PREPARE! TO GET HIGER RETURNSON SELLING YOUR BUSINESS

Leamon Crooms

STRATEGIC GROWTH ADVISORS LLC

To Get High Returns on Selling Your Business

Copyright © 2014 Strategic Growth Advisors, LLCAll Rights Reserved

Please treat this draft as proprietary and confidential.

Prepare!

Confidentiality Agreement.By receiving and reading this draft you are agreeing to keep this document confidential and all contents herein. Furthermore, you agree to use this document only for purposes of developing a statement of work, and to limit distribution only to those employees or vendors that need to view the information in support of the creation of a statement of work.

Do you know the saying, "Proper preparation prevents piss poor performance."? If you want toget a high return on selling your company, remember it and put it into practice well before youstart marketing your business for sale.

My years of experience running and selling my own businesses as well as advising and selling

They usually not only get the price they want but they often get more than their initial askingprice.

Without proper preparation before you start your sale process you willseem unprepared, and your business will appear less valuable. Youknow this if you have ever sold a car or a home.Simply put, clean and shiny looks more valuable than grimy and dull.

Unfortunately, my experience is that most sellers don't prepare to selluntil a buyer or their circumstances force the issue. The consequencesof this reactionary approach compounded bythe lack of preparation can severely and negatively impact your sales price.

Most real-world, buy-sell transactions initially favor your buyer. Think of it like dating. You wantto attract the best buyer. You want them to notice you, date you and seal the deal. No not just

At the beginning of the process you have very little power. However, your leverage increases asyour buyer progresses through the process and begins to really anticipate a deal with you. Butremember, your buyer can always walk away, so everything you do to keep your buyerinterested and comfortable will keep the process moving toward your goal.

You have 3 goals when you prepare:

PREPARATION IS YOUR MOST POWERFUL TOOL.

As you read this ebook you will discover:

look as good as possible to your buyer

But what are the components of preparation? And whatspecifically should you do to prepareyour business andhow? We will answer these questions and more inthis ebook.

begin preparing

destroy deal value

howto influence it

You will learn that you created all the value in your business during the years that you devotedto building your business and that during the sales process in the last 6-12 months you can onlyreceive all the value you created leave some on the table.

If you are a first time seller or a serial entrepreneur I guarantee that you will learn somethingthat will help you get a higher price at close or show you how to avoid mistakes that could ruinyour deal.

After reading this ebook you will be prepared to get a higher return on what may be be the mostimportant business day of your life.

Why 3 Years Before You Sell Is the Right Time to Begin Preparing

Preparation is not merely what you do before you start the sales process. It is the beginning of your sales process. Yes, taking the time to prepare is mandatory if you expect to get a high return when you sell

your business

The big secret when selling your business is that it has all been done before,and there is a standard and accepted approach for everything within a sale process.

LEARN IT AND YOU GAIN AN ADVANTAGE

Since the Middle Ages, Merchant banking dominance shifted from the Italian states, toAmsterdam, London, and then the US as Private Equity.

Throughout its 500 - 600 year evolution, countless businesses have been bought and sold. Even today we are using some of the same the rules of the buy-sell game created long ago.

Central to the rules is the expectation that the buyer will request a historical accounting of yourbusiness prepared by neutral party. This standard is also followed when requesting a loan froma bank. In both situations they will expect to see 3 years historical financial statements.

Why 3 years?Because, 3 years is the shortest amount of time within whichyou can detect a business trend:

So, if you decide to put your company up for sale withoutknowing the 3 year standard you will have missed out on

the opportunity to fix those things that might easily maximize your sale price.

After understanding how your business is trending, a buyer will generally turn his or her attention to the trailing twelve months (TTM) of EBITDA (earnings before interest taxes depreciation and amortization) as a representation of the profit your business generateswithout the effects of financing and accounting decisions.

