SELLING A BUSINESS: HELPING YOUR
CLIENTS WITH THEIR BIGGEST DEAL
North Shore Council
Financial Planning Association of Illinois
Markus May, Esq.
Jeff Smiejek, CPA, CVA, CEPA
Tom Meyer
Alex Fridman

e

• Outsider
• Insider
• Family Member

•
•
Price is higher, but higher taxes
No longer need to be involved long term in business – will have will training component
• Can will/gift the proceeds to children
• A way to distribute estate proportionately among children when business = major asset
• Lose the legacy

• Buyer knows the business
• Maybe a lower price, but have a person who can run the business well
• Seller financing is more likely to be paid
• Less post-closing disputes
• Reward loyal employees

• Good if want to leave a family legacy and all children treated equally
• Probably bad result if child has no experience
• Valuation is subjective: can leave more to the children with less estate or income taxes
• Issues if children are co-owners
• Issues if all children are not all owners

• Why valuations are performed and who performs them
• Effectively communicating an overview of the valuation process to your clients

• Oldest known appraisal —Genesis 23, Verse
15
• “The land is worth 400 shekels”
• Modern Valuation Theory —ARM 34—1920
• A result of the 18th Amendment (Prohibition)
• First attempt at valuing goodwill associated with breweries and distilleries



“Value…[is an] attitude of persons toward that thing in view of its estimated capacity to perform a service.”
“…certainly…property has no value unless there is a prospect that it can be exploited by human beings.”
James C. Bonbright

• “The value of any financial asset is the net present value of all future cash flows discounted at the appropriate rate of return.”
• Brealey & Meyers —Principles of Corporate Finance

• A prudent buyer will pay no more for property than it would cost to acquire an equally desirable substitute with the same utility.

• Valuation applies both quantitative analysis and qualitative (subjective) analysis to derive an opinion of value
• Training, experience and common sense are key elements in a supportable opinion of value

$350
$300
$250
$200
$150
$100
$50
$0
$0
Actual Transactions from IBA Database
Price/Gross Revenues
$100 $200 $300 $400 $500
Annual Gross Revenues in Thousands of $
$600 $700

Transactions Upper 25% limit Lower 25% limit
$400
$350
$300
$250
$200
$150
$100
$50
$0
$0 $100 $200 $300 $400 $500
Annual Gross Revenues in Thousands of $
$600 $700 $800

• Tax purposes
• Estate Tax Form 706
•
•
Gift Tax Form 709
S-Election —net unrealized built-in gains

• Non-tax purposes
• Business sale/merger/acquisition
• Buy/sell agreements
• Obtaining financing
• Strategic planning and consulting
• Dissolution of marriage
• Dissident shareholder action
• Litigation support
• Damages/lost profits/business interruption

• Business brokers/intermediaries and investment bankers
• CPAs
• Professors
• Financial analysts
• Professional business valuators

• Define the engagement and discuss expectations with the client
• Gather and review all necessary information that may impact the value of the subject company
• Analyze all information and make adjustments to “normalize” financial statements
• Apply valuation approaches and methods to estimate the value of the enterprise
• Consider application of premiums and discounts*
• Communicate the results

• Market value
• Asset
• Financial
• Synergistic
• Fair market value
• Fair value
• Economic value
• Book value
• Owner value
• Collateral value

• Value driver – n : an important factor that determines or causes an increase in value of a business, as viewed by investors
Source: Go Big Dictionary
• It is important to identify value drivers and their relationships to increasing cash flow, decreasing risk and increasing the growth of the business
• Value drivers are critical to the ongoing viability and success of a business!

 Customer list, repeat customers
 Proprietary products: patents, copyrights
 Large market share
 Diversified: industry, products, customers, geographic locations

 Commitment to employees – training, benefits, etc.
 Keep current with technology/equipment
 Additional capacity for growth
 Capital budgeting processes in place
 Improve facility appearance

 A solid purpose and vision for business
 Experienced, knowledgeable management
 Work force is motivated, dependable
 Key employees have employment/ non-compete agreements
 Departing owner dispensable
 Well-trained management team

• The “Numbers” affect value
• Cash flow: Positive, growing, sustainable
• Generally Accepted Accounting Principles
• Accounting firm report
• Importance of credibility

• Corporate Structure
• Corporate Formalities
• Issue Stock if not already issued
• Create By-Laws
• Minutes regarding Officers/Directors and Past Actions
• Operating Agreement or Buy/Sell Agreement
• Piercing the Corporate Veil
• Run the business to avoid personal liability

• Contracts
• Vendors
• Customers
• Leases
• Terms and Conditions, etc.

