EPI MasterclassCEPA Proctured Exam Prep

Overview of the CEPA ProgramThe Certified Exit Planning Advisor® (CEPA®) Program, created in 2007, is the only program of its kind. Developed by nationally recognized experts in the field of exit planning, the executive MBA-style program is taught by a faculty of industry leaders in their respective fields. The CEPA Program offers professionals an innovative learning experience, performance-enhancing resources, and the strategic tools to help them advance their exit planning practice.

Learn the Value Acceleration Methodology™Introduced to the profession by Exit Planning Institute (EPI) CEO, Christopher Snider, CEPA, the Value Acceleration Methodology™ is the process taught at the CEPA Program which integrates exit strategy into business, personal, and financial goals of the business owner. The process consists of three major components, referred to as the “Three Legs of the Stool”: 1) maximizing business value, 2) personal financial planning, and 3) life-after business planning. The process teaches that exit strategy is business strategy. It is about building, harvesting, and preserving family wealth for generations to come and integrating best-in-class business practices into daily operations. The methodology focuses on enterprise value and is a revenue-producing model for professional advisors that is justifiable with growth of overall enterprise value.

Overview of the CEPA ExamThe Certified Exit Planning Advisor examination is comprised of 150 multiple choice questions. There will be example situational stories followed by a series of questions related to that particular case.You will be allowed three hours to complete the exam. The CEPA exam is closed book, therefore no copies of the program manual, review notes, this study guide, or any other prewritten notes will be allowed during the exam. A pencil, blank scratch paper, and a calculator are allowed during the exam.For best results in your exam preparation, we suggest you actively participate in the classroom and case study group work. You should read all the required reading books at least once. Know your sessions’ learning objectives and participate in the review sessions. After completing each program’s day, review the program manual and review/answer the study guide questions. From your correct and incorrect answers, you will be able to better assess where you should concentrate during further study.

Note: The example stories presented in this study guide are for sample purposes only. They are not the same stories or questions found in the exam.

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Practice Test Questions

The Need for Exit Planning (Market Overview)

1. What percentage of privately held businesses that are offered for sale each year ultimately do not sell? a) 20% b) 40% c) 50% d) 80%

2. According to the Family Firm Institute, what percentage of family transitions survive into the second generation?

a) 20% b) 30% c) 50% d) 70%

3. According to EPI’s first national State of Owner Readiness Survey, what percentage of business owners have done

no exit planning at all? a) 99% b) 40% c) 83% d) 49%

4. Which of the following is not one of the five Ds?

a) Distress b) Decide c) Divorce d) Death

5. Business owners are leaving dollars on the table because they are not focusing on what?

a) Family unity b) Sales and income c) Enterprise value d) Creating an Exit Plan

6. The Advisor of the Future needs to get owners and advisors to make several paradigm shifts for exit planning and

value acceleration to work to the benefit of owners and their families. What is the first paradigm shift that needs to be made?

a) Focus on enterprise value b) Adopt a process and work from a common framework c) Exit planning is good business strategy d) All of the above

Answers: 1) d 2) b 3) d 4) b 5) c 6) c

The Need for Exit Planning (Market Overview)

B. What is exit planning? (Richard Jackim) a. An exit plan asks and answers all the business, personal, financial, legal, and tax questions involved in

transitioning a privately-owned business b. It includes contingencies for illness, burnout, divorce, and death c. Its purpose is to maximize the value of the business at the time of exit, minimize taxes, and ensure the

owner is able to accomplish all his or her personal and financial goals in the process

C. What is exit planning? (Christopher Snider) a. Exit Planning combines the plan, concept, effort and process into a clear, simple strategy to build a

business that is transferable through strong human, structural, customer, and social capital. The future of you, your family, and your business are addressed by exit planning through creating value today

D. Exit Planning is Simply Good Business Strategy

E. Blue Oceans and Value Innovation (from the book, Blue Ocean Strategy)

a. A Blue Ocean denotes an industry not in existence today b. Value innovation is a new way of thinking about and executing strategy that results in a blue ocean and a

break from the competition c. Focus is on making competition irrelevant by creating a leap in value

F. Historical Data on Exits:

a. One year after selling, three out of four business owners surveyed “profoundly regretted” the decision b. 70%-80% of businesses put on the market don’t sell c. Only 30% of all family-owned businesses survive into the second generation

G. Why Many Exits Fail (per the 2013 EPI State of Owner Readiness Survey)

a. 66% are not familiar with all exit options b. 78% have no formal transition advisory team c. 83% have no written transition plan d. 49% have done no planning at all e. 93% have no formal life after plan

H. Opportunities in Exit Planning:

a. Baby boomers own 63% of the private businesses in the US b. 76% of them plan to transition over the next 10 years c. Represents a transfer of approximately 4.5 million businesses and over $10 trillion of wealth

I. The Mission of EPI and CEPAs is to Change the Outcome. CEPAs do this by:

a. Creating awareness b. Fostering team-play c. Adopting a process

The Need for Exit Planning (Market Overview) (cont.)

J. Challenges that must be overcome include: a. Boomers don’t want to exit b. 50% of exits are caused by one of the five Ds (Death, Disability, Divorce, Distress, Disagreement) c. Owners are leaving money on the table because they are focused on income generation, not enterprise

value

K. Advisors of the Future change owner/peer paradigms about what exit planning actually is. a. Exit planning is business strategy b. Value is all about transferability c. They work from a common framework that focuses on value growth and aligning business, personal, and

financial goals

L. The Exit Planning Ecosystem defined: a. A system, or group of interconnected disciplines, formed by the interaction of a collaborative, like-

minded community of professional advisors, with a common goal to grow, preserve, and transition wealth for business owners.

M. The Advisor of the Future:

a. Focuses on value creation. b. Acts as the quarterback of the team. c. Oversees a master plan. d. Helps other advisors get engaged and resolves issues.

Overview of the Exit Planning Process

1. The Value Acceleration Methodology™ is based on a management philosophy called what? a) Cognitive theory b) Master planning c) Business enterprise d) Business canvas

2. Which of the following is not a gate in the Value Acceleration Methodology?

a) Prepare b) Plan c) Discover d) Decide

3. Which of the following is a benefit of focusing on value?

a) Very predictable results b) Gets employees thinking like owners c) Mitigates risk d) All of the above

4. The “Triggering Event” is delivered in what gate of the Value Acceleration Methodology?

a) Discover b) Prepare c) Decide d) All of the above

5. What is the total timeframe it typically takes to move a business owner through the full Value Acceleration

Methodology process? a) Six months to one year b) Minimum of one year c) One to three years d) 3.5 years or more

Answers: 1) b 2) b 3) d 4) a 5) d

Overview of the Exit Planning Process

B. 54321 a. Five Stages b. Four Capitals c. Three Gates d. Two Paths e. One Goal

B. Why focus on value (versus just income)?

a. You can have both income and value, but you need to focus on value first b. Focusing on value drives all other positive outcomes c. Typically, an owner has 70-90% of his/her wealth locked in the business

C. Two Types of Business Owner Styles:

a. Lifestyle b. Value Creator

D. Eleven Actions to Rapidly Grow Value, Unlock Wealth, and Become a Value Creator:

a. Shift your paradigm b. Align your “three legs” c. Make business value your #1 goal d. Focus on the present e. Manage using five stages of the Value Maturity Index f. Create intangible asset transferability g. Adopt value acceleration as your core management process h. Relentlessly execute i. Measure frequently; keep score j. Involve and build your teams k. Invest in your success

E. Four Core Concepts that Must be Adopted for Value Acceleration to Work:

a. Three Legs of the Stool (Master Planning) i. Maximize transferable value (Business) ii. Ensure the owner is financially prepared (Financial) iii. Ensure the owner has a plan for what is next (Personal) iv. All three legs should be equally addressed v. The personal leg is the one owners neglect the most often vi. Having a personal plan can be a powerful motivator

b. The Five Stages of Value Maturity i. Identify ii. Protect iii. Build iv. Harvest v. Manage

Overview of the Exit Planning Process (cont.)

c. The Four Cs i. Human Capital ii. Customer Capital iii. Structural Capital iv. Social Capital v. Intellectual Capital is the sum of everything everybody knows that gives it a competitive edge

(Thomas A. Stewart) vi. 80% of a company’s value usually rests within its intangible assets versus tangible assets vii. Accounting systems are important; they typically focus on managing tangible assets viii. Value Acceleration was created to focus on the management of intangible assets

1. It works with the accounting system to give the owner a holistic view of their entire net worth

d. Relentless Execution i. Vision ii. Alignment iii. Accountability iv. Rhythm

F. Key Tools and Other Concepts that are Important to Using Value Acceleration:

a. Workshops, not meetings b. 90-Day Sprints c. Ask, “grow or exit,” every 90 days d. Common Sense Scoring System

G. The Formula to Determine Strategic Value is Simple Math

a. Cash and/or sales x a market multiplier = value b. The market multiple, usually a range (range of value) c. The range is controlled by the private capital market d. Where a business falls in the range is controlled by the business owner e. Increasing both the left side and the right side simultaneously, raises value exponentially

H. Value Acceleration Methodology

a. A proven process that focuses on value growth and aligning business, personal and financial goals. b. Gate 1: Discover

i. “The Triggering Event”: a personal, financial, business assessment, correlated to business range of value (ROV)

ii. Alignment of personal, financial, and business goals iii. Create prioritized action plans: no more than five business and five personal

c. Gate 2: Prepare i. Two paths:

1. Personal and financial path (personal and financial are combined into one path) 2. Business improvements

i. Assemble proof ii. Prepare a Master Plan iii. Phase recycles every 90 days

Overview of the Exit Planning Process (cont.)

d. Gate 3: Decide i. Grow or Exit? (keep or sell?) ii. Grow: advanced value creation iii. Exit: initiate selected transition program iv. This is a major decision point v. Makes exit planning present tense by revisiting every 90 days

e. Primary Benefits i. Focuses on value versus income ii. Integrates the Master Plan, Three Legs of the Stool iii. Promotes team-play iv. Clarifies roadmap to success v. Clear accountability vi. Creates a leap in value

f. Other Benefits i. Makes the timing of the exit irrelevant ii. Very predictable results iii. Breaks big strategic efforts into 90-day chunks (sprints) iv. Connect daily activities to value impact v. Acts as a driver of organizational behavior vi. Mitigates risks vii. Get employees and management thinking like owners viii. Ensures family and wealth are at the center of the plan ix. Can be used as an intergenerational and employee development tool

I. Timing Impacts on the Value of the Business

a. Typically, trying to time the market is not a good exit approach b. Personal: owner’s energy level, age, personal involvement, health, passion about the business, willingness

to stay on after sale c. Business: growth stage, historical trends, future prospects d. Market: strength of the economy, capital gains taxes, availability of debt/financing

Financial Planning for Business Owners

1. Personal liability insurance is a supplementary insurance that is not imperative for business owners to own since most homeowners and car insurance policies are comprehensive and cover similar liabilities.

a) True b) False

2. Wealth management includes various components of investment management and comprehensive planning such

as: a) Portfolio management b) Retirement planning c) Risk management d) Estate planning e) All of the above

3. Which of the following is an example of lacking portfolio diversification?:

a) An appropriate three to six month cash reserve b) Too much US Large Cap or Private Company Stock c) High expense ratios d) Exposure to Emerging Markets

4. For a business owner to minimize estate tax liabilities and ensure specificity for control and protections of assets

before and after death, they should have: a) Will b) Power of attorney for financial transactions c) Revocable living trust d) All of the above

5. A retirement cash flow plan, which details the amount of, additions to and uses of investment assets, is most

accurate when the following is used in the analysis: a) A static rate of return b) Statistical modeling c) Historical S&P500 rate of return d) The historical average rate of return on the client’s existing portfolio

