Presentation Title Goes Here
Presenter NamePresenter Title Here
Succession by Design
Bob Ward – WARDden LLC
A blueprint for wealth creation and business continuity
Succession – One After the Other
When businesses are built to endure, everyone wins:
Retiring Owners
Successor Buyers
Employees
Customers
Communities
Every Business Needs a Plan
Family Wealth Preservation
Business Continuity
Intentional Results vs. Chaotic Consequences
Realization of Enterprise Value
A Rewarding Legacy
Reasons to Get it Done Now
Your business survives even if you don’t
Provides for your spouse and family’s security
Reduces employee turnover
Increases profitability
Your business is always ready for sale
Time is an asset – let it work for you
Business Continuity
Activation
Operational Authority
Employee Retention
Financial Stability
System Operations
Professional Resources
What is Your Business Worth?
Assets at FMV+
(Enterprise Value x Market Multiple)
= Sale Value
Assets at Fair Market Value
Accounts Receivable: Percent collectable
Inventory: Cash return parts @100%, balance will be discounted to marketability
Furniture, Fixtures, Equipment: Value at auction
Any business debt assumed by a buyer will be subtracted from assets value to arrive at Net Assets being purchased
Enterprise Value
Enterprise value is the cash flow generated by your people, utilizing the assets, and represents
an investor’s Return On Investment
Cash Flow = Net Income + Adjustments
Compelling Inspiration
“The growth and development of people is the highest calling of leadership.”
“It is only as we develop others that we permanently succeed.”
Harvey Firestone
Adjustments to Cash Flow
1. Interest, Taxes, Depreciation, Amortization
2. Personal items expensed to the business
3. Non-recurring extraordinary items
4. Owner lease payments above or below market rate
5. Owner’s salary & benefits above or below replacement rate
Owner’s Pay Normalization
1. Owner ($50,000) is NOT REQUIRED for the successful operation of the business – No replacement required:
Add $50,000 to Cash Flow
2. Owner ($36,000) is REQUIRED for the successful operation of the business – Market rate for replacement is $50,000:
Subtract $14,000 from Cash Flow
Summary - Enterprise Value
Net Profit – As Reported $80,000
Interest Expense $5,000
Depreciation $10,000
Owner Underpaid (required staff) -$14,000
Personal Gas, Maintenance, Insurance, Cellphones, Cable $10,000
Lease Payment in Excess of Market $9,000
Net Profit – As Adjusted (True Cash Flow) Enterprise Value $100,000
Cash Flow = Net income + Adjustments
Market Multiple
A multiple (premium) of enterprise value (cash flow) that a buyer would pay in exchange for
the required risk-adjusted return on invested capital
Security and consistency of cash flow drives the multiple (e.g. 0 – 4 x $100,000)
$000,000 - $400,000
Lower Risk Influences a Higher Multiple
Market Multiple – Key Influencers
Site Security: Lease Terms; Option to Purchase; FROP; FROR
Revenue Trend: Company and Industry Comparable (3 years)
Profit Margin Trend: Company and Industry Comparable
Employee Stability: Key Employee Tenure and Responsibility
Owner Autonomy: Operational Independence from Owner
Audience Reality Exercise - A
Site Security: Lease 3y + 5y; P-Option(N), FROP/FROR(N)
Revenue Trend: +2% -7% +4% +3%
Profit Margin Trend:-4% -6% +9% +1%
Employee Stability:
8 EE’s: Average Tenure = 3.5 years
Top 2 positions: #1 = 2 years and #2 = 4 years
Owner Autonomy: Works 50 hours week as Manager
Audience Reality Exercise - B
Site Security: Lease 3y + 15y; P-Option(N), FROP/FROR(Y)
Revenue Trend: +5% +9% +9% +12%
Profit Margin Trend: +7% +8% +12% +10%
Employee Stability:
8 EE’s: Average Tenure = 7 years
Top 2 positions: #1 = 12 years and #2 = 14 years
Owner Autonomy: Works 15 hours week Coaching Staff
Audience Reality Exercise - A
