Large loss of sales Governmental actions or seizures Political decisions Fraud or theft Wrong business decision Strike or labor disruption Lender changes terms of financing Involuntary bankruptcy possible

25. When to sell? • Experts say get prepared ___ to ___ years before selling • Why? • ___% of owners have to tell a “story” • Sell one year _____ ___ ___ _____ ___

26. Current Conditions • 2011 market conditions • Serious buyers, fewer in number though • Serious sellers, coming out from their shell • Willing banks??? • What do they want? • What don’t they like? • Is this business “recession proof”

27. Buy, Be Bought or Both • More buyer options • Higher multiple • More profits along the journey • More control • More cash at closing

28. What’s it Worth? • It’s a function of profit (EBITDA, free cash flow, etc.) • If not, you better be attractive to bigger companies, or, • Your value is based on your net asset value (and you’re worth less than the value based on profit )

29. What’s it Worth? From Rob Slee’s, “Midas Managers:” • $1-5MM in sales = 2-3 X EBITDA • $5-50MM in sales = 4-7 X EBITDA • You can bet a $40MM firm will get closer to 7X than a $5MM firm • Growth is the key

30. Strategic Buyers • Rapid growth potential • Management structure • Gross margin • Employees • Synergy • Excess overhead • Systems in place

31. ACTION™ Plan • A • C • T • I • O • N

32. ACTION™ Plan • Arrange all the affairs of the company • C • T • I • O • N

33. ACTION™ Plan • Arrange all the affairs of the company • Coach and counsel the company. Its people, process and systems • T • I • O • N

34. ACTION™ Plan • Arrangeall the affairs of the company • Coach and counsel the company. Its people, process and systems • Transmit and teach all the good “things” about your firm • I • O • N

35. ACTION™ Plan • Arrangeall the affairs of the company • Coach and counsel the company. Its people, process and systems • Transmit and teach all the good “things” about your firm • Intricacies that make your company special • O • N

36. ACTION™ Plan • Arrangeall the affairs of the company • Coach and counsel the company. Its people, process and systems • Transmit and teach all the good “things” about your firm • Intricacies that make your company special • Operations and management systems in place that will make a transition smooth • N

37. ACTION™ Plan • Arrangeall the affairs of the company • Coach and counsel the company. Its people, process and systems • Transmit and teach all the good “things” about your firm • Intricacies that make your company special • Operations and management systems in place that will make a transition smooth • Numbers, all the financials in understandable form, straightforward with no “tricks”

38. 6 Seller Pitfalls

39. 6 Seller Pitfalls • No selling plan • Reason for selling • Weak non-financial factors • Not being prepared (tell a story) • Poor financial systems and records • Not properly screening buyers

40. CREATIVE FINANCING = LOW DOWN PAYMENT Why? To get a deal done! • Savings & Investments • Private party loan to buyer • Buy excess assets and sell off • Buy inventory as needed • Sell shares to employees • Recruit equity partner • Buy cash and Accounts Receivable • Balloon payments, interest only loans, etc. • SBA guaranteed bank loan – current situation • 401k rollover (Guidant Financial, Bellevue) • Insurance

41. Case Study – Industry Buyer • Management structure • Protecting trade secrets • The buyer wants…? • Employees • Lease, etc. • Culture • The seller’s role post-sale

42. Case Study – Industry Buyer • Service Business • Quasi competitors (different cities) • Buyer was 5-7X as big • Weak management structure (seller) • Lease, equipment, T1 lines, etc. • Culture differences • Seller to remain in a sales role

43. Case Study – Industry Buyer • Background – the story • Planning yields benefits • Results • Industry offers • Seller’s next step • The return • A deal, a post-mortem

44. Case Study – Industry Buyer • Insurance needs–Where do you see a need? • Buyer • Seller • Management • Pension • Benefits

45. Case Study – Family Sale • Who? Kids, one kid, management? • Do they want the business? • Do they want the responsibility? • Will they put any money in the deal? • Do they expect a gift? • What’s it worth? • How long do mom and/or dad stay on?

46. Case Study – Family SaleDistribution Company • Discussion issues: • Who? • When? • How? • Future success? • If one child, what about the others? • Payment (this is mom & dad’s retirement)

47. Case Study – Family SaleDistribution Company • Dad bought company • Mom kept job, came on board later • Dad-CEO; Mom-CFO • Fast growth with both in management roles • Initial valuation • Business plan for growth • Family succession or outside buyer?

48. Case Study – Family SaleDistribution Company • Son got outside experience • Hired son as salesperson • Promoted to sales manager • Gift of 10% of stock • Daughter-in-law hired as office manager • Second valuation • 20-year payment plan from son to parents

49. Case Study – Family Buyer • Insurance needs–Where do you see a need? • Kids • Parents • Management • Pension • Benefits

50. Keep in touch • John Martinka • 425-576-1814 • partneroncall/johnmartinka.com • john@johnmartinka.com • Blog: johnmartinka.com • Free e-mail newsletter “The Business Buy, Sell & Growth Advisor”