Answers: 1) b 2) e 3) b 4) d 5) b

Financial Planning for Business Owners

B. What is Wealth Management? a. An extremely valuable service that many business owners take on themselves without the expertise of

investment management and comprehensive planning i. Retirement Planning

ii. Portfolio Management iii. Risk Management iv. Estate Planning

C. Benefits of Wealth Management

a. Comprehensive planning i. Act as quarterback of planning team

ii. Integration of personal and financial goals iii. Guidance through life’s big moments iv. Security and peace of mind

b. Investment management i. Strategic investing

ii. Periodic rebalancing iii. Tax efficiency iv. Fiduciary responsibility

c. Risk management i. Insurance analysis

d. Asset protection i. Estate planning review

D. Stages of planning and how it links to Value Acceleration Methodology and the Five Stages of the Value Maturity

Index a. Assessment b. De-Risk c. Building wealth d. Your legacy

E. Income Strategies

a. Strategy to produce repeatable, consistent and rising income stream over one’s lifetime after paycheck stops

b. Aligned with the client’s desired lifestyle c. Income designed to outlive them not the other way around d. Probability of success is measurable and acceptable

F. Retirement planning

a. The three main business owner issues i. How much do I need?

ii. What rate of return do I need on my investments? iii. Builds in stock market volatility

b. Traditional i. Straight-line analysis assuming consistent returns over time

c. Monte Carlo i. Probability analysis highlighting the likelihood of having X dollars left at age 85, 90, 95

ii. Allows clear comparisons with changes in spending and changes in asset allocation iii. Investing done in the context of an overall plan

d. Main drivers i. Age at retirement

ii. Spending in retirement iii. Current assets

Financial Planning for Business Owners (cont.)

iv. Savings until retirement e. Sources of retirement income

i. Dividend paying stocks ii. Bond funds

iii. Dividend paying equity mutual funds iv. Systematic withdrawals from mutual funds v. Individual fixed income securities

G. Risk management

a. Partnership or Buy/sell agreements i. Specifies how business interests will be valued and ultimately sold ii. Provides protection and facilitating guidelines for the company and owners in transition

b. Life insurance i. Provides liquid tax-free benefits for survivors

c. Other Insurance Products i. Health insurance ii. Personal liability (umbrella) insurance

1. Covers liability in excess of basic homeowners and automobile policies as well as perils not covered under your standard liability policies; it ‘sits on top’ of current policies

iii. Product liability insurance iv. Property insurance v. Disability income insurance

1. Present value of income stream is often client’s biggest asset 2. Much more likely to need disability coverage than life insurance

vi. Long-term care insurance

H. Estate planning a. To minimize estate tax liabilities and ensure specificity for control and protection of assets before and

after death, a business owner should have at minimum: i. Will – pourover format ii. Power of attorney for financial transactions iii. Health care directives iv. Revocable living trusts v. Beneficiary designations

b. Make sure assets go where business owner wants i. Specific bequests, charitable bequests ii. Manage the timing of estate distribution iii. Provide for asset management (control and distribution)

c. Create the team involved in the estate administration (guardians, executor, trustees) d. Emergency plans - plan for incapacity and business continuity e. Avoid family struggles over unknown wishes f. Faster, more private estate settlement g. Estate tax reduction h. Income tax basis strategies

I. Portfolio management

a. An individual’s stock-to-bond allocation is the driving factor behind investment performance b. Allocation chosen based on risk tolerance, cash flow needs, and unique personal goals and implemented

with a low-cost, tax-efficient, well-diversified portfolio

Advanced Estate Planning Concepts

1. If estate is less than $5 million ($10 million for a married couple), do I still need estate planning? a) Yes b) No

2. What is the primary objective for most Irrevocable Trusts or Family Limited Partnerships?

a) Remove the business (or other asset) and future appreciation out of the estate b) Pay less corporate income tax to state c) Pass 100% of the estate to family members d) All of the above

3. What is an advantage of moving assets to a trust?

a) Assets in trust avoid probate b) Personal details about the estate do not become public c) Make sure assets go where you want them d) All of the above

4. Which of the following is not considered an advantage of Family Limited Partnership?

a) Consolidates the ownership of multiple assets into one entity b) Can be used as a vehicle to transfer wealth and ownership to younger family members c) Assets are contributed at Fair Market Value d) Give away value of company and future appreciation without giving away control

5 Asset protection is a continuum that includes balancing equity, asset, and jurisdictional changes.

a) True b) False

Answers: 1) a 2) a 3) d 4) c 5) a

Advanced Estate Planning Concepts

A. Estate Planning Definition a. The process of planning for and documenting the transfer of assets with minimized tax and transfer costs.

B. Elements of Exit Planning that should be considered in Estate Planning

a. Developing and motivating future managers b. Transferring ownership c. Retaining key employees d. Dealing fairly with family and other stakeholders e. Contingency planning f. Retirement cash flow and investment portfolio strategies

C. Advantages of using Trusts

a. Reduce capital gains taxes, ordinary income taxes, and estate planning taxes b. Help ensure income for spending needs c. Provide financial security for future generations d. Fund charities e. Help to accomplish business owner personal goals

D. Methods of Transferring Asset Ownership

a. Joint tenancy b. Beneficiary designation c. Trusts d. Last Will and Testament

E. Estate Taxes

a. Federal law levies a tax on a decedent’s estate above the exemption amount. Several states also levy an estate or inheritance tax.

F. Basic Estate Planning

a. Revocable living trust b. Last Will and Testament (pour over) c. Power of Attorney – Property d. Healthcare directives

i. Power of Attorney – Healthcare ii. Living will

e. Proper beneficiary designations f. Co-ownership provisions

G. Advanced Estate Planning Goals

a. Liquidity to pay estate taxes or purchase stock b. Diminish value of estate subject to estate taxes c. Income tax basis step-up d. Asset protection:

Advanced Estate Planning Concepts (cont.)

i. New spouse ii. Son-in-law or daughter-in-law iii. Creditors

e. State tax mitigation f. Preserve cash flow

H. Advanced Estate Planning Strategies

a. Irrevocable Life Insurance Trust (ILIT) b. Intentionally Defective Grantor Trust (IDGT) c. Family Limited Partnership (FLP) d. Grantor Retained Annuity Trust (GRAT) e. Qualified Personal Residence Trust (QPRT) f. Charitable Remainder Trust (CRT) g. Gifts

I. Transferring Business Interests

a. Business interests can be sold to a third party or transferred to family or key employees via several methods, including:

i. Sale ii. Gifts iii. Trusts iv. Partnerships

J. Estate Planning Process

a. Prioritize goals b. Assemble documents c. Analyze asset values and ownership d. Consult wealth management team e. Prepare plan alternatives and recommendations f. Present findings and agree on next steps g. Estate planning attorney drafts documents h. Implement and monitor plan

Integrating Charitable Intent with Business Exit Planning

1. In 2016 charitable gifts exceeded what dollar amount? a) $400 million b) $350 million c) $350 billion d) $500 billion

2. What percent of entrepreneurs donate money to charities?

a) 50% b) 27% c) 90% d) 70%

3. What types of assets can be donated?

a) Cash b) Artwork c) C-Corps d) Whole Life Insurance policy e) All of the above

4. What are the two most highly valued gifts made to foundations/trusts/charitable organizations?

a) Mineral rights and farmland b) Marketable securities and cash c) Cash and insurance policies d) Business or business stock and real estate

5. What are the benefits for the business owner and family for integrating charitable contributions?

a) Wanting to transfer values and purpose, not just assets b) Creating intergenerational common ground to collaborate, make joint decisions, gain confidence,

develop/fulfill potential c) Developing an emotional and functional bridge between wealth, purpose, and society d) All of the above

Answers: 1) c 2) c 3) e 4) d 5) d

Integrating Charitable Intent with Business Exit Planning

A. Overview a. Charitable discussions with business owners can help ascertain some of the attitudes, values, and

behavioral characteristics that may be preventing an exit strategy b. Advantages for valued advisors

i. Build a meaningful relationship with the next generation that will outlive your client ii. Enhance your role as a trusted advisor through meaningful discussion of philanthropy iii. May attract clients’ charitable assets held elsewhere or in other charitable vehicles

B. Opportunity for Philanthropy:

a. The year 2016 contributions of charitable gifts were $390 billion b. 90% of entrepreneurs donate money, both personally and through their companies c. 3% of entrepreneurs’ company profits were reported as dedicated to charitable causes d. 70% of High Net Worth (HNW) individuals are interested in receiving help to understand what assets to

contribute

C. How HNW individuals give: a. 51.8% HNW give to five or more charities b. HNW give at 10x the rate of the general population c. Those HNW who volunteered gave 55.9% more d. 83% of HNW intend to increase their giving or maintain it in the next three years e. 32.5% of households with total net worth between $1-5M and 44.5% between $5-20M have or plan to

use a giving vehicle

D. Assets that May be Gifted: a. Cash b. Marketable securities (stocks, bonds, ETFs, and mutual funds; SMAs and model portfolios) c. Illiquid assets (C-Corps, S-Corps, LLCs and LPs; residential or commercial real estate; mineral rights,

personal property, collectibles, or other) d. Insurance policies (whole life, universal life, or variable life) e. Accounts that create income for a beneficiary (401k plan, IRA, SEP, profit sharing plans)

E. Benefits for the Family:

a. Want to transfer values and purpose, not just assets b. Create intergenerational common ground to collaborate, make joint decisions, gain confidence, and

develop/fulfill potential c. Develop an emotional and functional bridge between wealth, purpose, and society

F. How a Donor Advised Fund Works:

a. Donor works with financial advisors i. Donor maintains maximum choice available

b. Advisors use platform and manage gift assets in order to: i. Maximize tax benefit ii. Recommends grants iii. Assists in building legacy

Integrating Charitable Intent with Business Exit Planning (cont.)

c. Advisors pass gift assets through donor advised fund d. Donor advised fund transfers funds direct to donor’s favorite charity

G. Gifts of a business or real estate are the most highly valued gifts made to private foundations/trusts/charitable

organizations. With proper design and sufficient investment, a company’s “Corporate Responsibility Assets” can support returns related to:

a. Increase market value by up to 4-6% b. Increase sales revenue by up to 20% c. Increase customer commitment in core segment up to 20% (The total segment of 60%) d. Reduce the company’s staff turnover rate by up to 50%

Introduction to Value Enhancement

1. Why should you include value growth in your exit planning practice? a) Reduced or eliminated value gaps in owner-viewed value versus actual market value b) New revenue stream c) Higher success rates of exit plans d) Longer-term pipeline e) All of the above

2. Of the 250,000 US companies with $5M to $100M in revenue set to transition by 2030, how many will actually sell

for desired value? a) 200,000 b) 14,000 c) 16,000 d) 185,000

3. What is the timeframe most private companies can increase their value and should begin their value growth?

a) two to four years b) 12 to 18 months c) one to three years d) three to five years

4. What are some categories to evaluate and compare to other companies in the marketplace?

a) Market growth b) Equipment condition c) Information systems d) Products and sales e) All of the above

5. What is business road-mapping?

a) Creating a clear-cut plan of action for next phase b) Periodic assessment of a business enterprise and development of prioritized initiatives to strengthen the business c) Building a roadmap to a successful transition or exit d) None of the above

6. In the value growth process, the advisor should encourage their business owner client to focus primarily on:

a) Internal and external qualitative factors b) Internal quantitative factors c) Cutting costs d) Increasing sales

Answers: 1) e 2) b 3) d 4) e 5) b 6) a

Introduction to Value Enhancement

A. US Market Statistics a. 250,000 US companies ($5M-$100M in sales) will try to exit by 2030 b. 50,000 will be deemed ‘market ready’ c. 30,000 will transact d. 16,000 will sell with concessions e. 14,000 will sell at desired value

B. Company Specific Risk

a. Public companies are viewed as less risky because: i. Stronger management teams ii. Greater transparency iii. More comprehensive strategies iv. Better organizational structure v. Better systems and processes vi. More effective market positioning vii. Robust product development

C. Price Ranges in the Private Market Over 10 Years (2003-2013) (per GF Data)

a. All industries, 1891 transactions: 4.5x-7.7x b. Total Enterprise Value (TEV) $25 - $50 million: 4.5x – 7.7x c. Total Enterprise Value $10 - $25 million: 3.9x – 6.9x

D. Four Categories to Increase Enterprise Value Internally:

a. Revenue growth i. Volume ii. Price

b. Operating margin i. SGA (Selling, General, Administrative expenses) ii. Cost of Sales (CGS) iii. Taxes

c. Asset efficiency i. Working capital ii. Asset utilization

d. Business architecture i. Structure ii. Systems

E. Private Company Value Growth

a. Most private companies have the opportunity to double their value over a three to five year period i. By adopting a disciplined, methodical approach to reducing company-specific risk and increasing

quality ii. Identify as many risk areas as possible, assess objectively and link to calculation of business value

to create areas of focus to maximize client value through risk reduction

Introduction to Value Enhancement (cont.)