And what about other impacts on profitability such as the building the business owns or the perks like an airplane or boat that the business funds

There is a process called normalization where you add back to EBITDA all of the expenses thatare perks or non-essential to running the business.After you complete the normalization processyour EBITDA becomes Adjusted EBITDA.

As you can imagine there can be some debateand negotiation around which adjustments areacceptable to both buyer and seller.

Use The 5 C's To Prepare Your Diamond In The Rough

Certain elements need to be present to achieve the high value sale. Remember, the buy-sellprocess is an ancient one, so it always shocksme a little bit when I see sellers failing to take

the time to identify and understand these high-value generating keys. Fortunately, you are not one of those sellers.

The phrase "Cash is King" couldn't be more true when it comes to selling your company

positive adjusted EBITDA) then it couldn't possibly have any real value as an ongoing concern.

What would you pay me for a business that generates $50 million in revenue,has $50 million in expenses, and a negative adjusted EBITDA?

Of course, there are more than a few ways to value and price a company, and depending upon the situation many factors can make an impact. But, in general the value of your company is calculated using 3 components:

Actual and projected EBITDA stated in today's dollars. Timevalue of money tells us that adollar today is worth more than a dollar we are expecting to receivea year from now.

The EBITDA it actually produces today

The EBITDA it is projected to produce over a number ofyears usually 5-10

So,we must discount future dollars and state them in present value terms.

1 2 3

If your company does not generate a positive EBITDA then it has no real value as an ongoing concern.

Here is what you do:

Streamline and improve the efficiency of key processes that impact cash such as the orderto cash process, returns or reverse distribution, spoilage or shrinkage

Get rid of non-essentialexpenses such as the carryingcost of unused assets orinventory

Improve and streamline your revenue cycleconvert receivables into cash more quickly

Consistency

If Cash is King, Consistency is surely the Queen. What if your business consistently makes $750 thousand in profit year 1, $1 million in year 2, and $1.25 million in year 3?

But your competitor makes

$3 million in year 1, loses $2 million in year 2 and makes $2 million in year 3.

Which business do you consider the stronger business?

Of course, both made $3 million in profits over the 3 years, butthe way your business made it looks better. That is becauseyour performance was predictable and consistent. At a visceral

level that increasing trend line communicates strength andoptimism.

So, the business that produces $3 million over 3 years with the greatest consistency will get the higher price.

Your consistency has value because the buyer is looking everywherefor assurance that the business will continue to generate profits

after the transition. In fact, he has nightmares of going into the office the day after thesale, and showing a loss for thebusiness he just bought.

In finance, the definition of risk is the standard deviation or variability of thereturns of an investment, or EBITDA inthe case of your business. The greater

the variability, the greater therisk. The opposite is alsotrue - the more consistentthe lower the risk.

Yes, consistent cash produces a higher value and higher price.Manage your business so your cash profits are as consistentas possible.

COLLATERAL

When selling your business your marketing document thatpresents your business for sale is commonly called a "because it provides just enough information to "tease" yourbuyer forward in the process.

No, not "collateral" as in "damage", but collateral as in yourmarketing documentation.

All documentation that you provideyour buyer is marketing and salesdocumentation.

And, there is a lot of documentation to provide in thetypical sales process. From the confidentiality

agreement (CA), the teaser, Letter of intent (LOI) tothe countless due diligence documents, each tellsyour buyer a bit more about you and either swingsthe negotiation in your favor

So, as you turn over documents you will want to communicate 3 important points to your buyer:

- essentially that you are not arookie. And, it shows because you are running a standard process.

- you are ready to "open the kimono" by having the documentsprepared and ready to go

- you're not trying to "bury" facts, use non-standard approaches orcheap tricks to get around disclosing issues that may exist. No business is without anyissues.

Run a standard process.

It will be important to invest the time to learn the standard process, or to hire an advisor that is knowledgeable enough to create one for you. Prepare each step in advance andprepare contingent steps to account for unexpected changes. Explain the processto your buyers and verify that they understand it.

