Mike Costello presented this PowerPoint as part of the National Business Institute seminar.

1. A Global Reach with a Local Perspective
Helping Your Client Buy or Sell
a Small-To-Medium Sized
Business
www.decosimo.com
Mike Costello – mikecostello@decosimo.com

2. Today’s Presentation Will Include:
 A tentative guide to advising buyers/sellers at the
outset of the process
 An overview of relevant business valuation methods
 A discussion of your client’s various financing
options

3. A Global Reach with a Local Perspective
www.decosimo.com
Part One: A Tentative Guide to Advising
Buyers/Sellers at the Outset of the Process

4. Preliminary Steps
1. Assembling an Advisory Team
2. Business-For-Sale Market Analysis
3. Performing Due Diligence
4. Creating a Non-Disclosure Agreement
5. Structuring the Transaction
6. Drafting the Letters of Intent for the Stock and Asset
Purchase Agreements
7. Selecting and Using a Transaction Advisor

5. Assembling a Professional Advisory Team
 An effective transaction team requires many types of
expertise and knowledge.
• Knowledge of the client’s Circumstances and
Objectives
• Business Growth
• Sales or Mergers of the Business
• Tax Planning
• Business Valuation

6. Business-For-Sale Market Analysis
 Impartial assessment of the business is necessary
 Income Approach
 Market Approach
 Determine reasonable expectations
 Determine potential buyers of the business
 Identify what is hindering the company’s value?
 List the strengths of the business
• What does it do well?

7. Performing Due Diligence
 The seller is nearly always more informed about the
property being transferred than the buyer.
 Information has a cost
 Examples include Legal, Financial, and Operational Costs
 Focus on the key issues
 Set up an appropriate scope of work
• In context of the budget and areas of focus
 Close portions of the information gap between buyer
and seller
 Locate deficiencies in the information provided

8. Creating a Non-Disclosure Agreement
 Primary purpose of a “NDA”
 Keep out of a competitor’s hands
 Remedies for breaching the agreement
 Establish limits
 Tailor it to your specific circumstance

9. Structuring the Transaction
 Bridge the “Valuation Gap”
 Noncash Payments
• Earnouts
• Seller Notes
• Rollover Common Equity
 Employment Agreements
 Non-Compete Agreements
 Is the considered value consistent (or better than)
expectations for the business?

10. Drafting the Letters of Intent for the Stock
and Asset Purchase Agreements
 Lay out the intended terms of the potential transaction
 Stock or asset exchanged
 Expected Purchase Price
 Remaining Considerations
 Duration of Exclusivity
 Describe the obligations and promises assumed

11. Selecting and Using a Transaction Advisor
 Step 1: Determine what sort of professional will best meet
the company’s needs
• Make your inquiries
• Cultural Fit and Comfort with Banker
• Fees
 Sellers: Compensate with Value Added
 10% to 15% of total transaction
 Buyers: Decrease Percentage Fee as Transaction Size
Gets Larger
 Retainers

12. A Global Reach with a Local Perspective
www.decosimo.com
Part Two: Business Valuation Methods

13. Methods of Valuation
 Rules of Thumb
 Asset-Based Methods
 Income Methods
 Market-Based Methods
 Identifying and Obtaining the Necessary Documents
 Maximize Your Use of the Business Appraiser

14. Rules of Thumb
 Simple and convenient way to estimate a company’s
value
 Tests the reasonableness of other methods of valuation
 Multiple-of-Revenue Method
 Applies a multiple to a company’s revenue, such that the
result is a value comparable to a typical transaction price.
 Limitations
 Ex. Different sources providing different rules of thumb

15. Asset-Based Methods: “Asset Approach”
 Principle of Substitution
 Net Asset Value Method
• Book Value vs. Current Economic Value
 Illustrates contribution of each line item

16. Income Methods of Valuation
 Foundation = Present Value Mathematics
 Two basic inputs:
 Stream of Expected Future Benefits
 Conversion Factors from Future to Present Value
 Economic Income (Gross or Net) May be Grouped
Into One of Three Categories:
 1) Payouts
 2) Cash Flow
 3) Some Measure of Accounting Earnings
 Discounted Cash Flow

17. Market-Based Methods of Valuation
 Compares the subject to similar businesses that
have been sold
 3 Market-Based Methods
 Guideline Public Company Method
 Merger-and-Acquisition Method
 Same-Company-Transaction Method

18. Identifying and Obtaining the Necessary
Documents
 The Goal = Transparency
 Any document withheld could caution the buyer
 Coordinate one comprehensive request at the
beginning of the engagement
 Categories of documents to request include:
• Financial Records of the Seller
• Legal Documents
• Information on the Business That is Related Directly
to Operations

19. Maximize Use of Business Appraiser
 Hire a quality expert and early in the process
 Characteristics of a quality appraiser:
• Estimate the value of the selling enterprise
• Assess current risks involved in company operations,
finances, and managerial organization
• Provide suggestions for reducing or eliminating risks
prior to the transaction

20. A Global Reach with a Local Perspective
www.decosimo.com
Part Three: Know Your Client’s Options
For Financing the Deal

21. Financing the Deal
 Sources of Financing
 Seller Financing Dos and Don’ts
 The “Ins and Outs” of Asset-Based Lending
 Working With the SBA and Other Nonprofit Sources
 Venture Capital and Other Alternative Financing
Methods

22. Sources of Financing
 Banks have recently decreased the percentage of a
capital structure that they are willing to lend
 Best way to combat decreased lending: Increase
Value
 Reduce riskiness of the business
• Reduce customer/supplier concentration
• Non-compete agreements with key employees
• Sufficient debt coverage ratios and strong margins
 Traditional Equity Financing has its advantages and
disadvantages

23. Seller Financing Dos and Don’ts
 Do:
 Understand your client’s objectives and preferences
before analyzing the value of the arrangement
 Ask the client questions concerning their perception
of the value of cash today in comparison to other
financing
 Consider the proposed terms of seller notes and the
value of the notes
 Don’t:
 Base earnouts on subjective matters
 Leads to costly litigation and blurred expectations

24. The “Ins and Outs” of Asset-Based Lending
 Alternative to traditional debt financing
arrangements
 Company borrows a loan that is backed by specific
assets
 Advisors often participate in these processes
• Investment Bankers, Loan Services, Attorneys,
Independent Accountants, Trustees, Underwriters,
Rating Agencies, and Guarantors
 Can be created using any business asset
• Leads to a high quality loan which increases lending
opportunities

25. Working With SBA & Nonprofit Sources
 SBA- Established to assist small businesses in obtaining
the capital they need to grow
 Three main categories of programs that SBA provides:
 Debt Financing
 Surety Bonds
 Equity Financing
 Non-profit Examples:
 Women’s Venture Fund
 Operation HOPE
 FAME Renaissance
 Minority Business Development Agency

26. Venture Capital and Other Alternative
Financing Methods
 Traditional sources of financing may not provide
sufficient capital at manageable rates to every
company
 Alternative Options Include:
 Venture Capital
 Mezzanine Debt
 Debt Private Placement
 Private Equity Financing
 Equity Private Placement
 Recapitalizations
 Strategic Sales

27. Contact Information
Mike Costello CPA, ABV, CFE
mikecostello@decosimo.com
On LinkedIn:
www.linkedin.com/in/mikecostello
The contents and opinions contained in this article are for informational purposes only. The information is
not intended to be a substitute for professional accounting counsel. Always seek the advice of your
accountant or other financial planner with any questions you may have regarding your financial goals or
specific situations.