1. Valuation and Candidates Running and Selling a Business
Building and Exiting
Exiting the Venture
Chapter 13
Reasons for Selling
Valuation and Candidates
Running and Selling a Business
Intra-family sale
Financial
Issues
ESOP’s and
MBO’s
Patterns of Entrepreneurship Management
4th Edition,Chapter 13
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

2. Valuation and Candidates Running and Selling a Business
Presentation Outline
Personal Reasons for Selling
Business Reasons for Selling
Valuing the Company
Determining Best Candidates
Tax Considerations
Selling to Employees or Managers
Transferring to Family Members
IPOs
Running the Business while Selling
Chapter 13
Reasons for Selling
Valuation and Candidates
Running and Selling a Business
Intra-family sale
Financial
Issues
ESOP’s and
MBO’s
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

3. Personal Reasons for Selling
Chapter 13
Investors are demanding a LIQUIDITY event
Entrepreneur wishes to cash-in part or all of their ownership
Disagreements between shareholders
Acceptable Unsolicited Offer
Business - Burn Out
Personal Event
Poor Health
Retirement Planning
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

4. Be Clear Why You are Selling
Strategic Reasons
Growth Exceeded Management Capabilities
Diversify Personal Net Worth
Other Interests
Getting Older - Illness - Divorce
Owner Disagreements
Investors Desire to Liquidate
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

5. Business Reasons for Selling
Business Requires Significant Capital for Growth
New Competition Appearing
Limited Opportunity for Growth
Close to Bankruptcy
Market Condition Forecasts are Unattractive
Consolidation is Occurring in the Sector
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

6. Determine the Company’s Valuation
Before considering a sale of the company, it is important to estimate the potential value:
Valuation based on purely financial evaluation
Valuation on strategic fit that might be perceived by an existing corporate purchaser. This often attracts a premium in a competitive market sector.
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

7. Valuation Techniques for Later Stages –Asset Based
Chapter 13
As a company grows and has a few years’ history of asset purchases, sales, and profits, conventional methods for valuation are used:
Asset Valuations include:
Book Value = Current assets + property + equipment
Adjusted Book Value =Current assets + market value of property + equipment + intangible assets
Liquidation Value does not include intangible factors such as reputation, talent, or goodwill
Replacement Value is cost of replacing assets after a total loss
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

8. Valuation Techniques for Later Stages – Earnings Based
Can be based on either historical or projected earnings, or a blend
Estimate Price/Earnings (P/E) ratio by
comparing to similar public companies if available
or use S&P quarterly industry analysis handbook
Modify based on an assessment of these factors on a 1-6 scale
Risk (high/low)
Competitive position (strong/weak)
Industry (attractive/non-attractive)
Growth opportunity (high/low)
Desirability
Sum the factors and take the average as a multiplier for the P/E
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

9. Valuation Techniques for Later Stages – DCF Based
Chapter 13
Once there is a history and solid projections on future financial performance the DCF method can be used effectively for later stage companies
The discount rate and risk adjustment factors are much lower than for a pre-revenue company
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

10. Determine Best Candidates
Strategic Buyers
Competitors
Related or Complementary Businesses
Manufacturers of Related Products
Companies with Announced Acquisition Plans
Financial Buyers
Management – ESOP
Management Buy-out Firms
Related Businesses
High Net Worth Individuals
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

11. Valuation and Candidates Running and Selling a Business
Types of Transactions
Several different methods of payment are used for a corporate transaction
In a “Stock for Stock” purchase the seller takes certain risks – if the buyer is a public company and the stock is restricted then the final price might decline, for a private company there may be no liquidity option
Cash for Stock is the preferred method but the final price is usually lower
Installment transactions are common, in which the final payment depends on the performance after purchase which has inherent risks associated with control issues.
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

12. Beware - Double Taxation
It is important to take tax advice long before selling is contemplated
Taxation rules are complicated and depend on the form of transaction that is used
For example Asset Sales can lead to two levels of taxation, both Corporation. Tax + Stockholder Tax
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

13. Up-to-Date Financials
Maintain the finances on a consistent monthly P & L and cash flow basis long before a sale is contemplated
Fully audited accounts for the last three years are mandatory prior to a sale unless it is a strategic sale of assets
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

