Cybeck Capital Partners

Cybeck Capital Partners
CEBI Spring Summit April 27, 2012 Harry D. Loyle, CFE Cybeck Capital Partners What’s y Business Really Worth? M

Cybeck Capital Partners
Private Equity Firm based in Dayton, OH 13 Portfolio Companies 6 with Active Management; 4 in Franchising Great People + Good Companies = Growing Businesses © 2012 Cybeck Capital Partners, LLC

Current Portfolio

Cybeck Business Model Consulting Private Equity Investments
M&A, Capital Structure, Strategic Planning, Corporate Governance, Executive Coaching Private Equity Investments Mezzanine Financing Operating Partnership ProgramTM Acquisitions Investment Fund Management © 2012 Cybeck Capital Partners, LLC

Cybeck’s Unique Due Diligence Process
© 2012 Cybeck Capital Partners, LLC

$ Actually, Plus, it is a great metric for personal measurement!
It is always good to know what your business is worth… just in case: $ Financial problems Burnout Health decline Death Alternative business opportunity Marketplace changes Partnership dispute Plus, it is a great metric for personal measurement! © 2012 Cybeck Capital Partners, LLC

Fewer than 25% of small business owners actually know the value of their company, experts say.
Most just guess and those estimates are usually inflated. ( ) © 2012 Cybeck Capital Partners, LLC

Finding The Right Price
1. Maximize Enterprise Value Why it matters and what it is… 2. Evaluate Market Conditions How will macro factors and demand make an impact… 3. Determine The Valuation Which method and numbers to use… 4. Know Your Buyer/Investor What factors influence those who are interested… © 2012 Cybeck Capital Partners, LLC

Maximize Enterprise Value
(Start 2-3 years prior to sale) Remove passion and owner bias © 2012 Cybeck Capital Partners, LLC

Take a hard look at your business and the FACTS!
1. Maximize Enterprise Value Take a hard look at your business and the FACTS! Remove passion and owner bias © 2012 Cybeck Capital Partners, LLC

Intellectual Property Transferability Process & Procedure Manuals
1. Maximize Enterprise Value Marketability Competition Suppliers Lease/Contract Terms Management Team Customer Continuance Asset Condition Intellectual Property Transferability Process & Procedure Manuals Last Year’s Earnings Current Financials Sales Forecast Projected Earnings Remove passion and owner bias © 2012 Cybeck Capital Partners, LLC

1. Maximize Enterprise Value
You should always be thinking about how to enhance your growth and what you can do to make your business more attractive to investors or acquirers. © 2012 Cybeck Capital Partners, LLC

Clean Up Your Financials!
1. Maximize Enterprise Value Clean Up Your Financials! Report all sales Recast owner benefits Sell old equipment Remove obsolete inventory © 2012 Cybeck Capital Partners, LLC

Company Operating Performance
1. Maximize Enterprise Value Where is the Value? Company Operating Performance Reinvestment Personal Benefit Net Profit (NOI) EBITDA: Earnings Before Interest Taxes Depreciation and Amortization Post-Debt Cash Flow W-2 Income Standard of Living (SOL) Owner Distributions or Withdrawals ∆ Equity: Change in Equity Over Time © 2012 Cybeck Capital Partners, LLC

1. Maximize Enterprise Value Why it matters and what it is… 2. Evaluate Market Conditions How will macro factors and demand make an impact… 3. Determine The Valuation Which method and numbers to use… 4. Know Your Buyer What factors influence those who are interested… © 2012 Cybeck Capital Partners, LLC

2. Evaluate Market Conditions
Today’s Market Sellers have the advantage: Many buyers Few quality businesses Lenders are making acquisition loans On the horizon… Baby Boomer retirement Excess supply will make it a Buyer’s Market. Remove passion and owner bias - Gerry Chadwick, CBI Sunbelt Business Advisors © 2012 Cybeck Capital Partners, LLC

Transaction Data Resources
2. Evaluate Market Conditions Transaction Data Resources BizBuySell Most Active Business Marketplace on the Internet Quarterly Insight Reports Business Valuation Resources/BVMarketData Pratt’s Stats® - Private Company M&A Database BizComps® - Small Business Comparables Public StatsTM – Public M&A Transactions Done Deals Public & Private Transaction Details Purchase Price Range: $1 Million to $1 Billion Bizcomps (median sale price $135K) reports are Revenue, Seller’s Discretionary Cash (SDCF), Inventory, Fixed Assets, and the Purchase Price paid for the goodwill of the business plus the fixed assets. From this data, one can readily calculate a Price/Revenue and a Price/SDCF. Done Deals (median sale price $14M) reports Revenue, Net Profit after Tax, Net Worth, Selling Price, and in some cases, Operating Cash Flow and EBITDA. From this data, it is a straightforward exercise to calculate Price/Revenue and Price/Net Worth, and a P/E ratio or an after-tax earnings cap rate. Applying an estimated tax rate to the reported Net Profit after tax allows one to estimate an EBT cap rate. © 2012 Cybeck Capital Partners, LLC

