Download Building Value to Power Your Exit Strategy

Building Value to Power
Your Exit Strategy
How to prepare your company for
a profitable exit
Brandon Jacob
Comfortech – Baltimore 2006
Objectives
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To pass on to participants a general understanding of
preparing an exit strategy (exit strategy steps)
How to make your exit strategy profitable
Discuss in detail the three generally accepted methods
of valuation and how these may be applied to your
business
Answer specific questions on buying and or selling a
service/retrofit air conditioning company
Brandon Jacob - Contractors Financial Opportunity
Who can Benefit from this Course?
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A shareholder who is preparing to sell his business
immediately
A shareholder who wants to prepare a long-term exit
strategy (is not immediately prepared to sell)
Shareholders who are interested in gaining a better
understanding of the value of their business
Shareholders who are in the process of buying or
selling shares to/from a partner
Interested parties in purchasing an HVAC service
business
Brandon Jacob - Contractors Financial Opportunity
Brandon Jacob
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Actively engaged in valuing, analyzing, buying, selling and
consulting with privately held plumbing and HVAC
businesses since 1996
Owns and operates Contractors Financial Opportunity – a
financial consulting firm specifically focused to serve as
the CFO of small to mid sized privately held plumbing and
HVAC businesses
Former Acquisition Specialist/Valuation Analyst with
ARS/ServiceMaster
Certified Public Accountant (CPA)
Certified Valuation Analyst (CVA)
Aggie
Brandon Jacob - Contractors Financial Opportunity
Exit Strategy
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A plan for you to successfully relieve yourself from the
ownership of your business. An exit strategy consists of
understanding the reasons for exiting, establishing a
time frame, understanding the value of your business,
understanding the market and potential buyers,
preparing your business to maximize the sale price,
setting realistic expectations and building your advisory
team
An exit strategy does not have a specific time frame,
however generally speaking a longer time-frame often
equates to greater success
Brandon Jacob - Contractors Financial Opportunity
Exit Strategy Steps
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Define reason for your exit
Establish time frame to exit
Understand market and potential buyers
Set realistic expectations
Understand value of your business
Prepare business to maximize sales price
Build advisory team
Brandon Jacob - Contractors Financial Opportunity
Reasons for Selling
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Cash out
Retirement
Failing health
Burnout
Business problems
Partnership problems
Divorce
Catastrophic event
You won the lottery
Brandon Jacob - Contractors Financial Opportunity
Time Frame
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Rule #1 – the longer you have to
plan and prepare, the better off
you will be
Rule #2 – do not pass on an
opportunity just because you have
set a longer time frame
Brandon Jacob - Contractors Financial Opportunity
Potential Buyers
The list of potential buyers as it exists today
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Consolidators?
Strategic Buyers
Utility/Corporation
Local Competitor
Regional Competitor
Employee(s)
Family Member(s)
Private Individual/Group
Brandon Jacob - Contractors Financial Opportunity
Set Realistic Expectations
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Do not set expectations based upon arbitrary
wants or needs
Avoid setting expectations based upon assets
Do not expect a buyer to purchase your
business twice - no double dipping
How do you want to be paid?
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All Cash
Notes
Buyer’s stock
Earn-out
Combination
Brandon Jacob - Contractors Financial Opportunity
Build Value and Maximize the Sale Price
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Clean consistent financial
statements (avoid adjustments)
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Personal/non-business expense
Extraordinary/non-reoccurring
Profitable financials
Positive trends
Organized records
Consider reviewed financials
Brandon Jacob - Contractors Financial Opportunity
Valuation
Fair Market Value –
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As defined by Internal Revenue Service Revenue
Ruling 59/60, the term “fair market value” is
defined by the price at which the property would
change hands between a willing buyer and a
willing seller when the former is not under any
compulsion to buy and the latter is not under
any compulsion to sell, and both parties have
reasonable knowledge of relevant facts.
Brandon Jacob - Contractors Financial Opportunity
Valuation – Three Approaches
Three “Generally Accepted” Approaches
„ Market
Approach
„ Asset Approach
„ Earnings Approach
Brandon Jacob - Contractors Financial Opportunity
Earnings Approach
The approach that you want to be used
when a potential buyer is valuing your
business because:
„ Places a value on the goodwill
„ Places a value on the intangible assets
„ Typically returns the highest value
Brandon Jacob - Contractors Financial Opportunity
Goodwill
The collection of intangible
assets represented in dollars
by the difference between
the total purchase price for
the business and the net
value of the tangible assets
being purchased/sold.
Brandon Jacob - Contractors Financial Opportunity
Earnings Approach Applied
Enterprise Value =
Earnings Stream x Multiple
Common Earnings Streams
Pre-Tax Net Income
„ After-Tax Net Income
„ EBITDA
„ EBITA
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Enterprise value does not equal fair market value!
Brandon Jacob - Contractors Financial Opportunity
Multiple of Earnings Stream
“the multiple”
„ Determined
by the risk factor associated
with the earnings stream
„ Higher the risk = Higher the expected
return (stock market example)
„ Higher the risk = Lower the multiple
„ Determination can be very subjective
„ Historically “loosely” determined
Brandon Jacob - Contractors Financial Opportunity
Risk Factors/Value Drivers
Size of business
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Historical profitability
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Demonstrated growth
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Fleet/Asset condition
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Established pricing
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Work mix
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Customers/Service Agreements
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Employees
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Age of business
10. Geographic market
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Brandon Jacob - Contractors Financial Opportunity
Most Important Value Driver
The single most important value driver
is for your business to demonstrate
historical profitability - after taking
into consideration personal, nonbusiness, non-reoccurring and
extraordinary adjustments
Brandon Jacob - Contractors Financial Opportunity
Building Your Team
Certified Public Accountant (CPA)
Professional Advisor (intermediary)
Business Valuation Professional
Industry Expert/Consultant
Legal Attorney
Tax Attorney/Tax Accountant
Financial/Estate Planner/Real Estate
Peers
Brandon Jacob - Contractors Financial Opportunity
What I Have Learned
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Run your business like it is a publicly traded business
Pay down company debt
Network with local and regional industry people
(competitors, distributors, peers)
Be suspicious of “rules of thumb” valuations
Face reality – there are limited all cash buyers out there
Buyers do not pay for potential!
Buyers care mostly about the recent years of results
Negotiate through a letter of intent
Be prepared to stay for the transition, but also be
prepared to be dismissed by the buyer
Brandon Jacob - Contractors Financial Opportunity
Other Points to Understand
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Selling stock or assets – the difference
C Corporations and asset sales
Debt – you can not make money from the sale
of your business if you do not own your
business
Inventory – what is the real value
Buyer’s working capital expectations
Payment terms and buyers
Brandon Jacob - Contractors Financial Opportunity
Getting Right With It
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Understand that the process will be
an emotional roller coaster. Commit
to the goal and stick with it.
Build your advisory team to help you
understand and recognize a good
deal
Understand and then get over the
concept of “if I keep it”
Brandon Jacob - Contractors Financial Opportunity
Conclusions
Preparing a Profitable Exit Strategy Involves
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Identify the reasons you want to sell
Identify potential buyers
Understand the market
Set a realistic time frame
Begin preparing your business for sale today
Establish a benchmark valuation
Understand the three methods of valuation
Set realistic expectations
Establish and understand your team
Build a strong company
Prepare a plan as far in advance as possible
Brandon Jacob - Contractors Financial Opportunity
Questions?
Brandon Jacob, CPA, CVA
Contractors Financial Opportunity
(713) 426-4041
www.contractorscfo.com
[email protected]
Brandon Jacob - Contractors Financial Opportunity