An engaging presentation for business owners that discusses the important topic of understanding the value of your business, and maximizing to realize the optimum return when it comes time to transfer the business to a third party.

1. Understanding and Maximizing Business Value Michael F. Coyle, CBIPrincipal/Exit Planning Advisor, CenterPoint Business Advisors Sponsored by: Connecticut River Bank, NA

2. Michael F. Coyle, CBI Principal, CenterPoint Business Advisors, Inc. Exit Planning Advisor, Business Enterprise Institute Certified Business Intermediary (CBI) Awarded by the International Business Brokers Association MBA – Boston College, Carroll Graduate School of Management Serial Entrepreneur

5. During This Session You Will Learn: What is the Underlying Purpose of your Business What is the Reality for Most Small Business Owners What are the Components of Business Value What are Common Value Drivers & Detractors Key Strategies for Improving Business Value Exiting Your Business is Inevitable, Plan for It

6. The True Purpose of Your Business Is to Give You Life Michael Gerber, The E-myth Revisited, other E-myth Books The Entrepreneur * The Manager * The Technician Run your business to exit it, realize value to support your life’s objectives Importance of creating systems & extracting the business owner from the day-to-day Working “ON” and not “IN” your business

7. The Reality For Business Owners Exiting your business is Inevitable and the largest value detractor is often what the owner IS or IS NOT doing. 80% of business owners exit their business to retire, they are not serial entrepreneurs Their principal fear is “will I have enough money so that I can fund my retirement lifestyle without running out of money” Other considerations may includewealth transfer to the next generation, charitable giving,and minimizing taxes

8. Equities Real Estate Business The Reality For Small Business Owners (2) Typically 50-75% of a business owner’s net worth is in their business assets. The balance is in their personal real estate & financial investments Business owners typicallyonly have ONE chanceto monetize their largest asset

9. The Reality For Business Owners (3) Most business owners have only an anecdotal perception of the value of their business“My brother in law knew a guy who had a business like mine that sold for…” Relying on this type of perception can leadto large gaps in future wealth and quality of life "Paper or Plastic"

10. The Reality For Business Owners (4) 85% of all small business owners do not have an exit plan, a wealth management plan, and/or an advisory team to assist them Very few start the process early enough to achieve the maximum benefit of valuation and exit planning

11. Typical Business Owner Concerns Who should I transfer my business to? Family, Employees, Partners, a 3rd Party When is the right time to leave my business? What is my business really worth? What is the right deal structure? Tax avoidance vs. future risk How do I ensure that I meet all of my future goals and expectations?

12. There Are Only 4 Places Your Money Can Go An Exit Plan will let YOU decide where your hard earned assets end up!

13. The Exit Planning Process

14. Why Value Your Business? Business & Financial Planning Estate & Trust Planning Employee Stock Ownership Plans (ESOP) Partnership Agreements Litigation & Disputes Creating an Exit Strategy

15. Value is in the Eye of the Beholder Individual/Lifestyle Financial Industry Strategic Related Parties (KEG or Family)

16. Business Value Components

17. Value Drivers & Detractors

18. Value Drivers & Detractors

19. Value = CF * M Simple Right? The Complexity is in the Subscripts Value = CF (s), (t) * M Sustainable Transferable

20. What Is A Business Valuation? Both a Product and a Process Business valuation vs. a real estate appraisal Significant value is in the Process

21. What Is A Business Valuation? (2) Process is a multi dimensional analysis of your business from the Buyer’s Perspective Financial, lifestyle, asset, risk & growth attributes Identifies what adds to and what detracts from value Usually this leads to a handful of items that could greatly improve value Form of limited scope appraisal that determines a “Most Probable Selling Price” at a point in time (vs. “Fair Market Value” standard)

22. What Is A Business Valuation? (3) Determines economic benefit of ownership and not tax value Goals are to minimize taxes and maximize economic benefit Measures your business against the industry Tool for improving the business and maximizing value

23. What Is Valued? Tangible Assets Leasehold Improvements Equipment, Furniture & Vehicles Inventory, Accounts Receivable Intangibles Goodwill (vs. “Blue Sky”) Patents & Copyrights Controlled Territories, Product/Service Niche Customer & Supplier Contracts

24. What Are The Benefits of A Valuation? Demystifies the value of your business Establishes a baseline for comparison in the future Measures returns on equity, assets, & time Provides valuable data for an Exit Planning Process Provides tools to control where yourinvestment is going

25. What Kind of Valuation is Appropriate? Price Opinion Based upon broad “rules of thumb” For the “curiosity seeker” Business Valuation “Most Probable Selling Price” Multi dimensional analysis Information for planning andcontrol & decision making Fair Market Value Appraisal Tax, litigation, refinance

