Preparing for a Sale of the Business Marc D’Annunzio Siavage Law Group, LLC November 10, 2010

Overview 1.To Sell or Not to Sell? 2.Getting Ready for Sale 3.Sarbanes-Oxley and the Private Company 4.Current Issues 5.Checklist/Conclusion

1. To Sell or Not to Sell?

Why Sell? Reasons include: –succession planning –diversification –expansion/roll-up –retirement –cash needs A buyer will ask this question; have a good answer ready!

When to Sell? Whenever you can get the best price! Combination of internal/external factors –property, plant & equipment –status of R&D projects –need for additional capital –state of economy generally –market segments –geography

What’s it Worth? Common approaches: 1.Market Value – may be difficult to determine with private companies 2.Earnings Model – determination of the present value of future earnings; may use a discount rate appropriate to the business being sold; often the purchase price is based on a multiple of earnings (i.e. 6x EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization) 3.Book Value – focus on the balance sheet (FMV of all assets minus FMV of all liabilities) *In the end, the only valuation that matters in a typical sale context is the value to which a willing buyer and a willing seller both agree.*

Valuation Drivers Expected industry growth Market share Sustainable cash flow Strong financial position Employees Condition of the company and its products/services

How Should the Sale be Structured? Three basic forms: –asset sale –stock sale –merger (straight/triangular/forward/reverse) Relevant considerations: –Exclusions of assets and liabilities –Tax treatment –Third party consents –Shareholder approval

Types of Buyers Individual buyers –entrepreneurs, executives Strategic buyers –business competitors, other players in or near seller’s industry Financial buyers –venture capitalists, private equity funds Increasing prevalence of foreign buyers

2. Getting Ready for Sale

Why Prepare? Better Preparation=Better Valuation =More $$$ “Think like a buyer” – determine your company’s weaknesses, and address them

Attorneys, Accountants, Investment Bankers! Oh my! Relying on outside advisors and the information they provide is explicitly permitted under Georgia law (O.C.G.A (b)). Select based on expertise and comfort level Can include: –Attorneys –Accountants –Investment bankers/business brokers The “book” and auction processes

Due Diligence Financial matters –financial statements (audited if possible) –expenses documentation expense account review –taxes Corporate matters –organization, ownership and governance –necessary qualifications, licenses, permits –material contracts

What to Tell (and Not Tell) Employees What to tell When to tell Confidentiality / Non-disclosure agreements Stay bonuses – payable upon closing Non-competition agreements

3. Sarbanes-Oxley and the Private Company

Whither Sarbanes-Oxley? Technically not applicable to private companies, BUT –Represents accepted best practices –May be required by sophisticated buyers (or lenders) –Certain provisions may not be costly to implement Key Provisions –Section 302 – Disclosure Controls and Procedures –Section 404 – Internal Controls Over Financial Reporting If selling to a public company: –Compliance with Sarbanes-Oxley will be required post- sale –Plan ahead and increase attractiveness/value

4. Current Issues The rise of seller financing The recession’s impact on risk profiles Adjusting valuation expectations

5. Conclusion

Checklist General –timing –process –advisors –structure Financial information Corporate records Contracts Employment matters Litigation Regulatory and compliance Environmental

Questions?