Hide nothing!

Be as open and transparent as you can. Prepare and presentall documentation in advance. For example, put effort intoyour teaser by having it professionally drafted. This is your initial impression and your first chance to tell your story.Tell it well. Also, if you want to make it easy on yourselfand your buyers, use a data room. A data room is webTechnology where you can upload all documents once,and keep track of who downloads, when and howoften.This information can be very valuable to you in discerningwho really has an interest,where there interest lies, andwhen that interest changes.

If your business has issues clean them up before you sell.If issues remain after you start the sales process make yourstandard documentation available. It is the task toidentify issues and get comfortable with your businessthrough due diligence.

One additional point just for you - leverage your collateral to create a negotiation advantageBefore you turn over your due diligence documents there is a standard process that typicallystarts the negotiations. If you miss it, then you will surely leave money on the table.

It is customary for you, the seller, to draft a non-binding Letter of Intent (LOI) to purchase yourcompany and request your buyers to sign it. In their response to the LOI, the buyers offer aprice or price range that they are willing to pay. You select the buyer that looks the best.

Using this process and your due diligence documentation in this way creates a significant

CUSTOMERSYou have devoted most of your business life to building this business and everything comes down to the one day you sign final documents.

It may be the most important day of your business life. And,buyer may be your most important customer of all.

How important will that day be to you?

So, you will want to keep this in mind throughout your interactions.This final customer is no less a customer than any others you havehad over the years. The relationship is probably much more complexthan most relationships with customers because of the stakes andthe intensity of negotiations.

Nevertheless, treat them as you would any of your bestcustomers. Take them through your "white glove" process.Surprise and delight them at every interaction. You mustgive them every reason to buy your company at thehighest value, and feel good about it.

It is highly likely that they have recently looked at or arein the process of looking at other deals. Just as theexperienced buyer will expect that you are courting other

buyers they will have other options also. You must giveyour buyers a reason to stop looking elsewhere andfocus their attention on you!

Your buyer is your final and mostimportant customer.

ConfidantWho you choose to work with through your sale process is critically important.

That person or group will become one of your most intimate and trustedadvisers, yourleadership team and your business so they can help guide you through whatwill inevitably be an exciting but challenging process.

So, why does hiring an advisor that reaches the level of a confidant make sense vs. hiring someone else?

Of course, buyers and sellers are meeting and doing deals all of the time,and deals are getting done every day without the assistance of a "middleman".

ButRemember when we said thatdeals are naturally stacked infavor of the buyer?

Here's one very important reasonwhy - most buyers that arebuying well run and highervalued businesses like yours aregenerally professional buyers.They are Private Equity firms, orprofessionals working in M&Adepartments of companies.From the very beginning theyhave bigger teams with moreexpertise.

To tip the scales in your favoryou will want your "confidant"to do 4 very specific things foryou.

Assist you with preparing your business for sale wellbefore the process begins :

Who better than your confidant to roll up their sleeves andhelp you prepare your business for sale. By doing so youradvisor gets to know your business very well before the saleprocess unfolds. Engage your sell-side advisor early to helpprepare your business and tips the odds in your favor.

Apply experience from both the sell and buy side ofthe process:

Having an advisor on your team with experience from thebuy and sell side of a transaction will give you a uniqueadvantage. Perspectives change when you have experiencefrom both sides of the transaction and have had topersonally live with the buys and sells youhave made.

Deliver the right potential buyers to the table

Delivering the right buyer is critical in getting a deal done. Your advisorwill need to fully understand that value that your company deliversand what potential buyers in your market are looking for.

Support you and the process as it unfoldsThe journey from planning to a completed sale generally averages6 - 12 months. Once you start the process you only have 1 of twooptions. That is, hold on and see the process throughor hit the emergency brake and bail out.

Because a sale generally involves high stakes all parties are usually highly sensitized. It kind of like riding a vintage woodenroller coaster, a really large and long wooden roller coaster. You will feel every bump, anticipate the slow climb to the top,

seat next to you.

