The Robert Hedges Company

Exit Planning

During the “boomer retirement” years ahead, business owners who wish to sell will face greater competition for quality buyers. What’s more, changes in tax laws and regulations may limit their exit options in the future.

The best way to deal with these concerns is to develop a strategic exit plan that maximizes business value, identifies needs and opportunities, and meets your personal and business goals. To ensure a smooth, successful transition you must be proactive, not reactive. Yes, you can control your own destiny!

We will help you acquire key information to make informed exit decisions and maximize your after-tax proceeds when you exit your business. We can help you:

• Articulate and align your personal, business and financial goals
• Maximize your business value
• Minimize taxes
• Identify and capitalize on timing opportunities
• Resolve key issues by using wise guidance and solutions.

You can expect us to focus intently on you and ask many questions. This discussion will help determine our personal and business goals, financial needs, business value, tolerance for risk, and transition time frame. That, in turn, will drive the development of an exit plan tailored specifically for you.

Maximizing Business Value

As a Seller, you want to maximize the value of your business, in order to obtain the best possible price for your business, when you decide to sell. Once you have made the decision to sell within a specific time horizon, it is vitally important to ensure that all aspects of the business are in order to maximize its appeal and minimize any surprises or major issues that may be uncovered during due diligence by a potential buyer.

Below are a number of suggestions to help you on your way to increase business value and prepare your business for sale:

• General
  • Assemble a well qualified team including your banker, your accountant, your attorney, your tax advisor and a professional business intermediary/broker such as The Robert Hedges Company.
  • Develop an exit strategy early in your business history.
  • Consider having a 3rd party valuation facilitated by the Robert Hedges Company.
  • Sell when your business is strong, your market sector is still growing and you have a diversified customer base and product offerings.
• Financial
  • Have available the past three years of tax returns and fiscal year-end financials consisting of income statements and balance sheets. Also a current year month ending financials. Report ALL income and expenses!
  • Maintain an up-to-date-Furniture, Fixture and Equipment (FFE) list with current fair market values.
  • Write off bad debts, clear out excess or obsolete inventory, sell off non- producing assets, bring receivables current, and reduce liabilities.
  • Document all Owner benefits such as family salaries, vehicles, etc. as well as one-time or non-recurring expenses
  • Maximize profits by increasing sales every year and by reducing unnecessary expenses.
• Operations
  • Ensure operational processes and procedures are documented, current and up‐to‐date for all aspects of the business
  • Have systems in place to ensure business continuity.
  • Ensure IT infrastructure is current and fully employed to produce efficient results
• Management
  • Management and key personnel are stable, experienced.
  • Have an organizational chart that defines the roles and responsibilities of key personnel
  • Develop a succession plan. Your business is more valuable if it is NOT dependent on you!
• Facilities/Real Estate
  • Have a clean, well-maintained facility.
  • Make sure a long term lease is available
  • If you own Real Estate consider getting a current appraisal.
• Legal/Contracts
  • Ensure that the legal structure of company, contracts and agreements are in order so unexpected legal, tax, or litigation issues don’t arise
  • Avoid any encumbrances such as lawsuits and liens filed against you.
  • Ensure Intellectual property is protected
• Customers/Suppliers
  • Ensure Customer/supplier base is not overly concentrated
  • Have customer or supplier contracts in place whenever possible.
• Products/Services
  • Have a well-defined list of products and services offering
  • Ensure the all products and services are competitive and have clear discrimination over competitors
• Marketing/Sales
  • Document the sales and marketing strategy and process for new customers and for existing customer retention
  • Obtain customer feedback to validate your discriminators
  • Have current and update-to-date marketing collateral, website and social media

Testimonials

Government 8(a) IT Services & Staffing Business (~$26M Revenue)

Tom led the Core Capital Group team in guiding the sale process to a highly successful exit that exceeded our expectations. Through a disciplined and thorough process, he was able to bring well-qualified buyers to the table that allowed our team to make an informed decision most advantageous to us. His professionalism, integrity and knowledge throughout were outstanding! I was extremely pleased with his broker services and would highly recommend Tom to anyone looking to sell. -Eduardo Marques

Government Professional Technical & Management Services Business (~$16M Revenue)

As a small business owner looking to sell my company, a myriad of concerns entered my mind. Can I get the right price at the appropriate time of exiting? Will the acquiring company’s management philosophy align with mine? Will my employees be treated well after the sale? I needed a confident, trustworthy and experienced small business advisor/broker and Tom Knops was my choice to guide and instruct me through the entire selling process. From day one of engagement, Tom brought forth potential qualified buyers from within our marketplace. He helped us articulate and develop a strong and compelling Information Memorandum for potential buyers to review, and his responsiveness through each step of the due diligence process exceeded all of my expectations. I successfully closed on the sale of my business as a direct result of utilizing Tom’s unequaled ability and professional brokering services. I highly recommend Tom to assist in the process of selling your business. -Todd Bontrager

The Selling Process

The number one objective in selling any business is to obtain the maximum value under the most favorable terms that meet the owner’s exit objectives. Achieving this goal requires not only the engagement of an experienced, capable and professional team, but also a team that follows a well proven and effective process that is known to produce excellent results. The TRHC team uses a methodical staged approach to manage the entire selling process, while keeping all parties fully involved and informed along the way. No surprises!

