Process and Maximizing Value in Selling an event business

1. Buying and Selling a
Business in the Endurance
Market
STEVE GINTOWT
stevegintowt@gmail.com

2. Intention:
SUCCESSFULLY
Buying and Selling a
Business in the
Endurance Market

3. Have been a Buyer (18x)
Seller (3x)
 Important to Learn from Mistakes
 But you only get one shot
 Since Buyers generally have more experience and resources
 Rooting for the underdog – most of material is for Seller
 Will provide more Practical than Theoretical or Idealistic

4. Easy and Best Way
Informed &
Prepared
Seller
Informed &
Prepared
Buyer

5. How much a business is worth
IS NOT
How much will it will sell for.

6. WORTH:
 Sum of Future Cash Flows
 Discounted at some rate
 $200,000 in perpetuity at 8% is $1.6M
 Market Forces should PUSH PRICE
HIGHER

7. PRICE
Sales Price includes Market Forces
WORTH

8. Most Common Sale Benchmark:
Multiple of Earnings
What did you sell for?
How much did you pay?
WHAT’S THE AVERAGE MULTIPLE?

9. Difficulty in Calculating “Average” or
Market Multiple
Everybody Lies
Speculators are Loud
Most transactions are Private
Ambiguous Definition

10. Six Different “Earnings”
Historic: Trailing 12 mos.
Future: Forward 12 mos.
Reported
Earnings
Pro-Forma
With
Synergies

11. Four + Different Prices
Closing Price
With Wipeout of Loans From Owner
With Earnouts (paid from future
growth)
With Multi-Year Services Contract

12. Observed Multiples
Range: 3.0x to 10x+ (and ∞)
Most in the 5x Range +/- 2x

13. How to Get the Highest
Multiple

14. Factors that Affect the Multiple
Condition of your Business
Growth Rate of your Business
Type of Buyer: Strategic or Financial
Type of Sale: Auction or Private Placement
Competitive and Growth of Industry

15. Your Preparation makes a HUGE
difference
Your knowledge and control. Negotiate from
Knowledge
Buyer can gain confidence in what they’re buying
Lack of Clarity = Riskier Business = Lower Valuation
Lack of Organization = More Diligence Effort =
More Cost (Legal & Accounting Fees)
Distracted Management. Lost selling time

16. Type of Buyer:
Strategic or Financial
PROS
 Can pay higher because of
Synergies
 Understand the business. Faster
discussions
 You know them or know of them
Cons
 “Synergies” can be “No Job for you
or Staff”
 Direction of Business may change
 May not have the Cash
PROS
 Need you to run ongoing operations
 Generally have financing available
 Have done this before. Faster
Cons
 Generally lower multiple than
Strategic
 May not Understand Business
 Playing on their Home Court
 Are going to exit sometime

17. Type of Process:
Auction or Private Placement
PROS
 Potentially Higher Multiple from
created Scarcity and Ego
 Diversity of Interested Parties is
Surprising
Cons
 You competition will know you plan
 Requires multiple presentations.
More complicated, expensive, and
distracting. External resources likely
needed
 Hard to keep quiet in the market –
affecting employees, sponsors,
governments.
PROS
 Faster
 Less distraction to staff, stakeholders
 May get Premium for Exclusivity
Cons
 May miss the highest paying buyer

18. What you can do to
Maximize the Multiple

19. Pre-Sale Preparation Areas
 Accounting
 Pro-Forma Adjustments
 Records
 Employee Items
 Legal Items
 Other Information & Metrics

20. Accounting
 See “Financial Management for Event Businesses” for explanation of Cash
versus Accrual versus Full GAAP accounting and which you should use.
 You definitely need
1. Profitability by Event by year.
2. Overhead either direct or allocated
3. Owner expenses clearly identified
4. One-Time items clearly identified
5. Capital equipment purchases identified
 Make sure they’re complete.
 Net Income on Income Statement = Net Income on Balance Sheet = Net Income
on Tax Return.

21. Tax Returns
 Carry a lot of importance
 You wouldn’t lie to “The Man”

22. Bank Reconciliations
 You Can’t Fool Cash

23. Contracts
 Have available and organized.
Bonus for Summary Tables
 Permits: Even though they’re generally annual
 Contractors
 Business Insurance
 Leases
 Loans
 Sponsorship
 Municipal
 Key Vendors
 Employment

24. Employee Items
 Rosters & Org Charts
 Benefits Plans & Handbooks
 Medical
 Paid Time Off
 Layoff
 Retirement Plans
 Exempt / Nonexempt
 Workers Comp categorization.

25. Legal Items
 Articles of Incorporation
 Bylaws
 Shareholder Certs
 Board Minutes
 Certificate of Good Standing
 All the other ignored stuff

26. Other Legal & Intellectual Property
 Lawsuits (Current & Settled)
 Databases
 URLs
 Trademarks
 Investments
 IT system
 Software

27. Other Items
 Registration trends: Return Runners?
 Economic Impact Studies
 Industry and competitive research
 Digital traffic
 Course Maps

28. Pro-Formas
 Things you want extra credit for
 Unusual expenses that Buyer won’t incur
 Start up expenses for new products, courses
 New events just gaining traction
 Asset Purchases that were expensed
 Owner Expenses
 Costs reductions identified but not implemented
 Sponsorship deals signed but not received
 Have a MULTIPLE impact

29. Summary
The More you have ready in advance
the better your company looks
The faster the process
The stronger your negotiation position

