February 2009Growthink’s “Bottom Line” Guide to Selling Your

Business on the Best Terms

January 7, 2010 1

What’s in This 45 Minute Presentation?

• Our recommended approach to help you sell your private

firm on the best terms

• Our Bottom Line?

• Start as early as possible. Focus on four key areas to

maximize your price and the terms of the sale.

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Today’s Presenters

• Troy Centazzo

• Managing Director; Group Lead, Investment Banking

• Per Larson

• Managing Director; Group Lead, Consulting

• Decades of combined integrated entrepreneurship, consulting and investment banking (M&A) experience

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Who is Growthink?

• Integrated strategic consulting, investment banking, and market research practice• Practice focus on gazelles and mid-size

companies

• Founded in 1999, more than 2,000 client engagements to date

• Team of 40 finance & consulting professionals

• Offices in Los Angeles, New York, San Francisco

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Our Credentials

• Member FINRA, SIPC

• Inc. 100 Fastest-growing Business Services Company in U.S.A.

• Better Business Bureau “A” Rating

• Recognized for our thought leadership regarding business planning, growing and selling comapnies, & entrepreneurship

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Webinar Format

1. 45 Minute Presentation and Q&A

2. Questions/comments as we go:

– Type in utilizing GoTo Webinar chat-box

3. After Call:

– We will provide contact information

– Survey feedback

– You will receive, via email, copies of the review slides and a recording of the presentation

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Agenda

• Who Will Likely Get the Most from this Seminar

• Why Value is Often Left on the Table by the Seller

• The Growthink Four Pronged Approach to Selling a Business

• Ideal Timeline for This Process

• The 800 Pound Gorillas in the Room: Tax Changes and the Economic Climate

• To Learn More

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This Seminar is Ideal For

• Business owners who

– Have greater than $5 million annual revenue

– Pre-tax earnings greater than $1 million

– Have at least 2 years of operating history

– Considering a sale within 3 years

– Considering a transfer of leadership to the ‘nextgeneration’

– May have been approached by intermediaries(investment banks) to represent the company in asale transaction

– Have received offers in the past to sell

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How Most Midsize Private Businesses Are Sold… And Why Value is Often Lost by Sellers

• Many private businesses are sold in this fashion….– Selling to another company or executive based on a first

offer

– Not starting early enough

– Choosing the wrong – or no – professional advisors

• This process is too often marked by:– Failure to appropriately plan to invest in value-

increasing projects

– The company’s best attributes are not optimallypresented

– Company records, financials, processes not addressed

– Deals structured without considering tax and otherimplications

– Unprepared sellers 9

1. “Getting the (Business) House in Order - Early”

• “Cleaning up” financial statements, accounting practices, outstanding

legal and other situations, and “dotting the I’s and crossing the T’s”

2. “Maximizing Your Value by Re-energizing Your Company’s Business Plan”

• Enhance the price you command by implementing a few

strategic initiatives – Business Planning 101

3. “Run a Professional-Level Sales Process”

• Creating a professional offering package, targeting the

right buyers and a leading a well-run process

4. “Structure, Structure, Structure”

• Choose the right transaction structure that maximizes your return

What is the Growthink Approach to Selling Businesses?

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Selling Your Midsize Business – an Example Timeline (24 - 30 Months)

Documentation/Records Financial Models and Statements Due Diligence

1. Getting the (Business) House in Order

Understand Success Factors Strategic Planning Execute strategic initiatives

2. Enhance the Company’s Strategy and Plan to Maximize Valuation

3. Run a Professional Level Sales Process

Understand all Tax and Legal Requirements

Create list of possible deal structures

4. Execute Proper Structure

Develop Sales “Package” Commence outreach process

Close Transaction

January 2010 January 2011 January 2012 June 2012

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Prong 1 - Getting Your (Business) House in Order

• What are the key issues that owners of private businesses often facewhen they decide to sell?

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Record Keeping

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Prong 1 - Getting Your (Business) House in Order (cont.)

The Importance of Pre-Sale Preparation and Planning

• Often private – and especially family – businesses haveintertwined legal structures and agreements developed overthe years. These should be addressed.

