1. Buying or Selling a Business
Randy Rua, Rua Associates
Haans Mulder, Cunningham Dalman

2. The Agenda
The Two Choice Dilemma
• Your Big Goal
• Why Transactions Typically Fail
The Components of A Successful Transaction
• The First Three Components
• Vision
• Right Team
• Business Assessment

3. The Two Choice Dilemma
Grow
Sell
• Organic
• Acquisition
• Internal Sale
• External Sale

4. Before we begin….
What is your BIG goal?
Two criteria
Five years out
Only one thing

5. The Success Rate of Selling a Business
Only 5% of Businesses are Successfully Sold
80% of Business
owners that try to
sell fail
Of those that
are able to sell,
75% report
regretting selling
their business
because their
goals weren’t
met

6. The Success Rate of Buying a Business
Only 5% of Businesses are Successfully Purchased
75% of business
acquisitions fail
after a Letter of
Intent is signed
Of those that
are able to
purchase a
business, 80%
report their
acquisition goals
were not met

7. So why is the success rate so low?
Lack of planning
Lack of a team approach
Lack of focus on the vision

8. The Two Choice Dilemma
React to Growth
or Sale, Don’t
Have a Team
Approach and
Ignore the
Vision
Plan to Grow or Sell,
Have a Team Approach
and Focus on the Vision

9. The Components of a Successful Transaction
Vision
Right
Team
Process
Successful
Transaction
Market
Creation
Business
Assessment
Alternatives
Analysis

10. Our Focus Today
Vision
Right
Team
Business
Assessment

11. Vision
Vision
•
•
8 Questions
Same Page

12. The 8 Questions
Values
Core Reason
5-10 Year Goal
Prospect Selection
Transaction Picture
1 Year Post-Transaction Goals
90 Day Pre-Transaction Goals
Issues List

13. The 8 Questions

14. The 8 Questions

15. The 8 Questions

16. The 8 Questions
Values
Core Reason
5-10 Year Goal
Prospect Selection
Transaction Picture
1 Year Post-Transaction Goals
90 Day Pre-Transaction Goals
Issues List

17. How to Get on the Same Page
Other
Stakeholder
Goals
Owner’s
Goals
Business
Goals
Other
Stakeholder
Goals
Owner’s
Goals
Business
Goals

18. Typical Goals of a Seller
Seller Business Goals
Seller Personal Goals
Other Stakeholder Goals

19. Typical Goals of a Buyer
Buyer Business Goals
Buyer Personal Goals
Other Stakeholder Goals

20. Right Team
Right Team
• Right Seat
• Right People

21. Right Seat
Decision Maker
Other Stakeholders
Team Leader
Intermediary
Financial
Legal

22. Right People
Transaction
Type Focus
Transaction
Size Focus
Experience
Passion
Time
Person 1
Y
Y
Y
Y
Y
Person 2
N
Y
Y
Y
Y
Person 3
Y
Y
Y
Y
Y
Team Lead
Y
Y
N
Y
Y
BAR
3 Y’s and 1 N

23. Team Roles
Intermediary
Team
Lead
Legal
Financial

24. The Components of a Successful Transaction
Business
Assessment
• Valuation
• Viability

25. Valuation
Focuses primarily on the businesses’ financials through
three approaches:
Income approach
• Discount future earnings to present value
Market approach
• Cash flow times market multiple
Asset approach
• Liquidation or going concern- what your assets
are worth

26. Tool Example
100% Controlling, Non-Marketable Interest in Consulting Company
Discount/
Indicated
Premium Confidence
Value
Rate
Level
Valuation Method
The Market Approach
Price/Gross Sales Method
Price/DE Method
The Income Approach
Capitalization Method
Illiquidity Discount
Indicated Value
Discounted Future Benefits Method
Illiquidity Discount
Indicated Value
Weighted
Estimate
$ 1,065,000
20%
$
213,000
$ 2,486,000
20%
$
497,200
50%
$
961,200
10%
$
245,250
$ 2,136,000
$ (213,600)
$ 1,922,400
10%
$ 2,725,000
$ (272,500)
$ 2,452,500
10%
Value Conclusion - 100% Interest in Company
Value Conclusion - 100% Interest in Company (Rounded)
100%
$ 1,916,650
$ 1,917,000

27. Valuation Metrics
•
•
•
•
•
•
Public Company Industry PE Ratio - 3 year trend
Private Company EBITDA Multiples - 3 year trend
EBITDA Multiple
Revenue Multiple
Capitalization Rate
Required Working Capital

28. Median EBITDA Multiples for Buyouts
The median valuation-to-EBITDA multiple has exploded to a decade
high of 10.7x

29. Median EBITDA multiples rose for large deals but
fell to just 2.5x for transactions of less than $25M

30. West Michigan – Selling Multiples (3 year history)
4.5
Other Transactions
Rua Associates
Transactions
4
3.5
3.94
2.96
3
2.5
2
1.5
1
0.98
0.54
0.5
0
Price to Revenue
Ratio
Price to Cash Flow
Revenue: $1-15M
Ownership: Privately Held
Industry: Service, Manufacturing and Distribution
Location: West Michigan
Price to Revenue
Ratio
Price to Cash Flow

31. Viability
The problem with just getting a valuation is it doesn’t
answer many of the key questions regarding a transaction:
What are my options?
Will there be a market interest?
What expectations does the market have?
What type of structure(s) can be expected?
Can the structure(s) be financed?
Is the business saleable?

