Without an Exit Strategy
You Have No Strategy
John Martinka -
“ Partner ” On-Call Network

Statistics
 How many medium sized businesses are predicted to sell in the next decade?

Statistics
 How many of these businesses are prepared for sale?

Statistics
 According to Kiplinger, those companies without an exit strategy will _________
_______ ____ __ ________.

Statistics – SunTrust Bank
 75% of business owners ultimately plan to sell or pass along their business as part of their exit plan
 23% of owners are looking to expand and/or acquire other businesses
 60% have delayed their exit plans by, on average, two years due to the Great
Recession
 42% feel maximizing their business’s value is the most important part of their exit plan

Statistics – The Disconnect
 11% of owners have lowered their expectations for the value of their business as a result of the current economy
(SunTrust)

Where does the Financial
Professional fit?
 Financial Planning
 Motivation
 Team coordination
 Protection and tax relief
 Tax advantaged products
 Compensation programs
 Retirement plans

Statistics
 The number one mistake small businesses make is ____________________.
 Those with a business plan have, on average, sales and profit growth ____% more than those without a plan?

Decisions
 What is my business worth?
 Is it even salable?
 Do I sell all or part of my business?
 When? Now, six months or six years?
 Who do I sell to?

Who Do I Sell To?
 Outsiders
 Insiders
 Public Markets
And I get paid via:
 Cash, Stock, Notes, Consulting Agreement,
Employment Agreement, Earnout…

 Financial
 Strategic
 Hybrid
– Foreign
– PEG
Types of Buyers

Financial Buyers
•
•
•
•
• Individuals
Corporate refugees
Small business owners
Family
Employees

Financial Buyers Look For
 Salary
 Profits
 Net worth increase
 Salability in future
 A job
 Manageable risk

Statistics
 There are ______ more people in the baby boomer generation than Gen X
 Rank the generations in terms of entrepreneurship
 ___ Baby Boomer
 ___ Gen X
 ___ Gen Y

Strategic Buyers
 Rapid growth potential
 Management structure
 Gross margin
 Employees
 Synergy
 Excess overhead
 Systems in place

Why do Strategic Buyers Buy?
 People – Customers, Employees, Vendors
 Geographic
 Synergies, lower overhead, etc.
 Equipment
 Eliminate a competitor
 To prove you can do it
 Scaling = options & a higher selling price

Hybrid Buyers
 Growth
 Employees/Management
 Solid practices
 Stable, non-cyclical industry
 A good “ feel ” (for the future)
 Profit and salary

Your Situation
 Who is your logical buyer?
 Why me?
 Why now?
 What is their motivation?

Insurance
 On the Seller
 On the Buyer
 Key Employee
 Buy-Sell Agreement
 Deferred Comp as part of the financing package

Why Sell a
Profitable Business?

Why Sell?
 The 3 D ’ s a buyer looks for

 Divorce
 Death
 Disability
The 3 D ’ s

Reasons affecting the owner
Divorce
Death
Disability
Burnout
Retirement
Family feud
Partnership dispute
Life
Earn a better return elsewhere
Company is part of larger firm
Company outgrows owner
Owner is an entrepreneur

Reasons affecting the business
Owner dies without succession plan
Catastrophic natural event
Uninsured damage or legal claims
Large loss of sales
Governmental actions or seizures
Political decisions
Fraud or theft
Wrong business decision
Strike or labor disruption
Lender changes terms of financing
Involuntary bankruptcy possible

When to sell?
 Experts say get prepared ___ to ___ years before selling
 Why?
 ___% of owners have to tell a “story”
 Sell one year _____ ___ ___ _____ ___

Current Conditions
 2011 market conditions
– Serious buyers, fewer in number though
– Serious sellers, coming out from their shell
– Willing banks???
 What do they want?
 What don’t they like?
– Is this business “ recession proof ”

Buy, Be Bought or Both
 More buyer options
 Higher multiple
 More profits along the journey
 More control
 More cash at closing

What ’s it Worth?
 It’s a function of profit (EBITDA, free cash flow, etc.)
 If not, you better be attractive to bigger companies, or,
 Your value is based on your net asset value
(and you’re worth less than the value based on profit )