26. Who to Select for the Business Valuation Process? Accountant/CPA Certified Business Broker/Valuation Professional Licensed Commercial Appraiser With the proper training all can do the work. Select a professional who can best understand the industry and find the value builders and detractors

27. Business Valuation

28. Exit Planning: Key to Value Realization Demographics are changing Aging population of baby boomer business owners More than 8.4 Million Business owners will seek to exit their business in the next 10-12 years. (70%) Many businesses are still based in an “old economy model” Next generation of buyers want “new economy models’ Supply of Businesses for sale will outstrip Demand Only those business owners that Plan will be successful

29. The Exit Planning Process

30. From The Endless Focused Work in Building Your Business…

31. ...To Achieving Your Life’s Next Goals

33. Step One: Identify Exit Objectives “When a man does not know which harbor he is heading for, no wind is the right wind.” - Seneca

34. Step One: Identify Exit Objectives Universal Objectives How much longer does the owner want to work in the business before retiring or moving on? _________ years What annual after-tax income does the owner want during retirement (in today’s dollars)? $_________ To whom does the owner want to transfer the business? Family? Co-Owner? Key Employee(s)? Outside party? ESOP?

35. Step One: Identify Exit Objectives Working with a Team of Advisors No one professional has all the answers. Diverse skills and talents are necessary. Team approach minimizes time and cost. If properly facilitated and led.

37. Business Intermediary

38. Investment Banker

39. Business or Management Consultant

40. Banker

41. Exit Planning Advisor

42. Financial Planner

43. Insurance Advisor

44. Investment Advisor

45. Business Attorney

46. Estate Planning Attorney

48. Personal Wealth Plan Having a Post Retirement Plan on How to Support Your Lifestyle Delivers “Peace Of Mind” Personal Wealth Plan + Business Value = Retirement Income Plan

49. Business Valuation Benefits to the Owner Provides a baseline business value by projecting cash flow. Measures business and personal resources both today and as a basis for future projections. Allows you to monitor progress toward your stated objectives.

50. Business Valuation (2) Identifies what is being sold Inventory, Equipment, Real Estate, Stock Establishes profitability Assesses risk Identifies value drivers Scans marketplace Considers financing strategies Establishes relationship between earnings and value Should be done Cyclically with business planning

51. Step Three: Maximize and Protect Business Value “Making a silk purse from a sow’s ear.”

52. Step Three: Maximize and Protect Business Value Benefits to the Owner Grow business value and intangible value of the business. Reduce income taxes upon sale of business. Protect assets from potential business and personal creditors. Create ability to sell the business. Motivate and keep key employees.

53. Step Three: Maximize and Protect Business Value Promote Value Through Value Drivers Focus on increasing cash flow. Develop operating systems that improve sustainability of cash flows. Solidify and diversify customer base. Implement strategies to grow the company. Improve company performance as measured by industry metrics. Build a solid management team and groom a successor.

54. Business Valuation Financial statements are key! EBITDA multiples Discretionary income multiples Cash and non-cash add backs Value derived from market data

55. Strategies for Maximizing Value Value your business early… and often Focus on implementing business improvements Create and participate in your ownExit Planning Process Wealth Management Team Legal & Tax Team Business Advisory & Intermediary Team

56. Step Four: Ownership Transfer to Third Parties “Making a mountain out of a molehill.”

57. Step Four: Ownership Transfer to Third Parties Benefits to the Owner Cash at closing. Eliminate financial risk. No family succession issues. Speed of exit.

58. Step Four: Ownership Transfer to Third Parties Third Party Sales – Not Just About the Business Ability to sell and business value are determined by: Intrinsic Value: the value drivers. Extrinsic Value: the value the market places on the business. Effectiveness of the sale process.

59. Step Four: Ownership Transfer to Third Parties Current M & A Marketplace Of businesses with sales of less than $10 million per year, 20 percent are for sale, but only one out of four actually sells. Businesses with sales of $10 million per year aren’t much better – only one-third sell. Above $10 million per year, the odds improve to 50-50.

60. Step Five: Ownership Transfer to Insiders “Making a molehill out of a mountain.”

61. Step Five: Ownership Transfer to Insiders Benefits to the Owner Achieves Exit Objective of: Selling to Key Employee Group (KEG). Transferring to a Family Member. Motivates and retains key employees. Planning reduces risk and increases amount of money received.

62. Family Owned Businesses Keeping the Family Peace while Growing Business Value “Many Hats” Problem Fewer than 50% transfer to 2nd Gen and less than 20% to 3rd Gen Special Considerations Estate Planning Leadership Development Choosing Advisors Compensation & Performance Strategic Planning

63. Step Six: Business Continuity Planning “Making sure the business continues when the owner doesn’t.”

64. Step Six: Business Continuity Planning Benefits to the Owner Objectives can still be achieved if you don’t survive your exit. Retains ownership and control of company if co-owner departs. Can force non-contributing owners to leave the business. Provides consistency between lifetime and death objectives. Ensures survival of the business for the benefit of others. Results in family receiving value of owner’s interest, in cash.