The stages of our process are depicted below along with a summary of the major steps within each stage:

Selling Process

Stage 1: Planning

• Educate owner(s) on process and critical points of involvement (Presentation)
• Define owner goals, expectations and transaction criteria (Deliverable with client sign off)
• Prepare and issue engagement planning document
• Company background/data gathering (Checklist of information/documents required to facilitate the transaction)
• Review other professional needs of client such as attorneys, CPAs etc. (Referrals)
• Support seller in determining an acceptable fair market value. We may recommend and coordinate preparation of an independent third party valuation where needed
• Research, profile and assemble a list of most likely strategic and/or financial “Targets”, where appropriate (List for client review and sign off)
• Prepare confidential Information Memorandum (IM) and related marketing materials for presentation (Deliverable for client review and sign off)
• Prepare one page blind profile and outreach letter (Deliverable for client review and sign off

• Market the business opportunity as appropriate:
  • Listings featured on national/international websites as appropriate
  • Target marketing to strategic and financial buyer pool (letter and blind profile)
  • Co-Broker opportunities (National and Local)
  • Advertising as appropriate (Cost to Client –Based on business and market complexity)
• Directly contact and qualify the Targets
• Execute NDAs with interested and qualifies parties
• Distribute confidential Information Memorandum (IM) to interested Targets under NonDisclosure conditions (Periodic verbal and/or written status reports to client)
• Coordinate any resolution of any questions resulting from IM review
• Filter and develop short list of candidate buyers

Stage 3: Deal Making

• Organize and support teleconference introductions and discussions
• Coordinate on‐site client meetings with the most qualified and interested candidate buyers
• Follow‐up with candidate buyers to resolve any outstanding questions/issues/concerns resulting from visit
• Develop transaction guidance and LOI schedule for target(s)
• Solicit offers from qualified & approved buyers present to Client
• Support negotiations and selection of best offer
• Provide periodic status reports to Client

Stage 4: Closing

• Coordinate and support due diligence activities
• Coordinate resolution of any outstanding issues/concerns (if any) raised during due diligence such as the removal of contingencies for lease transfer and inventory verification.
• Coordinate with closing Attorney to provide a check list of closing documents and critical actions required.
• Seller or Buyer Attorney to prepare Definitive Purchase Agreement(s)
• Support negotiation process
• Coordinate with Seller and the Buyer to conduct a physical inventory, if appropriate
• Assist, where needed, with any closing documents
• Close!

Valuing Your Business

When selling your business it is very important to establish a fair and reasonable value for the business, based upon an independent analysis that will withstand scrutiny, from a variety of interested parties. This valuation may be used for a variety of purposes, including: substantiate your asking price to the buyer; serve as the basis for a business loan from lending institutions; help determine fair market value of assets; and help establish an Employee Stock Ownership Plan (ESOP) for your employees, to mention a few.

There is a high correlation of deals that close when business owners have had professional valuations and abide with the valuation’s pricing and terms. The International Business Brokers Association estimates that over 70% of businesses for sale never sell! We suspect that the success rate is so low because of the seller’s unrealistic pricing and terms. This is why working with valuation experts that understand “real-world” deals, and how to get them done, is critical to achieving wealth-planning goals.

The value of a business is based on three things: what it owns, what it earns and its risk versus return.

What it owns

The tangible assets include the furniture, fixtures, equipment, inventory and real estate. The intangible assets can include the trade name, contracts, leases, processes, client lists, licenses, recipes and patents.

What it earns

A business provides a certain financial benefit to the owner. The benefit generally comes in the form of business profits and a salary for the owner. It can also provide the owner with fringe benefits such as health insurance, a company car or a retirement plan.

Risk versus Return

Every investment has a perceived level of risk and an expected rate of return. In determining the goodwill component of the business sale, the likelihood of future income and the repeatability of current income are quantified.

Beware of “Rules of Thumb”

There are many different rules of thumb available, but in most cases they do not give an accurate value of a business because they are based on an “average business.” Even though most industries have one or more such rules, there are not any “average businesses.” Each business is unique and a particular rule of thumb can be off by as much as 100% or more. The business valuator will be able to decide what the most relevant information about a business is and then make an informed decision about its value.