Managing Relationships in Brokerage

Douglas A. Dickey, CPA

DRDA, P.C.

Agenda

Entrepreneurs– Advisors – Allies or

Roadblocks– Entrepreneurial Traits

Deal Process– Buyers Side– Seller Side

Financing the Deal– Equity - BORSA– Debt

Due Diligence Closing the Deal

Advisors to Entrepreneurs According to a poll conducted by National

Federation of Independent Business and Wells Fargo, 84% of small businesses sought outside advice from:– CPA – 59% (Most Trusted Advisor)– Family – 44%– Attorney – 39%– Other Business Owners – 34%– Suppliers – 31%– Stock Broker – 30%– Insurance Agent – 30%

Managing Key Advisors

CPAs - “Most Trusted Advisor” Understanding Typical CPAs Avoids Risks Looks for Problems Focus on Past - Not Future Look for Reasons to NOT Do

Something, vs Ways to Get it Done

Traits of Entrepreneurs

Action Oriented - Make it Happen Go with their Gut Product and Sales Focus Willing to Take Certain Risks Take Control of Situations

Psychology of Entrepreneurs

Entrepreneurs versus Accountants

Communication & Coordination

Accountants are from Mars

Are backward looking Are recording, organizing &

reporting what happened in the past

Have knowledge of what has happened

Can produce tremendous amounts of data

Can produce any type of report you want, but do not know what you need

Entrepreneurs are from Venus

Are forward looking Envisioning, planning & creating Have knowledge of what is

planned. Needs information for decision

making, not data Does not know what is available

therefore does not know what to request

Deal Process

Buyer Side

Seller Side

Buyer Side Process

Qualification

Deal Review

Letter of Intent (LOI)

Due Diligence

Financing

Closing

Buyer Qualification

Financial ResourcesPersonal Financial Information

Buyer Qualification Forms

Experience

Attitude and Motivation

Strategic versus Financial

Deal Review

Matching Buyers to DealsFinding Good Matches

Deal SizeIndustry ExperienceTechnical KnowledgeStrategic versus Financial

Buyer PresentationAppropriate Presentation and Disclosure

The Handshake

Getting the LOI signedValuation Issues

Personality Issues

Doing Due DiligenceManaging the Advisors

Avoiding the Deal Killers

Creating the Definitive Documents

Financing the Deal

Financing to Increase the Deal ValueAppropriate Financing

3rd Party

Owner Finance

Earnout

Good Financing yields More Bidders

More Bidders yields Higher Price

Financing the Deal

Equity FirstSavings

Friends and Family

Investors

Tools like BORSA

Debt to Increase Return on InvestmentExternal Startup Equity is Expensive

Leverage Equity with Debt

BORSA

Business Owners Retirement Savings Account

Use 401(k), IRA and Pensions as Equity

No Taxes, Penalties or Interest!

Can result in 50+% more Equity in Deal

 Full-

Notification Factoring

SBA Lender

7a

Asset Based

Transfer & Inv.

Bank ABLConventional

BankMezzanine

Start Up Y Y  N N N N

Concentration of Accounts

Y Y Y < 20% < 20% < 20%

Inventory N Y Y Y Varies NAP

Balance Sheet/Income

StatementN Compiled

Review Preferred

Review Preferred

Varies Audited

Turnaround Time 3-5 days 3-4 weeks 2-3 weeks 4-6 weeks 3-4 weeks 3-12 weeks

Current Ratio N/A > 1.0 > 1.0 > 1.25 > 1.0 > 1.0

Working Capital N/A Positive Positive Positive Positive Positive

Total Liabilities/TNW N/A < 4:1May be

negative< 5:1 < 3:1 < 5:1

Debt Service Coverage

N/A > 1.25 > 0.75 > 1.15 > 1.25 > 1.25

LTV Equity Req'd N/A 10% N/A N/A 20% N/A

Personal Guarantees N/A Y Y Y Y Negotiable

Collateral Y Y Y Y Y Y

Key Man Insurance N Y N N Y Y

Terms < 60 days 7-25 yrs 5-25 yrs 5-25 yrs 1-25 yrs 1-5 yrs

Max Loan Amt Asset Based $2MM Asset based Asset Based Negotiable Negotiable

Facility Comparisons

Closing the Deal

Working with Attorneys

Following up on Details

Managing the Buyer and Seller

Keeping the Advisors in Line

Positive Attitudes Close Deals

Seller Side ProcessSeller Side Process

• Qualification

• Listing

• Appraisal

• Maintenance Period

• Letter of Intent (LOI)

