Download President, Veracap Corporate Finance Limited Grant

Exit Strategies for SMEs
Speakers:
•Howard Johnson, President, Veracap Corporate Finance Limited
•Grant Walsh, Director and Co-founder, KPMG Centre for Family Business
70 University Avenue
Suite 320, PO Box 11
Toronto, ON M5J 2M4
(416) 597-1198
www.veracap.com
Exit Strategies for SME’s
October 2008
Howard E. Johnson
MBA, FCMA, CA, CBV, CPA, CFA, ASA, CF, C.Dir.
416-597-4500; [email protected]
About Veracap
Veracap Corporate Finance Limited helps business owners and
executives to maximize shareholder value through acquisitions,
divestitures, management buyouts, family business succession,
corporate growth strategies and private equity financing.
Veracap’s principals have authored some of Canada’s leading texts on
the subject of valuation, acquisitions and divestitures, and they
frequently speak at conferences throughout North America.
Veracap is an affiliate of Campbell Valuation Partners, Canada’s
longest established independent business valuation firm.
www.veracap.com
Experts In Value ™
Speaker
Howard E. Johnson
MBA, FCMA, CA, CBV, CPA, CFA, ASA, CF, C.Dir
President, Veracap Corporate Finance Limited
(416) 597-4500; [email protected]
Howard is President of Veracap Corporate Finance and a Partner at
Veracap’s affiliate, Campbell Valuation Partners Limited. Howard has
been involved in business valuation, acquisition, divestiture, and
shareholder value advisory assignments for corporations throughout
North America. He is the editor of Corporate Finance for Canadian
Executives (Thomson-Carswell, 2007), author of Selling Your Private
Company (Canadian Institute of Chartered Accountants, 2005), coauthor of The Valuation of Business Interests (Canadian Institute of
Chartered Accountants, 2001) and co-editor of Canada Valuation
Service (Carswell Publishing, periodical). Howard has acted as an
expert witness on valuation matters before the Courts and is a frequent
speaker at conferences throughout North America.
Experts In Value ™
Disclaimer
This material is for educational purposes only. It deals with technical matters
which have broad application and may not be applicable to a particular set of
circumstances and facts. As well, the course material and references
contained therein reflect laws and practices which are subject to change. For
these reasons, the course material should not be relied upon as a substitute for
professional advice in connection with any particular matter.
Although the course material has been carefully prepared, the author does not
accept any legal responsibility for its contents or for any consequences arising
from its use.
© Veracap Corporate Finance Limited 2008
Experts In Value ™
The Sale Process
1. Deciding When to Sell
2.
3.
4.
5.
Preparing for the Sale
Estimating Value & Price
Search for Buyers
Preliminary Due Diligence
6. Deal Structuring
7. Negotiations
8. Closing
Experts In Value ™
EXECUTION PHASE
PLANNING PHASE
VALUE
ENHANCEMENT
Building Deal Momentum
Deciding
When To Sell
Preparing
For the Sale
Estimating
Value and Price
The Search
For Buyers
Preliminary
Due Diligence
Deal
Structuring
Negotiations
Closing
Experts In Value ™
Preparing for the Sale
•
•
•
•
•
•
Value and price expectations
Hidden value on the balance sheet
Management and employees
Customer retention
General operational and administrative matters
Tax Planning
– Holding companies and redundant assets
– Capital gains exemptions and family trusts
Manage “Transition Risk”
Experts In Value ™
Valuation Methodologies
70%
70%
(Note: many respondents indicated more than one method.
Therefore, the percentages do not total 100% )
% of Respondents
60%
50%
40%
32%
30%
22%
20%
12%
10%
0%
2%
Discounted
Cash Flow
Multiple of
Earnings
Multiple of EBITDA
Methodology
Multiple of EBIT
Other/industry
-specific
Experts In Value ™
Multiple of EBITDA Methodology
Normalized EBITDA
Multiplied by EBITDA multiple
$ 5 million
5x
Equals enterprise value
$25 million
Deduct interest bearing debt
Equals equity value
($5 million)
$20 million
Experts In Value ™
Determinants of Valuation Multiples
• Company size
•
•
•
•
Revenue stability and concentration
Proprietary product or service
Growth expectations
Debt capacity
• Capital expenditure requirements
• Buyer synergy expectations
• Terms of the transaction
• Comparable transactions
Experts In Value ™
Types of Buyers
• Strategic
•
•
•
•
Non-strategic
Small corporate / individuals
Financial
Management and employees
Experts In Value ™
The MBO Opportunity
• Availability of capital from financial investors coupled
with a lack of quality opportunities for investment
• Quicker and more confidential than a 3rd party sale
• Deal structuring opportunities
– Tax efficient transaction and availability of cash
• Possible lucrative upside for owner and management
• Personal sentiment of the owner
– Management has “earned” the opportunity
Experts In Value ™
Private Equity Considerations
• Strong business fundamentals
•
•
•
•
Corporate growth opportunities
The management team
Debt capacity
Exit strategies
Experts In Value ™
Terms of the Deal
• Assets vs. shares
• Forms of consideration
–
–
–
–
–
Cash at closing
Holdback
Promissory notes
Share exchange
Earn-out
• Management contracts
Experts In Value ™
Negotiating Principles
• Information is key
• Credibility
– Information provided
– Changes in stated positions
• Alternatives
– Number and quality of buyers
• Price and terms are important
– When / how paid
– Conditions for payment
– Tax issues
Importance of the Letter of Intent
Experts In Value ™
The Buyer/Seller Advantage Curve
Seller
Buyer
Management
Presentation
Multiple
Offers
LOI Negotiations
Exclusivity to Buyer
Closing
Experts In Value ™
Closing
• Buyer’s due diligence
•
•
•
•
Purchase and sale agreement
Non-competition / non-solicitation agreements
Post-closing audit
Working capital adjustments
Don’t Underestimate the Time and Effort Required
Experts In Value ™
Why Deals Fail to Close
• Buyer and seller have different expectations
– Secure a comprehensive, unambiguous LOI
• New issues uncovered in detailed due diligence
– Ensure full disclosure of major issues prior to the LOI
• Material adverse change in the company’s operations
– Adopt a ‘business as usual’ attitude during closing
• External circumstances
– Negotiate a relatively short exclusivity period
Experts In Value ™
Final Words
• Preparation is key
•
•
•
•
Stay in control of the process
Build momentum
Create good alternatives
Secure a comprehensive, unambiguous LOI
• Stay the course through closing
Experts In Value ™
Resources
• Books
– Exit Strategies for Business Owners
– Corporate Finance for Canadian Executives (Thomson, 2007)
– Selling Your Private Company (CICA, 2005)
– The Valuation of Business Interests (CICA, 2001)
• Articles and other resources at www.veracap.com
– Business valuation and pricing
– Shareholders agreements
– Management buyouts
– Many others
Experts In Value ™