What ’s it Worth?
From Rob Slee’s, “Midas Managers:”
 $1-5MM in sales = 2-3 X EBITDA
 $5-50MM in sales = 4-7 X EBITDA
 You can bet a $40MM firm will get closer to
7X than a $5MM firm
 Growth is the key

Strategic Buyers
 Rapid growth potential
 Management structure
 Gross margin
 Employees
 Synergy
 Excess overhead
 Systems in place

 A
 C
 T
 I
 O
 N
ACTION ™ Plan

ACTION ™ Plan
 Arrange all the affairs of the company
 C
 T
 I
 O
 N

ACTION ™ Plan
 Arrange all the affairs of the company
 C oach and counsel the company. Its people, process and systems
 T
 I
 O
 N

ACTION ™ Plan


Arrange all the affairs of the company
C oach and counsel the company. Its people, process and systems
 T ransmit and teach all the good “ things ” about your firm
 I
 O
 N

ACTION ™ Plan
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

Arrange all the affairs of the company
C oach and counsel the company. Its people, process and systems
T ransmit and teach all the good “ things ” about your firm
 I ntricacies that make your company special
 O
 N

ACTION ™ Plan




Arrange all the affairs of the company
C oach and counsel the company. Its people, process and systems
T ransmit and teach all the good “ things ” about your firm
I ntricacies that make your company special
 Operations and management systems in place that will make a transition smooth
 N

ACTION ™ Plan





Arrange all the affairs of the company
C oach and counsel the company. Its people, process and systems
T ransmit and teach all the good “ things ” about your firm
I ntricacies that make your company special
Operations and management systems in place that will make a transition smooth
 Numbers, all the financials in understandable form, straightforward with no
“ tricks ”

6 Seller Pitfalls

6 Seller Pitfalls
 No selling plan
 Reason for selling
 Weak non-financial factors
 Not being prepared (tell a story)
 Poor financial systems and records
 Not properly screening buyers

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Why? To get a deal done!
Savings & Investments
Private party loan to buyer
Buy excess assets and sell off
Buy inventory as needed
Sell shares to employees
Recruit equity partner
Buy cash and Accounts Receivable
Balloon payments, interest only loans, etc.
SBA guaranteed bank loan – current situation
401k rollover (Guidant Financial, Bellevue)
Insurance

Case Study – Industry Buyer
 Management structure
 Protecting trade secrets
 The buyer wants…?
 Employees
 Lease, etc.
 Culture
 The seller’s role post-sale

Case Study – Industry Buyer
 Service Business
 Quasi competitors (different cities)
 Buyer was 5-7X as big
 Weak management structure (seller)
 Lease, equipment, T1 lines, etc.
 Culture differences
 Seller to remain in a sales role

Case Study – Industry Buyer
 Background – the story
 Planning yields benefits
 Results
 Industry offers
 Seller’s next step
 The return
 A deal, a post-mortem

Case Study – Industry Buyer
 Insurance needs–Where do you see a need?
 Buyer
 Seller
 Management
 Pension
 Benefits

Case Study – Family Sale
 Who? Kids, one kid, management?
 Do they want the business?
 Do they want the responsibility?
 Will they put any money in the deal?
 Do they expect a gift?
 What’s it worth?
 How long do mom and/or dad stay on?

Case Study – Family Sale
Distribution Company
 Discussion issues:
– Who?
– When?
– How?
– Future success?
– If one child, what about the others?
– Payment (this is mom & dad’s retirement)

Case Study – Family Sale
Distribution Company
 Dad bought company
 Mom kept job, came on board later
 Dad-CEO; Mom-CFO
 Fast growth with both in management roles
 Initial valuation
 Business plan for growth
 Family succession or outside buyer?

Case Study – Family Sale
Distribution Company
 Son got outside experience
 Hired son as salesperson
 Promoted to sales manager
 Gift of 10% of stock
 Daughter-in-law hired as office manager
 Second valuation
 20-year payment plan from son to parents

Case Study – Family Buyer
 Insurance needs–Where do you see a need?
 Kids
 Parents
 Management
 Pension
 Benefits

Keep in touch
 John Martinka
 425-576-1814
 partneroncall/johnmartinka.com
 john@johnmartinka.com
 Blog: johnmartinka.com
 Free e-mail newsletter “ The Business Buy,
Sell & Growth Advisor ”