F. Business Road-Mapping a. The periodic assessment of a business enterprise and development of prioritized initiatives to strengthen

the business; prepare it for long-term growth and maximize its sustainable future value in a measurable manner

G. Master Framework a. Planning b. Leadership c. Sales d. Marketing

e. People f. Operations g. Finance h. Legal

H. Create current business value assessment.

a. Review the following categories: i. Company age ii. Products iii. Sales iv. EBITDA v. Market growth vi. Product development vii. Market development viii. Equipment condition

ix. Management team x. Strategic planning xi. Information systems xii. Corporate culture xiii. Financial reporting xiv. Lean initiatives xv. Environmental xvi. Training

b. Compare and review with other comparable companies in the marketplace c. Typically, there will be a Value Gap between the current assessed company value and the owner’s viewed

value

I. Owner misconceptions a. Many owners believe that the most effective way to build business value is to:

i. Grow sales ii. Cut costs iii. Make acquisitions iv. Or some combination of these three

b. Typical client strategies i. How do they grow sales?

1. Cut prices 2. Chase revenue 3. Expand territory 4. New products 5. Growth can consume capital, strain an organization, damage reputation, increase

business risk, and actually erode value 6. Recommendation: execution of a comprehensive written strategic plan

ii. Where do they cut costs? 1. Cheaper products 2. Reduce G&A

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Introduction to Value Enhancement (cont.)

3. Pressure supply chain 4. Cost reductions can undercut the ability to support long-term growth, hurt a

company’s market position, and destroy long-term value. 5. Recommendation: a cost study to identify and capture efficiencies

iii. Can they successfully make an acquisition? 1. Can the company absorb it? 2. Can cultures mesh? 3. Can efficiencies be captured? 4. Can customers be retained? 5. Acquiring another company on top of a weak infrastructure can cause failure to both

the acquired company and the core business. 6. Recommendation: detailed analysis to determine whether an acquisition, joint venture,

or reinvestment will create most value iv. Focusing the client on qualitative factors that drive quantitative results can align and

strengthen the organization, improve profitability, enhance growth potential, reduce overall risk, and maximize value.

v. Overall quality impacts overall value. Deficiencies in any area may be viewed as indicators of overall quality, even if they would not directly impact the operation after a transaction.

J. Developing Your Own Process for Value Enhancement

a. The assessment i. Every company is comprised of a series of interdependent modules ii. Subdivide each module for easier assessment and management iii. Develop a question set to assess each subcategory

b. Linking assessment to Value i. Developing questions, creating a standardized answer system ii. Scoring system in each category should reflect balance iii. Scoring system then used to compare the company before and after improvements are made iv. The percentage increase in overall score should approximate the percentage increase in

baseline value, without any corresponding increase in sales or profitability v. Individual category scores can then be used to estimate the impact of various organizational

improvements on overall value c. The roadmap: moving to implementation

i. Develop recommendations to address each of the identified weaknesses ii. Rank the recommendations in order of priority to be addressed iii. Provide several ‘what-if’ scenarios to demonstrate the impact of various combinations of

recommended initiatives d. Conditions for success

i. Organizational balance is the most critical element to establish ii. Standardized questions should be broad and deep enough in each category to adequately

address all potential company specific risks iii. Include enough overall questions to allow some assessment error without rendering the result

unreliable iv. Establish the links at the sub-category level to provide transparency as to how each category

affects the overall results

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Introduction to Value Enhancement (cont.)

v. Establish the links at the sub-category level to provide transparency as to how each category affects the overall results

vi. The process must be simple, easy to execute, and easy to understand, for both the advisor and the company

K. Internal Qualitative Value Factors: a. Strategic plan b. Management team c. Corporate culture d. Systems and processes e. Product / service quality f. Financial reporting quality g. Financial management / stability h. Age of facilities / equipment

i. Policies / procedures j. Ability to scale k. Product / Service R&D l. Continuous improvement programs m. Environmental and safety plan n. Advisory board o. Succession planning p. Legal structure and protection

L. External Qualitative Value Factors: a. Customer concentration b. Market demand c. Market position d. Supply chain e. Competition f. Barriers to entry g. Geographical considerations h. Labor supply

i. Marketing / branding j. Distribution methods k. Market growth opportunities l. Market strategy m. Community relations n. Corporate reputation o. Access to capital

M. Common Implementation Opportunities:

a. Strategic planning b. Executive coaching c. Transition planning d. Wealth management e. Transaction support f. Cost and pricing studies g. Profitability analysis h. Lean initiatives i. Incentive plans j. Staffing assignments

k. System evaluations l. Project management m. Policies and procedures n. Insurance reviews o. Website development p. Strategic alternatives q. Cash flow forecasting r. Bank negotiations s. Capital sourcing t. Equity structures

N. Benefits of Providing Value Growth Services:

a. Higher success rate of exit plans b. Higher transaction prices c. Reduced / eliminated value gaps d. Differentiated value proposition

e. New revenue streams f. Deeper client relationships g. Increased client referrals h. Long-term pipeline visibility

33

Introduction to Value Enhancement (cont.)

O. Benefits to Clients from Value Growth Services a. Reduced or eliminated value gap b. Higher quality, lower risk company c. More sustainable and profitable

growth d. Less management stress, improved

work balance

e. Improved customer, supplier, employee relations

f. Higher success in future transactions g. Better access to capital h. Maximum Transferrable Enterprise

Value

P. Challenges for Owners and Advisors: a. Owners need

i. Education in regard to 1. Current and potential business value 2. Impact of qualitative improvements on value 3. M&A transaction process and market dynamics

ii. Guidance 1. Disciplined, methodical, consistent, prioritized approach 2. Advisors whom they can trust as business experts

b. Advisors need i. Education and awareness ii. Tools to help facilitate an effective process iii. Collaborative networks

Exit Planning Deliverables

1. In what gate would you utilize a business valuation? a) Gate 3 b) Gate 1 c) Gate 2 d) Triggering Event Gate

2. Which of the following tools can you use for deliverables in the Discovery phase?

a) Business valuation b) Exit readiness assessment c) Business attractiveness score d) All of the above

3. What is a common exit readiness issue?

a) No personal goals and objectives b) Shareholders/family members aren’t on the same page c) Credibility of financial information d) Customer concentration e) All of the above

4. What would be considered a mid-range business attractiveness score?

a) 45% b) 50% c) 57% d) 82%

5. In Gate 2, what deliverables could you use?

a) Master Plan, validation, five business action items b) Prioritized action plan workshop, Master Plan, verify & assemble proof c) Business valuation, business assessment, exit readiness d) Exit options analysis, Master Plan, business valuation

6. In what gate would you utilize an exit options analysis and keep or sell decision?

a) Gate 4 b) Gate 2 c) Gate 3 d) At any time

Answers: 1) b 2) d 3) e 4) c 5) a 6) c

Exit Planning Deliverables

B. What is a deliverable? a. A report, meeting, workshop, or event that represents the conclusion of an assignment, step, stage, task

or action b. Its represents what the client pays for c. It is important that the deliverable leads the client to the next stage of work d. Therefore, it should recommend the next stage, steps, action that the client should take, the resources

needed, and tee up your next assignment exit planning deliverables

C. The Value Acceleration Methodology™ a. Gate 1 – Discover

i. Personal, financial, and business assessment 1. Exit Readiness score

a) How can I increase my business value? b) Identify areas of risk which lower value c) Quantifies valuation d) Determines if you trade high or low e) Need for strategic planning

2. Business Attractiveness score a) How attractive does my business look to a potential buyer?

ii. Business valuation 1. How do I perform relative to the industry? 2. Identifies financial opportunity or strength 3. Needed for personal and financial planning 4. Needed for strategic planning

iii. Prioritized action plan 1. De-risking action plan

a) Prioritize personal, financial, and business actions to improve value and readiness b) Establish a 90-day implementation schedule

iv. Gate 1 Value Advisor Deliverables 1. The Triggering Event (Enterprise Value Assessment (EVA) 2. Personal Envisioning Statement 3. Business Envisioning Statement 4. Team education 5. Strategic Roadmap I 6. Strategic Roadmap II 7. Management alignment 8. Metrics / dashboard 9. Rhythm

b. Gate 2 – Prepare i. No more than five business and five personal actions (completed every 90 days)

1. Goals and objectives 2. De-risking first 3. Strategy/business model

Exit Planning Deliverables (cont.)

4. Efficiency 5. Growth 6. Culture

ii. Master plan iii. Verify & assemble proof iv. Validation v. Gate 2 Deliverables

1. Monthly 1:1 2. Monthly Team Accountability Workshop 3. Ninety-Day Renewal Workshop 4. Spin-off projects

c. Gate 3 – Decide i. Exit options analysis ii. Keep or sell decision iii. Strategic exit iv. Strategic growth v. Repeat Gate 2 vi. Gate 3 Deliverables

1. Keep or Sell? Workshop 2. Exit Options Analysis 3. Spin-off projects

D. Deliverable #1 – The Triggering Event

a. A business valuation correlated to a personal, financial, and business attractiveness and readiness assessment to determine where the business value lands in the range of value.

b. Triggers owner action 70% of the time c. Range of value (EBITDA multiples/sales multiples) d. Range of value (where do I fit in?) e. Benefits

i. Establishes, based on fact, your present value ii. Predicts the probability of succeeding with growth and transition strategies iii. Identifies your profit gap: how much more ebitda? iv. Identifies your value gap: how much more value? v. Identifies actions you can take to protect, build, and harvest value

E. Strategic Value = Simple Math

a. Cash and sales x a market multiplier = Value b. Initiates strategic business discussions with the owner c. Real number versus. tax number d. Concept of the Range of Value

F. What is exit readiness?

a. It is not a decision to sell b. It is a state of fact, not of mind

Exit Planning Deliverables (cont.)

c. Consider: i. Is the owner ready ii. Is the business ready

G. Readiness versus Attractiveness

a. Understand the difference b. Common readiness issues

i. Personal 1. No goals and objectives 2. No contingency plans 3. Dated buy-sell 4. Shareholders and/or family members not on the same page

ii. Financial 1. Income requirements post transition 2. Needs versus wants 3. Financial plan does not consider the value of the business or overstated opinion of value 4. Did not start tax planning soon enough 5. Financial plan not aligned

iii. Validation (buyer versus. seller) iv. Creditability of financial information v. Management/key employee retention vi. Customer concentration vii. Power to sell/offer shopping viii. Deal breakers

c. Benefits of being ready without wanting to sell i. Pushes in the direction to be best in class ii. Serves as a contingency plan iii. Non-solicited offers do happen iv. Increases annual income and value

H. Common Sense Scoring System

a. Scores personal, financial, and business attractiveness and readiness value factors b. Scale of one to six c. One nothing done; two something but bad (maybe thought about it, no documentation); three

documented, but below average; four documented and above average; five best in class; six nothing more can be done

d. Six almost impossible to attain overall, but may attain on individual value factors e. Premium score 72%+, Target 67%, Mid 51%-66%, Discount 50% or less

I. Where a business places in the range of value is determined by

a. Business Attractiveness Score b. Exit Readiness Score c. Financial Benchmarking

Exit Planning Deliverables (cont.)

