NTDA 2012: The Art of Buying & Selling a Small Business

The Art of Buying &
Selling a Small Business
Tom Marx, CEO
September 26, 2012

22nd Annual Convention © 2012 Marx Group advisors - The Art of
1
Buying & Selling a Business

Who We Are

Over 25 years’ experience in the Automotive
and Commercial Vehicle Aftermarket

Brokerage: Equity and debt
Consulting services
Buy-Sell-Merge financing

2

Marx Group Advisors
TOM MARX DAVE BARBEAU
• Business growth & • Parts distributor &
marketing focus aftermarket executive
• 25+ years industry • Industry management
experience consultant
PAUL COOPERSTEIN CHRISTINE LEMAy
• Venture capitalist & • Business development
investment banker
manager
• Business lawyer &
mediation specialist • International specialist

Support Staff + 10-Member Nationwide Advisory Board

3

Buying/Selling a Small Business
When we finish today, you will learn:
• How buying/selling a business fits in your
succession plan
• Basic understanding of terms and deals
• Better idea of the value of your business
• Knowledge of how deals are structured
• Best way to market your business for the price
you want
• Understanding of the closing and transition process

© 2012 Marx Group advisors - The Art of Buying & Selling a Business 4

What is Your Situation?

• Are you a baby boomer ready to
retire?
• Are you tired after a decade of
consolidations, business cycles,
banking hassles – and the recession?
• Are you a young lion hungry to grow?
• Do you want to eliminate competitors
or expand your footprint?


Understand
Your Short, Mid and Long Term Goals
and
Your Options For Exit Strategies


Timeless Questions
• Will my business survive me?
• How do I get my equity out and gain liquidity
when I want to?
• How can I get a fair price when I sell?
• How do I value the business?


When Do You •• You are tired of the hassles – not having fun!
You want to do something else in life
Know it is • Nostalgia – “It ain’t like it used to be”
You aren’t sleeping at night
Time to SELL? •
•
After work…you don’t want to talk with your
spouse – or even your dog!


• You cannot achieve your goals with
organic growth
• Opening new stores takes too long
When Do You • One of your competitors is low price
leader
Know it is • You have excess cash
• You have investors that want higher
Time to BUY? rate of return
• Your long term exit strategy requires
significantly more revenue and
EBITDA


• What will happen if you
TAKE CHARGE don’t have a plan in place?
OF YOUR • Are you really taking care of
your family?
FUTURE • Are you really taking care of
yourself?


• Succession plan must be in
Are You place
Getting • Decide if you are going to
transfer the business to a
Ready to family member(s) or key
Retire? employee(s)
• Considering selling the
business


70% of All Small and Midsized
Businesses Don’t Sell After They
are Put on the Market

Selling a business is not
like selling a piece of real
estate or any other asset


Buyers and Sellers
Need to Position Themselves
• Be financially stable – show
good valuations
• Have strong management
and staff willing to stay on
• Sustain a diverse and loyal
customer base


Buyers and Sellers
Need to Position Themselves
• Develop differentiating value
proposition – superior product,
services and customer support
• Invest in IT, processes,
infrastructure, people skills
• Have strategic plan in place
• Identify target profile


VALUATION:
How to Sell Your Company for
What it’s Worth


Plan Ahead:
Begin to Prepare at Least 3 Years
Before You Want to Sell


Preparing •
•
3 years tax returns
3 years profit & loss statements

to Go to •
•
3 years balance sheets
Current YTD financial statements,

Market projection through YE and
projection for following year
• Write a “Book” on the opportunity


• Company overview and history

Seller’s •
•
Key investment highlights
Management and ownership

“Book” •
•
Industry overview
Facilities
• Competitive analysis
• Call to action, offering price and
next steps for interested parties


All the above PLUS
• Business strategy
Preliminary • Products and services
• Customers and suppliers

Due • Market research
• Sales & marketing teams
• Management and ownership
Diligence • Facilities, property, assets
• Legal / accounting issues
• Contracts
• Capital
• SWOT analysis
• And more…


Three Fundamental
Valuation Methods
• Cost approach – valuation based on the cost of
purchasing or reproducing the assets of the business
• Income approach -- valuation based on ability of
company to generate income and risk reflected by
current and predicted market conditions
• Market approach – valuation based on sales price for
similar businesses

