1. To Sell or Not to Sell That is the Question! TiE - MumbaiGirish GodboleFebruary 26, 2009

2. What will we cover today Should you sell your company? Why? When? Agenda Why do buyers buy? What do they buy? Is your company positioned to sell? What do buyers read into financials? What is a fair valuation? How do you go about selling? Can you do it alone? How is life after an acquisition different? 3. Should you sell your company To Sell or Not to Objectives Picture has been removed for Sell That is thecondensing of file format Question! Personal Reasons toSell Business Reasons toSell Timing is Everythingin Life! 4. To Sell or Not to Sell Traditional conservative mentality is NEVER to sell.considered a losing proposition or surrender mentality Is it always a good idea in todays fast-changing world? What growth, stability and profits can you forecast realistically for the next 3 to 5 years? What are your personal goals? 5. To Sell or Not to Sell 6. Personal Reasons to sell Personal non-financial reasons Retirement - age/health/enjoyment Boredom! repetitive work, no challenge Freedom! from work, stress, long hours Partnership issues / break up Personal financial reasons Need money for other businesses or investments Divorce settlement Risk management (take money off the table) 7. Business Reasons to sell Problems-driven High debt Stagnation or decline (need to reinvent every 5 years!) Market changes forcing realignment Stale/Obsolete Products forcing new direction Opportunity-driven Synergy with complimentary / larger company Investment for growth (smaller portion of a bigger pie) Need for management expertise or market expansion Early Investors (typically, VCs) desire Liquidity Event 8. Timing is everything in life! Compelling Problems (health, debt, sudden changes in market conditions, etc) can force a quick sell so can Compelling Opportunities (partnership synergies, eager buyer with investment potential) Planned Selling always keep options open.there is a right price for every company at any time Plan sell strategy for game-changing trends that can have huge impact on your companys valuation 9. Why and what do buyers buy Types of ObjectivesBuyers/Investors Picture has been removed forcondensing of file format Reasons to Buy What Do They Buy? The BuyersPerspective Beauty is in the Eyeof the Beholder 10. Types of Buyers/Investors Financial Venture Capitalists, Private Equity Groups Hedge Funds, International Funds Roll-up Strategists Strategic Competitors / Suppliers / Customers Companies with complimentary products/services International companies Current Management Team 11. Reasons to Buy Financial Buyers Value-driven (cheap, good ROI by fixing/integrating) Strategic New products (acquire v/s develop) Entry into new markets (Geographical, industry vertical, technological,specialty) Client acquisition (accelerated growth / market share) Cross-selling of products / leveraging products for services Acquire management expertise Pressure to show Growth in Revenues Increased Profitability through synergistic eliminations 12. What do they Buy Turn-around or Roll up Target Companies have Good product/service , stifling due to lack of capital Stagnant/declining/loss-making due to poor management Quick to integrate established product or service Offers some other leverage opportunity e.g. offshoring Strategic Target Companies have Proven products with track record, I/P, bright future Proven services with strong client relationships Strong management team that can be integrated Growth Potential Market / Technology recognition 13. The Buyers Perspective Typical expectation is to get 3 to 5 year payback Financial buyers: 20% to 40% annualized return on capital Risk Mitigation is very important to all buyers Track record of growth Proof of responsible financial management Good business ethics Predictable revenue streams and profitability Stable and committed seller and management team Deal Structure is the tool used by the buyers to achieve the above goals 14. The Buyers Perspective Beauty is in the Eye of the Beholder Buyers dont have to buy unless they find it attractive Cultural Fit can make or break the deal Win-Win is the key Deal Structure is very important to any successful transaction both during and after acquisition 15. Is your co positioned to sell The Soul SearchingObjectives Picture has been removed forcondensing of file format Plan Strategy to Sell Getting the House inOrder Business Plan ManagementStructure Parallel Paths 16. The Soul Searching Understand the reasons why you would like to sell (Problem-driven v/s opportunity driven) What is your time horizon? Are you under pressure? How long and why do you want to stay after acquisition? What should your realistic valuation be? What will you do after the acquisition and the transition? 