J. Exit Readiness and Business Attractiveness Scores predict a. Probability of successfully transitioning to family, employees, management and partners b. Probability of successfully selling to third parties c. Probability of successfully growing and/or sustaining growth of the business d. A business that is not ready to successfully transition or sell is not ready to grow

Basic of Business Valuation

1. When would you use/prepare a business valuation? a) Selling a business to a third party b) Transferring ownership to family via gifting c) Establishing value for estate tax determination d) All of the above

2. Which assumption is true of Fair Market Value (FMV)?

a) FMV assumes a leverage transaction at industry debt percentages. b) FMV is a price at which a hypothetical willing buyer would pay a hypothetical willing seller. c) FMV is based on individual investment requirements and expectations. d) FMV is a price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between ‘actual’ market participants at the measurement date.

3. Creating a business valuation is the same process or formula for every business. a) True b) False

4. In the income approach to business valuation, which method is predicated on a specific future look at economic

benefits? a) Future asset method b) Capitalized earnings method c) Discounted cash flow method d) Economic method

5. The three schools of business valuation include:

a) Investment banking, formal FMV, and smallest companies rule of thumb b) Investment banking, formal FMV, and enterprise value c) FMV, enterprise value, and standard value d) DCF, FMV, and EV

Answers: 1) d 2) b 3) b 4) c 5) a

Basics of Business Valuation

B. Purposes for Business Valuation: a. Selling a business to a third party b. Transferring ownership to family via gifting c. Litigation between shareholders d. Divorce between husband and wife e. Establishing value for estate tax determination f. Installing an Employee Stock Ownership Plan and Trust (ESOP) g. Acquiring a business

C. Determining Transaction Price

a. “Price” and “Terms” examined i. Hold-Back of Proceeds (escrow) ii. Seller Financing iii. Performance Payments iv. Earn-Out Provision v. Non-competition Agreement vi. Employment Agreement and/or Consulting Agreement vii. Contingent and unknown liabilities

b. Standard of Value i. Fair Market Value (FMV)

1. The price at which the property would change hands between a ‘hypothetical’ willing buyer and ‘hypothetical’ willing seller; when the former is not under any compulsion to buy and the latter is under no compulsion to sell; both parties having reasonable knowledge of relevant facts.

ii. Investment value 1. The value to a particular investor based on individual investment requirements and

expectations. iii. Intrinsic or fundamental value

1. The value that an investor considers, on the basis of an evaluation of available facts, to be the “true” or the “real” value that will become the market value when other investors reach the same conclusion. When the term applies to options, it is the difference between the exercise price or the strike price of an option and the market value of the underlying security.

iv. Fair value 1. Valuation definition: the price that would be received to sell an asset or paid to transfer a

liability in an orderly transaction between “actual” market participants at the measurement date.

2. Litigation definition: with respect to dissenter’s shares, means “restore me to equity” with the valuation on an enterprise level (no minority position discount) and with no discount for lack of marketability.

v. Emotional value 1. What a buyer and seller perceive 2. Most commonly an unrealistic seller expectation

Basics of Business Valuation (cont.)

D. Types of Buyers and Sellers: a. Hypothetical Buyer and Seller b. Financial Buyer c. Strategic Buyer d. Family Members

E. Enterprise Value (Control Position) a. The following non-exclusive list indicates common elements of control position attributes within the

context of owning a business: i. Establish company policy ii. Appoint the Board of Directors and correspondingly appoint management iii. Establish base compensation for employees and incentive programs iv. Declare dividends v. Acquire or divest assets vi. Establish strategic business relationships vii. Issue or redeem stock viii. Recapitalize the company ix. Change bylaws or articles of incorporation

F. Liquidity Issues – Lack of Marketability

a. Liquidity becomes an issue when the investment is a closely held company where there is no active market established for its stock

b. Converting an investment, in a closely held company, to cash may involve significant uncertainty and substantial risk

G. Three Principal Approaches to Valuation: a. Income approach

i. Discounted Cash Flow (DCF) method 1. Predicated on a specific future look at economic benefits 2. Financial projection

a) Prospective financial statements that present, to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions, an entity’s expected financial position, results of operations, and cash flows.

2. Economic benefits a) Common references include pre-tax income; earnings before interest and taxes (EBIT);

net income (NI); earnings before interest, taxes, depreciation, and amortization (EBITDA); and free cash flow.

3. Rate of return a) The future stream of benefits is ‘discounted’ by an appropriate rate of return

specifically developed for the particular assignment. Also referred to as ‘cost of capital’ or the ‘discount rate’.

4. Morningstar-Ibbotson & Associates a) One of the most widely used and quoted sources for determining the cost of capital.

Cost of capital is the same as the discount rate; it is used to discount the economic returns to the current period

5. Duff and Phelps a) Another widely used resource to determine the cost of capital

Basics of Business Valuation (cont.)

ii. Capitalized earnings method 1. Complimentary to DCF 2. Best used when future cash flows are expected to be consistent and based on past

performance b. Market approach

i. Public company guideline method 1. Sales of stock on public markets 2. Suitability of comparable guideline companies 3. Advantages of Public Company Guideline Method 4. Cautions Regarding the Public Company Guideline Method

ii. Guideline transaction method 1. Focused on the sale of an entire company to another buyer; identify comparable company

transactions a) Pratt’s Stats b) Done Deals c) Bizcomps

c. Asset approach i. Reported book value ii. Adjusted book value iii. Premise of value

H. Three Schools of Valuation:

a. Formal FMV (IRS and Tax related valuation) b. Smallest company rules of thumb

i. Smallest companies (arbitrary under $2M in revenue) are often not suitable for formal FMV analysis

ii. Best resources: Business Reference Guide – The Essential Guide to Pricing Businesses and Franchises c. Investment banking

i. Value is frequently some index of profitability (EBIT, EBITDA, Net Income, Pre-tax Income, etc.) multiplied by a time-tested multiple

ii. Multiples are often the object of intense analysis – larger companies command higher multiples

I. Observations on multiples (Dennis J. Roberts – Mergers & Acquisitions, John Wiley & Sons, Inc.) a. Rule of ten: Adjusted pre-tax income (EBIT or EBITDA) on average for many companies will be in the

range of 10% of revenue. Some firms will be higher and some will be lower, but on “average” the adjusted results will be approximately 10%.

b. Rule of 5: On average the transaction multiple of 5 x EBITDA will apply for most closely held companies. Some firms will be higher and some lower but on “average” the results will be approximately 5x. This particular relationship is supported by a number of the transaction data bases such as Pratts Stats.

Basics of Business Valuation (cont.)

c. Super Rule of 5: On occasion to be competitive a buyer will pay more than 5x EBITDA to secure a deal. The higher multiple (say 6, 7 or 8) is justified because longer term it is anticipated the multiple will resort to a central tendency in migrate back toward 5. The statistics apply to closely held companies.

J. Transaction Issues: a. The goal is often to maximize net proceeds to seller b. Business often priced at Enterprise Value (EV)

i. Often a multiple of EBITDA or EBIT ii. Caution: Section 179 depreciation skews results

c. Two main types of transactions i. Asset sales (most common lower middle market) ii. Stock sales

d. Buyers often prefer asset sales e. Sellers prefer stock sales

K. Elements of Net Proceeds:

a. Determine value of business (EV) i. Minus: Interest bearing debt ii. Plus or minus:

1. Balance sheet targets (A/R, A/P, Inventory, Accruals, etc.) 2. Working capital true-up (true-down) 3. Unrecorded and off-balance liabilities (e.g. vacations) 4. Escrows and holdbacks

iii. Plus any earnouts iv. Minus fees and expenses v. Minus taxes

Goals and Objectives

1. How does creating a vision help focus a business owner? a) Expresses personal values b) Drives inspiration c) Directs focus and movement forward d) All of the above

2. Which is not a characteristic of a SMART goal?

a) Specific b) Realistic c) Measureable d) Cost Effective

3. What are the three key success areas a business owner’s goals and objectives should focus on?

a) Business, Financial, and Personal b) Business, Philanthropy, and Financial c) Business, Transition, and Personal d) Business, Financial, and Post-Business Life

4. When is a good time to establish goals and objectives with a business owner within the Value Acceleration

Methodology™? a) During the Triggering Event so you know what the owner wants to achieve longer term b) Business goals and objectives are an outcome of a Personal Envisioning workshop c) After discovering and discussing themes from the Triggering Event with the business owner d) All of the above

5. Which of the following is not a conflicting value system to be considered when establishing goals and objectives?

a) Owner b) Political c) Family d) Management

Answers: 1) d 2) d 3) a 4) c 5) b

Goals and Objectives

A. Falls under the Discover phase of the Value Acceleration Methodology™

B. Relentless Execution and Value Acceleration Gates: a. Vision – Gate 1 (Discover) b. Alignment – Gate 1 (Discover) c. Accountability – Gate 2 (Prepare) d. Rhythm – Gate 2 (Prepare)

C. Vision

a. Expresses personal values b. Inspires and unifies the team c. Focuses action d. Disciplines us to think strategically e. Tested with four words

i. Belief ii. Passion iii. Opportunity iv. Focus

f. Drivers and Influences i. Personal identity ii. Financial security iii. Health status iv. Family responsibilities v. Partner & family situations

D. Defining Success: What does success mean to you?

a. Define success from several viewpoints (Three Legs): i. Personal ii. Financial iii. Business iv. Are they all in alignment?

b. Consider conflicting Value Systems: i. Management ii. Family iii. Owner iv. Know your important relationships

E. To Help Owner Discover Personal and Business Vision:

a. Identify, organize and discuss common themes discovered in the Triggering Event. b. Workshops to help discover/create/validate personal and business visions:

i. Personal Envisioning Workshop ii. Business Envisioning Workshop

Goals and Objectives (cont.)

F. Goals and Objectives Success Areas a. Personal

i. Family & friends ii. Self-worth iii. Philanthropy iv. Health v. Fun

b. Financial i. Need versus want ii. Risk iii. Income iv. Personal wealth v. Retirement security

c. Business i. Clarity of direction ii. Value factors iii. Salability iv. Viability v. Predictability

G. S.M.A.R.T. goals:

a. Specific b. Measureable c. Aspirational d. Realistic e. Time-Based

Creating Action Plans

1. Creating action plans is associated with which activity of Relentless Execution? a) Vision b) Alignment c) Accountability d) All of the above

2. Which activity do you need to complete to create personal and business action plans?

a) Establish personal and business priorities b) Determine and committing business resources c) Define the personal financial deliverable or outcome expected d) All of the above

3. Which action below should be the first type of action to be completed when prioritizing business actions?

a) Create a contingency plan b) Develop the business strategy c) Improving shop floor efficiency d) Taking action to improve the culture within the company

4. When is an Opportunity Assessment completed?

a) Before the scoreboard and team communication protocols are developed b) After the personal vision is established and 90-day personal actions are selected c) After the business vision is established and before the 90-day business actions are selected d) Both a and c e) Both a and b

5. What is a benefit of a Start-Stop workshop?

a) A start-stop workshop is useful to determine inside versus outside realty b) A start-stop workshop can help you understand informal politics and leadership in the company c) A start-stop workshop determines what things you do well from a customer standpoint d) All of the above

Answers: 1) b 2) d 3) a 4) e 5) d

Creating Action Plans

A. After the Owner’s Personal and Business Visions, themes and goals and objectives are established, the next step is to create an Action Plan. This is called “Alignment” within the process of Relentless Execution and includes:

a. Integrated business and personal planning b. Establishing strategic competencies needed to achieve the vision c. Creating three to five themes for next year d. Creating three to five priorities (actions) to complete in the next 90 days e. Assigning each priority to a champion f. The champion uses Opportunity Assessments to get into the details of how to implement the 90-day

action, examines alternative implementation approaches, defines resources required and establishes milestones and a deliverable (outcome)

g. Workshops, NOT meetings, are used to facilitate the process. Know the difference between a workshop and a meeting.