In this industry, the market approach is most commonly
used – and understood


What is EBITDA?
EBITDA = Earnings Before Interest, Taxes,
Depreciation and Amortization
• Some call is “normalizing the P&L”
• Some call it “recasting the P&L”


Why is EBITDA the Standard?
Allows for consistent comparison of companies
in the same industries, with terms such as
“This business will sell between 5x to 7x”
• After recasting the P&L, apply multiple to
EBITDA number
• Adjust this number based on other factors
• Adjust this number on whether this is a financial or
strategic buyer…strategic buyers often pay higher price


Recast Your P&L
Pay attention to:
• Balance sheet items (dividends, real estate)
• Accelerated deductions, amortization etc.
• One-time expenses
• Owner(s) expenses


Recast Your P&L


Determining the

• Operating earnings averaged over a period of years
times a multiple
• Consistency in earnings (margin & growth) = fewer
years needed
• Typical average is prior 3 years


What Does • Looks at brighter future
and diminishes historical
the Seller performance, including
Consider those caused by The
When Valuing Great Recession
• Promotes strengths for
the Business? higher price


What Does the Buyer Consider
When Valuing the Business?
Looks at the same financial statements from a
buyer’s perspective
• Looks at historical performance and does not value possible
potential upside
• Finds vulnerabilities that substantiate lowering of the price
• Points out weaknesses so they can present lower offer
• Questions the true value of assets, inventory and
collectability of receivables
• There are exceptions when the buyer is HIGHLY motivated!


Value Lays in the Eye
of the Beholder
• Context Dependent
– Are you a Buyer or a Seller
– Sale to company management
– Passing down to family member
– Sale to PE (Private Equity) firm
– Sales publicly held company
– Industry standards, benchmarks, trends


Other Factors Taken into
Consideration:
• Comparable Sales • Buyers’/Sellers’ Motivation
• Margin • Customer Base
• Barriers to entry and • Special Conditions
competitive positioning • Technology
• Regional differences & • Projected Cash Flows
Market Saturation • Personnel
• Debt Capacity • Revenue & operating trends:
• Volatility/Stability Past, Current & Future
• Discounted Cash Flow • Strength of balance sheet


Potential Factors That Increase the Value
• Strong revenue & profit growth = higher multiple
• Above average margins= higher multiple
• Strong buyer marketplace = higher multiple
• Valuable assets = higher value


• Long term debt
Potential • High level of goodwill compared
Factors to assets and net income
• High percentage of aged
that receivables
Reduce • Dominance of a few customers
the Value • Lower operating margin than that
of buyer


How to Increase the Value of
Your Business
• Keep revenues & profits growing
• Have credible successor management
• Have a broad customer base
• Pay attention to your balance sheet: quality of
assets, inventory, old equipment, cores, level of
debt, working capital reserve
• Other strategic assets (real estate, life insurance
policies etc.)


• Despite some loosening of
credit, financing poses an
obstacle in the deal making
process
The Impact of • Impacts both sellers and
Financing buyers
• Sellers and buyers need to
think about how this deal
will look through the eyes
of a banker


Sale to Company Management
Valuation is often book value and goodwill to
founder via premium or deferred
compensation


Selling Options
Typical Deal Structures
Transfer to Family
• Valuation is more complex
• Estate and gift tax considerations significantly
impact these transactions


Selling Options
Sell to Publicly Held Company
• Some valuation components more important
to privately-held buyers
• Due diligence and discovery even more
critical
• Regulatory agencies and guidelines
complicate the transaction


Selling Options
Sell to Privately Held Company
• Valuation is determined by the marketplace
or the buyer
• Seller’s representatives can and should
influence buyer’s valuation


Selling Options
PE Firms
• PE firms have funds that need to be invested
• Auto and commercial vehicle aftermarkets are
key industries due to steady growth and low risk
(less sexy than technology – adds good balance
to portfolio)
• Tend to buy where regional locations fill in gaps
• Tend to buy based on multiples and less sweat
of the details – once deal is done, site usually
must conform to the brand and its products.