• Legal and Documentation

• Review legal and incorporation documents, contractualagreements and outstanding legal issues, make anynecessary changes (see due diligence list)

• Fix issues on D&B Report and/or outstanding ownersituations that affect business

• Work with counsel or a financial advisory group to create aplan to clean up your capitalization table

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Prong 1 - Getting Your (Business) House in Order (cont.)

Lower income/higher expenses = lower taxes.

BUT,

It also generally means a lower price for your company.

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Prong 1 - Getting Your (Business) House in Order (cont.)

• Financial Statements, Accounting and Taxes

• “Cleaning up” Your Balance Sheet

Assets:

• Get rid of “dead” inventory to avoid adjustments to theprice

• Eliminate “personal assets” – avoid adjustments duringdue diligence

• Excess cash – either dividend or use for growth andvaluation enhancing initiatives

• Liabilities:

• Pay off notes and other liabilities to shareholders

• Make sure all liabilities are accounted for (accruals, etc.)

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Prong 1 - Getting Your (Business) House in Order (cont.)

There are likely local accounting firms that specialize in pre-sale services. Ask for referrals.

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Prong 2 – Maximizing Value by Re-energizing Your Business Plan

• Every Business Can Enhance its Strategy and Plan

• In the stock market, businesses are judged on the future potential

of a company, not just the past. Yours should too.

• Understand the value drivers of your sector

• Generic sources of value in any industry:• Size of company

• Strength of firm compared to competition

• Profitability and cash flow; contractual ongoing (“sticky”) revenue

• Growth rate and sales pipeline

• Size of market and industry trends

• Market share

• Uniqueness of products and/or services

• Patent/intellectual property protection

• Identify and execute on key strategic initiatives that will drive thevalue of your firm

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Prong 2 – Maximizing Value by Re-energizing Your Business Plan

Lots of value left on the table by the seller

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Prong 2 – Maximizing Value by Re-energizing Your Business Plan

• Every Business Can Enhance its Strategy and Plan

• Lead a strategic and business planning process at yourcompany, asking the following:

• Do you really know your

• Customers and their needs?

• Products’ and/or services’ benefits?

• Industry and its opportunities and value drivers?

• Competition and how you compare?

• Staffing needs and expertise?

• Operations and whether they’re efficient?

• Focus on executing a few select initiatives to maximizeresults…quickly.

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Prong 2 – Maximizing Value by Re-energizing Your Business Plan

Lots of FREE content on our website: Conducting Market Research ** Business Planning **

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• Case Study – Media and Technical Staffing Company in Mid-2009

• About $6M in revenue, four years old, only a few full-time employees

• Connected to established production company

• Strong growth rate

• Intends to sell within 18 to 24 months

• Several “brand name” clients

• Minimal sales and marketing expertise and effort

• Unique expertise

• Tough market conditions to raise capital

Prong 2 – Maximizing Value by Re-energizing Your Business Plan

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Equity Valuation Enterprise Valuation

Industry Market Cap. ($mm)

65,213.8 Industry TEV ($mm) 70,713.2

P/E (LTM) 12.4x TEV/Total Revenue 0.4x

Price/Book 2.3x TEV/EBITDA (LTM) 6.5x

Price/Tangible Book 9.7x TEV/EBIT (LTM) 7.7x

Margins Profitability

Gross Margin % 22.6% Return on Assets % 8.6%

EBITDA Margin % 6.2% Return on Capital % 15.0%

Net Margin % 3.0% Return on Equity % 19.3%

Leverage Coverage

Total Debt/EBITDA 1.2x Current Ratio 1.4x

Debt/Equity 43.9% EBITDA / Interest Exp. 13.9x

Debt/Capital 30.1% (EBITDA-CAPEX) / Interest Exp.

