Preparing your business for sale requires knowledge of what a buyer is looking for along with knowing where the value in your business resides. We discuss this topic from three different angles: M&A strategy, Valuation drivers, and using 80/20 to increase the EBITA of your business.
Getting your business ready for sale - Smith & Gesteland Webinar
1. Preparing to Sell Your
Business? It Takes
More Than You Think
Martha Sullivan
Theresa Zeidler-Shonat
Heather Schommer
July 22, 2014
2. About the Presenters
• Martha Sullivan
– Martha is a partner and the Chief Operating
Officer with Smith & Gesteland, LLP.
– Martha began her career as a systems
consultant with a regional CPA firm.
Throughout her nine-year term with this firm,
she performed numerous operational/process
improvement reviews, systems selection
projects, and policy/procedure review
engagements. Additionally, she facilitated
strategic planning initiatives and played a key
role in developing the firm’s own inaugural
strategic plan.
– Martha leveraged her consulting experience
by then moving into industry into the controller
and CFO roles. After 13 years in industry,
Martha returned to her CPA firm roots
performing transaction support/due diligence
and Sarbanes-Oxley services for its clients.
She enjoyed the energetic pace of mergers
and acquisitions and assisting client’s ready
their company for sale. The depth of her
understanding of her clients’ businesses
facilitates timely and prompt completion of
these time-pressured engagements.
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3. About the Presenters
• Theresa Zeidler-Shonat
– Theresa specializes in business valuations;
valuing the invested capital in the business,
business equity, and intangible assets,
depending on the client’s needs. Theresa’s
valuations assist business owners with
understanding the value of their business, and
what drives that value, as well as what
differences exist between the way a business
owner perceives their business and the way a
potential buyer perceives the business.
– Theresa has performed valuations for
companies across a wide variety of industries
from traditional manufacturing and service
industries to rapidly-changing industries such
as high-tech, ethanol/alternative fuels and
photovoltaic cell production and for
companies across a wide range of sizes, from
family-owned business with just a few
employees to middle-market firms with
thousands of employees, and has a deep
understanding, drawn from extensive
experience, of the factors that impact the
value of your business.
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4. About the Presenters
• Heather Schommer
– Heather is a Strategic Advisor in the Profit
Enhancement Solutions group and is a key
player in analyzing products, customers,
services and divisions to guide companies in
achieving profitable market share growth.
Heather works closely with members of the
management team to employ various tools
from the 80/20 toolbox, including zero up
analysis, which helps companies identify the
true profitability of their business segments,
and segmented financial reporting, which
provides a focused approach to financial
management. Heather is a trusted advisor,
and companies seek her input in monthly
operations meetings to identify processes and
improvements used to drive 80/20 through
organizations.
– Prior to Smith & Gesteland, Heather spent
nearly seven years in the banking industry
working closely with small to medium sized
businesses across a variety of industries, and
this experience gave her a deep
understanding of small business needs.
Heather is an expert in working with business
owners to understand their organization’s
financial and strategic goals. 4
9. Deal Related Statistics
• 30 million small businesses in the US (Bureau of
Labor Statistics)
• Approximately 60% of today’s small business
owners were born before 1964
• Turning 65 at a rate of one every 57
seconds which will continue for the next
16 years
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10. Know Why You Are Doing This
Why do you want to do sell?
What is your desired result? What you hope to
gain and/or achieve?
What will you do post-close?
What is negotiable? What is not?
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20. Valuation Gap
• Valuation Methods
• Measurement Period
• M&A Experience
• Retirement Cash Flow Needs – Rule of
25x
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21. Unreasonable Buyer or
Seller Demand
• Emotion
• Compensation plans outside of
market range for certain
employees
• Representation and warranties
• Seller financing
• Earn outs
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25. Economic Uncertainty
• Lack of Capital to Finance – Locally
• Banks are ready but are looking for
1. Sufficient cash flow to service the debt
2. Management quality – experience in the industry
3. Collateral – most banks discount values
20% to 25% and will lend on the balance
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27. Factors That Affect Business Value
Factors that
Affect Business
Value
External
Business owner
can't really
change these
Internal
Business owner
can change
these and impact
business value
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28. External Factors
INCREASE VALUE DECREASE VALUE
Access to Capital Capital Markets Shrinking
Strong Barriers to Entry Lack of Barriers to Entry
Expanding Industry Contracting Industry
Expanding Economy Contracting Economy
Shift in Consumer Preference to
Your Product
Shift in Consumer Preference
Away from Company Product
Access to Good Labor Pool Lack of Qualified Labor Pool
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29. Internal Qualitative Factors
INCREASE VALUE DECREASE VALUE
Experienced Management Weak Management
Strong Sales Culture Weak Sales Culture
Cross Trained Employees Lack of Cross Training
Systems and Processes Weak Infrastructure
Intellectual Property Lack of IP
Organized Up to Date Financials Poor Accounting
Good Location / Appearance Poor location/ Appearance
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30. Internal Quantitative Factors
INCREASE VALUE DECREASE VALUE
Annual Increasing Sales Declining Sales
Strong Gross Margin Declining GM or Below Industry
Diversified Customer Base High Concentration
Strong Financial Ratios Weak Financial Ratios
Good “ISOTIF” Poor “ISOTIF”
Low Employee Turnover Rate High Employee Turnover Rate
Recurring Revenue Stream Non-recurring Revenue Stream
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32. Internal Qualitative Factors
INCREASE VALUE DECREASE VALUE
Experienced Management Weak Management
Strong Sales Culture Weak Sales Culture
Cross Trained Employees Lack of Cross Training
Systems and Processes Weak Infrastructure
Intellectual Property Lack of IP
Organized Up to Date Financials Poor Accounting
Good Location / Appearance Poor location/ Appearance
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33. Keep Score!
