1. BUYING AN SME IN CZ BCC Breakfast Briefing 19.1.2006, Prague © Business Brokerage Partners BusinessMarket / Trh firem

2. Buying an SME in CZ – help yourself  area not properly surveyed yet  main information sources  experiences of local M&A agents and individual brokers  individually published cases  PWC market research  SME definition and characteristics  CZ acquisition market and approaching it  SME sellers and buyers  Main considerations when investing in SME  Running an SME acquisition

3. SME - Something More Eerie?  definition  size - annual turnover < CZK 500 mln., number of employees < 250  legal form - sole entrepreneur, limited liability company, private unlimited company, public limited company  characteristics  increased volatility of sales and profits / vulnerability to the economic cycle  less than 15 years of history  less transparent accounting

4. SME - Something More Eerie?  characteristics  owners engaged in management  main business relationships and decision making linked to a limited number of key people  owners/management focused only on their business - less expertise in other areas  owners often exclusively in charge of M&A negotiations  family/friends involved  more shareholders – potential dispute can paralyze the business  lack of strategic planning or planning at all  reduced access to some “higher level“ services (e.g. in banking)

5. Understanding SME sellers  reasons for sale  retreat of the owners – personal reasons  a decline or anticipated decline of the business  differing views of individual shareholders  new business focus of the owners  mature company with limited growth possibilities within the current management/ownership set up  growth potential perceived – need for expansion  corporate restructuring – sale of non-core business  sale of a business by a bankruptcy administrator  reasons often combined

6. Understanding SME sellers  expectations of the seller  high sale price expected – key issue  ensuring a “going concern” concept for their business  sometimes quick sale solution  confidentiality  avoidance of insolvent buyers  his/her business is salable

7. Who are SME buyers?  strategic – horizontal or vertical expansion  financial  small and medium financial groups  venture capital and private equity investors  private individuals  foreign – limited to strategic, domestic – both strategic and financial  ! lots of suspect insolvent individuals !  expectations of the buyer  yields higher than in corporate segment  good investment protection  temporary management assistance from former owners  often no concept of handling the takeover

8. How buyers and sellers approach each other  no institutionalized market  market based on individual counterparties search  SME sellers´ approach  sole search within their local or business environment – prevails  advertisement  search via a mediator/broker  SME buyers´ approach  being sought out by sellers themselves  contact network, sole search and advertisement  search via a mediator/broker

9. How buyers and sellers approach each other  structure of brokers/mediators  “big four” and investment banks  medium M&A agents  related services providers  small and “occasional” brokers  non commercial – chambers, associations, state agencies  expectations from a broker  the smaller the business → the smaller potential added value from an advisor → less willingness of owner to hire an advisor

10. Main considerations when investing in SME  sector and region  stage of SME’s “life” and size  yield/risk level within SME sector  control strategy - stake to be gained  full takeover  majority takeover  joint venture  venture capital investment  investment horizon and potential exit strategy  legal form  purchase of shares / share in an ltd.  purchase of a set of property  purchase of a business

11. Main considerations when investing in SME  participation and contribution  synergies with own activities  complete funding needs and their structure  engagement of former owners in the business  management resources needed  stability of the employees team, disclosing relevant relations  current capacity usage and expansion possibilities  disclosing the real motivation for the sale  other aspects related to SME characteristics

12. Running an SME acquisition  transaction process  seller´s decision to sell – takes looong  formalizing the decision – first real steps  location of potential buyer(s)  negotiation with potential buyer(s)  agreement on the sale and its conditions  transaction processing (due diligence, legal contracts, settlement)  the whole process is LESS FORMAL  evaluation of the business for sale

13. Other aspects and facts  personal sympathy of buyer and seller – PRECONDITION to proceed any further  differences with corporate M&A  SME investment generally riskier  higher discrepancy in the evaluation view from buyer and seller  negotiations directly between seller (owner) - buyer  limited role and added value of M&A advisers  less formal and standardized process  less information quality and transparency  success rate of SME takeovers – ???  success rate of business sale offers – we estimate below 10%

14. Your potential way to buy an SME  “matching” agent  creating a theoretical marketplace, where SME sale offers and acquisition demands are matched  pre-selection and presentation  processing information and facilitating initial communication  confidentiality concern Business Brokerage Partners, s.r.o. Na Výsluní 201/13 100 00 Praha 10 tel.: (420) 226 004 135 tel./fax: (420) 226 004 136 e-mail: info@trhfirem.cz www.trhfirem.cz www.businessmarket.cz www.unternehmensmarkt.cz