B. Creating Action Plans (Personal and Business) are a Part the Discover Gate (Gate 1) of the Value Acceleration

Methodology a. An Action Plan is the final outcome (deliverable) of the first two cornerstones of relentless execution

(Vision and Alignment) i. The Action Plan is aligned with the owner’s personal and business vision ii. The Action Plan is the second major deliverable in Gate 1 (Discover) iii. It is the key to passing through Gate 1 (Discover) into Gate 2 (Prepare)

C. Creating an Action Plan Involves:

a. Creating personal and business actions plans around your themes from the Attractiveness and Readiness Assessment

b. Conducting workshops to align vision and action c. Establishing priorities: personal (and financial) and business d. Determining and committing resources e. Defining the deliverable or outcome expected

D. We Have This “List” of Value Factors that Need to be Improved to Protect and Build Value. Now what? Set No More

Than Five Business Actions and Five Personal Actions to be Complete in the Next 90 Days.

E. Building an Action Plan and Aligning with Goals and Objectives (In Order): a. Vision b. Themes c. Projects d. Tasks e. Milestones f. Deliverable

Creating Action Plans (cont.)

F. Next Phase – Two Typical Options: a. Option #1: tell business owner what the next steps are by proposing in the ‘Triggering Event’ deliverable b. Option #2: run a series of workshops to set priorities

G. Workshops are Useful to Create Action Plans

a. Start-Stop workshop i. What three things do we already do well? ii. What three things should we start doing? iii. What three things should we stop doing?

b. Six Weeks to Better Business Workshop Series™ i. Team education ii. Business vision (or personal vision) iii. 1-Year and 90-Day priorities (Big Rocks!) iv. Team alignment v. Metrics/Dashboard vi. Rhythm

H. Sort and Organize Actions (Value Factors from Triggering Event)

a. Value low to high b. Time/effort/money low to high c. Identify risks d. Separate strategic versus non-strategic e. Work on non-strategic first

I. Prioritize

a. De-Risk (least effort, least value) b. Strategy/Business Model c. Efficiency d. Growth e. Culture (most effort, most value) f. The priority should tie to a specific value factor in the Triggering Event so that it can be re-scored later

and so you can measure the impact on value g. Priorities are lead measures and are predictive of a likely favorable outcome which should raise business

value

J. Getting into the Details is the Key to Developing a Plan that can be Relentlessly Executed a. Who is responsible? b. What are the implementation options? c. What are the deliverables? d. Where are the resources coming from? e. What are the risks…and contingencies? f. What are the milestones that demonstrate we are on track?

Creating Action Plans (cont.)

K. Use Opportunity Assessment as a Guideline, Not an Absolute a. Proposed project and the opportunity / problem b. Describes what you are proposing to do -- What is the opportunity or what is the problem you are trying

to solve? c. Background d. Alternatives being considered e. Suggested action f. Timeline and team structure g. Five priorities / milestones and the due dates to complete the project

Delivering Action Plans

1. Which activity is an action that would usually be completed in Delivering action plans? a) Hosting a team accountability workshop b) Meeting with a priority champion to discuss progress c) Meeting with the owner to establish his or her personal vision d) All of the above e) Both a and b

2. What tools or deliverables are useful to help sustain action and deliver the action plan?

a) A monthly 1:1 workshop b) A monthly team accountability workshop c) An Opportunity Assessment d) Both a and b e) All of the above

3. Name three of the four cornerstones of relentless execution

a) Discover, Prepare, Decide b) Analyze, Align, Implementation c) De-risk, Efficiency, Growth d) Vision, Accountability, Rhythm e) All of the above

4. How you deliver is more important than the deliverable itself. Which of the following is not a key factor to use in

your approach at the deliverable workshop? a) Getting agreement on next steps b) Keeping the owner focused on his or her life after plan c) Developing relationships d) Avoiding information overload

5. What is the best definition of a 90-day sprint?

a) An annual road race that stretches from Las Vegas to Los Angeles every spring. b) A continual loop of prioritizing, executing, measuring, reconnecting, and recalibrating every 90 days. c) A process that focuses on selection of one-year initiatives; 90-day projects; and long-term goals. d) A process that determines needs versus wants; buy-sell agreement; and strategy.

Answers: 1) e 2) d 3) d 4) b 5) b

Delivering Action Plans

A. Delivering action plans is completed in the Prepare Gate (Gate 2) of the Value Acceleration Methodology™

B. Once the Action Plan is Created it Needs to be Relentlessly Executed. This is the Fourth Core Concept of Value Acceleration (Relentless Execution)

a. Cornerstones of relentless execution (in order): i. Vision ii. Alignment iii. Accountability iv. Rhythm

b. Accountability and Rhythm are accomplished in the Prepare Gate (Gate 2) of the Value Acceleration Methodology

C. What is Relentless Execution? a. A specific set of behaviors and techniques that companies need to master in order to have a competitive

advantage. b. A systematic process that rigorously discusses the how’s and what’s, questioning, tenaciously, following

through, and ensuring accountability. c. A core element of an organization’s culture. d. A relentless pursuit of reality, coupled with processes for constant improvement.

D. Getting things done is not good enough. Getting things done well also means:

a. Delivering to the quality that matches the brand b. Hitting the numbers (timeframe/budget) c. Documenting “how” you did it d. Delivering again and again, better and better to create rhythm e. Advertising you delivered value

E. 90-Day Sprints

a. A continual loop of prioritizing, executing, measuring, reconnecting, and recalibrating every 90 days.

F. Depression Row Secrets to Implementation Success: a. First, create a compelling vision and purpose – a “worthy” cause, big picture, answers “why?” b. Engage the team/educate; frequent touch points; help them be successful (you lose if they lose!) c. Be accountable (own it) – metrics, deliverables, keeping promises (some may not like it) d. Rhythm – routines, habits, and discipline e. Defend your team. Be their champion! f. Rewards – monetary and non-monetary (giftology) g. Celebrate wins. Dashboards. Visibility. Recognition. h. Leadership – energy, energize, edge, execute (four E’s) i. Manage expectations and scope – 90 Day Sprints. Small, consistent victories j. Be Realistic; be sensitive to other ongoing responsibilities k. From workshops or evaluations pull together to create action plan deliverable

Delivering Action Plans (cont.)

G. Accountability is a Learning Experience a. It is a method to systematically assess accomplishments and disappointments and to determine why we

were successful or not successful in accomplishing the 90-day priority b. It is used to enhance team performance and build high performing teams c. It is best when champions feel more accountable to each other versus the owner or manager.

H. Rhythm

a. Rhythm is developed through repetition of 90-Day Sprints which are completed in Gate 2 (Prepare) b. Don’t forget to keep score – scorecards are essential c. Each priority should be aligned with a value factor from the Attractiveness or Readiness Assessment d. Periodically go back and re-score and correlate the score to Range of Value. e. As the scores go up, attractiveness and readiness go up, you should be able to correlate this to the

increase in the value of the business f. This is important as it justifies advisor fees and demonstrates the value that the advisor is bringing to the

table

I. Workshops that are Useful to Reinforce Action: a. Monthly 1:1 b. Monthly Team Accountability c. Ninety-Day Renewal d. Annual Retreat

J. The Deliverable Workshop

a. Avoid information overload i. Owners are right-brained

b. Get agreement on next steps c. Develop relationships d. How you deliver is more important than the deliverable itself

K. Prepare Gate 2 Summary (in order):

a. Develop three to five year inspirational vision. b. Define three to five year capabilities that need to be developed; c. Focus on the next year and next quarter. Set one year and next 90-day business and personal goals and

priorities; d. Separate de-risking versus. strategic. Focus on de-risking first. e. Align the team. Assign accountability. Commit resources. f. Establish a measurement and feedback process. Individual and company dashboards. Lead and log

measures. g. Define a rhythm: daily huddles, weekly project progress (tactical), monthly management, quarterly

accountability (accomplishments and disappointments, recalibrate) h. Revisit step one every 90 days

Importance of Teams

1. Of the following, what is most important for a team to be successful? a) Set team meeting schedule b) Team hierarchy c) Trust d) Team manager

2. Teams help deliver a better-quality product to the business owner because they create synergy, thus generating

performance greater than the sum of the performance of its individual members. a) True b) False

3. Which of the following is not a good method for building trust among team members?

a) Share common experiences b) Call out members when you assume a negative conclusion c) Become familiar with how each member prefers to communicate and make decisions d) Get to know one another socially

4. What is a corrosive element within a team?

a) Absence of trust b) Conflict avoidance c) Ambiguity d) Lack of accountability e) All of the above

5. As the quarterback of the team, if some of the team members appear to have lost focus or aren’t as committed to

the team and business owner, you should: a) Set and publish clear goals b) Call those team members out at next meeting c) Create results-based rewards d) Start leaving them out of team updates or communications e) Both a and c

Answers: 1) c 2) a 3) b 4) e 5) e

Importance of Teams

B. Teams and the Business Owner a. The owner is surrounded by many different teams b. This makes the exit planning process complex in the eyes of the owner c. It can look very daunting and expensive d. Common complaint from owner is that his/her advisors give conflicting advice; not on the same page

C. How do advisor teams evolve in each gate of the Value Acceleration Methodology™?

D. State of Owner Readiness Survey And Teams (2017, Twin Cities Results):

a. 74% of business owners indicated they have not established a formal transition advisory team b. For those owners who had a transition team, many recognized the need for a CPA (65%)

i. 58% indicated that their spouse or another family member was on their transition team 1. 38% indicated spouse

ii. Only 52% indicated a Corporate Attorney was on their transition team iii. Only 26% indicated their wealth manager was on their transition team iv. All other advisors were below 20%

c. The CPA was considered the most trusted advisor; 34% chose the CPA as most trusted advisor i. 27% indicated peer group as most trusted advisor ii. 16% indicated lawyer iii. Only 12% indicated spouse iv. Only 8% indicated financial advisor v. Insurance and banker were below 2%

E. Why work in teams?

a. A team becomes more than just a collection of people when there is a strong sense of mutual commitment.

b. A team creates synergy, thus generating performance greater than the sum of the performance of its individual members.

c. Core team should include, at a minimum, CPA, Wealth Manager, Attorney, Board of Advisors, key members of Executive Management, and key members of the owner’s family.

d. The extended team should include: at a minimum, insurance advisor, commercial banker, and may include an investment banker or other transition specialists, real estate advisor, strategic or specialized consultant, and other functional specialists.

F. What makes a team effective? a. Five core characteristics:

i. Trust ii. Conflict management iii. Commitment iv. Accountability v. Results

Importance of Teams (cont.)

b. Other characteristics of effective teams: i. Communicate naturally ii. Share cause, pain and benefits iii. Not easily broken – WILL iv. Honest and trustworthy v. Enjoy each other’s company vi. Stick together vii. Group before individual viii. Share similar philosophy and interests ix. Respectful x. Rhythm and structure

G. What is collaboration?

a. A cooperative arrangement where two or more people, which may or may not have a previous relationship, work jointly towards a common goal.