17. Plan Strategy to Sell Why is your company attractive to others? Who will find your company attractive? What is your realistic valuation range? How can you get maximum amount? How are you going to market it? Can you do it yourself? Who should / shouldnt be involved in the process? 18. Getting the House in order Financials prepare last 3 years Profit & Loss, Balance Sheet, Cash Flow Stmt, tax returns.observe trends Understand your Revenue and Profitability by customer / geography / product / vertical.observe strengths and weaknesses Customer contracts / vendor contracts.get renewed / extended Are there any legal cases /issues?... resolve/document I/P (patents, trademarks, product documentation) file/document Assets (improve A/R, appraise/prepare fixed assets, cash make B/S strong) Liabilities (pay overdue A/P, shareholder loans, Reduce debt , leases and risks) 19. Business Plan Minimum 3 years, perhaps 5 years financial forecast realistic growth and profitability with and w/o M&A Product development plans, with investment/synergy Sales and Marketing plans, with investment/synergy Delivery plans, with investment/synergy Competitive landscape your strengths / weaknesses 20. Management Structure Is the company professionally managed? Can it function well without you? Who has sales relationships? Who has technical vision and know-how? Organization chart clearly showing management responsibilities for Sales, Delivery, R&D, F&A, Legal, HR Team stability, track record, future commitment, drive Systems and Processes Plan, Document, Deliver Budgetary process planning and tracking 21. Parallel Paths M&A can take 6 to 12 months and may not work out Must not lose focus on business and cause distraction Confidentiality is very important Parallel execution and patience is essential Strategize.Prepare.Explore.Execute 22. How do buyers read financials Which financialdocuments Objectives Picture has been removed forcondensing of file format What does a P&Lstatement say How to read ahistorical P&L How does a B/Srelate to health How does a CF bridgethe P&L and B/S 23. Which financial documents Profit and Loss accounts with clarity on Revenue mix COGS components Thought Presented Gross ProfitA summary of whathappened in the period Expense components EBITDA Adjustments and rationale A snapshot of how it Balance sheetlooks today Assets with classification (current, fixed) Liabilities with classification (current, short term, long term) EquityAn narrative of the Cash flow statementchanges in the period Operating Financing Investing 24. What does a P&L say Revenues (Income) An indicator of all the money that flowed into a business from ops Dependent on customer invoicing for product and service salesThought Presented Not an indicator of the performance of the business Cost of Goods Sold (Direct Expenses) Money expended directly for the generation of revenues Varies in proportion with the cost of labor resources and materials Impacted by operational efficiency of a business Gross Profit Profit generated before accounting for indirect expenses Expenses (Indirect Expenses or SG&A) Money expended on sales, administration and management Control over expenses is a good indicator of how a business is run EBITDA (Earnings before Interest, Taxes, Deprn. & Amortzn.) Indicator of how much cash a business could generate with a stable B/S Key metric used by most business is establishing value of a business Adjustments to EBITDA Expense additions and subtractions to reflect a steady professionally run business 25. How to read a historical P&L Thought Presented Demand for products andWhy has growth servicesbeen variableIs future growthHow well run isthe business realisticWhat is the basis What is the value of Synergy potentialfor improved GP future year profitsValue to company Why dont expenses increase with revenues 26. How does a B/S relate to healthThought Presented Operating comfort Customer quality andcontrol over customers Investments in the business Quality of the businessas a pay master Always a problem if not currentCash management andgeneration ability Investment into the business Owner drawsMoney left in the business the business Value of 27. How a CF bridges a P&L and B/S Baseline cash generated Thought PresentedIncreased AR meanscash is consumedIncreased AP meanscash is producedCash generationpotential of the businessNew investmentsconsume cash Growing capital intensive businesses willconsume cash Cash taken by shareholders as yield from the business New debt / loans add cash, repayment reduces cash New loans personal or commercial will add cashCumulative impact of allcash flows during the year End cash is the same as cash on the B/S 28. Whats a fair valuation How are publicObjectivescompanies valued Picture has been removed forcondensing of file format How does this translateto a private company Will my valuation beabove or