Trainingthere is no way to get around the fact that selling acompany is a technicalprocess that requires trainingand skill. Look for an advisor with:

• A degree in finance or an MBA• Valuation training or certification• Training or solid experience as a consultant

growing and improving businesses• Training as an investment banker

PreparationMany advisors are primarily sales focused and theyrun their businesses like real estate agencies wherevolume is key to their success. There may be a placefor that type of advisor in the high volume market.However, for your business consider that it has taken

your advisor spend significant time helping youprepare your business to sell so you can get thehighest return? Look for an advisor that:

• Is willing to spend the time to prepare yourbusiness before the sale

• Has operational expertise with businesses like yours• Has a track record of helping businesses improve

ExperienceMany advisors are sales focused and they want to get to and through the sale as quickly as possible. Sure, you want a trustedAdvisor and confidant that can close your deal but you want and should expect more. You want your transaction to have the

advisor and confidant to have experience:

youthrough this process

• Attention –

A successful sale will be the catalyst for a great relationship butlong before the relationship develops much time and attentionwill be invested in you and your company. You will want your

even. Yours is not a high volume sale so your advisor should:

Attention

business

and understand your business

practicing your roles, processes and sales pitch

How Crappy Collateral And Cheap Tricks Destroy Deal Value

Why would a seller present crappy collateral or resort to cheap tricks? Simple, the seller iseither uninformed and does not understand the consequences, or he knows his business has

fatal flaws and he is trying to sell you a pig with lipstick.

Unfortunately, your buyer won't easily be able to distinguish betweenthe uninformed seller and the pig promoter.

But, the real value of this section is in the cheap tricks that you want to avoid.

Here are the top 3:

Multiple of Revenue Pricing

Occasionally a seller may attempt to use an unconventional approach to valuation and pricing. Beware the seller thatattempts to convince you to pay based on a multiple (1x, 2x, etc.) of revenue. Remember that valuation and pricing foran ongoing and healthy concern is based on bottom line, cash profits.

Not every seller or buyer understands this, nor does every broker or adviser. And, that isprecisely what the seller may be counting on.

Not every seller or buyer understands this, nor does every broker or adviser. And, that is precisely what the sellermay be counting on.

Add backs to EBITDA

The commonly accepted measure of profitability in traditional buy-sell transactions is EBITDA. It is an accepted measureof company operating profitability, and often inaccurately accepted as a proxy for cash flow.

It is an acronym that stands for earnings before interest, taxes, depreciation and amortization, and is commonly used byinvestment bankers, brokers and advisers. You will see company valuations and prices presented in terms of a multiple ofEBITDA such as 3 times (3x) or 7 times (7x) EBITDA. The multiple range is based on what comparable companies likeyours are sellingfor in the market.

When using EBITDA to value a company it is customary toadd back to EBITDA or "normalize"EBITDA with items likeexcessive salary taken out by the owner, non-essential familyworkerson the payroll, owner perks such as the companyairplane or yacht.

Cash accounting is used primarily by small companies becauseit is an easier accounting method. Some companies exploit the"flexibility" of cash basis for tax purposes by pre-paying itemsat the end of the year, or holding checks into the new year todelay revenue. All for the purpose of manipulating tax eectsbecause it is harder to track cash.

Because of this flexibility, cash accounting is a lousy basis touse for valuation.

The Secret to Controlling the Sale

Getting a deal done is not easy!

If it were, there would be no need for investment bankers, brokers oradvisers. When a deal issuccessfully concluded you can bet that abuyer, a seller and their respective teams have invested anywherefrom 6 - 12 months on average working through countless details.Each side needing to play its part, and working together toward asuccessful conclusion.

As we discussed previously, buyers are ultimately in control - theyhold all the cash and can walk away at any time. But, as the processcontinues the seller gains more leverage as the buyer becomes moreinvested in the deal. The more control you can maintain over the salesprocess - finding, engaging and closing the buyer, the greater yourodds of closing a successfuldeal.