• Due Diligence

• Closing

Seller QualificationSeller Qualification

• Seller Goals

• Seller Motivation

• Financial Position

• Timeline

• Managing Expectations

Securing the ListingSecuring the Listing

• Understanding Seller’s Goals

• Know the Seller’s Team– CPA– Attorney– Other Advisors– This Transaction and Future Referrals

• Collecting Key Information– Financial and Marketing Information

AppraisalsAppraisals

• Setting Expectations

• Dealing with Advisory Objections– Normalized Earnings– Understanding Trends

• Balancing Expectations with Hope

Relationship ManagementRelationship Management

• Avoiding Seller’s Remorse– Keeping the Seller Motivated– Waiting for Offers

• Managing Information Exchange

• Letter of Intent– Managing Advisors– Educating / Counseling the Seller

Due DiligenceDue Diligence

• Confirming Known Information– Presentation Creates Image– Working with Professionals

• Finding Unknowns – Positive Attitude Toward New Info– Put Positive People in Place

Closing the DealClosing the Deal

• Working with Attorneys– Do Not Change the Deal– No Renegotiation

• Following up on Details

• Managing the Buyer and Seller– No Runaway Bride or Groom

• Keeping the Advisors in Line

• Positive Attitudes Close Deals

Sourcing Equity and DebtSourcing Equity and Debt

• Equity is Ownership– Every Business has Equity– Even if it is less than Zero

• Debt is Borrowing– Can be From a Bank or Other Places– Debt Pays Interest

Sources of Equity

Personal Savings Refinance Personal Residence Friends and Family Private Equity Group Capital Markets Retirement Funds - BORSA

BORSA – Sources of Funds

401(a): Pensions, Profit Sharing, ESOPs 401(k) 403(b) Teachers’ Annuities 457 State, County & City (government)

IRAs – most all Traditional IRAs,Rollover IRAs SEPs, SIMPLEs, & Roth IRAs EXCEPT Inherited Non-spouse IRAs

How BORSA™ Works

o Form a new corporation - Newcoo Newco establishes a BORSA™ Plano Prior employer plan rolls over entrepreneur’s

retirement funds to BORSA™ Plano BORSA™ Plan invests in stock of Newco and

funds Newcoo Save Money on Taxes, Penalties and Interest!

BORSA™ Diagram

Prior Employer Retirement Plan

BORSA™Plan

Rollover Cash

NewcoC-Corp.

Cash to

Purchase S

hares

Corporate S

tock to B

OR

SA

TM

BORSA™ SavingsBORSATM Tax SavingsMarried Filing JointNo Dependents Without With Difference/

Distribution Distribution Savings

Wages 100,000 100,000 0

Distribution 0 150,000 150,000

Total Income 100,000 250,000 150,000

Standard Deduction 9,700 9,700 0

Personal Exemption 6,200 4,340 1,860

Taxable Income 84,100 235,960 151,860

Income Tax 14,506 58,892 44,386

10% Pre-59 Penalty 0 15,000 15,000

Total Tax/Erosion 14,506 73,892 59,386

Sources of Debt

Credit Cards SBA Loans USDA Business & Industry (B&I) Traditional Bank Financing Asset Backed Loans

EquipmentFactoring

Deal Structure

Type of TransactionAsset SaleStock PurchaseLicensing

Debt and Equity Mix Vary According to:Collateral Interest RateDeal Size

Due Diligence ProcessDue Diligence Process

• Confirming Known InformationConfirming Known Information– Presentation Creates ImagePresentation Creates Image– Working with Professionals Working with Professionals

• Finding Unknowns Finding Unknowns – Positive Attitude Toward New InfoPositive Attitude Toward New Info– Put Positive People in PlacePut Positive People in Place

Normal Due DiligenceNormal Due Diligence• Boring Tables of NumbersBoring Tables of Numbers

