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Reps and Warranties. Reps and warranties is a term used to describe the assertions that a buyer and/or seller makes in a purchase and sale agreement. Both parties are relying on each other to provide a true account of all information and supporting documents to close the transaction. The seller's representations BUSINESS WEBINARS ON DIVESTOPEDIA M&A Transactions in Uncertain Times. Now more than ever is the perfect opportunity to join our upcoming live webinar (Thursday, May 28 2020 @

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EBITDAC: THE MOTHER OF ALL ADD-BACKS EBITDAC: The Mother of All Add-backs. For those involved in M&A, EBITDA (earnings before interest, taxes, depreciation and amortization) is the often-referenced, industry standard metric that plays a major role in how companies are traditionally valued. For those considering a sale of their business — the rule is that when

you maximize EBITDA

DO IT YOURSELF VALUATION TEMPLATE Selling to employees; Bank financing. This is a "do it yourself" valuation template that shows how to normalized EBITDA, figure out comparable company multiples and apply a market valuation approach to determine a good estimate for the value of your business. Click here for an instructional article on how to use the template. HOW TO RETAIN KEY EMPLOYEES DURING A SALE PROCESS How to Retain Key Employees During a Sale Process. It’s important to incorporate incentives to harness your deal team’s commitment to the successful sale of your business while minimizing uncertainties during this transitional period. This article is co-authored with Paul Pittman: Founder and president of The Human Well, fellow of the FOUR STEPS TO ESTABLISHING A BOARD IN A PRIVATE ENTERPRISE Create a document (often called a board charter) outlining the objectives of the board, the roles and responsibilities of directors, and operating norms. Consider the ideal size of the board and the committee structure to achieve the mandate. Review how many internal directors are required in addition to external independent directors. A SUMMARY OF M&A FEES FOR SELL-SIDE TRANSACTIONSSEE MORE ON

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EBITDA ENGINEERING BEFORE SELLING A BUSINESS EBITDA is a commonly used metric for the valuation of mid-market businesses. Now, the appropriateness of using EBITDA can be debated, but the fact is that most estimates of business value start with this number. So needless to say, increasing EBITDA will increase the value

of a business.

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of a business.

WHAT IS A VENDOR TAKE BACK? A vendor take back is a type of non consideration often used by buyers to finance the total purchase price of a company. It provides a buyer with a source of financing without having to access the external debt market and pay fees. For the seller, it is a good alternative to receiving cash or stock in the buyer depending on how favorable the NEGOTIATING WORKING CAPITAL LEVELS IN A BUSINESS SALE Negotiating working capital is one of the most contentious issues in closing a deal. That's because determining the amount of sufficient working capital needed to fund ongoing business is a complicated exercise. Robert B. Moore, Partner, McGladrey LLP, has expertly summarized the issues is his white paper, "Negotiating Working Capital Targets and Definitions". WHAT IS YOUR FINANCIAL PLANNING PRACTICE REALLY WORTH? Using the expected norms, it would be valued at $750,000. Advertisement. This valuation ignores the quality of the revenues being generated. If the practice has a 30% gross margin, its annual profit from operations would be $127,500. Repayment of debt on the purchase price of $750,000 over a five-year term would be $150,000 per

year.

WHAT IS A PLATFORM ACQUISITION? The term platform acquisition originates from the private equity world where platform investments are very common. In the context of private equity, a platform acquisition refers to the initial acquisition a private equity group makes to enter an industry with the intent to then roll up, or acquire, other smaller companies in an industry. FOUR STEPS TO ESTABLISHING A BOARD IN A PRIVATE ENTERPRISE Create a document (often called a board charter) outlining the objectives of the board, the roles and responsibilities of directors, and operating norms. Consider the ideal size of the board and the committee structure to achieve the mandate. Review how many internal directors are required in addition to external independent directors. KEY NEGOTIATION TACTICS FOR YOUR M&A TRANSACTION Types of Negotiators. The types of negotiators you will encounter when negotiating a business sale or purchase will vary significantly from deal to deal, making it necessary for a good negotiator to be able to read dynamic situations and to be highly adaptable to ensure the best outcome is achieved for the transaction. Negotiation styles and perceptions can be broken down into many broad WHAT IS CAPITALIZATION FACTOR? Capitalization factor is the multiple or divisor that is used to convert the income expected from an investment into a value metric. This factor is mostly used to determine the value of a business and is computed as the inverse of a company's expected rate of return. The most common formula used for deciding the capitalization factor is 1/r

