1. Succession Planning and Valuation
Mike Upah

2. Statistics - USA
25,000,000 businesses in the US
20% for sale at any one time
25% of the 20% (5%) actually sell
• “Testing the Water”
• Over Priced
• Solve the Issue Causing the Need to Sell – Divorce, Health, Etc.
3% of “Buyers” making a purchase inquiry actually buy

3. Statistics
Baby Boomer Businesses for Sale in Next 2 Decades?
• One business owner turns 65 every 57 seconds
• People 55+ own 50% of all businesses
• 50% want to sell in next decade
• Children less likely to want to take over business
Number of Gen Xers in a Financial Position to Buy???

4. Statistics
75% of Owners Have no Exit Plan
Selling within 6 months of deciding to do so can
reduce the business’s value by 50% to 70%.

5. Are You Ready to Sell?
Why Selling? Retirement, Health, Relocation, New Competitor, Bored?
What are you going to do next ?
(especially important with a family buyer)
Selling What ?
• Partnership Position – Buy/Sell Agreement in Place?
• Business – Stock or Assets
• Building ?
Ship Shape ?
• Financials - Accurate, Growth, Debts
• Brand Reputation, Market Position, Pending Competition
• Employees – Disgruntled, Loyal to Business?
• Customers – Loyalty, Diversity
• Pending Capital Improvements – Equipment, Facilities, etc.

6. 30,000 Foot View
Business’s Financial Position – 3 Categories
1. Business earns more than a reasonable salary for owners…
• Provides Return on Investment
• Valuation of Discretionary Cash Flow is Meaningful
2. Business earns just a reasonable salary for owner
• Make vs. Buy - FMV of assets ?
• - How much “baggage” (bad employees, weak inventory, etc.)
• + Value of one less competitor in the market?
3. Business earns less than a reasonable salary for owners…
• Risk = what significant discount on FMV of assets?
• - Pain of “Gutting” (bad employees, weak inventory, etc.)
• + Value of one less competitor in the market?

7. Who to Sell to … ?
Existing Partner
Another Business
• Strategic Buyer
• Competitor
Stranger
Employee
Employees - ESOP
Liquidator

8. Conditions of Sale
Consulting Agreement? Paid or Unpaid ?
Non-Disclosure / Non-Compete ?
Earn-Out ?
Owner Financing ?
Trusted Employee(s) – What Happens to Them ?
Competitor Purchase – What to Disclose ?
Existing Debts – Who Pays ?
Accounts Receivable – Who Collects ?
Lease – If favorable, how much longer and can you sub-lease?

9. Team
Due Diligence
Negotiation
Preparation
Marketing
Closing
Pricing
You x x x x x x
Accountant / CPA x x x x
Appraiser x
Attorney x x x x
Business Broker x x x x x
Consultants x x
Your Banker x x

10. Process
Build Team
Adjusting Financial Statements, Pricing
Marketing
Confidentiality Agreement
Buyer Interview / Qualification
Financial Disclosure – 3 years or more
Negotiation
Term Sheet / Letter of Intent
Purchase Agreement
Closing!
Fulfill Consulting Agreement

11. Adjusting Financial Statements
Net Income
+ Salaries to non-working family members
+ Payments on the condo in Vail
+ Payments on non-essential vehicles

12. Marketing
FSBO Ads in Local Newspaper; Networking
Broker ~ 10% commission
Directory BizBuySell.com; businessbrokers.net

13. Valuation
Certified Business Appraiser

14. From Buyer’s Perspective
Can I Afford to Buy ?

15. From Buyer’s Bank’s Perspective
Turn Key Purchase Cost
Price Collateral
Assets (FMV) 500,000 400,000
Goodwill 200,000 0
Improvements 150,000 80,000
Working Capital 75,000 0
Total 925,000 480,000
Equity (25%) 231,250

16. Seller Financing Usually Needed
$4,246 $1,559
Monthly Payment Monthly Payment
Seller Buyer Bank
$500,000 $50,000 $100,000

17. Buyer Homework …
Max Purchase Price Method

18. Valuation Methods
Multipliers
• Owner’s Cash Flow
• Monthly or Annual Revenue
Industry Rules of Thumb – e.g., $13,000 per Hotel Room
Discounted Cash Flow

19. Multipliers

20. Discounted Cash Flow
Today 1 Year
$1.00 $1.03
$1.00 3% discount Rate $1.03
$29,126 3% discount rate $30,000
$23,077 30% discount rate

21. Discounted Cash Flow
30% discount Rate
Today Year 1 Year 2 Year 3
$23,077 $30,000
$22,485 $38,000
$19,572 $43,000
$160,207 $46,000
1% Growth
$225,341 Business Value + Non Critical Assets

22. Price Agreement…
Once You’ve Agreed on Price…,
The Negotiations are still not finished…

23. Seller vs. Buyer Tax Preferences
Stock Sale Seller gets capital Gains Treatment
Buyer looses ability to depreciate assets
Asset Sale Seller taxed at corp. level and then again
at personal level
Buyer gets to depreciate assets

24. Asset Price Allocation
Asset Sale - $1,000,000 Sale Price
Seller Buyer
Building 600,0001 400,0001
Machinery 200,0001 150,0001
Inventory 40,0002 100,0002
Accounts Receivable 100,0002 200,0002
Consulting Agreements 60,0002 150,0002
1 Buyer get cap gains treatment Seller has long depreciation
2 Buyer has to recognize as income Seller gets immediate expense

25. Questions
Mike Upah
515.296.7828
mjupah@iastate.edu