Is Your Business Exit Ready? Most Aren’t, but Here’s How to Get There

Forbes Insights Webinar

January 31, 2019

• What steps should middle-market business owners and their families be taking in order to become more retirement “aware”?

• How do buyers determine the value—the price they will pay—for your business?

• How does the market measure “risk,” and why is this such a critical factor in valuation?

• What steps should you be taking now to ensure that when the time comes to exit, your business will be “transaction ready”?

Key Questions We’re Going to Pose

ContributorForbes Insights

SVP, Director Family Wealth Consulting

Key Private Bank Family Wealth

Managing Director Family Wealth Consulting

Key Private Bank Family Wealth

Panelists

Director, M&A

KeyBanc Capital Markets

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Planning: If You’re Not Transaction Ready, You’re at the Back of the Line

250,000 U.S. companies ($5M-$100M sales) will

try to exit by 2030

Only 50,000 will be deemed "market ready"

Only 30,000 will actually transact

16,000 will sell with concessions

14k will sell at desired value

Middle-Market Inefficiency

That leaves 22,000 businesses worth $1 trillion waiting for a shot at going to market

Planning:What Are You Trying

to Accomplish?

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ASSESSING THE SITUATION • Can I afford to exit my business today?

• Do I know what my company is worth?

• Do I know the transition structure that will help me get paid?

• What will I pay in taxes?

• What can I expect to earn on net proceeds and other income?

Can you answer these questions?

PLANNING: WHAT KIND

OF OWNER ARE YOU?

Well-off but

choose to workRich and ready

to go

Stay and growGet me out at the

highest price

Low High

Low

High

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Financial

Readiness

Mental Readiness

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BUSINESS VALUATION:

REALITY CHECK

• How many believe you know the value of your company?

• How many believe you could sell your company today for the expected value?

• How many believe you are objective in assessing your company?

• How many would invest 100% of their proceeds back into the company you just sold?

2.5% 13.5% 34% 34% 13.5% 2.5%

How attractive is your company?

Sort of

Cute

Sort of

Pretty PrettyNot So

Pretty

Greatly

Lacking

Beauty Beautiful

-3 -2 -1 0 1 2 3

STANDARD DEVIATIONS

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BUSINESS VALUATION:

REALITY CHECK

Cute

Comparable Companies

Company Age

Product

Sales

EBITDA

Market Growth

BUSINESS VALUATION: A TALE OF TWO COMPANIES

Company A

25 Years Old

Niche Consumer Product

#30M

#3M

Nominal

Company B

25 Years Old

Niche Consumer Product

#30M

#3M

Nominal

Should These Two Firms Have the Same Value?

Minimal Product Development Program Robust

Original and Worn Equipment Condition New, State-of-the-Art

Thin and Weak Management Team Deep and Experienced

5-Year-Old Plan Strategic Planning Highly Developed

Old, Antiquated Information Systems State-of-the-Art

Unsophisticated Financial Reporting Highly Disciplined

None Lean Initiatives Fully Implemented

At Risk Sustainability Industry Leader

Haphazard Training Regular and Formal

Historical cash flow = distributions + amounts reinvested in business

Benefit Stream

X Multiple

= Value

Highest possible based on “rosy” risk assessment

Amount equivalent to satisfy ego or justify

effort for last 20-30 years

Sustainable & realistic bottom-line

future cash flows

Lowest possible based on “realistic”

risk assessment

Amount that achieves desired rate of return

SELLER’S VIEW

Value is a function of quality and risk

vs.

vs.

vs.

BUSINESS VALUATION: VIEW OF SELLER VERSUS BUYER

BUYER’S VIEW

Business Valuation: Simple Valuation Formula

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cost of capital-aka-“RISK”

Cash flow next period

growth

valueV

=CF1

_____________

k - g

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Transaction Value Based on:

• Economic conditions

• Industry dynamics/timing

• Comparable transactions

• Can I sell for higher?

• Can I buy for lower?

• Negotiating strategy

• Deal structure and terms

• Legal documentation

• Creating auction processes

What do these items have to do with fundamental value?

Business Valuation: The Seller Perspective

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Transaction Value Based on:

Business Valuation: Buyer Focus

• Strategic plan

• Quality of operations

• Transferability of IP

• Sustainability of profits

• Depth of management

• Customer relationships

• Market leadership position

• Competitive tension

• Working capital management

• Cyclical exposure

• Ability to achieve projections

• Operating synergies

• Sales growth potential

• Long-term ROI

• Ability to finance

• Quality of reporting

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$15 million

THE DREADED “VALUE GAP”

BUSINESS VALUATION: IMPACT TO SELLER

Retirement portfolio needs

$15 millionOwner assessment of business value

$11 millionMarket assessment of business value

$4 millionValue Gap

Action required: Grow your company!

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Many owners believe that the most

effective strategy to build business value is to:

BUSINESS VALUATION:

OWNER MISCONCEPTIONS TO BUILDING VALUE

INCREASE

REVENUE

DECREASE

COSTS

ACQUIRE

OTHER FIRMS

Or some combination of the above

|

V

A

L

U

E

| ----------REVENUE---------->

Consumes capital

Strains organization

Increases business risk

Damages

reputation

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COMMON UNINTENDED

CONSEQUENCES:

PURSUING REVENUE STRATEGY

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|

V

A

L

U

E

| ---------COST CUTS-------->

Quality suffers

Service weakens

Relationships break

Morale

deterioratesCOMMON UNINTENDED

CONSEQUENCES:

PURSUING EXPENSE

REDUCTION STRATEGY

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|

V

A

L

U

E

| --------ACQUISITIONS------->

Pressure exposes

weaknesses

Cultures don’t mesh

Customers defect

Synergies aren’t

realizedCOMMON UNINTENDED

CONSEQUENCES:

PURSUING ACQUISITION

STRATEGY

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The Cycle of Building Value

External Value Drivers Create Opportunity

Internal Value Drivers Create Capacity

Continuous Improvement

Products Services

RelationshipsIndustry Positioning

Branding Barriers Competition

Distribution Demand

Mission Vision Planning Leadership

Strategy Structure Organization

Management Systems Processes

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Business Valuation: Setting Priorities/Selecting Projects

De-Risking

Strategy

Efficiency

Growth

Culture

1

2

3

4

5

Time / Effort / $ Invested

Valu

e (

$)

SETTING PRIORITIES

In Summary

You need

to understand

the role of risk

in valuation—

and take steps

to reduce risks;

maximize

intangible value

You need

to understand

your goals

You need an

objective

assessment of

your business

and personal

situation

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Questions?

Where to Learn More

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