"Seeing small business transaction totals reach 2008 levels bodes well for the upcoming months," Mike Handelsman, group general manager of BizBuySell.com and BizQuest.com said. "While we are not out of the woods yet, economic factors are slowly improving and have given the business-for-sale marketplace a nice boost to start 2012."

A main driver of the increase in transactions is that business owners were willing to accept lower prices than in previous quarters. While total closed transactions increased in Q1 of 2012, average sale price as a multiple of both revenue and cash flow decreased compared with the same period last year. The average sale price as a multiple of annual revenue fell over 10 percent to 0.59, the lowest since the financial crisis at the end of The average sale price as a multiple of cash flow decreased by 4.7 percent to 2.36. Average Sales Price as Multiple of Revenue / Average Sale Price as a Multiple Cash Flow 2007 Q 2007 Q / 2.80 2008 Q 2008 Q / 2.68 2009 Q / 2.69 2009 Q 2009 Q / 2.44 2012 Q / 2.36 For lower middle market companies with enterprise valuations (EV) below $25million GF Data reports sales multiples for the first half of 2011 between 5.2x to 5.5x times EBITDA, very close to prerecession levels. And lucky owners with EV above $50million are seeing multiples above recession levels, now averaging between 6.8x and 7.5x EBITDA.

2007 Q2 Median Sale Price: $186K 2007 Q4 Median Sale Price: $187K 2008 Q1 Median Sale Price: $200K 2008 Q2 Median Sale Price: $200K 2008 Q3 Median Sale Price: $189.5K 2008 Q4 Median Sale Price: $177.5K 2009 Q1 Median Sale Price: $165.5K 2009 Q3 Median Sale Price: $149K

1. Maximize Enterprise Value Why it matters and what it is… 2. Evaluate Market Conditions How will macro factors and demand make an impact… 3. Determine The Valuation Which method and numbers to use… 4. Know Your Buyer/Investor What factors influence those who are interested… © 2012 Cybeck Capital Partners, LLC

Evaluation - Qualitative Valuation - Quantitative
3. Determine the Valuation What’s It Worth? To Whom? Evaluation - Qualitative Valuation - Quantitative People VALUES “Warren Buffet” Business Model Understanding Professional Management Clean, Straightforward Structure and Governance Other Investors VISION and Business Opportunities Book Value Liquidation or Net Asset Value Comparable Companies Earnings Multiple Discounted Cash Flow Precedent Transactions or Replacement Value © 2012 Cybeck Capital Partners, LLC

Valuation Methods Comparable Worth Asset Valuation
3. Determine the Valuation Valuation Methods Comparable Worth Examines publicly traded companies (comps) Adjustments made for geography, earnings, financials, etc. Asset Valuation For companies with large fixed asset base Careful assessment of machinery, equipment, land, vehicles, inventory, intangibles, etc. Financial Performance Most commonly used for small to medium companies Measures historical performance and predict future © 2012 Cybeck Capital Partners, LLC

Basis for Valuation Multiples
3. Determine the Valuation Basis for Valuation Multiples I. Seller’s Discretionary Cash Flow (SDCF) SDCF = EBITDA + Owners Compensation + Other Owner Benefits Pre-tax earning of business before non-cash expenses, owner compensation, interest expense/income, one-time expenses and non-business expense items Most commonly used in small business valuation Also known as seller’s discretionary earnings (SDE) © 2012 Cybeck Capital Partners, LLC

3. Determine the Valuation Basis for Valuation Multiples II. Business Earnings Historical: Last year or last 3-5 years (avg) Future: Next year or next 3-5 years (avg) Commonly based on Earnings Before Interest and Taxes (EBIT) but Earnings Before Interest, Taxes Depreciation and Amortization (EBITDA) or Earnings Before Interest, Depreciation and Taxes (EBIDT) can also be used © 2012 Cybeck Capital Partners, LLC