13.5x

Company Stock Price 2 % of 52 Wk. High 2 Market Cap ($mm) 2 TEV ($mm) 2 LTM Total Rev ($mm)Manpower Inc. (NYSE:MAN) $41.31 58.4 3,236.8 3,315.7 21,552.8Kelly Services Inc. (NasdaqGS:KELY.A) $10.80 46.6 375.6 372.5 5,517.3Robert Half International Inc. (NYSE:RHI) $22.75 75.9 3,454.0 3,101.3 4,600.6Volt Information Sciences Inc. (NYSE:VOL) $7.04 44.4 146.7 138.5 2,346.0MPS Group Inc. (NYSE:MPS) $8.04 63.0 743.7 662.6 2,222.3Spherion Corp. (NYSE:SFN) $3.70 59.7 191.0 222.8 2,189.2Watson Wyatt Worldwide, Inc. (NYSE:WW) $52.17 84.1 2,222.2 2,208.9 1,773.9Administaff Inc. (NYSE:ASF) $25.70 80.9 653.5 401.6 1,724.4TrueBlue, Inc. (NYSE:TBI) $9.39 53.7 410.9 304.0 1,384.3Monster Worldwide, Inc. (NYSE:MWW) $11.80 40.2 1,453.7 1,285.0 1,343.6Industry Overall - Human Resource and Employment Services

NA NA 65,213.8 70,713.2 175,338.6

Industry Performance

A Quick Sector Check – Big Market Shares, Stock Prices Down

Information about firms in your sector yields a gold mine of information about the “value drivers” in your industry

Company Example – Media and Technical Staffing Company

Yahoo Finance, EDGAR, Yahoo/Google Business News 22

Technical Staffing Industry Overview – Key Drivers of Value (Price)

• Threshold revenue number and growth rates

• Scale, market share

• Customer list, including “types” of customers (recognizable?)

• Gross margin

• Success in a tough sales environment with a long sales cycle

• Reaching critical size

Key Business Plan Issue – How to Grow Quickly with Limited Access to Growth Capital?

Company Example – Media and Technical Staffing Company

These Conclusions Were All Derived from Publicly Available Information

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Short-Term Initiatives to Drive Value

Strategic Initiative 1 – Build up the Pipeline…and Fast

• Every Business Can Enhance its Strategy and Plan

• Implement a sales and marketing outreach strategy• Target prospects by conducting simple “Google News” searches on key terms like

“media technical staff” and reviewing online job postings

• Create a 20 minute PowerPoint presentation that provides the prospect withvaluable information about their needs, “pain points,” and options

• Implement an online “first pitch” to quickly qualify leads and set up meeting

• Reach out to non-competing, complementary providers of products/services andask for referrals

Company Example – Media and Technical Staffing Company

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Short-Term Initiatives to Drive Value

Strategic Initiative 2 - Increase Gross Margin Percent and Gross Profit Amount

• Every Business Can Enhance its Strategy and Plan

• Implement a sales and marketing outreach strategy

• Focus on adding high margin services for existing clients (company already had those available but did not focus on them)

• Focus on incremental high margin services on every new proposal and relationship

• Identify the most profitable clients and focus on delivering additional services/products to them

Company Example – Media and Technical Staffing Company

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Short-Term Initiatives to Drive Value

Company Example – Media and Technical Staffing Company

Listen To Your Existing Customers

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Potential Outcome of Strategic InitiativesIncreased Valuation and Enhanced Attractiveness as Acquisition

Even 2 – 3 additional clients and a robust pipeline will significantly enhance this company’s valuation and attractiveness to a (strategic) buyer

Each incremental $1M in annualized revenue

Each incremental $500k

in annualized EBIT

Projected revenue from late stage pipeline

prospects

Value of marquee client list to strategic partner

Will add between $500K and $1M to valuation

Will add between $4 - $8M to valuation

Will be discounted but will add to valuation and

attractiveness

Always adds to attractiveness of firm

Company Example – Media and Technical Staffing Company

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Prong 2 – Maximizing Value by Re-energizing Your Business Plan

• Key Take-Away

• This does NOT require a several month managementconsulting study that results in a report

• Focus on a few basic – but important - initiatives

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Prong 2 – Maximizing Value by Re-energizing Your Business Plan

Analysis-Paralysis by Your Friendly Neighborhood Management Consultant

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Prong 3 – A Professional-Level Sales Process