Site Security: Lease 3y + 5y; P-Option(N), FROP/FROR(N) 1
Revenue Trend: +2% -7% +4% +3% 1
Profit Margin Trend: -4% -6% +9% +1% 1
Employee Stability: 1
8 EE’s: Average Tenure = 2.5 years
Top 2 positions: #1 = 2 years and #2 = 4 years
Owner Autonomy: Works 50 hours week as Manager 0
Audience Reality Exercise - B
Site Security: Lease 3y + 15y; P-Option(N), FROP/FROR(Y) 3
Revenue Trend: +5% +9% +9% +12% 3
Profit Margin Trend: +7% +8% +12% +10% 3
Employee Stability: 4
8 EE’s: Average Tenure = 7 years
Top 2 positions: #1 = 12 years and #2 = 14 years
Owner Autonomy: Works 15 hours week Coaching Staff 4
Audience Reality - Results
Enterprise Value = $100,000 Business A Business B
Site Security 1 3
Revenue Trend 1 3
Profit Margin Trend 1 3
Employee Stability 1 4
Owner Autonomy 0 4
Indicated Market Multiple 4 / 5 = 0.8 18 / 5 = 3.6
Suggested Enterprise Value $80,000 $360,000
Compelling Inspiration
“Outstanding leaders go out of the way to boost the self-esteem of their personnel. If people believe in themselves, it’s amazing what they can accomplish.”
Sam Walton
What is Your Business Worth?
Assets at FMV+
(Cash Flow x Market Multiple)
= Suggested Value
Build a Valuable Enterprise
Define your objective – What do you want?
Work each day with the end in mind
Build the business to operate without you
Hire Partners Not Employees
Ensure Your Succession
Exit Options
Liquidation
Unsolicited Outside Buyer
Brokered Sale
Inside (Employee) Buyer
Financing Options
1. Purchaser Cash
2. Bank Financing: Assets x (75% - 85%)
3. Owner Financing
Cash / Equity Accumulation / Bank Financing
Succession Creativity
Comparing Two Options
$400,000 Cash Payment
– You invest @ 5% for 10 years = $200,000) = $600,000
Succession Creativity
Cash / Equity Accumulation / Bank Financing
– Sell 5% a year for 10 years; Bank assists balance financing
– $200,000 + $725,000 dividends + $200,000 cash out
– = $1,125,000 (plus earnings on payments)
Letter of Intent
“Formal Handshake”
Sale Terms
Conditions
Contingencies
Property Sale or Lease Terms
Succession Plan Killers
Losing focus of the goal
Procrastination
Unrealistic expectations
Business not ready for sale
Skepticism, mistrust, selfishness
Time – Progress too slow – Enthusiasm wanes
Succession in Real Life
Doug Knutzen
Long Beach, Washington
Millie Showers
Succession in Real Life
Steeleville, Illinois
Matt & Andrea Mevert
Homework Assignments
Decide what you really want in your life Maintain a Business Continuity Plan Maintain a Business Profile (Always ready for sale) Build your business to operate without you Don’t hire employees – cultivate Partners Plan your succession Have the essential conversation with your staff
The Essential Conversation
“Key Employee,
“I’m working on my plan for the future of (business) and my retirement one day. You’re an important part of that planning and I want to know what’s important to you and your family.
– Where do you want to be in the next 5 – 10 years?
– What are your aspirations?”
Compelling Inspiration
“The greatest good you can do for another is not just to share your riches, but to reveal to him his own.”
Benjamin Disraeli
It’s Time to Begin
Perpetuating Successful Small Business in America
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Your business, your future – We’ll help you get it done.
Compelling Inspiration
“The essence of competitiveness is
liberated when we make people
believe that what they think and do is
important – and then get out of their
way while they do it.”
“Giving people self-confidence is by far
the most important thing that I can do
because, then they will act.”Jack Welch
Thank You!
Succession by Design
Bob Ward – WARDden LLC
A blueprint for wealth creation and business continuity
Seminar Presentations Available for Download Until June 10, 2015
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