3. Determine the Valuation Basis for Valuation Multiples III. Gross Sales Not very accurate Used for business categories with large numbers of the same type of businesses, such as franchises Often used in combination with another business earning calculation © 2012 Cybeck Capital Partners, LLC

EBITDA Multiple Range LOW 1x AVG 2.5x HIGH 10x
3. Determine the Valuation EBITDA Multiple Range LOW 1x AVG 2.5x HIGH 10x Product/Service Industries Consulting Businesses Technology Industry Strong Brand Name $50M + Professional Practices average SDE multiple for companies up to 1 million in revenue was 2.2, and for companies with revenue between 1 and 5 million was 2.9. High Liquidity Competitive Advantage Low Barrier to Entry Low Risk High Barrier to Entry © 2012 Cybeck Capital Partners, LLC

Finding Right Price 1. Maximize Enterprise Value
Why it matters and what it is… 2. Evaluate Market Conditions How will macro factors and demand make an impact… 3. Determine The Valuation Which method and numbers to use… 4. Know Your Buyer/Investor What factors influence those who are interested… © 2012 Cybeck Capital Partners, LLC

What Buyers Want Type of Buyer Drivers Individuals
4. Know Your Buyer/Investor What Buyers Want Type of Buyer Drivers Individuals Wants to expand, to relocate, be their own boss or enter a new field Looks for sound return on money and time Usually involves less than $1 million cash Strategic Buyer Wants to enter market, increase market share, add technology, etc. May want to eliminate competition Probably will give the highest valuation for the business Synergistic Buyer Industry Buyer “Buyer of last resort” who pays a lower price for assets Won’t pay for goodwill and isn’t interested in consulting agreements Financial Buyer Rely heavily on financing Want to maximize returns (up to 40%) with minimal capital invested Usually wants to exit within 5 years © 2012 Cybeck Capital Partners, LLC

Buyer Type vs. Deal Size Type of Buyer Less Than $3M $3M to $10M
4. Know Your Buyer/Investor Buyer Type vs. Deal Size Type of Buyer Less Than $3M $3M to $10M More Than $10M Individuals 45% 25% 5% Public Companies 30% 20% Private Companies 10% 15% Investment Groups Source: Advantage Commercial Brokers, Inc. © 2012 Cybeck Capital Partners, LLC

Typical Acquisition Transaction
4. Know Your Buyer/Investor Typical Acquisition Transaction CASH for Equity Sale (±80%) Opportunity for “Second Bite of the Apple” (±20%) Potential for Continued Employment Potential Equity for Management Team © 2012 Cybeck Capital Partners, LLC

Private Equity (PE) Venture Capital
4. Know Your Buyer/Investor Private Equity (PE) A broad term that encompasses a range of strategies for investing in companies whose stock is not traded on public stock exchanges. Venture Capital Investment in a new or developing company Buy-out Acquisition usually with control Special Situation Unique opportunity distressed, macro change Merchant Banking © 2012 Cybeck Capital Partners, LLC

4. Know Your Buyer/Investor
PE – “PROS” PE – “CONS” CASH Marketplace Valuations “Professional” Buyers Potential for Continued Management Involvement Management Team Equity Additional Resources: Money, People, Knowledge, etc. Opportunity to Sell It’s NOT your company anymore “Yes Boss” “Professional” Buyers Extensive Due Diligence Relatively Short Term Focus Transactional Focus Financing Contingency Management Accountability © 2012 Cybeck Capital Partners, LLC

Picking the “Right” PE Firm
4. Know Your Buyer/Investor Picking the “Right” PE Firm People VALUES Industry Experience Situational Experience Typical Size of Portfolio Companies Management Style: Active versus Passive Planned or Discussed Exit Strategy Capital Structure: Debt versus Equity % Willingness for Additional Cash Injection © 2012 Cybeck Capital Partners, LLC

WARNING: The final valuation can vary widely and depends on diverse factors, including:
market conditions, timing, internal motivation, buyer and seller goals, resulting operating synergies, transaction structure and other factors that may not be explicitly defined © 2012 Cybeck Capital Partners, LLC

Cybeck Capital Partners, LLC
“Dedicated to Personal and Organizational Development through Business” Cybeck Capital Partners, LLC 7086 Corporate Way Dayton, OH Harry has a passion for helping people design their companies to reach their personal and organization goals. As the Managing Director of Cybeck Capital Partners they add management value through experience and professional management practices, and coupled with mezzanine financing, partner with great people to build sustainable organizations. Harry D. Loyle, CFE Managing Director

Thank You!

Cybeck Capital Partners

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