or

INVOLVING YOUR MANAGEMENT TEAM IN A BUSINESS SALE Involving Your Management Team in a Business Sale. Before finalizing the sale, consider discussing the impending transfer of ownership with your management team. The following is an excerpt from Noah Rosenfarb's book "Exit: Healthy, Wealthy and Wise - A Step-By-Step Guide to Conquering Business, Personal, Family and Financial Issues". THE REASONABLE PAYBACK PERIOD FOR AN INVESTMENT IN A SMALL O The profit multiples in the SME world are based on EBITDA (earnings before interest, taxation, depreciation and amortization) or seller's discretionary earnings (SDE), where SDE – owner manger salary = EBITDA. For these profit measure to be equal to cash flow, we must assume a steady state of affairs — stable profits forever — but most importantly, theoretically, we must deduct WHAT IS A CHANGE OF CONTROL? What Does Change of Control Mean? The change of control, or acquisition, of an entity is defined as: Any change in the entity ownership occurring when any person or company, directly or indirectly, becomes the beneficial owner of voting equity shares of the entity (to the extent of more than 50 percent of the voting shares) or the rights to acquire such shares; WHAT ARE BASKETS AND CAPS? The baskets and caps clause limits the seller's exposure to this indemnification. The caps concept usually limits, or "caps," the total amount payable under the indemnity. The most common cap used is 50% of the enterprise value, but this cap can be negotiated by both parties. The basket concept establishes a threshold for the indemnification SO YOU RECEIVED A LETTER OF INTENT, NOW WHAT? The letter of intent will specify key milestones such as the receipt of the due diligence package (a seller needs to build the preparation time into the timeline), receipt of a purchase and sale agreement for review, receipt of employment and/or non-competition agreements for managers and principals, and the proposed closing date.

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you maximize EBITDA

WHAT IS YOUR FINANCIAL PLANNING PRACTICE REALLY WORTH? Using the expected norms, it would be valued at $750,000. Advertisement. This valuation ignores the quality of the revenues being generated. If the practice has a 30% gross margin, its annual profit from operations would be $127,500. Repayment of debt on the purchase price of $750,000 over a five-year term would be $150,000 per

year.

HOW TO RETAIN KEY EMPLOYEES DURING A SALE PROCESS How to Retain Key Employees During a Sale Process. It’s important to incorporate incentives to harness your deal team’s commitment to the successful sale of your business while minimizing uncertainties during this transitional period. This article is co-authored with Paul Pittman: Founder and president of The Human Well, fellow of the INVOLVING YOUR MANAGEMENT TEAM IN A BUSINESS SALE Involving Your Management Team in a Business Sale. Before finalizing the sale, consider discussing the impending transfer of ownership with your management team. The following is an excerpt from Noah Rosenfarb's book "Exit: Healthy, Wealthy and Wise - A Step-By-Step Guide to Conquering Business, Personal, Family and Financial Issues". NEGOTIATING WORKING CAPITAL LEVELS IN A BUSINESS SALE Negotiating working capital is one of the most contentious issues in closing a deal. That's because determining the amount of sufficient working capital needed to fund ongoing business is a complicated exercise. Robert B. Moore, Partner, McGladrey LLP, has expertly summarized the issues is his white paper, "Negotiating Working Capital Targets and Definitions". HOW DOES WORKING CAPITAL IMPACT THE VALUE OF YOUR BUSINESS? Company 2: $2.2 million EBITDA x 4X Multiple = $8.8 million entity value. Working capital of $600,000 that is considered insufficient for normal operations by $400,000, and is deducted from the purchase price, to result in a $8.4 million purchase price. $8.4 million value / $2.2 million EBITDA = 3.82X EBITDA multiple. FOUR STEPS TO ESTABLISHING A BOARD IN A PRIVATE ENTERPRISE Create a document (often called a board charter) outlining the objectives of the board, the roles and responsibilities of directors, and operating norms. Consider the ideal size of the board and the committee structure to achieve the mandate. Review how many internal directors are required in addition to external independent directors. WHAT IS NON-CASH WORKING CAPITAL (NCWC)? Non-cash working capital (NCWC) is calculated by taking all current assets net of cash and subtracting all current liabilities. Usually during due diligence, the target's historical NCWC is calculated on a monthly basis for two to three years to understand how much working capital the business needs to support ongoing operations.

