Business Exit Planning Presented by Phil Thompson Phil Thompson & Associates Business Lawyers, Corporate Counsel Business Exit Planning Presented by Phil Thompson To ExecForum June 24th, 2003 © Phil Thompson, 2003

Who We Are Four lawyers practising in association Offices in Richmond Hill and Etobicoke Focused 100% on owner managed business and real estate investors Three of the four of us started in large Bay Street firms Besides running our own businesses, two of us have extensive experience in running the “family” business outside of practising law We can be reached through www.philthompson.com

Today’s Topic - Business Exit Planning Extremely broad topic No two situations are exactly the same Will highlight ten important issues Topics dealt with in more depth on our website www.philthompson.com and in many other sources

Tip #1 – Do no procrastinate – Start now You should always run your business with one eye on the exit You may not control exit timing You may not even be around to manage the process Some examples: Death Critical illness or disability – yours or your spouse’s A sudden shift in market conditions A sudden loss of key employees, customers or suppliers An offer you can not refuse

Tip #2 – Make a plan Exiting your business is a process, not an event You need a plan to be in control of the process Some plan benefits: You need a plan to know what success looks like You need a plan to make a roadmap others can follow with or without you Having a plan should give you some peace of mind But most importantly - making a plan should have an immediate, positive impact on you and your business

More notes on the plan: Put the plan on paper Keep it short and to the point Share it around – professional advisors, spouse, key confidants Review it once a year Be ready to share it with a prospective purchaser – make it part of what you have to sell

Tip # 3 – Get competent, professional advisors You may only do this once or twice - we will be involved in doing this hundreds of times Get people who know what they are doing, have done this many times before, and are cost-effective Be wary of consultants who want big fees – the best work will be done by those focused on relationships, not projects

Tip #4 – Put a team together Your accountant A business lawyer A business valuator (CBV) A tax professional Key personal advisors – spouse, other family, key employees, friends and mentors

Tip #5 – Know your triggers Why do I want to exit my business? – the #1 question from any buyer What do I want to get out of it, and why? What do I need to get out of it, and why? Note the difference between “want” and “need”

When to exit your business: Depends on why you are exiting Depends on what you want and what you need to get out of the business The right conditions are more important than dates on a calendar Be flexible – it is not totally under your control Note: the best businesses to sell are those which are not timing dependent – sustainable, predictable and durable performance, not personality based – if possible, get your business to look like that and timing becomes less of an issue

Tip #6 – Do a realistic assessment on what it is you have to sell “How are businesses like mine valued?” “What is the present value of my business?” “What economic trends impact the value of my business?” “What industry trends impact the value of my business?” “What is going on in my company that is impacting the value of my business?”

Your own expectation of price The #1 impediment to selling your business will probably be ... Your own expectation of price If you get a deal on price, the success rate on actually completing the deal is over 90%

The biggest reasons why owner price expectations are out of whack? They do not understand how their businesses are valued – especially from a risk/return perspective They do not appreciate that their business is of more value to them than to anyone else – after all, they understand the risks better than anyone else and are most confident in being able to manage them They have trouble assessing risk from a buyer’s perspective, and how that impacts price They expect buyers to accept an ROI equivalent to public companies, second mortgages, and other lower risk investments

One way to see things from a buyer’s perspective: Write down what you think someone should pay to buy your business Add that amount to your existing balance sheet as long term debt, and reduced your retained earnings by the same amount Now look at your company – how long will it take you to pay that off with after-tax dollars? Now take that same amount of money and consider all the other ways you have of investing it – what risk/return scenarios are available to you?

The key to getting the best possible price is to manage the buyer’s perception of risk – in your mind and in the mind of a buyer. The greater the risk, the greater the ROI a buyer will need The #1 way a buyer manages risk and ROI when buying a business is in the price The greater the buyer perceives the risk, the lower the price he or she wants to pay Your job, starting at least one year before you plan to go to market - Minimize the buyer’s risk

Tip #7 – Wherever you are today, start working immediately to enhance the value of your business “What could I do that would enhance the value of my business?” “What do I need to do that?” “What risks do those things represent?” “What impact will they have on the value of my business?” “What impact will they have on buyer’s perception of risk?”

Things that most impact value/price: Profitability – sales, margins, overheads, % and $ Cash Flow – to service debt, to repay debt, to fund expansion or improvement, to provide reserve, to distribute to owners Sustainability – profits, cash flow and key relationships Predictability – consistent, reliable, tied to measurable outside indicators Durability – robust, adaptable, well positioned Believable growth opportunity – the more the buyer sees an opportunity for post-closing profit growth, the less they need to use price to manage their risk, and the more they will pay to you

More things that impact price: Financability – has the company been managed to leave room for additional third party financing – operating loans, term loans, equipment leases – or potential cost savings and reductions VTBs – is the seller willing to take back a mortgage for part of the purchase price Earnouts – is the seller willing to tie a part of the purchase price to the company’s post-closing performance Minimal Personal Goodwill – the company is at a stage where anyone can own it and make money Synergy – buyer will reduce competition, or improve margins, or reap cost savings or sales increases

Tip # 8 – Pick who you are going to sell your business to Start with the end in mind Choices usually include – competitor, customer, supplier, employee, investor, true successor Have more than one scenario Know why they would want to buy you out, and what they will value most Make sure it will get you want you need, and a shot at what you want Run your business accordingly

Tip # 9 – Get your house in order Plan you tax strategy and be ready to implement it Plan how to get redundant assets out of your company Understand EBITDA and be able to account for it, especially owner compensation issues Get the right relationships in place with the right people – customers, suppliers, employees 

More ideas for getting your house in order: Get your company properly financed, with some excess borrowing capacity left on the table Get the right contracts in place with the right people – customers, suppliers, employees Have a “clean” situation on all legal and government matters Get some third party studies done, if they will help – environmental, marketing

Tip #10 – Prepare yourself for moving on Be sure you can let go when the time comes That you can act when the conditions are right The #1 impediment to making and implementing a good succession plan is an owner who hangs on too long, or can not let go