not yet a practical guide to valuation. craig kirsch director of acquisitions being a business owner...
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NOT YetNOT Yet
A Practical Guide to ValuationA Practical Guide to Valuation
Craig Kirsch Director of Acquisitions
Being a business owner is like Being a business owner is like owning a boat….owning a boat….
The two happiest days are the day The two happiest days are the day you buy it and the day you sell you buy it and the day you sell
it!it!
Craig Kirsch Director of Acquisitions
AgendaAgenda
1.1. Should I sell?Should I sell?
2.2. Types of Buyers and RisksTypes of Buyers and Risks
3.3. Valuing your companyValuing your company
4.4. Prettying up for the dancePrettying up for the dance
5.5. The other optionThe other option
Craig Kirsch Director of Acquisitions
Capital MarketsCapital Markets
Unprecedented Capital MarketsUnprecedented Capital Markets– Everyone is buying everyone elseEveryone is buying everyone else– Where do you fit in?Where do you fit in?
Craig Kirsch Director of Acquisitions
Should I Sell?Should I Sell?
Only you know this answerOnly you know this answer Things to consider:Things to consider:
– Am I ready?Am I ready?– Why am I selling?Why am I selling?– What is my company worth?What is my company worth?
Craig Kirsch Director of Acquisitions
Am I Ready…NOT YETAm I Ready…NOT YET
NO THANKS!
Big OFFER!
Please, Please
How ‘Bout Me?
Craig Kirsch Director of Acquisitions
Five Years Later……Five Years Later……
Craig Kirsch Director of Acquisitions
Now I’m ReadyNow I’m Ready
Perfect timing is Seldom Perfect
Craig Kirsch Director of Acquisitions
Why am I SellingWhy am I Selling
Maximizing your company’s value?Maximizing your company’s value?– Good timing (industry changes, peak Good timing (industry changes, peak
earnings, etc)earnings, etc) Succession Planning?Succession Planning? Just want out?Just want out? Other business interest?Other business interest? Other outside interest?Other outside interest?
Craig Kirsch Director of Acquisitions
Importance of WhyImportance of Why Answers to these questions help Answers to these questions help
determine:determine:– Potential buyersPotential buyers– Acceptable BuyerAcceptable Buyer– Acceptable priceAcceptable price– Legacy issuesLegacy issues– Future involvementFuture involvement– Who you will sell toWho you will sell to
Legacy issuesLegacy issues– False start riskFalse start risk
Craig Kirsch Director of Acquisitions
Buyer Profile and RisksBuyer Profile and RisksTypeType ProfileProfile RiskRisk
SuccessiSuccessionon
- Son or daughter- Son or daughter
- Current management- Current management- Willing?- Willing?
- Able?- Able?
- Carry note?- Carry note?
StrategicStrategic - Industry player- Industry player
- Synergy- Synergy
- Higher price- Higher price
- Dissolve - Dissolve companycompany
- Employee - Employee loyaltyloyalty
- Sharing info- Sharing info
FinancialFinancial - Equity groups- Equity groups
- Changes and exit- Changes and exit- Seeking exit- Seeking exit
- Employee - Employee loyaltyloyalty
- Lower price- Lower price
Craig Kirsch Director of Acquisitions
What is my Company What is my Company Worth?Worth?
Valuation is complex and subjectiveValuation is complex and subjective Appraisals (for selling purposes) are Appraisals (for selling purposes) are
a waste of timea waste of time Value is purely a “risk/reward” Value is purely a “risk/reward”
equation (unless you get lucky)equation (unless you get lucky)
Craig Kirsch Director of Acquisitions
Risk/RewardRisk/Reward
Multiple of earnings (or EBITDA)Multiple of earnings (or EBITDA)– Multiple predicts income the buyer Multiple predicts income the buyer
expects in return for his investmentexpects in return for his investment– Risk adjusted basisRisk adjusted basis– Risk/Price inverse relationshipRisk/Price inverse relationship
RIS
K
PR
ICE
Craig Kirsch Director of Acquisitions
Two ScenariosTwo Scenarios
Buyer 1Buyer 1 Buyer 2Buyer 2
EarningsEarnings $1.0 mil$1.0 mil $1.0 mil$1.0 mil
MultipleMultiple 5 5 8 8
Purchase pricePurchase price $5.0 mil$5.0 mil $8.0 mil$8.0 mil
Anticipated ReturnAnticipated Return 20% 20% 12.5% 12.5%
What makes up the risk/return equation?What makes up the risk/return equation?
What makes up your company’s risk/return equation?What makes up your company’s risk/return equation?