• All signs point to hiring a third party (as well as business advisors) to assistyou in the sales process

• A professional advisor will understand the value of your firm, the taxissues you face, and how to market your firm during a sale

• Packaging is key, and takes hundreds of hours to do well: financialstatements, company overview, projections, due diligence materials

• Keep the process as confidential as possible

• Creating a targeted buyer list to increase demand

• Full time process to contact and communicate with this list

• Third party intermediary allows owner to focus on the company

• The sales process can be extremely distracting and is not guaranteedto be successful

• Statistics show that hiring a third party increases valuation

• Professional negotiator – this is what an intermediary does30

Prong 3 – A Professional-Level Sales Process (cont.)

• Types of third parties (intermediaries) and advisors

Unregistered “brokers” and intermediaries with little experience

Advisor Types Description

Business Brokers – “Main Street Businesses (list price for business)

Represent small businesses and may specialize in a sector. Contingent fees about 10%+. Advertise your business.

Investment Banks – “Middle Market” (receive bids)

Develop strategy for company sale and prepare sales package (memo, presentation, financials, due diligence docs). Lead process. Retainer plus success fees.

Consultants – Individuals and Firms, including Business Appraisers

Miscellaneous advisors to prepare company for sale, find buyer, etc. Appraisers value businesses.

Accountants Enhance accounting processes, create financial statements (recasts), assist in due diligence. Advise on structure and tax issues.

Lawyers/Law Firms Review company documents and other agreements. Advise on tax issues. Review and negotiate purchase documents.

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Prong 4 – Optimizing Deal Structure and Terms

A Huge Tax Hit By Not Planning Ahead

Deal Structures, Terms

Description Pros/Cons

Asset Sale Sell assets of your company and retain liabilities.

Often preferred by buyer (to leave (hidden}liabilities and create step-up basis), but can create a large tax burden for seller. C-corp double tax –corporate tax, plus capital gains tax (more than 50% of sale).

Stock Sale Purchase stock of company fromshareholders

Most buyers prefer asset sales, but taxes may be higher

Recapitalization Option of selling to current employee and remaining active in business

Seller’s Note/Financing and Installments

You “loan” part of the purchase price to the buyer, which is paid to you over time. Installment sales.

Allows for the deferral of taxes. Third party equity investors often like this approach. But, want to be tied to business?

Ongoing Royalty Additional payments post-close (e.g., % of revenue)

Consulting Agreements

Ongoing relationship with purchased company

Additional income post-transaction.

Miscellaneous structures/terms/issues

1. Accept stock from buyer. 2. Tax free transfers to heirs. 3. Use of proceeds from sale. 4. Use of “goodwill”. 5. Annuity guarantees with installments. 6. Company structure (LLC, C Corp, S Corp). 7. Depreciation recapture.

There are so many alternatives, sellers should seek extremely qualified and experienced advisors

Nominee:“The Busiest, Most Confusing Slide in History”

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The 800 Pound Gorillas in the Room – Current Issues

• There are a few evolving conditions to closely follow

Services What’s Going On?

Capital Gains Tax Increases Potential increase from 15% to 20/25.4% in 2011 when tax cuts expire (ordinary income top bracket may rise to 39.6%).

Selling in a Down Economy -Availability of Buyer Financing

Tight credit markets, no matter what the banks are telling Congress. On the other hand, there’s lots of capital ready to invest.

Boomers, Boomers, Boomers Stats say that up to 75% of private businesses will be up for sale within a decade. Will there be more supply on the market?

? ? ?

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Recap

• Start Now if You Think you Will Sell in the Next 3 years

• Learn what Drives Value in Your Business

• Get Your (Financial) House in Order

• Re-energize Your Business Plan

• Engage a Professional to Run the Sales Process

• Understand Deal Structures and What’s the Right One for You

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To Learn More

• Contact us at:

– troy.centazzo@growthink.com

– per.larson@growthink.com

– 800-506-5728

• We can also conduct a free Company Sale Audit*

– Guidance on your particular company sale process

• In the LA area?

• We’re holding a three hour seminar based on these concepts (February 18)

*Pre-qualification required35