32. Options Analysis
Grow
Organically
Grow Through
Acquisitions
Internal Sale
External Sale
New
Products/Services
Buy Suppliers
Family
Liquidation
New Markets
Buy Customers
Shareholder
Buyout
3rd Party
Gain Market Share
Buy Competitors
Management
Buyout
Recapitalization
Buy
Complimentary
Companies
ESOP

33. Potential Prospects
Actively
Seeking
7%
Current
Sellers
7%
Passively
Receptive
24%
Source: PWC
Current
Non – Sellers
62%

34. Prospecting Case Study
Oil and Gas
Mfg
Tech
Furniture
Number of Prospects
116
326
152
362
Total Prospects Contacted
87
248
64
121
Willing to Discuss
34
39%
140
59%
28
44%
39
32%
Interested Parties
12
14%
39
16%
13
20%
7
5%

35. Tool Example
Market Test
Summary
• Contacted 20 Strategics and 20
Private Equity Firms
• Received Feedback from 5
Strategics and 7 PE’s
• 50% of Strategics were
interested and 75% of PE’s
Typical Structure:
• Strategic: All Cash if long-term
management team is in place
besides ownership
• PE: 70% Cash at Close, 30%
Seller-Note, Rolled-Over Equity
or Earn-Out
Typical Multiple Range
Strategic: 4-6 times EBITDA
PE: 4-6 times EBITDA
Drivers of Multiple and Structure:
Strategic Top 3:
• Location
• Synergies
• Service Type
Private Equity Top 3:
• Flexibility of Ownership
• Customer Concentration
• Strength of Management Team

36. Financing Metrics
Seller Factors
• Collateral Value
• Required DSC
• Goodwill Financing
• Seller Financing
Buyer Factors
• Industry Experience
• Liquidity
• Net Worth
• Down Payment

37. Tool Example
Financing Feasibility
Bank
Industry Experience
First National Very important along
with the new owner
being behind the
Company and the
capital injection that
may be required.
Huntington Most important - Not
just manufacturing, but
a competitor or
someone with
substantial knowledge
of the field.
Buyer Liquidity
$150,000-$225,000
(10%-15% of
outstanding debt)
Buyer Equity
25% of purchase price should
be equity in the form of cash
or full stand-by seller note.
15% cash at close.
Structure
Other Comments
Cash at close for equipment If SBA is involved, it must be
with additional seller note a 100% acquisition.
and full-standby seller note.
Higher than 10% due
to projection.
If Goodwill > $500,000, SBA
requires 25% of the purchase
price.
Financial structure
proposed would fit under
SBA guidelines.
Chemical
Bank
Must have knowledge
of the technology
required.
Depends on how
SBA may not see it as an
hungry a banker is for entirely "new business" if
the deal.
there is no major change in
management team for 5 years 10% down at close.
Fifth Third
Less important than
liquidity.
Projection-basis
requires 15% of debt
outstanding.
Management team would
need to either sell their
shares now to be part of the
buyer group in 6 months, or
they would have an
employment contract for 12
months. It would be up to
the buyer group to renew
this contract after 12
months. be confident in
Need to
May be willing to lend 10%
on inventory and 75% on AR equipment value. Bank will
less than 90 days. Could
need to order appraisal and
refinance seller note as SBA specifiy SBA as a user.
7A after close, but bank
would require
subordination agreement.
SBA requires 25% of purchase May be willing to bump up
price.
financing with a highlyliquid buyer.

38. Tool Example
Sellability Report

39. Highest Multiple Offered To Companies With A
Sellability Score of 80+
Q
“What multiple of your earnings did the offer represent?
Data from 6955 users of The Sellability
Score between July 1, 2012 and December
31, 2013. 96.9% of business owners
surveyed had revenue of less than
$20,000,000.
3.55
Average multiple
“The Sellability
Premium”
Comparing
average
multiple
offered
6.1
80+
0
SellabilityTracker Q4 2013. Copyright 2014
www.SellabilityScore.com
2
4
6
8

40. Tool Example
Sellability Report
Overall Score driven by a weighted algorithm made up of 32 questions in a
total of 8 categories:
1. Financial Performance
2. Growth Potential
3. The Switzerland Structure
4. The Valuation Teeter Totter (i.e. See Saw)
5. The Hierarchy of Recurring Revenue
6. The Monopoly Control
7. Customer Satisfaction
8. Hub & Spoke

41. Factors Correlated to Getting a Premium Offer
Copyright, 2013. Built to Sell Inc

42. Other Key Components of Business Assessment
Management Team and
Employees
Sales Team and Customer
Relationships
Key Assets

43. Other Key Components of Business Assessment
Management Team and
Employees
•
•
•
•
Strong/loyal management team
Incentives aligned to motivations
Risk of employees leaving
At-will employment clear in documentation

44. Other Key Components of Business Assessment
Sales Team and
Customer Relationships
• Protect confidential info/relationships
• Agreements to lock in revenue streams
• Assignment rights

45. Other Key Components of Business Assessment
Key Assets
• Tangible vs Intangible
• Legal issues related to assets
• Transferability

46. Conclusion
The Two Choice Dilemma
• Your Big Goal
• Why Transactions Fail
The Components of A Successful Transaction
• Vision
• Right Team
• Business Assessment

47. Next Seminar
Next Seminar Date:
Monday, April 28
Process
8AM-10:30AM
Same Location!
Alternatives
Analysis
Market
Creation

48. Questions?