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| Sell to the Highest Bidder |
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| Use Mergers &
Acquisition professionals. |
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#5 Who are some of the Largest businesses in your
sector?
Transcript Segment -
Exit Strategies & Liquidity |
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| HATTIE: #5, sell to the best bidder. There are
three groups who could be interested. One is business brokers and agents;
that's much like real estate and selling your home. Another is the venture
capital market. The other is the angel market. |
| TRACY MYERS (Co-founder, Advertising Arts
College): I wasn't thinking about retiring. I thought, `Oh, I'll work for maybe
another 10 years.' Then I got a phone call. |
| BOB ORENSTEIN (Founder, International Wine
Accessories): It was like being a rat on a treadmill. I was running and running
and running, and it was time to figure out, `How do I get off this treadmill?'
And there were different ways. |
| HATTIE: (Voiceover)Bob Orenstein and Tracy Myers
both used a broker and both sold to publicaly traded companies. Tracy showed us
where in 1981 she opened her business, the Advertising Arts college. It offered
curriculum designed to prepare students for a career in advertising. The school
grew and in 2000 she sold to The Art Institute, a growing enterprise traded on
the Nasdaq. |
| TRACY: I think I was in shock at first. I kind of
thought someday it would be nice to be able to sell the school, and everybody
thinks about an exit strategy. Do I have one? Do I need one? Is there someone
to pass this to? |
| BOB: First thing I'd like you to do is I'd like
you to just pick up this glass, roll it a little bit, and try to smell the
aroma. |
| HATTIE: (Voiceover) In 1983, Bob Orenstein started
International Wine Accessories in the spare bedroom of his condominium.
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| BOB: But remember, this is functional also.
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| HATTIE: (Voiceover) Bob grew the business to over
$20 million in sales, and in 2000, he sold to the $5 billion conglomerate, the
Foster's Group. After the sale, he promised to stay on as president for three
years. |
| HATTIE: How did you, A, come up with the
valuation, and then, B, come up with the prospect list that you would pitch?
BOB: The valuation is based upon — that you do all the financials going
back five years, you project five years forward. And then it was Larry Starks
from The Geneva Companies it was their responsibility to go in and make an
evaluation. |
| HATTIE: (Voiceover) Larry Starks met us at
IWA. |
| LARRY STARKS (Waterview Advisors): And very
simply, it's contingent on a company's cash flow. And this is very much a
financial model, the one I'm talking about now. But I look at discounted cash
flow, I look at what I call market multiples. Those are, from a simple
perspective, someone may know of a price/earnings ratio, and it's a similar
kind of approach, but applied to private company valuation. (Voiceover) And
then the last thing you would look at is the value of the assets of the
business, not their book value, but their fair market value. And in Bob's case,
the unique asset he had is an intangible asset that really had strong value,
and that's his customer list. |
| HATTIE: How do we build something that somebody
else wants to buy? |
| BOB: The first thing you have to do is you have to
have solid financial numbers, numbers that somebody can check and rely upon. A
lot of small businesses put all their effort into growing the sales, growing
the organization, investing in the future, but they don't invest in the
accounting. We had everything on a trajectory that looked like you could
project right into the future |
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| Understanding wealth and capital formation |
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| Case Study
Guide |
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| Bob and Tracy sold their companies to
publicly-traded compaines and they both got big piles of money. |
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Topic for Discussion: What was different
about the two sales and what was similar? |
| Answer: The sales started off differently
but ended up being handled in a similar fashion. Bob started chasing a buyer
and Tracy was chased. While you might think that Tracy could negotiate from a
strong position since her buyer sought her out, Bob was able to get the
interest of several buyers which made his position even stronger. |
| What they both did was seek out experts to help
them. We learned from them that when you are ready to sell, you'll need a
business broker, an attorney for the legal documents, a CPA, and potentially, a
banker. |
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All of these experts are important, but probably
business brokers (up to $50M sale), the Mergers & Acquistions people ($10M
to $300M sale), and investment bankers ($50M to over a billion) -- all
"matchmakers" -- are the most critical. Tracy and Bob used different criteria
in making their decisions and each made the right choice for her and his
company. Tracy was approached by a buyer directly and contracted with a broker
with industry expertise. Bob had made the decision to sell and sought the
"right" broker based on skill set, enthusiasm, and dedication; he was less
concerned with industry expertise. You meet his mergers and acquisition person,
Larry Starks, in this episode. |
| The first job of a business broker is to place a
value on the business. However, it doesn't hurt to educate yourself. We all
need to be aware of a program by the American Institute of Certified Public
Accountants (AICPA); they offer an accreditation program to CPAs in business
valuation. Once completed, the CPA is designated as an ABV, Accredited Business
Valuation professional. If your CPA is not accredited in this area, you should
have a candid discussion with him or her about the need to seek additional
assistance. The CPA, as a valuation expert, is particularly critical in
circumstances where the broker is compensated with a percentage of the purchase
price. . |
| When the buyer or his/her representatives comes in
to evaluate your company, that process is called "due diligence". You want to
pass due diligence with flying colors. The single most important thing you can
do to ensure this is to keep great books. What do we mean by great books? We
mean annual financial statements and the underlying records that support those
financial statements. It is only with the bottom line results of your company
that the buyer can calculate EBITDA -- earnings before interest, taxes,
depreciation and amortization, and his or her return on the purchase price.
Nothing makes your numbers more credible than if they are certified and
attested to by your CPA. And most buyers want a five year track record of
audited financial statements. |
| You think about it: Can you provide a three
to five year track record of financials? |
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