65. Step Seven: Personal Wealth and Estate Planning “When the ‘slings and arrows’ of outrageous fortune befall you, fight back.” - William Shakespeare (Hamlet)

66. Step Seven: Personal Wealth and Estate Planning Benefits to the Owner Preserve wealth, minimize taxes using both lifetime and death planning tools. Coordinates and integrates lifetime exit objectives wishes with estate plan. In effect, estate planning becomes part of business and exit planning.

67. Key StrategiesImproving Business Value Manage Value as Seen By The Market Positioning in the market place Strategic buyers Industry buyers Financial buyers Business continuity Balance short term and long term business needs Employee development and mentoring

68. Key StrategiesImproving Business Value Good Planning Eases Adversity Owner illness Divorce Death Disability Litigation

69. Key StrategiesImproving Business Value Reduce Business Viability Concerns Performance relative to benchmarks Revenues and revenue trends Income and cash flow trends Expansion potential Competitive advantages Core competencies Company Culture Owner dependence Is the owner the business?

70. Key StrategiesImproving Business Value (2) Financial Concerns Need for good & accurate record keeping Positive cash flow and focus on value not tax minimization Realistic growth strategies Valuation and Price justification 3rd party valuation Return on Investment to buyer Payback periods in years

71. Key StrategiesImproving Business Value (3) Owner’s Role Delegate more effectively Reduce reliance on business owner Formal employee training Succession/Exit Plan Identify and groom a successor Developing & Mentoring key personnel Succession takes time and effort Complex mix of potentially conflicting issues

72. Key StrategiesImproving Business Value (4) Partners and Employees Execute agreements with partners Buy/sell and buyout agreements Employee dependency Employee tenure/turnover Employee contracts 401(k) plans to keep employees Human resource documentation Employee handbooks Job descriptions Personnel files

73. Key StrategiesImproving Business Value (5) Operational Process Policies and procedures Processes Core activities Systems (consistency of quality, customer service) Equipment Maintenance Technology and Web Presence IT current Web links to the world

74. Key StrategiesImproving Business Value (6) Operational Process (2) Streamline processes Evaluate each product or service to verify contribution to bottom line Outsource non-core activities Analyze and outsource activities that can be obtained cheaper on the outside Inventory Control Inventory turnover relative to industry standards Review methods (FIFO, LIFO, etc.)

75. Key StrategiesImproving Business Value (7) Suppliers Supplier relations Supplier/approval selection process Long-term contract benefits Owner dependent relationships Cost of input materials Review frequently Renegotiate if necessary

76. Key StrategiesImproving Business Value (8) Customers Retention Friends or relatives of owner Customer service and support Customer loyalty Limit Customer Concentration 80% of revenue concentrated around a small group of customers 20% of business concentrated with one customer Reevaluate Marketing/Sales Direct Reps & Agents Internet – new channels

77. Key StrategiesImproving Business Value (9) Marketing and Advertising Enhance marketing strategy/plans Advertising Trade Shows Internet Brand Awareness and P.R. Clear and consistent message/value proposition Differentiation

78. Key StrategiesImproving Business Value (10) Competition Know your competition Use industry groups Ask your customers Know what they do differently Articulate your advantages and disadvantages Pricing strategies Learn from competitors Benchmark Borrow good ideas

79. Key StrategiesImproving Business Value (11) Legal Issues Intellectual property…is it secure? Patent, copyright and trademark applications Litigation issues Settle all litigation Resolve all product liability cases Resolve all insurance claims Form of incorporation pros & cons C-Corp, S-Corp LLC, Partnership Proprietorship

80. Key StrategiesImproving Business Value (12) Regulatory Issues Clear environmental compliance Have environmental review by reputable firm Review all permits and licenses OSHA issues Pending zoning issues

81. Most business owners spend more time planning a family vacation than how to build value and exit from their business. This is not due to a lack of desire or intelligence. It is simply because they don’t know how or where to begin. The vast majority of owners are unaware there is a specific planning and implementation process that can help ensure they achieve their objectives.

82. Get Started with Maximizing & Realizing the Full Value of Your Business Read my Newsletter, Exit Planning Review on Value Building, Bi-monthly advertising-free subscription Explore the handout materials and try out the questions in the Business Owner Exit Planning Checklist Contact me for a FREE copy of How to Run Your Business So you Can Leave It In Style by John Brown Read White Paper “Inevitabilities” and contact me for copies of other topics or FREE assessment.