H. Commitment a. To gain commitment of the members of your team you need a clear organizing principle, or goal, and

buy-in of the members to work towards that goal. b. Managing commitment

i. Agendas ii. Restate the primary goal and what has been accomplished to date iii. Give summaries of the meetings with what has been decided, homework for members, and next

steps iv. Give deadlines and manage the deadlines

c. Accountability and leading to accountability i. Willingness of team members to call their peers on performance and behaviors that might

damage the work of the team ii. Always publish deadlines iii. Have simple and regular progress review iv. Have team rewards so that the team becomes the peer pressure for follow through

d. Tips on refocusing the team to attentiveness: i. Set and publish clear goals ii. Publish declaration of results iii. Create results-based rewards iv. Lead for results

I. Organizing Principle

a. The Three Legs of the Stool – The Master Plan b. Applied through the Value Acceleration Methodology™. c. Where we concentrate on enterprise value while aligning personal and financial goals. Placing the

business owner and their family in the center. d. Collaboration amongst advisors. Operating outside our silos.

Importance of Teams (cont.)

J. CEPAs will likely encounter advisors who will not work within the team dynamics. They exhibit the following: a. Fear of being displaced b. Fear of losing control or not being in control c. Fear of losing their relationship with the owner d. Lack of knowledge or experience e. Creation of inner team politics

K. These situations can fragment the team causing inconsistent delivery and lost clients

a. The answer is to work on team building upfront and get buy-in on a holistic approach (i.e. Value Acceleration Methodology)

b. Consider the following to address team challenges: i. Where are you entering in the process? ii. What role are you going to play in the ecosystem? iii. How do you convince other team member to adopt the methodology?

c. Best approach is to campaign to peers in the same fashion as you would execute any marketing campaign

i. Education ii. Chapter projects and community outreach iii. Know the methodology and your place in it iv. Host a workshop to demonstrate the holistic approach v. Speak and write vi. Consider the messaging on your website and social media vii. Host regular social networking events such as happy hours

L. A common goal of any CEPA, regardless of role, is to get the owner to complete a Triggering Event because 70% of

the time this initiates action and engages the entire team.

Exit Option Analysis

1. Based on the 2013 EPI State of Owner Readiness Survey, how many business owners were not familiar with all their transition options?

a) 1/3rd b) About half c) Nearly 2/3rds d) 99%

2. What is a pro for an intergenerational transfer?

a) Business legacy preservation b) Planned c) Lower cost d) All of the above

3. What are the two general categories for private ownership exit options? a) Sale and Transfer b) Planned and Unplanned c) Inside and Outside d) Management Buyout and Sale to Partners

4. Which of the following is not an inside exit option? a) Intergenerational transfer b) Recapitalization c) Management buyout d) Sale to existing partners

5. A business owner you are advising on exit options does not have a family member or children to transfer the business to. She would like the exit option that will get her the highest price for the business, more cash up front, and will allow her to walk away faster. What option do you recommend?

a) Sale to existing partners b) Recapitalization c) Sale to third party d) Management buy-out

6. An owner must sell a majority position to complete a recapitalization or refinance option? a) True b) False

Answers: 1) c 2) d 3) c 4) b 5) c 6) b

Exit Option Analysis

A. Two general categories for private ownership transition: a. “Inside”

i. Intergenerational transfer ii. Management buyout iii. Sale to existing partners iv. Sale to employees (ESOP)

b. “Outside” i. Sale to third party ii. Recapitalization iii. IPO iv. Orderly liquidation

B. Owner awareness of transition options, based on the 2013 State of Owner Readiness Survey (SOOR)

a. Nearly 2/3 (65.6%) of business owners are not familiar with all their exit options b. When asked, “what best describes how you are planning to transition?” Owner plans for transition, based

on 2013 SOOR: i. 35.6% indicated they would transition via an internal exit option ii. 31.4% indicated they would transition via an external option iii. 30.9% indicated they were not sure iv. 2% of the sample answered “other”

C. Intergenerational Transfer

a. Transfer of business stock to direct heirs, usually children. 50% of business owners want to exercise this option – in reality, only about 30% actually do.

b. Pros: i. Business legacy preservation ii. Planned iii. Lower cost iv. More control v. Less disruption vi. High buyer/seller motivation

c. Cons: i. Family dynamics ii. Illiquid buyers / lack funds iii. Lower sale price iv. Key employee flight risk v. Tradition may outstrip good strategy vi. Path of least resistance – but not always a path to growth or success

D. Management Buy-Out (MBO)

a. Owner sells all or part of the business to the company’s management team. Management uses the assets of the business to finance a significant portion of the purchase price

i. Pros: 1. Continuity

Exit Option Analysis (cont.)

2. Highly motivated buyers (pent-up desire) 3. Preserves key human capital / knowledge 4. Planned 5. Can be combined with private equity to access additional capital and resources for growth

ii. Cons: 1. Management ‘sand-bagging’ 2. Distraction 3. Threat of flight (coercion of owner) 4. Illiquid buyers 5. Lower price and unattractive deal terms for seller 6. Heavy seller financing introduces risk 7. Managers are not always good entrepreneurs

E. Sale to Existing Partners

a. Success is closely linked to the existence and quality of a buy-sell agreement. Not available to single-owner businesses.

i. Pros: 1. Less disruptive 2. Planned 3. Well-informed buyers 4. Controlled process (if buy-sell agreement in place and funded) 5. Lower cost

ii. Cons: 1. Lower sales price 2. Potential discord 3. Competency gaps? 4. Buy/Sell may restrict selling options 5. Realization of proceeds from sale is often slower (and less)

F. Sell to your Employees (ESOP)

a. Company uses borrowed funds to acquire shares from the owner and contributes the shares to a trust on behalf of the employees.

i. Pros: 1. Business stays in the ‘extended family’ 2. Shares purchased with pre-tax dollars by the ESOP 3. Taxable gain on the shares sold to the ESOP by the owner may sometimes be deferred 4. ESOP is an employee benefit 5. May cause employees to think and act like owners

ii. Cons: 1. Complicated and expensive 2. Requires securities registration exemption 3. Company compelled to buy-back shares from departing employees 4. Generally suitable only for gradual exit over time

Exit Option Analysis (cont.)

G. Sell to a Third Party a. Owner sells the business to a strategic buyer, financial buyer, or private equity group through a

negotiated sale, controlled auction, or unsolicited offer. i. Pros:

1. Higher price (highest of the options) 2. More cash up front 3. Walk away faster 4. Stability of deal terms 5. Business refresh (growth, new energy) 6. Cost-effective 7. Breaks deadlock at management level with family

ii. Cons: 1. Long process (nine to 12 months) 2. Distraction / loss of focus 3. Privacy concerns 4. Emotional for the owner 5. After sale tie-downs 6. Highest absolute cost of options (but higher benefit) 7. Complex – involves about 1,000 professional hours 8. Can be difficult to close

H. Recapitalization / Refinance

a. Finding new ways to “fund the company’s balance sheet.” Essentially brings in a lender or equity investor to act as a partner in the business. Can sell minority or majority position.

i. Pros 1. Allows partial exit 2. Reduces owner risk (diversifies asset concentration) 3. Provides growth capital 4. Second bite at the apple 5. Works well with other exit options

ii. Cons 1. Continuing accountability to partners (not a clean break) 2. Loss of control 3. Culture shift 4. Slow transaction 5. Expensive relative to benefit

Exit Option Analysis (cont.)

I. Orderly Liquidation a. The business is shut down through a simple, quick process. Makes sense if asset values exceed the ability

of the business to produce income required to support an investment. i. Pros

1. Good option when asset value exceeds value of continuity 2. Sum of the parts are greater than the whole (asset division produces value) 3. Efficient way to exit 4. May be less expensive than some of the other options

ii. Cons 1. Uncertain proceeds (no guarantee) 2. No $ for goodwill 3. Emotional / stigma 4. Hard to predict costs 5. Damage to employees / jobs 6. Higher tax (C-corporations)

Understanding Private Equity

1. Which type of transaction does a private equity sponsor acquire older generation’s shares to allow the younger generation management to continue operating the business?

a) Owner retirements b) Working capital c) Family successions d) Recapitalizations

2. In a minority recapitalization transaction, a sponsor acquires less than 50% of the company to hold minority

position to support the current management team. a) True b) False

3. Which of the following is not a factor for a private equity group considering an investment?

a) Stage of development b) Management c) Stock price d) Company size

4. In which type of private equity transaction does the owner or shareholder end with the most liquidity but the least

control? a) Recapitalization b) Outright sale c) Minority recap d) Majority recap

5. How does a private equity group value a business?

a) EBITDA x multiple b) How the company makes money c) The company’s growth opportunities d) Type of business e) All of the above

Answers: 1) c 2) a 3) c 4) b 5) e

Understanding Private Equity

A. How Private Equity Groups (PEGs) Select Investments a. Timeframe and big picture

i. Bringing on a private equity firm can be a fundamental step towards achieving the highest possible gross proceeds over the long run.

b. Firm’s charter + Firm’s partners = Investment Criteria i. A Firm’s ‘Charter’ is what PEGs tell their LPs what they do

1. Limited Partners (Investors) (pension funds, insurance companies, high net worth individuals, family offices, endowments, etc.)

2. Invest into a Private Equity Fund (General Partnership) 3. Then Fund invests in businesses

ii. Stage of development: mature, growing businesses with a history of profitability that need capital for growth, expansion, working capital, or buyouts

iii. Company size: revenue of $10 to $100 million with EBITDA of $2+ million iv. Management: desire to assume meaningful ownership stakes v. Transaction types:

1. Buyouts 2. MBO/MBI 3. Family successions 4. Recapitalizations 5. Corporate divestitures 6. Growth capital

vi. Targeted sectors: 1. Niche manufacturing 2. Value-added distribution 3. Specialty services

vii. Geography: nationwide

B. How PEGs Value Those Businesses a. Finance theory says that value is a formula b. Real world values EBITDA

i. EBITDA x Multiple = Valuation c. The Three Legs of the Stool in private equity

i. Company ii. Management iii. Deal

C. The Company

a. What is the business model? – service, distribution, manufacturing i. Business Model – Service

1. Investment merits: a) Offerings that drive regular servicing/visits b) Sticky relationships with customers c) Unique offerings and competition

Understanding Private Equity (cont.)

d) Customers dependent on service 2. Pillars of growth

a) Assess, recruit, and retain labor b) Balance backlog against capital expenditure needs c) Build infrastructure to manage larger territories d) Develop new customer markets

ii. Business Model – Distribution 1. Investment merits

a) Established, long-term customers b) Integrations with stakeholders c) Proprietary / consumable products d) Exclusive territory rights e) Proprietary sourcing relationships

2. Pillars of growth a) Develop new geographic markets b) Add service-based revenue streams c) Resolve real estate and/or warehouse issues d) Improve MIS and inventory management systems

iii. Business Model – Manufacturing 1. Investment merits

a) Proprietary products b) Resistant to overseas production/outsourcing c) Non-discretionary components d) Consumable or maintenance and repair related

2. Pillars of growth a) Capital budgeting process b) Lean manufacturing techniques c) Improve capacity throughout d) Create and protect intellectual property e) Open new end markets

b. How does it make money? – sustainability c. Where are growth opportunities? – money, people, technology, etc. d. Where are the risks & weaknesses? – money, people, technology, etc.

i. How to evaluate risk 1. Investment risk

a) Customers b) Industry and end markets c) Suppliers d) Competition e) Management and financials f) Valuation / multiple is a function of risk

Understanding Private Equity (cont.)

D. The Management a. Key items b. Cultural fit c. What does ‘the bench’ look like? – detailed organizational structure d. What are the gaps? – What does it need? How to source? e. What is the vision? – Resources to get there? f. Key non-owner managers?