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HOW YOUR BALANCE SHEET IMPACTS BUSINESS VALUE Cash. Let's take, for example, a company that has cash and equivalents sitting on the balance sheet of approximately $300,000. Also included in other non-current assets is the company-owned retreat in Palm Springs, Ca., recently appraised at $500,000. We would consider these items as redundant assets in assessing the value of the business, in FINDING THE RIGHT INVESTMENT BANK TO SELL YOUR BUSINESS Finding the right investment bank may be a once-in-a-lifetime decision that sums up your life's work. For most business owners, finding a new partner for the business can involve some very unique challenges. Those challenges can become magnified when searching for an investment bank that will be best suited for your specific transaction. WHAT IS A VENDOR TAKE BACK? A vendor take back is a type of non consideration often used by buyers to finance the total purchase price of a company. It provides a buyer with a source of financing without having to access the external debt market and pay fees. For the seller, it is a good alternative to receiving cash or stock in the buyer depending on how favorable the SO YOU RECEIVED A LETTER OF INTENT, NOW WHAT? The letter of intent will specify key milestones such as the receipt of the due diligence package (a seller needs to build the preparation time into the timeline), receipt of a purchase and sale agreement for review, receipt of employment and/or non-competition agreements for managers and principals, and the proposed closing date. WHAT IS OVERALLOTMENT? What Does Overallotment Mean? Overallotment, also known as a 'green shoe option', is the process by which an organization allows its underwriters to sell additional shares during an initial public offering. The details of overallotment are contained in the underwriting agreement of the IPO. Sometimes, underwriters are even

allowed to sell 15

WHAT IS NON-CASH WORKING CAPITAL (NCWC)? Non-cash working capital (NCWC) is calculated by taking all current assets net of cash and subtracting all current liabilities. Usually during due diligence, the target's historical NCWC is calculated on a monthly basis for two to three years to understand how much working capital the business needs to support ongoing operations.

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WHAT IS TERMINAL GROWTH RATE? Terminal growth rate is an estimate of a company’s growth in expected future cash flows beyond a projection period. It is used in calculating the terminal value of a company as follows: Terminal Value = (FCF X ) / (WACC - g) Whereas, FCF (free cash flow) = Forecasted cash flow of a company. g = Expected terminal growth rate

of the

WHAT IS A HOCKEY STICK PROJECTION? A hockey stick projection is one that shows its last few years of actual results flat, and then magically rockets up for future years just like the blade of a hockey stick. These forecasts usually show significant growth in revenues, EBITDA and EBITDA margins. Also known as a hockey stick forecast. Advertisement. WHAT IS A GENERAL PARTNER (GP)? In the context of private equity (PE), the general partner, or GP, refers to the PE firm that manages a private equity fund. These funds are usually set up as general partnerships with the third party investors being the limited partners and the PE firm acting as the GP. In addition to raising the funds and administering the daily