Craig Kirsch Director of Acquisitions
Buyer is Seeking ReturnBuyer is Seeking Return
Capital goes to investments that Capital goes to investments that provides the best risk adjusted returnprovides the best risk adjusted return
Craig Kirsch Director of Acquisitions
Buyer’s OptionsBuyer’s Options
Buyer has competing options:Buyer has competing options:– T-Bills (no risk)T-Bills (no risk)– Internet start up (high risk)Internet start up (high risk)
Your company has its own risk profileYour company has its own risk profile– Different for every business and industryDifferent for every business and industry– Buyers assess risk differentlyBuyers assess risk differently
Craig Kirsch Director of Acquisitions
Known RisksKnown Risks
Buying a closely held company Buying a closely held company comes with some inherent comes with some inherent risks:risks:– No one knows your business like No one knows your business like
you doyou do– Customer concentrationCustomer concentration– Lack of LiquidityLack of Liquidity– Lack of ManagementLack of Management– Narrow economic MoatNarrow economic Moat
Craig Kirsch Director of Acquisitions
RisksRisks
Other risks become apparent during Other risks become apparent during negotiations and due diligencenegotiations and due diligence– Certain risks are mitigated during Certain risks are mitigated during
negotiations and due diligencenegotiations and due diligence– There is always an analysis of There is always an analysis of
risk/reward for the buyerrisk/reward for the buyer
The key for the seller is to mitigate The key for the seller is to mitigate risksrisks
Craig Kirsch Director of Acquisitions
Risk ComparisonRisk Comparison
Back to our scenarioBack to our scenario– Is 20% right (5 times)? Is 20% right (5 times)? – Is 12.5% (8 times) right?Is 12.5% (8 times) right?
S&P 500 has returned 12.9% over S&P 500 has returned 12.9% over the last 10 yearsthe last 10 years– What is the right number? What is the right number? – Depends on the buyer, the company and Depends on the buyer, the company and
the industrythe industry
Craig Kirsch Director of Acquisitions
Mitigate RiskMitigate Risk
If you are not an S-Corporation (or If you are not an S-Corporation (or other flow through entity), elect S-other flow through entity), elect S-Status immediately.Status immediately.– Ten year waiting periodTen year waiting period– Ways to mitigateWays to mitigate– Talk to your accountantTalk to your accountant
Consider non-compete agreements Consider non-compete agreements with key personnel (talk to your with key personnel (talk to your attorney)attorney)
Craig Kirsch Director of Acquisitions
Mitigate RiskMitigate Risk
Demonstrate sustainable growthDemonstrate sustainable growth Keep customers a long time; keep blue Keep customers a long time; keep blue
chip customers longer!chip customers longer! Manage returns and creditsManage returns and credits Watch bad debtWatch bad debt Understand and communicate economic Understand and communicate economic
moat (what makes you great)moat (what makes you great) Cultivate and motivate managementCultivate and motivate management Be honest and forthright Be honest and forthright
Craig Kirsch Director of Acquisitions
All Common Sense?All Common Sense?
YES!YES!
Buyer does not know you or your Buyer does not know you or your businessbusiness– CredibilityCredibility– Small stuff adds upSmall stuff adds up– Be preparedBe prepared– No surprises No surprises
Craig Kirsch Director of Acquisitions
Other StuffOther Stuff
Be preparedBe prepared– Have answers to questions that may Have answers to questions that may
never be askednever be asked– Know your weaknessesKnow your weaknesses– Know your walk away pointKnow your walk away point
Craig Kirsch Director of Acquisitions
Some More Other StuffSome More Other Stuff
Broker or No BrokerBroker or No Broker– Pick broker wiselyPick broker wisely– Beware of “exclusivity” and length of timeBeware of “exclusivity” and length of time– Beware of “upfront” feesBeware of “upfront” fees– Transaction fees hurt (could be 6 – 8%)Transaction fees hurt (could be 6 – 8%)– Check referencesCheck references– How many deals currently (trick question)How many deals currently (trick question)– Time and disruption Time and disruption
Craig Kirsch Director of Acquisitions
Other Option – “Rex-Hide” Other Option – “Rex-Hide” ModelModel
Perfect TimingPerfect Timing Leadership and visionLeadership and vision Legacy and employeesLegacy and employees Risk off the table - cash in your pocket)Risk off the table - cash in your pocket) Someone else’s risk – keep some upsideSomeone else’s risk – keep some upside Focus on core competenciesFocus on core competencies Minimal disruption and confidentialMinimal disruption and confidential No transaction feesNo transaction fees
Craig Kirsch Director of Acquisitions
Thank You!Thank You!Craig Kirsch, Director of AcquisitionsCraig Kirsch, Director of Acquisitions
Rex-Hide, Inc.Rex-Hide, Inc.
PO Box 4726PO Box 4726
Tyler, TX 75712Tyler, TX 75712
www.rex-hideinc.com