E. The Deal

a. Key items i. What’s the deal/situation? ii. Seller’s goals & objectives iii. Valuation expectations

b. Fundamental M&A Options i. Outright sale

1. Sell 100% of company a) Corporate divestitures b) Owner retirements c) Management buy-ins

2. Most liquidity / least control ii. Majority recap

1. Sell >50% of company a) Recapitalizations b) Family successions c) MBOs

iii. Minority recap 1. Sell <50% of company

a) Growth capital b) Working capital c) Debt refinancing

iv. Debt recap 1. Subordinated debt 2. Most control / least liquidity

Third Party Sales and the M&A Process

1. Comprehensive company analysis and due diligence is completed in which stage of an M&A process? a) Strategy and planning b) Materials preparation c) Research and analysis d) Negotiation and due diligence e) Closing documentation and follow up f) Marketing and bid generation

2. The investment banker’s role on the deal team includes which of the following set of activities?

a) Direct negotiator for the business, economic and legal terms of the transaction b) Provides a customized professional process to maximize sale proceeds c) Provides access to a public database and network of buyers d) All of the above e) None of the above

3. Why should you consider including a M&A Investment Banker on the team?

a) Conducts preliminary valuation/research b) Speeds the process (exponentially) c) Shelters principals from emotional deal-killers and poor future relations d) Provides professional negotiation skills e) All of the above

4. Why would you advise a business owner against timing the sale of the business?

a) The economic cycle may change b) Next year’s anticipated growth may decrease or flat line c) The business may be more valuable in its current smaller state that after growth in the next year d) All of the above

5. What mistake could a seller make when putting together the information memorandum, which is distributed to

interested buyers after the confidentiality agreement is signed? a) Including preliminary due diligence b) Communicate opportunities vs weaknesses c) Leaving off any problems or issues with the company d) Not including names of management team

Answers: 1) c 2) b 3) e 4) d 5) c

Third Party Sales and the M&A Process

A. The middle market a. Businesses generating sales from $5 million to $1 billion:

i. Less than about $5 million – Micro market; best served by business brokers ii. Greater than about $1 billion – best served by Wall Street

B. Forces driving the middle market

a. Buy side i. Roll-ups ii. Diversify products or customers iii. Growth strategies iv. PEGs, Family offices, and abundant capital

b. Sell side i. Record valuations and multiples in select industries ii. Distressed situations iii. Baby-boomer retirement and succession iv. Use M&A to raise capital and expand

C. Buyer types and strategies

a. Roll-up groups – financial engineering b. Industry consolidators – operational means (expansion, economies of scale, market share, etc.) c. Industry (non-strategic) – bottom-fishers (opportunistic) d. Private equity groups / financial buyers – financial engineering and operational efficiencies e. Family offices f. Individual buyers g. ESOPs & MBOs h. Strategic versus Financial Buyers

D. Top seller mistakes

a. Selling without representation b. Selling to a single offeror c. Poorly constructed earn-out d. Disclosing an insufficient amount of information in Offering Memo e. LOI not thorough f. Focusing on history and numbers instead of future opportunity g. Mismanaging team, end runs h. Representation by an unlicensed broker i. Communicating your asking price inappropriately j. Eliminating offshore buyer k. Assuming the type of buyer l. Waiting until management is ready to retire m. Waiting for next year’s growth n. Ignoring or over-emphasizing timing

Third Party Sales and the M&A Process (cont.)

E. M&A process a. Strategy and planning c. Research and analysis d. Materials preparation e. Marketing and bid generation f. Negotiation and due diligence g. Closing, documentation, and follow up

F. Strategic considerations

a. Consideration (Terms) vs. Price i. Terms drive the deal, not price ii. Key negotiation technique: your price, my terms, and seller/buyer egos iii. Deal terms, not price, determine value

b. The Earn-Out i. Comfort earn-out: bridges the comfort gap ii. Incentive earn-out: offers an opportunity for a double dip

c. Timing the Sale: A Big Mistake i. Perennial cycles ii. Businesses sometimes are more valuable when they are smaller iii. Economic cycles and personal cycles: do the two coincide? iv. New cycles: will they be the same? v. Waiting for next year’s growth is a potentially costly trap

G. Conducting a Preliminary Valuation

a. Determine pre-tax net income b. Normalize pre-tax net income (EBITDA) c. Determine a valuation multiple by reviewing real-life, comparable deals d. Determine the value of the business income by multiplying EBITDA by the Valuation Multiple e. Examine the balance sheet to identify additional value, balance sheet value f. Add the value of the business income to the balance sheet value

H. Controlled Auction vs. Negotiated Sale

a. Controlled auction i. Now a major part of general M&A ii. Establishes a competitive process that drives values up iii. Works best in a strong M&A climate and with interest from both strategic and financial buyers

b. Negotiated sale i. Deal with individual buyer until consummation; perhaps have a backup buyer or two ii. Great for the buyer, possibly less so for the seller iii. Generally used in smaller transactions, special situations and family succession or

management/employee buy outs

Third Party Sales and the M&A Process (cont.)

I. The Auction & Negotiation Staging a. Timing of buyer proposals

i. Have multiple buyers ii. Time them to activate simultaneously iii. Negotiate independently and simultaneously iv. Consider controlled auction if big enough

b. Dialogue with buyers i. Be ingenuous. Don’t price the company but do discuss market/consideration/process ii. Opportunity vs weakness iii. Never underestimate your own position iv. Beware of the single offer

c. The effective auction i. Don’t assume the ‘likely’ identity of the buyer

J. M&A documents (in order)

a. Acquisition profile/teaser b. Non-Disclosure agreement c. Confidential Information Memorandum (CIM)

i. Preliminary due diligence document ii. Sales document iii. Communicates opportunities vs. weaknesses iv. Don’t hide problems or issues

d. Indication of Interest/The Letter of Intent i. Executed to keep the deal moving with the least amount of disruption ii. Must be thorough iii. Binding in only two regards

e. Definitive agreement

K. The Core Deal Team a. CEO/President b. Senior Management c. Accounting Firm d. Lawyer e. Wealth Advisor f. Investment Banker

L. Properly leveraging the negotiation team

a. Investment Banker – direct negotiator for the business terms i. Should be a highly trained and highly experienced individual in capitalization, sale, or

acquisitions of business entities. ii. Training usually includes heavy doses of deal structuring, finance, valuation, accounting,

securities laws, commercial law, and especially negotiation techniques and staging. b. Attorney – direct negotiator for legal terms c. Client – shadow negotiator for all terms d. Beware of two fatal mistakes:

i. Do not confuse team members or the roles they play

Third Party Sales and the M&A Process (cont.)

ii. Avoid end runs

M. The Investment Bankers Role a. Direct negotiator for the business/economic terms of the transaction b. Fully customized professional process to maximize sale proceeds c. Proprietary database and network of buyers d. Minimize disruptions to daily operations and senior management e. Maintain confidentiality throughout process f. Deep experience in art and science of this process g. Maintain momentum to prevent languishing or appearing “shopped” h. Generate multiple QUALIFIED buyers i. Optimize terms and conditions to maximize value j. Avoid owner’s emotions while owner is still in control with all the advantages of having his or her deal

team k. Shadow negotiator phenomena -- owner makes all the decisions behind the scenes l. Preserve subsequent relationship with new owner/partner -- employment/consulting agreement/minority

interest holder m. Relative value to relative cost -- small percentage of the transaction which can be made or lost in one

moment

N. Underlying causes of the dreaded end run a. Not understanding that every deal dies 1,000 deaths before it’s finally closed b. Close correlation to the above: misunderstanding the process c. Sellers who think they know more than their highly-paid advisors d. Sellers assuming that, “If we can just sit down with the other side, we can work something out” e. Mr. Nice Guys who cannot say “no” f. Stressed-out clients/deal fatigue

O. Buyers Buy: (EBITDA) Pre-Tax, Pre-Interest, Income or Cash Flow

a. EBITDA = Earnings Before Interest Taxes Depreciation and Amortization b. Buyers and sellers consider EBITDA a proxy or close approximation to cash flow c. Cash flow comparisons allow buyers to evaluate alternative investment vehicles that provide cash flows

i. Bonds 5% (20 times multiple) ii. Real estate (commercial) 9% to 11% (11 to 9 times multiple) iii. Large cap stocks 12% (8 times multiple) iv. Small cap stocks 21% (4.8 times multiple)

d. Normalize earnings to establish “real” EBITDA or pre-tax cash flow e. Buyers buy future earnings which can only be estimated usually with reference to one of the following:

i. Last 12 months (LTM or TTM) earnings plus a short-term growth rate supported by reasonable facts and assumptions

ii. Average of some past periods (only cyclical businesses, maybe) iii. Pure projection of future periods (start-up businesses only)

Third Party Sales and the M&A Process (cont.)

P. Enterprise value and the balance sheet a. Buyer gets the (necessary) balance sheet except:

i. Assumes a cash-free (usually), long-term, debt-free company ii. Unnecessary assets may be retained by seller and/or sold to buyer for additional consideration

Q. Enterprise value and working capital

a. Working capital is the difference between current assets and current liabilities b. Reasonable cash free, positive, working capital must be left on the balance sheet for the buyer

i. Since Enterprise Value (in deals) is cash free, ‘reasonable’ working capital then is usually some average of recent historic working capital without cash

ii. If cash free net working capital is negative, then usually at least enough cash will need to be left to create positive working capital for the buyer

ESOPs as an Exit Strategy

1. The most common application of an Employee Stock Ownership Plan and Trust is to provide liquidity for private company owners.

a) True b) False

2. Which of the following is a success factor for an ESOP candidate?

a) Unused debt capacity b) Capable management c) Well established company with predictable cash flows d) All of the above

3. Tax regulations and incentives for C Corporations, include:

a) 1042 rollover b) Annual Contributions to ESOP create a tax deduction c) Defer capital gains on stock sale d) Diversify seller’s net worth e) All of the above

4. Which of the following is not considered for valuation in an ESOP transaction?

a) Fair market value b) Enterprise value c) Current stock price d) Lack of marketability discount

5. Besides providing liquidity for the owner, what is another reason an ESOP may be a viable exit option?

a) Capital formation b) Employee productivity and retention c) Known Buyer – controls timing and communication d) All of the above

Answers: 1) a 2) d 3) e 4) c 5) d

ESOPs as an Exit Strategy

B. Traditional Uses of an ESOP a. Employee Stock Ownership Plan and Trust (ESOP) b. Most common application is to provide liquidity for private company owners c. Additional applications:

i. Capital formation ii. Finance corporate acquisitions iii. Employee productivity and retention iv. Succession plan v. Liquidity in divorce

d. ESOPs have a demonstrated record of success e. Tax incentives are attractive to business owners f. Waive of Baby Boomers retiring g. Much of the boomer wealth is in private companies h. ESOPs are a viable option matched to goals of owners

C. Overview of ESOPs

a. Tax qualified defined contribution deferred compensation employee benefit plan b. Primarily invested in securities of sponsor company c. Trust is legal entity and owns the stock (employees are NOT shareholders) d. Common funding methods

i. Prefunding with cash or stock ii. Leveraged ESOP (banks, seller notes, company notes, etc.)

e. ESOP has the highest voting rights

D. ESOP Valuation Considerations a. Standard of value

i. IRS: Fair Market Value (FMV) ii. Department of Labor: ESOP can pay no more than Adequate Consideration (~ FMV of the stock as

determined in good faith) b. Value on enterprise basis

i. Minority position discounts apply ii. Lack of marketability discounts (DLOM) apply iii. ESOP DLOM are often small (0-10%) as compared to typical discounts (30%+)