Intellectual and Property Value Drivers
• Review Key Licenses
• Review Intellectual Property Ownership
Copyrights
Trademarks
Patents

Intellectual and Property Value Drivers
• Review Ownership of Property
• Works Made for Hire
• Computer Software
• Advertising
• Art Work

•
•
•

• Rule-of-thumb method
• Quick and dirty method based on industry averages
• Guideline publicly traded company method
• Based on similar and relevant comparable public companies
• Comparative or private transaction method
• Based on actual transactions of similar entities

• Apply a multiple to derive a value
• Price to earnings (P/E ratio)
•
•
Price to EBIT or EBITDA
Price to seller’s discretionary earnings (SDE)
• Price to gross revenues
• Price to book value

Gross Revenues
Multiple X
450,000
2
$ 900,000
Earnings
Multiple X
220,000
4
$ 880,000

• Capitalization of earnings method
• Discounted earnings method
• Dividend pay-out method
• Excess earnings method

• Operating history
• Sensitivity to economic environment
• Management depth
• Capital structure
• History of distribution of earnings
• State of the industry
• Financial returns and ratios
• Intangible value
• Patents/trademarks etc.
• Trade secrets
• Processes, formulas etc.
• Location

Capitalized Earnings Method Example
V = __I__
R-G
I
R
= Earnings
= Business risks
$100,000
25%
G = Growth 5%
(R-G = Capitalization Rate)
Example: $100,000 = $500,000
25%-5%

Future Periods
Earnings
Discount Factor
Present Value
1 2
200,000 230,000 270,000
3 Sum
700,000
0.86
0.75
0.67
172,000 172,500 180,900 525,400
Net Present Value
Plus: Terminal/Residual Value
Estimate of Total Business Value
525,400
500,000
1,025,400

• Net asset value method
• Liquidation value method

• Useful for
• Asset-intensive businesses
• Real estate holding companies
• Entities that hold mostly securities (or cash)
• Some contracting businesses that bid for work

Book Value Adjustment
Assets:
Accounts Receivable 3,000 (400)
Fair Market Value
2,600
Fixed Assets
Less: Depreciation
Net Fixed Assets
Total Assets
3,000
(1,000)
2,000
5,000
(2,500)
1,000
(1,500)
(1,900)
500
-
500
3,100
Liabilities:
Current Liabilities
Long-Term Liabilities
Total Liabilities
Owner's Equity
Total Liab & Equity
150
200
350
4,650
5,000
0
0
0
150
200
350
(1,900)
(1,900)
2,750
3,100

 M&A Advisor will do the “heavy lifting” to allow the Company to focus on running the business
 M&A Advisor will emphasize the Company’s growth strategy and focus Buyer(s) on the appropriate financial metrics o Educate Buyer(s) to focus on run-rate or forward metrics to reflect current growth profile and business momentum o Adjust for potential non-recurring and one-time adjustments
Value from Well-
Managed Process
Validating the Business
Strategy
Perceived Value Today
 Established and proven business today
Explaining the Story
 Stable base business with attractive growth opportunity
 Unique defensible market position
 Significant investment in assets and employees
 Proven management team with established track record
 EBITDA adjustments
 Top-line growth secured by sustainability of endmarket demand
 EBITDA margin expansion from scalable operating platform and attractive new markets
 Minimize potential buyer concerns
 Organic and acquisition growth opportunities
 Unique asset creating significant scarcity value
 Validation of financial model will provide comfort that business can sustain growth and cash flow profile
 Attractive financing markets
 Buyer(s) actively seeking investments to deploy capital
 Well run process will further drive value and minimize transaction risk

• Advise Client about the sale process and what to expect
• Time Frame: 3 months to 2 years between going to market and sitting down at the closing table
• The well prepared business sells faster

• Broker Agreement
• Market Business
• Confidentiality Agreement
• Letter of Intent
• Due Diligence
• Purchase Agreement
• Closing