operations of

DIVESTOPEDIA

Stephen Groves is an experienced and sought after mid-market M&A advisor based in Sydney, Australia. Stephen is recognized as a respected industry thought leader and is frequently consulted by a range of news outlets and industry colleagues for his opinion on the state of the M&A and business sales marketplace within Australia. BUSINESS WEBINARS ON DIVESTOPEDIA Looking to stay up-to-date on resources for entrepreneurs who want to sell their business for the best price and terms? Divestopedia webinars are the most popular online destination for live presentations led by world leading experts! EBITDAC: THE MOTHER OF ALL ADD-BACKS For those involved in M&A, EBITDA (earnings before interest, taxes, depreciation and amortization) is the often-referenced, industry standard metric that plays a major role in how companies are traditionally valued. For those considering a sale of their business — the rule is that when you maximize EBITDA, you can maximize valuation.. Calculating EBITDA is equal parts science and art. HOW TO RETAIN KEY EMPLOYEES DURING A SALE PROCESS Transitioning the ownership of your business is a significant undertaking that requires help from key members of your management team. As your sale process progresses, buyer due diligence will become more broad and the number of people on your internal deal WHAT IS YOUR FINANCIAL PLANNING PRACTICE REALLY WORTH? In the example of a practice with $500,000 GDC and 85% payout from the BD, assuming 6% compound growth and a modest discount rate of 20% over a 10-year period with a terminal valuation, the firm would be worth approximately $620,000.. This valuation increases the IRR for the buyer by 50%. In the model above, the reduction in the asking price from $750,000 to $620,000 pushes the IRR to 11% INVOLVING YOUR MANAGEMENT TEAM IN A BUSINESS SALESTATE TAX INCENTIVES

FOR BUSINESS

The purpose of having these conversations sooner rather than later, is to evaluate where your management team is in their level of responsibility and authority.Once that is established, the next step is to find ways to delegate responsibility from the owner to NEGOTIATING WORKING CAPITAL LEVELS IN A BUSINESS SALENET WORKING CAPITAL DEFINITIONNET WORKING CAPITAL RATIO Negotiating working capital is one of the most contentious issues in closing a deal. That's because determining the amount of sufficient working capital needed to fund ongoing business is a complicated exercise. Robert B. Moore, Partner, McGladrey LLP, has expertly summarized the issues is his white paper, "Negotiating Working Capital Targets and Definitions". WHAT IS MY AUTO REPAIR BUSINESS WORTH? Example. An automotive repair service business is consistently busy from keeping up with today’s new techniques. It’s a research-intensive project as you have to be up-to-date with the fast-paced production of new car models, along with their ever-changing advancing parts WHAT IS THE LEHMAN SCALE? What Does Lehman Scale Mean? The Lehman Scale is an industry accepted formula used by investment banks, M&A advisory firms, and business brokers to calculate the success fees on a sell-side (or sometimes buy-side) engagement. WHAT IS SUSTAINING CAPITAL REINVESTMENT? What Does Sustaining Capital Reinvestment Mean? Sustaining capital reinvestment is the periodic addition of capital to the business that is required to maintain operations at existing levels.

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year.

DO IT YOURSELF VALUATION TEMPLATE Selling to employees; Bank financing. This is a "do it yourself" valuation template that shows how to normalized EBITDA, figure out comparable company multiples and apply a market valuation approach to determine a good estimate for the value of your business. Click here for an instructional article on how to use the template. UNDERSTANDING RETURN ON EQUITY FOR PRIVATELY OWNED BUSINESSES Value creation occurs when returns on equity are greater than the cost of equity;; 70% or so of private business owners are not increasing the market value of their firms; and; Most business owners are not generating returns on equity investment greater than their company’s cost of equity capital.; This article is intended to explore these issues and their implication for mid-market business WHAT IS OVERALLOTMENT? What Does Overallotment Mean? Overallotment, also known as a 'green shoe option', is the process by which an organization allows its underwriters to sell additional shares during an initial public offering. The details of overallotment are contained in the underwriting agreement of the IPO. Sometimes, underwriters are even