30. Type of Sales:
Stock Sale or Asset Sale
 Sell Shares or LLC Interest
 Capital Gains
 Entire Company and Pre-
Sale Period Risk goes to
Seller
 Seller buys the assets but
not the Company.
 Liabilities for pre-sale
period stay with Seller
 Buyer gets tax-deductible
amortization on Purchased
Assets – NOT on Stock
Bought
Asset Sale has VALUE to Buyer. Get
something for it

31. What’s the Process Like: Auction
1. “Teaser” deck – little info
2. NDA: Non-Disclosure Agreement
3. CIM: Confidential Information Memorandum
4. Get some kind of LOI, value range
5. In person meetings
6. Revised value range
7. Due Diligence
8. Final Offers, Definitive Docs

32. What’s the Process Like: Private
1. “Teaser” deck
2. NDA: Non-Disclosure Agreement
3. CIM: Confidential Info Memo
Light Financials
4. LOI, value range
5. In person meetings
6. Revised value range
7. Due Diligence
8. Final Offers, Definitive Docs

33. Due Diligence
The LOI figure is the HIGHEST you will see.
It’s all downward from there.
Some Buyers excel at this.
Downward Adjustments are rationalized
via Due Diligence

34. What Buyers Look For in
Financial Due Diligence
 Consistent Earnings
 Overstated Earnings = Reduce Price
 Understated Earnings = Silence
 Understated Expenses = Reduced Price
 Overstated Expenses = Silence
 One time / non-recurring

35. What Buyers Look For in
Legal Due Diligence
 Permit Expirations
 Contract Expirations
 Oral or Poorly Documented
Agreements
 Contingent Liabilities
 Staffing and Plan Liabilities

36. Maximize Your Value
Consider “Carving Out”
 Undervalued Products, Events, Lines
Timing Business
Equipment
Undervalued Races
 Nobody has ever shown the Lifetime Value of a
Participant

37. Why Deals “Go Bad”
Common Mistakes

38. Misunderstanding of Closing
Mechanics
 Working Capital Cutoff
 Aged A/R, aged Inventory = no credit
 Deferred Revenue Less Prepaid Expenses
 Missing accruals for payroll and taxes
 Credit Card cutoff can be tedious - negotiate
away
 Seller is Responsible for Taxes and Payroll up to
Closing

39. Expenses: Who Pays?
 Each party pays their own
 Buyer Generally Writes the Documents
 Can be 5% to 10% of the Transaction
 Try to Negotiate a Non-Refundable Deposit /
Breakup Fee

40. Very Important Things to Know
About Buyer
 Ability to Close / Knowing the sources of
financing
 How they are Pricing the deal (multiple of
earnings)
 Who has final approval

41. Know the sources of financing
 Assess the Ability to Close. Some are just Fishing or
Shopping your LOI
 Funding Sources
 Bank loans - even more due diligence
 Seller Financing
 “Rollover” equity in new entity (make sure its tax free)
 Notes Receivable
 Earnouts

42. The Rollover Discount
 Requires you be able to value the New Company
 And you lock up your cash (you exit when they exit)
 with limited control
Buyer Determined Multiple of Combined Company 5x 6x 7x 8x 9x
Multiple on Your Company 5x 5x 5x 5x 5x
Discount on Your Rollover 0% -17% -29% -38% -44%

43. Typical Deal Structure Includes
Cash At Close
Indemnity Escrows - up to 10%
Earnouts or Holdbacks if a higher
multiple is paid on “contingency”
Services Contract

44. Indemnity Baskets
 Up to 10% of Sales Price
 Usually 1 year or until next audit / tax filing
 Baskets: For efficiency, up to some amount ($50k)
 Buyer pays any claims up to Basket Amount without recourse
 Once Full, the Basket Amount comes out of indemnity escrow
 Common Items:
 Late Invoices, Credit Cards, Understated Vacation Accruals (Or other once-a-
year items)

45. Make Sure You Get
 All the Positive Adjustments in
 Sellers think in ½ Multiple Increments
 Every Item is Multiple Times Important
 Get Professional Advice as Necessary
 Can have a HUGE impact on multiple and sale price
 Get “Tail Insurance” to cover yourself after sale
for later claims

46. Summary: What are Buyers Looking for
 Accurate Reports
 Consistent over Time
 Showing the ongoing earnings of the company.
Pro-Forma out
 Owner Expenses
 Capital Equipment
 One time gains / expenses
 Balance Sheet without a lot of aged items

47. Advice for Buyers

48. Why you will pay more
 Market Conditions
 Landscape scraped a few times. More buyers than sellers.
 Emotion plays as much a role as Financial
 Financial Buyers: Belief that you have deep pockets
 Strategic Buyers: Ongoing Seller role is diminished or
eliminated
 Human Nature: Sellers overvalue their business.
 Higher growth, better future than can be proven

49. Dealing with Sellers
What is their Legacy?
Ongoing role?
Continued security for staff
Ongoing reputation of business
Need for over-communication

50. Multiple Ways to Close a Deal
 Cash at Close
 Deferred Cash
Seller notes
Earnouts is business performs as planned
Holdbacks if risks do not materialize
 Rollover
 Services Contracts

51. Make it Fast
Seller remorse
Business Growth Delayed
Seller reducing spending
Hard to get / keep customers in uncertain
environment
Hard to hire talent
Deal Fatigue

52. Summary: Top Practical Points
 Be Informed & Prepared
 Avoid the drama of “Multiples”. Focus on Cash. Now & Total
 Select the Process that works for you
 Get Everything ready well in advance
 Get Professional Assistance. Specific expertise
 Exclusivity has Value. Sale Type has Value. Get Value for Them
 Keep undervalued assets
 Consider Deposits / Breakup Fees for long processes
 Understand the Derailing Issues: Working Capital, Indemnities,
Rollover