AVOID SURPRISES!
• Disclose, Disclose, Disclose
• Breach of Trust Kills Deals
• Better up Front than Later
• But not too Early

• Initial Draft by Buyer Usually
• Sets the Terms of the Deal
• Get Attorney Involved in Negotiating
 Deal Killer if Change Terms Later

• Should be Non-Binding Except Certain Items
• Takes Business off the Market
• Allows Due Diligence
 Make sure you get what you think you are getting
 Adjustments to Deal
 Seller’s Due Diligence on the Buyer

• Identify the Parties
• Identify What is Being Sold
 Stock v. Assets
 Accounts Receivable
 Liabilities
 Exclusions from Sale
 Some Liabilities Follow

• Payment Terms
• Seller Financing
• Security from Buyer
 Security Agreement – pledging stock or assets
 UCC Filing / Mortgage
 Letter of Credit
• Earn Out

• Working Capital
 Cash + A/R + Inventory = Current Assets


A/P + Other Liabilities = Current Liabilities
Net Operating Assets (Assets – Liabilities)
• Pro Rations
















Organization and Good Standing
Enforceability; Authority; No
Conflict
Capitalization
Financial Statements
Books and Records
Sufficiency of Assets
Description of Owned Real
Property
Description of Leased Real
Property
Title to Assets; Encumbrances
Condition of Facilities
Accounts Receivable
Inventories
No Undisclosed Liabilities
Taxes
No Material Adverse Change






Employee Benefits
Compliance with Legal
Requirements; Governmental
Authorizations
Legal Proceedings; Orders








Contracts; No Defaults
Insurance
Environmental Matters
Employees
Labor Disputes; Compliance
Intellectual Property Assets
Relationships with Related
Persons
Brokers or Finders
Securities Law Matters
Solvency
Disclosure

• Accurate Reps and Warranties
• Compliance with Agreement
• No Adverse Changes
• Buyer Financing
• Satisfactory Lease
• Key Customers/Employee Retention
• Satisfied with Due Diligence?
• Etc.

• Generally breach of Reps and Warranties / Agreement
• Add Deal Specific items – e.g. litigation
• Personal or Corporate?
• Set Off
• Baskets (deductible or tipping?)
• Dollar Limit
• Duration

DISPUTE
RESOLUTION
ETC.
WAIVER
VENUE
ASSIGNMENT

Ancillary Documents
• Employment Agreements
 Seller/Owner
 Key Employees
• Non-Compete
• Promissory Note/Security Agreement
• Escrow Agreement
• Bill of Sale and Assignment

• Training
• Working Capital Adjustments
• Taxes
• Investment of Income
• On the Beach….

Financial Advisor
Business Valuator
Business Broker/
Intermediary
Begin Assembling a Deal Team
Deal
Attorney
Accountant

• Identify Client and Potential Purchaser
• Prepare Client for Sale by getting business operations and legal documents in place
• Assemble Good Advisors
• Prepare Client by informing about the sale process to avoid a disgruntled client

Alex Fridman is a Co-Founder of The Peakstone Group, a middle market investment banking and direct investing firm. Mr. Fridman has executed over
30 investment banking and principal transactions across numerous industries including general industrial, consumer and retail, distribution, healthcare and business services. Mr. Fridman previously held senior investment banking positions with Lehman Brothers and previously worked at Banc of America
Securities. He has his series 24, 79, 82 and 63 licenses and graduated from
Indiana University's Honors Business Program.
Alex Fridman
The Peakstone Group
150 N. Wacker Drive, Suite 2500
Chicago, IL 60606
(312) 346-7303 alex@peakstonegroup.com

Markus May is a client focused and service oriented business attorney at May
Law Firm Ltd. with knowledge in a broad range of industries. Mr. May has represented numerous clients with respect to M&A transactions and spoken to numerous professional and business organizations on the topic of helping to prepare a business for sale. Mr. May is a prior or current Chairman of the:
Securities & Business Law Section Council of the Illinois State Bar, Chicago
Bar Association (CBA) Business Law Committee, and CBA Mergers and
Acquisitions Committee and a member of the American Bar Association. He served six years on the MBBI board of directors.
Markus May
May Law Firm Ltd.
400 E. Diehl Rd. Suite 130
Naperville, IL 60563
630-864-1003 mmay@illinois-business-lawyer.com
www.illinois-business-lawyer.com