below market How are valuationsdone What are possible dealstructures How do I get what Iwant 29. Whats the link to public cos How are public companies valuedThought Presented How does this translate to a private company Will my valuation be above or below market What are market comparables What is a DCF valuation What are other types of valuation 30. How are public cos valued Valuations are based on future returns driven by Thought Presented Product and service demand Competitive advantage Quality of management Impact of perception creates swings Impact of perception is limited with private cos The opinion that matters is that of sellers / investors / buyers Other valuation principles are broadly similar Small private co valuations are governed by Risk discount Unlisted discount 31. How to compare public / private Valuations are still based on future projections Thought Presented Credibility of future projections matters Are relationships with current customers strong Will there be repeat business or will new customers be needed Size of the potentially addressable market The extent of investments required to realize projections Synergies with buyers current product / service portfolio Public valuations drive valuation approach Comparables based on similar companies Revolutionary companies are harder to benchmark 32. How is a valuation exercise done Net Asset Value (NAV)Thought Presented Based on historical / provisional financial statements Generally represents the minimum breakup value of a transaction Relates to the shareholders funds or net assets owned by the business Discounted Cash Flow (DCF) Concentrates on a businesses future cash generation potential Uses future free cash flow as a basis for estimating value Based on summing the discounted value of future cash flow + theterminal value of the business 33. How is a valuation exercise done Market ComparablesThought Presented Based on identifying similar publicly traded firms to act as benchmarks Benchmark P/E or P/S ratios are used to determine valuation Comparable Transaction Based on the assumption that similar transactions form relevantbenchmarks Comparable transactions together with key financial ratios are used toestablish valuation Aggregating All Inputs A typical valuation exercise uses a minimum of 3 and possibly all methods Each method provides a data point in establishing a valuation range Buyers will aim to a provide a valuation and structure that providespayback in under 3 years 34. Examples of Market CompsCOMPANY P/EMarket Cap* Thought PresentedInfosys 13.4 747,583 TCS 10.0 501,000 Wipro 9.7338,267 Tech Mahindra 5.528,978 Patni 3.315,831 Zensar2.31,678 * INR MillionP/E ratios and Market Cap as of Jan 31, 2009 35. What are possible deal structures Partial or complete sale of assets or stockThought Presented Consideration provided as cash or stock or both Guaranteed component of valuation Paid either fully at closing or over time Contingent component of valuation (Earn out) tied to Revenues Profitability Management / employee retention Integration Structures can be complex reverse merger, triangular merger, etc. to minimize risk, mitigate taxation, etc. 36. What a deal could look likeCould scale between $0 Deferral of Earn Out Valuationand $3M, may be higher$1.5M guaranteedvaluation may Thought Presented Help buyer close$3Mfinancially $1M Convince skeptics on the buyers side$0.5M Earn out valuation $1M Shared risk reward Guaranteed Valuation No growth means$1Mlittle to no earn out$4M Exceeding projections could yield a windfall $2M Seller financing Relates to EBITDA or Gross ProfitClosing 1 year2 years3 years 37. How do I get what I want Manage expectations Thought Presented Try to understand parameters for similar deals in the past Expectations way above market will lead to lots of effort with no result Think from a buyers point of view The same story may not work for every buyer and every market Most buyers will look for payback in 3 years or less Link value received to value delivered Share in the risk / reward to leveraging projections Think about benefits of leveraging the buyers infrastructure Achieving bigger and better goals Realizing growth using the buyers strengths in addition to yours 38. How do I go about selling Prep yourself and the coObjectives Picture has been removed for Preparing a detailed memocondensing of file format Contacting buyers Evaluating buyers Getting serious / LOI Supporting due diligence Negotiating final docs Closing 39. What is an information memo A to the point description of your business and opportunitiesThought Presented for a buyer An information memo is best customized to each buyer A memo should provide An Executive Summary A history and description of the business including products / services Current perspective customers, resource model, org. structure,management