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A Global Reach with a Local Perspective Helping Your Client Buy or Sell a Small-To-Medium Sized Business www.decosimo.comMike Costello – mikecostello@decosimo.com

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Today’s Presentation Will Include: A tentative guide to advising buyers/sellers at the outset of the process An overview of relevant business valuation methods A discussion of your client’s various financing options

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A Global Reach with a Local Perspective www.decosimo.com Part One: A Tentative Guide to AdvisingBuyers/Sellers at the Outset of the Process

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Preliminary Steps1. Assembling an Advisory Team2. Business-For-Sale Market Analysis3. Performing Due Diligence4. Creating a Non-Disclosure Agreement5. Structuring the Transaction6. Drafting the Letters of Intent for the Stock and Asset Purchase Agreements7. Selecting and Using a Transaction Advisor

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Assembling a Professional Advisory Team An effective transaction team requires many types of expertise and knowledge. • Knowledge of the client’s Circumstances and Objectives • Business Growth • Sales or Mergers of the Business • Tax Planning • Business Valuation

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Business-For-Sale Market Analysis Impartial assessment of the business is necessary  Income Approach  Market Approach Determine reasonable expectations Determine potential buyers of the business Identify what is hindering the company’s value? List the strengths of the business • What does it do well?

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Performing Due Diligence The seller is nearly always more informed about the property being transferred than the buyer.  Information has a cost  Examples include Legal, Financial, and Operational Costs  Focus on the key issues Set up an appropriate scope of work • In context of the budget and areas of focus Close portions of the information gap between buyer and seller Locate deficiencies in the information provided

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Creating a Non-Disclosure Agreement Primary purpose of a “NDA”  Keep out of a competitor’s hands Remedies for breaching the agreement Establish limits Tailor it to your specific circumstance

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Structuring the Transaction Bridge the “Valuation Gap”  Noncash Payments • Earnouts • Seller Notes • Rollover Common Equity  Employment Agreements  Non-Compete Agreements Is the considered value consistent (or better than) expectations for the business?

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Drafting the Letters of Intent for the Stock and Asset Purchase Agreements Lay out the intended terms of the potential transaction  Stock or asset exchanged  Expected Purchase Price  Remaining Considerations  Duration of Exclusivity Describe the obligations and promises assumed

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Selecting and Using a Transaction Advisor Step 1: Determine what sort of professional will best meet the company’s needs • Make your inquiries • Cultural Fit and Comfort with Banker • Fees Sellers: Compensate with Value Added  10% to 15% of total transaction Buyers: Decrease Percentage Fee as Transaction Size Gets Larger Retainers

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A Global Reach with a Local Perspective www.decosimo.comPart Two: Business Valuation Methods

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Methods of Valuation Rules of Thumb Asset-Based Methods Income Methods Market-Based Methods Identifying and Obtaining the Necessary Documents Maximize Your Use of the Business Appraiser

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Rules of Thumb Simple and convenient way to estimate a company’s value Tests the reasonableness of other methods of valuation Multiple-of-Revenue Method  Applies a multiple to a company’s revenue, such that the result is a value comparable to a typical transaction price. Limitations  Ex. Different sources providing different rules of thumb

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Asset-Based Methods: “Asset Approach” Principle of Substitution Net Asset Value Method • Book Value vs. Current Economic Value Illustrates contribution of each line item

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Income Methods of Valuation Foundation = Present Value Mathematics Two basic inputs:  Stream of Expected Future Benefits  Conversion Factors from Future to Present Value Economic Income (Gross or Net) May be Grouped Into One of Three Categories:  1) Payouts  2) Cash Flow  3) Some Measure of Accounting Earnings Discounted Cash Flow

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Market-Based Methods of Valuation Compares the subject to similar businesses that have been sold 3 Market-Based Methods  Guideline Public Company Method  Merger-and-Acquisition Method  Same-Company-Transaction Method

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Identifying and Obtaining the Necessary Documents The Goal = Transparency  Any document withheld could caution the buyer Coordinate one comprehensive request at the beginning of the engagement Categories of documents to request include: • Financial Records of the Seller • Legal Documents • Information on the Business That is Related Directly to Operations

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Maximize Use of Business Appraiser Hire a quality expert and early in the process Characteristics of a quality appraiser: • Estimate the value of the selling enterprise • Assess current risks involved in company operations, finances, and managerial organization • Provide suggestions for reducing or eliminating risks prior to the transaction

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A Global Reach with a Local Perspective www.decosimo.comPart Three: Know Your Client’s Options For Financing the Deal

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Financing the Deal Sources of Financing Seller Financing Dos and Don’ts The “Ins and Outs” of Asset-Based Lending Working With the SBA and Other Nonprofit Sources Venture Capital and Other Alternative Financing Methods

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Sources of Financing Banks have recently decreased the percentage of a capital structure that they are willing to lend Best way to combat decreased lending: Increase Value  Reduce riskiness of the business • Reduce customer/supplier concentration • Non-compete agreements with key employees • Sufficient debt coverage ratios and strong margins Traditional Equity Financing has its advantages and disadvantages

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Seller Financing Dos and Don’ts Do:  Understand your client’s objectives and preferences before analyzing the value of the arrangement  Ask the client questions concerning their perception of the value of cash today in comparison to other financing  Consider the proposed terms of seller notes and the value of the notes Don’t:  Base earnouts on subjective matters  Leads to costly litigation and blurred expectations

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The “Ins and Outs” of Asset-Based Lending Alternative to traditional debt financing arrangements Company borrows a loan that is backed by specific assets Advisors often participate in these processes • Investment Bankers, Loan Services, Attorneys, Independent Accountants, Trustees, Underwriters, Rating Agencies, and Guarantors Can be created using any business asset • Leads to a high quality loan which increases lending opportunities

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Working With SBA & Nonprofit Sources SBA- Established to assist small businesses in obtaining the capital they need to grow Three main categories of programs that SBA provides:  Debt Financing  Surety Bonds  Equity Financing Non-profit Examples:  Women’s Venture Fund  Operation HOPE  FAME Renaissance  Minority Business Development Agency

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Venture Capital and Other Alternative Financing Methods Traditional sources of financing may not provide sufficient capital at manageable rates to every company Alternative Options Include:  Venture Capital  Mezzanine Debt  Debt Private Placement  Private Equity Financing  Equity Private Placement  Recapitalizations  Strategic Sales

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Contact Information Mike Costello CPA, ABV, CFE mikecostello@decosimo.com On LinkedIn: www.linkedin.com/in/mikecostelloThe contents and opinions contained in this article are for informational purposes only. The information isnot intended to be a substitute for professional accounting counsel. Always seek the advice of youraccountant or other financial planner with any questions you may have regarding your financial goals orspecific situations.