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NOT Yet

NOT Yet. A Practical Guide to Valuation. Being a business owner is like owning a boat…. The two happiest days are the day you buy it and the day you sell it!. Agenda. Should I sell? Types of Buyers and Risks Valuing your company Prettying up for the dance The other option.

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NOT Yet

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  1. NOT Yet A Practical Guide to Valuation

  2. Being a business owner is like owning a boat…. The two happiest days are the day you buy it and the day you sell it!

  3. Agenda • Should I sell? • Types of Buyers and Risks • Valuing your company • Prettying up for the dance • The other option

  4. Capital Markets • Unprecedented Capital Markets • Everyone is buying everyone else • Where do you fit in?

  5. Should I Sell? • Only you know this answer • Things to consider: • Am I ready? • Why am I selling? • What is my company worth?

  6. Am I Ready…NOT YET How ‘Bout Me? NO THANKS! Please, Please Big OFFER!

  7. Five Years Later……

  8. Now I’m Ready Perfect timing is Seldom Perfect

  9. Why am I Selling • Maximizing your company’s value? • Good timing (industry changes, peak earnings, etc) • Succession Planning? • Just want out? • Other business interest? • Other outside interest?

  10. Importance of Why • Answers to these questions help determine: • Potential buyers • Acceptable Buyer • Acceptable price • Legacy issues • Future involvement • Who you will sell to • Legacy issues • False start risk

  11. Buyer Profile and Risks

  12. What is my Company Worth? • Valuation is complex and subjective • Appraisals (for selling purposes) are a waste of time • Value is purely a “risk/reward” equation (unless you get lucky)

  13. Risk/Reward • Multiple of earnings (or EBITDA) • Multiple predicts income the buyer expects in return for his investment • Risk adjusted basis • Risk/Price inverse relationship PRICE RISK

  14. Two Scenarios Buyer 1 Buyer 2 Earnings $1.0 mil $1.0 mil Multiple 5 8 Purchase price $5.0 mil $8.0 mil Anticipated Return 20% 12.5% What makes up the risk/return equation? What makes up your company’s risk/return equation?

  15. Buyer is Seeking Return • Capital goes to investments that provides the best risk adjusted return

  16. Buyer’s Options • Buyer has competing options: • T-Bills (no risk) • Internet start up (high risk) • Your company has its own risk profile • Different for every business and industry • Buyers assess risk differently

  17. Known Risks • Buying a closely held company comes with some inherent risks: • No one knows your business like you do • Customer concentration • Lack of Liquidity • Lack of Management • Narrow economic Moat

  18. Risks • Other risks become apparent during negotiations and due diligence • Certain risks are mitigated during negotiations and due diligence • There is always an analysis of risk/reward for the buyer • The key for the seller is to mitigate risks

  19. Risk Comparison • Back to our scenario • Is 20% right (5 times)? • Is 12.5% (8 times) right? • S&P 500 has returned 12.9% over the last 10 years • What is the right number? • Depends on the buyer, the company and the industry

  20. Mitigate Risk • If you are not an S-Corporation (or other flow through entity), elect S-Status immediately. • Ten year waiting period • Ways to mitigate • Talk to your accountant • Consider non-compete agreements with key personnel (talk to your attorney)

  21. Mitigate Risk • Demonstrate sustainable growth • Keep customers a long time; keep blue chip customers longer! • Manage returns and credits • Watch bad debt • Understand and communicate economic moat (what makes you great) • Cultivate and motivate management • Be honest and forthright

  22. All Common Sense? YES! • Buyer does not know you or your business • Credibility • Small stuff adds up • Be prepared • No surprises

  23. Other Stuff • Be prepared • Have answers to questions that may never be asked • Know your weaknesses • Know your walk away point

  24. Some More Other Stuff • Broker or No Broker • Pick broker wisely • Beware of “exclusivity” and length of time • Beware of “upfront” fees • Transaction fees hurt (could be 6 – 8%) • Check references • How many deals currently (trick question) • Time and disruption

  25. Other Option – “Rex-Hide” Model • Perfect Timing • Leadership and vision • Legacy and employees • Risk off the table - cash in your pocket) • Someone else’s risk – keep some upside • Focus on core competencies • Minimal disruption and confidential • No transaction fees

  26. Thank You! Craig Kirsch, Director of Acquisitions Rex-Hide, Inc. PO Box 4726 Tyler, TX 75712 903-593-7387 ckirsch@rex-hideinc.com www.rex-hideinc.com

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