• Potentially ConfrontationalPotentially Confrontational

• StressfullStressfull

• Negative ImpressionNegative ImpressionFreight 2,520 1,440 1,920 1,800 1,920 2,510 Repairs 2,076 183 713 244 1,935 2,949 Telephone 1,521 746 1,100 718 1,288 959 Legal fee - - - - - - Advertising 2,434 478 525 624 - 67 Auto Expense 76 2,062 143 - 1,983 2,040 Dues & Sub. 104 150 99 - 104 99 Postage 382 47 225 - 162 114 Maintenance 3,605 1,200 1,467 1,526 1,251 1,467 Licenses & Fees - - 100 - - 450 Interest Other 213 109 128 126 122 2 Consulting Fees 9,009 5,000 3,750 - - -

DRDA Due DiligenceDRDA Due Diligence

• ColorfulColorful

• PositivePositive

• InformativeInformativeOptimal Profit Improvement

76,045 85,551 95,056 104,562 114,067

1,299,768

1,462,240

1,624,711

1,787,182

1,949,653

1,223,723

1,376,689

1,529,654

1,682,620

1,835,585

611,862688,344

764,827841,310

917,793

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

80% 90% 100% 110% 120%

Percent of Normal

Do

llars

($)

Current ProfitOptimal Profit

Optimal Improve.50% Optimal Improve.

Sales vs Profit

Sales

Profit

7.1%8.1%

8.9%

10.1%

6.8%

$-

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

$16,000,000

2000 2001 2002 2003 2004

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Sales

Profit

Percent

Asset Financing

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2000 2001 2002 2003 2004

Net Fixed AssetsCurrent LiabilitiesLong Term Liabilities

Sample List of Due Diligence RequestSample List of Due Diligence Request

A CD copy of Quick BooksA CD copy of Quick BooksCompensation schedules for Compensation schedules for

employeesemployees

Bank statements for the previous 12 Bank statements for the previous 12 months months Articles of IncorporationArticles of Incorporation

Records indicating orders, back orders Records indicating orders, back orders and WIPand WIP Corporate by lawsCorporate by laws

List of all products and their costsList of all products and their costsList of owners and their percentage List of owners and their percentage

of ownershipof ownership

Special discountsSpecial discountsEmployment agreements written or Employment agreements written or

verbalverbal

Profit margins based on wholesale and Profit margins based on wholesale and retail marketsretail markets

Contingent or off balance sheet Contingent or off balance sheet assets or liabilitiesassets or liabilities

Aged Accounts ReceivableAged Accounts Receivable Any existing buy/sell agreementsAny existing buy/sell agreements

Aged Accounts PayableAged Accounts Payable options to purchase stockoptions to purchase stock

Physical Inventory countPhysical Inventory count rights of first refusalrights of first refusal

Income tax returns from inception of Income tax returns from inception of the companythe company List of current DistributorsList of current Distributors

Equipment list with related Equipment list with related depreciation schedules.depreciation schedules. Copies of Distributor AgreementsCopies of Distributor Agreements

Copies of all leases and rental Copies of all leases and rental agreements.agreements.

Buyer Due DiligenceBuyer Due Diligence

• People MatterPeople Matter

• Buyer Team or Broker TeamBuyer Team or Broker Team

• Recommend Advisors Recommend Advisors – Good ApproachGood Approach– Makes Deals HappenMakes Deals Happen

• Manage Timeline to ClosingManage Timeline to Closing

Seller Due DiligenceSeller Due Diligence

• Good PreparationGood Preparation– Well OrganizedWell Organized– Well DocumentedWell Documented– Makes Good ImpressionMakes Good Impression– Fewer Problems and SurprisesFewer Problems and Surprises

• Be Ready Before the Buyer AsksBe Ready Before the Buyer Asks– Avoiding the Deal KillersAvoiding the Deal Killers

• Keep It Positive!Keep It Positive!

281-488-2022

doug@drdacpa.com

Douglas A. Dickey, CPA

2525 Bay Area Blvd., Ste. 460

Houston, TX 77058

281/488-2022 * Fax 281/488-5764

1011 Tremont Street

Galveston, TX 77551

409/765-9311 * Fax 409/765-9393

Managing Relationships in Brokerage