• That which gets
measured gets
better!
• Manage to the
numbers
– USE A BUDGET!
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34. Keep Score!
• Remember you don’t take percentages to
the bank, you take dollars
• Use a simple scorecard to track high level
metrics
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35. Actual Forecast Delta Prev Yr Delta Actual Plan Delta Prior YTD Delta
Total Revenue 1,321,847 959,180 362,667 1,087,529 234,318 13,277,115 12,737,074 540,041 13,170,405 106,710
Direct Material 760,213 538,986 221,227 542,191 218,022 5,960,569 5,500,347 460,222 5,187,284 773,285
Direct Material % 57.51% 56.19% 49.86% 44.89% 43.18% 39.39%
Material Margin 561,634 420,194 141,440 545,338 16,296 7,316,546 7,236,727 79,819 7,983,121 (666,575)
Material Margin % 42.49% 43.81% 50.14% 55.11% 56.82% 60.61%
Direct Labor 82,227 73,519 8,708 140,023 (57,796) 1,014,840 899,184 115,656 1,392,765 (377,925)
Direct Labor % 6.22% 7.66% 12.88% 7.64% 7.06% 10.57%
Overhead 254,088 148,204 105,884 374,731 (120,643) 3,034,263 3,109,028 (74,765) 3,687,379 (653,116)
Overhead % 19.22% 15.45% 34.46% 22.85% 24.41% 28.00%
COGS 1,096,528 760,709 335,819 1,056,945 39,583 10,009,672 9,508,559 501,113 10,267,428 (257,756)
COGS % 82.95% 79.31% 97.19% 75.39% 74.65% 77.96%
Gross Margin 225,319 198,471 26,848 30,584 194,735 3,267,443 3,228,515 38,928 2,902,977 364,466
Gross Margin % 17.05% 20.69% 2.81% 24.61% 25.35% 22.04%
SG&A 124,399 123,970 429 121,253 3,146 1,146,916 1,261,190 (114,274) 999,389 147,527
SG&A % 9.41% 12.92% 11.15% 8.64% 9.90% 7.59%
Operating Income 100,920 74,501 26,419 (90,669) 191,589 2,120,527 1,967,325 153,202 1,903,588 216,939
Operating Income % 7.63% 7.77% -8.34% 15.97% 15.45% 14.45%
Net Inc 130,592 108,839 21,753 (86,599) 217,191 2,125,527 2,000,078 125,449 1,923,589 201,938
Net Income % 9.88% 11.35% -7.96% 16.01% 15.70% 14.61%
For the Month of December 2013 Year to Date
Financial Scorecard
Division Financials for: XYZ
Keep Score!
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36. ITW Acquisition Criteria
1. Do they have a great brand?
2. Do they have a great product that
we can improve?
3. Do they have good management
talent?
4. Single digit operating income with
material margin greater than 40%?
5. Is it “80/20-able”?
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37. What is “80/20-able”
• Pareto Principle
• ITW’s fundamental principle
• Four Steps to 80/20
– Simplify Your Business
– Separate Unlike Divisions
– Align the Minimum Resources for each
division
– Streamline the Processes (get really good)
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41. Business is Out of Balance
Quartile Customers % of Revenue Effort / Overhead
1 1-25 89% 25%
2 26-50 7% 25%
3 51-75 3% 25%
4 76-100 1% 25%
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42. Separate Unlike Businesses
• Segment the business to understand
where you make money and where you
lose money
• Hire champions for each segment and
incentivize them
• Create strategic plans around each
segment
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43. Align Minimum Resources
• Direct resources to growth segments
• Only give the segments what they need
• Consider ways to expand your capacity
without adding resources. Remember:
EBITDA x the multiple = Price
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44. Now Get Really Good!
• Streamline processes and systems
• Lean
• Six Sigma
• Kaizen Blitzes
• USa
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46. Top Deal Killer - The Gap
• Understand your numbers
– What you would like
– What you think your business is worth
– What the market suggests your
business is worth (baseline business
valuation)
– The value drivers you should focus on
to build value
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47. Assemble Your Team
• M&A expert
• Tax accountant / CPA
• M&A Attorney
• Owner / CFO / HR Director
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48. Get Your Books In Order
• Accurate Monthly Closings
• Clean up your inventory
• Collect or write off past due accounts
• Identify unrecorded liabilities
• Level of Financial Reporting
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49. Prepare for an Emotional
Roller-Coaster
• Six month to 18 month process
• Timelines
• Try to keep emotion out of the process
• Run your business!
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50. Protect the Fort
• Can’t take your eye off the ball
• Over-serve your best customers
• Protect your intellectual property including
your best employees (non-compete
agreements)
• Be careful with new equipment
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51. Keep it Confidential
• Only key members of the transaction team
should know
• Use non-disclosure agreements
• Rumors of the sale can impact your
business negatively
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