Selling Options
Individual Investor or Operator
• Often a financial buy – numbers must pencil
• Generally investor wants to add value with smarter
management or procurement…looks for healthy
companies where buyer can significantly
improve results
• Tough negotiators, especially those already in the
industry looking to pick up market share


Payout • Additional payments over 2 – 5 years
based on meeting profit targets
• A kicker for revenue growth
Structure • A hold-back if key customer is lost; key
metric is missed; or if accounts
receivable is uncollectible
• Seller financing


Getting Equity Out
Other Options for Owners
• Management Buyout
• ESOP
• Equity Partner
• Deferred Compensation Payment


Cashing in Does Not Always Mean
Selling Out
Stay on in some fashion (if you choose)
• Employee
• Consultant
• Run the business for a defined period of time
• Grow the business with someone else’s investment


Selling Process
Your biggest challenges:
• Keeping it all confidential -- internally and
externally
• Keeping your eye on your business so sales and
profits are not eroded
• Getting the transaction done as quickly as practical


Confidentiality Agreements
(NDA’s)
• Needs to be well drafted
• Term is from the date of signing or last exchange of
Confidential Information
• Employee poaching clause
• Non-compete provisions


Be Smart from the Beginning
Understand what truly makes a difference
• Clean up your balance sheet and P&L
• Clean up assets and inventory
• Valuation determination
• Thorough and engaging offering package
• Prospects search
• Letter of Intent
• Due Diligence
• Definitive Purchase Agreement or Asset Sale Agreement
• Closing
• Transfer of assets


What Do You Need to Do During
the Sales Process?
• Keep making profit
• Maintain adequate inventory, fill rates and margins
• Retain key people
• Keep customers happy


Reducing the Stress
• Get all skeletons out of the closet—eventually they
will be discovered anyway
• Full disclosure of all positives and negatives
• Timely review and response
• Carefully think through all responses so they are
complete and accurate
• Have an intermediary do the heavy lifting


When Do You Know the Deal
is Not Going Well?
• LONG delays in response
• Every deal results in a new detail
• When every paragraph of the LOI ends with “BUT”
• When the legal bills are double and triple what you
were originally estimated


The Closing Process
• Post LOI Due Diligence
• Definitive Purchase Agreement Negotiated and
Signed
• Post Agreement (Pre-Closing) Due Diligence
• Determining any hold backs
• Closing and transfer of funds from escrow
• Post-closing settlement issues


When Do You Know the Deal
Is Going Well?
When the deal closes and
money is transferred!


What Do You Need to Do During
the Sales Process?
• Keep making profit
• Maintain adequate inventory, fill rates
and margins
• Retain key people
• Keep customers happy


Why Hire an Intermediary?
Comments we heard from those that
completed or attempted a self-brokered sale:
• “I did not know what my business was really worth”
• “I spent so much time on this that my business
suffered and at the end the sales price was
reduced”


Why Hire an Intermediary?
Comments we heard from those that
completed or attempted a self-brokered sale:
• “This was a very painful and expensive process. I
ended up in countless meetings and spent a LOT of
money on legal and accounting fees”
• “I would never sell my own home without an agent
and I will never again sell a business without an
agent”


What to Look for When Hiring a
Broker or M&A Consultant
• Industry knowledge
• M&A experience
• References
• Intelligent strategy
• Trust


Fees Paid to Broker or
M&A Consultant
Depends on size of potential deal and specific
complications
• Expect to pay some level of retainer, varying from
$10K to $100K. Both you and your
broker/consultant must have skin in the game.
• Lehman Formula, depending on size of transaction,
will equal 3-7% of the total value of the deal


Fees Paid to Broker or
M&A Consultant
Typical Lehman Formula
• 1st $2 million = 7-8%
• 2nd $2 million = 5%
• 3rd $2 million = 4%
• 4th $2 million = 3%
• 5th $2 million = 2%
• Above = 1%


Summary
• Preparation = Increased ROI and success
• Buyers & Sellers need to understand each other’s
perceptions
• Make sure you understand the process
• Don’t do this alone – get the support of
professionals WHO HAVE EXPERIENCE and KNOW
YOUR INDUSTRY


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http://www.marxgroupadvisors.com/resources

© Marx Group Advisors – Northwood University: Heavy Duty Leadership: July 11, 2012
59

Questions?
TOM MARX
415.453.0844 ext. 106
tmarx@marxgroupadvisors.com

Marx Group Advisors are located nationwide:

SAN NEW
BOSTON HOUSTON OHIO FLORIDA PHOENIX
RAFAEL YORK

www.marxgroupadvisors.com


NTDA 2012: The Art of Buying & Selling a Small Business

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