profiles Potential for growth based including market opportunity addressable Historical financials and projections Deal considerations why a buyer would be interested in this business 40. How many buyers to contact The larger the buyer pool the better the chance of doing a Thought Presented deal Your company will not be a fit for every buyer You only need one buyer, but thats probably not your friend or neighbor Confidentiality is paramount Irreparable damage could be caused should employees / customers cometo know a company is for sale Buyers should be first contacted anonymously Buyers should be screened to make sure they will maintain confidentiality Striking a balance Contact as many buyers as possible without risking loss of business Loss of business will lead to a lose-lose situation for you. You will loseyour business and thus any hope of being acquired at a good price 41. Who would be a good buyer A long term vision for your businessThought Presented Product / service offering synergies Customer / geography synergies Organizational synergies One that you could live with Management / cultural rapport What are the buyers stated acquisition drivers Does the buyer create a win-win strategy The ability to pay Strength of the buyers balance sheet and ability to fund immediate andfuture acquisition price commitments Committed sources of external funds to enable deal funding 42. How an LOI is a mini-contract An LOI should document key deal terms that when fully built Thought Presented out will become the final contract Principal terms for a good LOI Identity of the buyer and seller Description of the business / assets to be bought and sold Valuation and structure Management retention and compensation Exclusivity and confidentiality Non compete and non solicitation guidelines Due diligence support and back out penalties Governing Law 43. Will due diligence wear me out Require significant time and resource commitmentThought Presented Typical data requirements General business info, organization and ownership Management and staff Accounts and records including taxation and regulatory compliance Historical and projected financials (P&L, B/S and CF) Assets details including IP, real estate, equipment Liability details including long and short term loans, leases Current or threatened litigation Usually takes between 30 and 90 days (and a toll on mgmt) 44. What makes a good contract Captures everything in the LOI and more Thought Presented Provides clarity on issues and documents understandings Addresses items and issues discovered in DD Treats both sides fairly (unfair could equal unenforceable) Documents business and consideration transfer mechanisms One that a buyer and seller can live with Contract signing equals closing and funding is often immediate 45. Should I do it alone Should be able to run your business while you are selling itThought Presented Bring enough qualified buyers to the table Ensure a business is not damaged due to time, effort and confidentiality impacts Run the process efficiently Secure the best deal for yourself Should you decide you need help Work with some one you trust Trust who you work with Do not work with everyone 46. Will my life change after selling Did I do the right thing Objectives Picture has been removed forcondensing of file format Losing your throne fitting in Leveraging synergies Past reflections andfuture planning 47. Did I Do the Right Thing? Dont second guess .didnt you plan it for a reason? Show Leadership Your employees need it! Your customers relationships depend on it! Your vendors will appreciate it! Your buyer paid for it and expects it! You and your shareholders will benefit from it! 48. Losing Your Throne Fitting In! You are no longer the ultimate boss accept it happily Embrace your new role and follow the bigger vision Be a good team player. Stop saying but we always used to do it this way. Learn new methods, systems and processes Make an effort to fit in - do not form a clique consisting only of your old colleagues 49. Leveraging Synergies Synergies duplicated roles, systems (IT, HR, CRM, etc), officespace, equipment, R&D plans, vendors This is the hardest, but most important part of selling Be honest, fair and just Study and Plan as much as possible before closing Move as swiftly as possible.sooner the better Communicate appropriately with all stakeholders 50. Past Reflections and Future Planning Unique opportunity to reflect and learn from the past Enjoy the success and nostalgic memories Spend more time with the family Slow down and Recharge! ... Good opportunity to invest some time on your health, hobbies, friends, social work Introspect, research, plan your next 5 years Congratulations! You may be an Unemployable Serial Entrepreneur! 51. Whats nextObjectives Picture has been removed forcondensing of file format