As the seller you get to decide the rules of your particular sale process. If you start with what is considered standard thenyou will attract the most potential buyers. A standard process looks something like this:

company financials in depth- a non-binding statement of interest,

and indication of desire to move forward

out lookie--binding commitment to purchase subject to key conditions

from remaining buyers

to finalize their price and conclude the purchase, including onsite visits

describing the deal

Variations of this process may exist based upon the size and complexity ofthe company you are selling, and based upon how you would like tocontrol the process.

When selling your company, time is your enemy once the processgets started.

There are a million things that can go wrong and the longer it takes toconclude a deal the greater the likelihood that something will go wrong.Any number of deal killers can occur like:

results from his company

by the buyer

downward trend beginning

So, invest the time to structure your sale process to your advantage because everything else remains in the hands

of your buyer.

Know the 1 Thing That Is Out Of Your Control and How to Influence It

Whether you get a deal done or not during any particular sales process is really not completely within your power to see.

The most you can do is to apply leverage to increase your odds of a successful outcome; that is, running a tight processwith the right support team, selecting the right buyer to enter into exclusivity, and getting a bit lucky with your timing.

Knowing this will help you think realistically about what it will take to sell your business. In the face of all of that

In the face of all of that uncertainty your big concern is probably,"What if I go through the process and I don't sell?"

Prepare for extremes and the rest will be easy!

Here is what you can do:

You will want someone that can help you prepare the business andhelp you sell it.

Prepare early and thoroughly

Start your prep process 1, 2 even 3 years before you are ready to sell.Deliver a clean business, with organized documentation, and animproving profit trend.

Invest in value generating activities

focus on processes like your revenue to cash cycle, and on trimming non-essentials. This will immediately increase your profits regardless of how long it takes to get your deal done.

Commit to the long haul

Remember that it may not happen fast nor the first time so be prepared for a 1 -2 year process

Include employees in the payo

This one is easy but almost always overlooked. Oer a bonus for a successful close and transition, and as a nice way to saythank you after years of successfully working together. Right up to the day you sign closing documents and very often evenafter the new owners take over, employees are critical to maintaining your value and sale price. If key employees or a significantnumber of employees leave, then your price will surely drop or you may lose the deal altogether. And, if you have to run morethan one process your employees will be more likely to stay engaged.

Take care of customers

What is true for employees is doubly true for customers. Your customers will obviously be concerned about a change inownership so deal with it by ramping up your customer service and benefits before the sale process starts.

At a point when a transaction is imminent, contact your customers by phone or in person and break the news. Yes, you! Thehead honcho. Be sure to calm their fears and let themknow as is customary that you will be continuing with the businessfor some time to assistwith the transition. Plan on staying for a period of time through the transition. Remind themof your commitment to them now and through the transition.

Put your competitors on the defensive

When your competitors get wind of a potential change in ownership(and they eventually will) anticipate that they might use that informationto cherry pick your best customers.

Don't let that happen. Direct your sales force to double its eorts wellbefore the news becomespublic. As we discussed earlier, enlist them todeliver improved customer service and additional benefits. Personallycontacting each of your key customers will also help.

Then, if you want to take an aggressive posture direct your salesforce to increase their calling activity onyour competitor's customers. Beat them to the punch.

PREPARE YOUR BUSINESS TO SELL AND GET A HIGHER PRICE AT CLOSE

P.S. one final secret:

Remember that real value and your higher price is created long before thedeal gets done.

So, look for an advisor that is truly interested in you, your business,and willing to invest the time to prepare your business. Make sure they havethe operate experience, business improvement expertise and training towork with you up to 1 -3 years before the sale.

Supporting you with the transaction is the easy part at the end of a longervalue-creating, preparation process.

TOOLSDue diligence processDue diligence documentsData room