1. Reason: ‘Put Rights’ for ESOP employees exceed the rights of typical shareholders in closely-held companies

E. Advantages and Disadvantages of ESOPs a. S-Corporation ESOP Tax Advantage

i. S-Corporation ESOPs do not pay federal income taxes for the portion of their stock owned by the ESOP

ii. They are only taxed when participants take distribution upon death, disability, retirement, etc. iii. Other S-Corporation Seller Advantages

1. Avoid using after-tax dollars to buy owner’s shares (like MBO) 2. Enables faster repayment of debt with improved cash flow (low taxes / no taxes)

ESOPs as an Exit Strategy (cont.)

b. Seller Advantages i. Retention and continuity of local HQ / jobs ii. “Legacy” – Company can continue and be sustained iii. Diversify Seller’s net worth (can sell portion, retain portion) iv. Known Buyer – controls timing and communication

c. 1042 Rollover Tax Advantage i. Benefit available to seller of C-Corporation stock only ii. Defers Capital Gains on Stock Sale (tax free proceeds at closing) iii. Eliminates Capital Gains (with step-up basis, if assets held at death) iv. At least 30% of Company stock is sold to the ESOP v. Seller must have held stock for three years & Qualifying Replacement Property (QRP) within one

year vi. QRP: Stocks and Bonds of U.S. operating companies as defined by §1042 vii. Seller who makes 1042 election, and their family members, cannot receive ESOP stock allocations

like other employees d. Additional Advantages

i. Stock Sale with ESOP transaction (versus. Asset Sale to Third-Party buyer) 1. ESOP transaction must involve Stock Sales 2. Accordingly, ESOPs can potentially generate greater after-tax proceeds than third-party

sales structured as asset sale 3. Depends on tax attributes of Company (ex. depreciation recapture)

ii. Annual Contributions to ESOP create a tax deduction 1. Cash from contribution is returned to Company for ESOP Inside Loan repayment 2. Subject to deduction limits

iii. Employees can ‘rollover’ ESOP payments to IRA e. Advantages to employees

i. Avoid sale to third party which could affect jobs ii. Avoid potential loss of jobs during economic downturns

1. Three percent of employees with employee stock ownership were laid off during Great Recession compared to a 12% rate for employees without employee stock ownership (National Science Foundation & GSS/2012)

iii. “Put right” on ESOP shares (“liquidity” for their stock) iv. More retirement assets

1. ESOP participants have approximately 2.2 times as much in their accounts as participants in comparable non-ESOP companies with Defined Contribution plans (Employee Ownership Foundation/2010)

f. ESOP Disadvantages i. ESOP can only pay Fair Market Value

1. Strategic premium might be gained by sale to industry participant or ‘roll-up’ ii. Owners may not get 100% “cash out” at closing

1. Even with bank borrowing, a 100% sale will require taking back a “seller note” for a portion of the sale price

iii. Must prepare for the current Regulatory Environment (DOL) iv. Repurchase Obligation post-formation must be planned for by the Company

ESOPs as an Exit Strategy (cont.)

F. ESOP Candidate Criteria a. Owner approaching retirement b. Capable management team to succeed owner c. Unused debt capacity d. Profits to support ESOP debt service e. Company size (more cost-effective benefit) f. Motivated by tax advantages g. Motivated by “ownership culture” advantages h. Desire to buy-out a minority shareholder i. Limited third-party / strategic buyers in market

G. Best Practices

a. Feasibility Analysis i. Valuation Analysis ii. Deal Structure discussion & analysis iii. Overview of ESOP benefits for all stakeholders iv. Financing options & alternatives v. Potential for §1042 Rollover vi. Two or more “Scenarios” may be created (ex. partial sale versus. 100% sale) vii. Defensible Projections (is forecast supported by past earnings?) viii. Sensitivity analysis to gauge “cushion” for economic downturn

b. Independent, experienced ESOP advisors i. ESOP Trustee who is Independent of the Selling shareholder

1. Financial Advisor to Trustee (Valuation Firm) c. Independent Valuation Firm (no other work performed

1. for company) 2. Legal Advisor to Trustee (ESOP counsel)

ii. Company advisor / “Quarterback” for seller and company iii. Company counsel with ESOP Experience iv. Assemble an ESOP team that has demonstrated expertise and has worked together

d. Mindful of ESOP regulatory environment i. ESOPs are regulated by the both the IRS and Department of Labor (DOL) ii. IRS: ESOP as a qualified retirement plan; avoidance of prohibited transaction rules iii. DOL provides greater scrutiny (ESOP valuation ‘Adequate Consideration’ and Fiduciary Duties of

Trustee and Selling Shareholder) iv. Companies considering an ESOP would be wise to review high-profile DOL cases and consider the

impact of these cases on their situation v. Settlements of recent DOL cases provide guidance on ‘best practices’ to limit risks for a successful

ESOP plan e. ESOP plan provisions that support sustainability

i. Vesting and plan entry rules that fit the Company’s Employee Base ii. Is 100% vesting granted to current employees, or not? iii. Distribution Rules that protect company from Repurchase Obligation issues

1. Form of distribution (lump sum thresholds, installments) 2. Timing

ESOPs as an Exit Strategy (cont.)

iv. Benefit level analysis: how large is the ESOP contribution as a % of salary? f. Sweat equity plan for management

i. Stock Appreciation Rights ii. Phantom Stock iii. Stock Options iv. 100% S-Corporation ESOPs often use Synthetic Equity to maintain tax advantage v. ESOP Trustee agreement on form and dilution % allowed for these plans

g. Integration of ESOP into overall master plan i. Gifting and/or Charitable Contribution timing ii. Employment plan & compensation plan for Selling Shareholder iii. Create “Win-Win” situation for business owner and company

H. ESOP Debt Default Rates

a. Default rates for leveraged ESOPs is low, at approximately 2% i. Default is defined as a material adjustment in terms of note, not actual bankruptcy, and total non-

payment ii. Default rates at or near rates on secured senior level debt (much lower than all other buyout

default rates)

I. Other Employee Ownership Forms a. Employee/worker-owned Cooperative

i. Does not fall under DOL jurisdiction ii. Lower cost option for sale to employees iii. Legal form of ownership – limited states iv. Limited tax benefits versus ESOPs v. Democratic – one member share = one vote vi. Operates as any normal business

b. Employee Owned Trusts i. Well established in the United Kingdom ii. Perhaps a dozen in the U.S.A iii. Few states allow for this structure iv. Assets held by the trust v. Employees share in the annual profit, not in the increase of equity over time

Family Transitions

1. Family businesses face many challenges. The most important challenges which are not being addressed include which of the following?

a) Breakdown of communication and trust within the family b) Heirs unprepared for required roles and accountability c) Non-technical people-based issues d) a and b e) a, b, and c

2. What emotional pitfalls do you need to be on the lookout for when working with family business transitions?

a) Fair vs equal b) Sibling rivalries c) Artificial harmony d) All of the above

3. The most effective way to work with a family is to only work with them during triggering or participating events?

a) True b) False c) True and false d) Neither true nor false

4. What does a Family transitions specialist not do?

a) Provide continuity across business, personal, and familial goals related to the exit planning process b) Navigate potentially challenging issues with the family so they can successfully go through the transition together c) Recommend the best structure for transferring assets without tax implications d) Build competence to have important conversations before major decisions need to occur

5. When it comes to estate planning and exit planning, who do you include?

a) The owner of the company b) The owner’s spouse c) The owner’s adult children d) The owner’s children’s spouses e) All of the above

Answers: 1) e 2) d 3) b 4) c 5) e

Family Transitions

A. The landscape a. Studies have shown that family-controlled businesses outperform non-family-controlled businesses b. Family business challenges not being addressed

i. Lack of a common vision between interested parties ii. Lack of a communication framework for all parties involved iii. Difficulty dealing with conflict, particularly around sensitive issues iv. Unwillingness for all involved parties to support the succession v. Owners are ambivalent about planning for transition and/or reluctant successors vi. Managing business profitably through change

c. Family Needs i. Greatest challenges are non-technical, people-based issues ii. Skills beyond professional qualifications are required to be effective iii. Team playing can deliver better value for client

B. What makes the family enterprise unique?

a. Identify, reputation, and history b. Family and business naturally collide c. Variety of assets d. Family dynamics e. Personalities, generations, and preferences f. Resistance to change g. Wear multiple hats h. Fairness and equality i. Disparate vision and goals j. Poor communication k. Specialized governance l. Transition pressure m. Lack of advisors trained specifically in family dynamics

C. What is a family enterprise?

a. Family business i. Operating business or businesses

b. Family wealth i. Family assets ii. Real estate iii. Heirloom assets iv. Philanthropy v. Deferred assets vi. Family assets

D. What is a family genogram?

a. A genogram is a graphic representation of a family tree that displays detailed data on relationships among individuals.

b. It goes beyond a traditional family tree by allowing the user to analyze hereditary patterns and psychological factors that punctuate relationships.

Family Transitions (cont.)

E. Family business challenges a. Preparation for the next generation to take over b. Managing family dynamics and conflicts c. How and where to transition the assets to (family, employees, outside buyers, combo) d. Division and transition

F. Continuity timeline

a. Continuity is a dynamic process that occurs over a long period of time

G. Emotional pitfalls a. Watch out for in-laws treated as ‘out-laws’ b. Sibling rivalries c. One sibling having too much influence over a parent d. Fear of conflict e. ‘Artificial harmony’ f. ‘Triangulation’

H. Common fears of parents

a. Fear of money messing up children’s lives b. Fear that children will become spoiled and dependent c. Fear of robbing children of resilience should their fortunes change

I. Key factors for a successful transition in family businesses

a. Focus on ‘What’s Next’ as you begin i. Start with the end in mind ii. When ‘exiting’ from one role, what role are you entering? iii. Create a vision based on passion and purpose

b. Modified master plan i. Financial, tax, and estate planning ii. Include all the family (as young as 18 years; in-laws) iii. Context vs. content

c. Including family in Value Acceleration Methodology™ – who, when, where i. Discover: Interviews to determine alignment and interest of stakeholders ii. Prepare: Define roles and responsibilities; assess preparedness of interested family members

and determine areas of potential conflicts of interest and future discord iii. Assemble proof: Opportunity to involve family members and build their awareness iv. Decide: No matter what decision you make, there will be an impact on your family v. Intergenerational transfer: Intersection between family, ownership, and management

1. Pros of keeping it in the family a) Business legacy preservation b) Planned c) Lower cost d) More control e) Less disruption f) High buyer/seller motivation

Family Transitions (cont.)

2. Cons a) Unhealthy family dynamics b) Illiquid buyers/lack funds c) Lower sale price d) Key employee flight risk e) Tradition may outstrip good strategy f) Path of least resistance

3. Where breakdowns often occur: a) Tension around fair vs. equal b) Lack of trust leading to insufficient education and hands-on training c) Control and power differentials d) Misunderstandings related to roles and responsibilities due to lack of

transparency vi. Other strategies: Shifting family identity from owners of the company to possibly wealth

managers d. Recommended best practices when facilitating family transitions

i. Focus on ‘fair’ vs ‘equal’ – in perception and reality ii. Clarify qualifications and expectations for roles iii. Determine standards for ownership iv. Transparency across generations v. Financial education vi. Address ‘power differentials’ and relationships vii. Determine the best governance strategies and if a family council is appropriate

J. Advisor market that surrounds the family enterprise

K. Family transitions specialists

a. Become familiar with the role of a family transitions specialists; when needed, how to introduce, ways to select

b. How to refer to a family transitions specialist i. Name the issues that need to be attended to and what could happen if they are not ii. Reassure them that you are well aware of what needs to be addressed iii. Offer them three referrals along with tips for choosing the right advisor for their particular

needs and style c. When giving referrals, empower your client to

i. Ask about their background and qualifications ii. Ask what got them into the field and how many families they have worked with iii. Ask why clients typically hire them and what happens for those who do iv. Ask about a family transition they worked on that did not go well and what they learned