14. Valuation and Candidates Running and Selling a Business
3-Year Projections
As well as historical financial records at least 3- year detailed forecasts are required:
by Month Actual Account Plus Future Accounts
by Actual Product Plus New Products
by Region and/or by Location
by Division or Subsidiaries
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

15. Selling to Employees - ESOPs
Definition of 'Employee Stock Ownership Plan - ESOP‘
A qualified, defined contribution, employee benefit plan designed to invest primarily in the stock of the employer. ESOPs are "qualified" in the sense that the ESOP's sponsoring company, the selling shareholder and participants receive various tax benefits. ESOPs are often to align the interests of a company's employees with those of the company's shareholders
An ESOP can be structured so that over time employees can end up with owning the company and thereby “cashing out” the founders
It is also a way in which the culture and uniqueness of the company can be retained
Although the gross value to the founders may be somewhat lower than an outright sale to a third party, the net proceeds may be attractive because of the special tax treatments.
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

16. Selling to Managers – MBO’s
Definition of “Management Buyout – MBO” – When the managers
and/or executives of a company purchase a controlling interest
in a company from existing shareholders
These shareholders can be founders who feel they wish to “cash-out”
and allow key managers to continue to run the company
In most cases, the management will buy out all the outstanding
shareholders because it feels it has the expertise to grow
the business better if it controls the ownership completely
If the company is public, the new team will take the company private
Often, management will team up with a venture capitalist
specializing in MBO’s to acquire the business because
it's a complicated process that requires significant capital.
Often much of the purchase price is funded through debt in which
case the transaction is referred to as a “leveraged buy-out, (LBO)”
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

17. Transferring Ownership to Family Members
Family owned businesses constitute the largest percentage group of private companies:
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

18. Transferring Ownership to Family Members
Despite the need to transfer ownership to later generations, the process is fraught with difficulties. This chart shows the survival rate just through two generational shifts:
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

19. Transferring Ownership to Family Members
Transferring to the next family generation is much more difficult that to an established and trusted management team. Some of the reasons are:
Unwillingness to confront mortality by the founders
Emotional family relationships hinder rational decision making
Failure to prepare the new management team – holding onto control
Family members not engaged so passionately to the business as the founders
Company is in poor financial health
Systematic planning is required to hand-over control and preparation for a smooth transition take several years.
Often the transition is forced for health reasons unexpectedly
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

20. Things to Do While Still Running the Business
Keep Term Liability Agreements Short
Leases - 2 to 3 Years with Options to Renew
Distributor Agreements - Short Term Cancellation
Supplier Agreements - Cancel at Your Option or in Days
Keep Term Asset Type Agreements Longer
Employee Non-Compete Agreements
License and Royalty Agreements
Sales Agreements with Price Escalation
All Agreements Must Be Assignable if possible
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

21. A Model for Running the Business for Greater Perceived Value
Develop a Prestigious and Stable Customer List
Keep a Well-Maintained Facility
Show a Continuous Growth in Sales and Profits
Develop Propriety Assets
Patents, Copyrights, Trademarks
Process Know How: Formulations and
Clear Documentation
Develop a Well-Respected Sales Distribution Channel
Document and Organize All Contractual and Legal Obligations
In General, Do Things That Others Will Value Much Higher Than Your Cost to Create Them
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

22. Valuation and Candidates Running and Selling a Business
The Actual Process of Selling (Average Time from Beginning to Closing is Up to One Year)
Develop a List of Candidates
Choose a group of strategic buyers
Try to Play the Role of a “Reluctant Suitor”
Have Others Make Initial Contacts
Investment Bankers - Consultants - Brokers, etc.
Get More Than One Serious Candidate
Use Competitive Negotiation Strategies
Let All Candidates Know Others Are Interested
Negotiate An Equitable Sales Price And Related Issues
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren

23. Valuation and Candidates Running and Selling a Business
The Actual Process of Selling (Average Time from Beginning to Closing is Up to One Year)
Select One Candidate
Develop A Letter of Intent
A) All Equity Issues Described “How Much”
B) A Period of Due Diligence - up to 60 Days
Negotiate a Definitive Agreement of Sale
Closing
Chapter 13
Reasons for Selling
Valuation and Candidates
Financial
Issues
ESOP’s and
MBO’s
Intra-family sale
Running and Selling a Business
Copyright 2013 Jack M. Kaplan & Anthony C. Warren