allowed to sell 15

or

VALUATIONS ARE NECESSARY, UNLESS YOU'RE VERY LUCKY Valuations Are Necessary, Unless You're Very Lucky. Business valuations are necessary before you sell, unless you are in specific market conditions that make a valuation irrelevant. A successful M&A intermediary advisor used to say that valuation is just a tool to open the door to the client. Rumor has it that the valuations he presented

to

WHAT IS A CHANGE OF CONTROL? What Does Change of Control Mean? The change of control, or acquisition, of an entity is defined as: Any change in the entity ownership occurring when any person or company, directly or indirectly, becomes the beneficial owner of voting equity shares of the entity (to the extent of more than 50 percent of the voting shares) or the rights to acquire such shares; WHAT IS A GENERAL PARTNER (GP)? In the context of private equity (PE), the general partner, or GP, refers to the PE firm that manages a private equity fund. These funds are usually set up as general partnerships with the third party investors being the limited partners and the PE firm acting as the GP. In addition to raising the funds and administering the daily

operations of

WHAT ARE REDUNDANT ASSETS? Redundant assets can include cash and other marketable securities which have accumulated in a company's balance sheet. They may also include real estate (unless it is a real estate or development company), equipment, or other tangible assets that aren't directly used in the provision of services or goods of the selling company.

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How I Sold My Business HOW I SOLD MY BUSINESS: THE PERSONAL TOUCH APPROACH Jason Gibson specializes in timber frame construction, a traditional style of carpentry that dates back hundreds of years. Every project he touches—whether... By: DIVESTOPEDIA TEAM

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THE TOP 10 EBITDA ADJUSTMENTS TO MAKE BEFORE SELLING A BUSINESS By: JOHN CARVALHO | President,

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THE REASONABLE PAYBACK PERIOD FOR AN INVESTMENT IN A SMALL- OR MEDIUM-SIZED BUSINESS By: YIANNIS EMPEOGLOU

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BUSINESS VALUATION EXCEL TEMPLATE: 10 SIMPLE STEPS TO SUCCESS By: JOHN CARVALHO | President,

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TRANSITIONAL SERVICE AGREEMENT A transitional service agreement (TSA) is a type of agreement that is made between the buyer and seller of a company. In this arrangement, the seller agrees to provide certain services to the buyer at a predetermined price. These services can include accounting, IT and human resources and their...

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REPS AND WARRANTIES

Reps and warranties is a term used to describe the assertions that a buyer and/or seller makes in a purchase and sale agreement. Both parties are relying on each other to provide a true account of all information and supporting documents to close the transaction. The seller's representations...

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PIK INTEREST

PIK, or payment-in-kind, interest is the option to pay interest on debt instruments and preferred securities in kind, instead of in cash. PIK interest has been designed for borrowers who wish to avoid making cash outlays during the growth phase of their business.

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THE TOP 10 EBITDA ADJUSTMENTS TO MAKE BEFORE SELLING A BUSINESS The most common EBITDA adjustments you need to know when it comes time to sell your business. By: JOHN CARVALHO | President,

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Valuation

7 KEY PRINCIPLES OF BUSINESS VALUE Grasping the basics of technical valuation can go a long way toward helping business owners increase the valuation of their business. By: JOHN CARVALHO | President,

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Valuation

THE REASONABLE PAYBACK PERIOD FOR AN INVESTMENT IN A SMALL- OR MEDIUM-SIZED BUSINESS Inform yourself on what you can reasonably expect a payback period to be for your small- or medium-sized business. By: YIANNIS EMPEOGLOU

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Valuation

WHAT'S THE DIFFERENCE BETWEEN GROWTH CAPEX, MAINTENANCE CAPEX AND INTERNALLY FINANCED CAPEX? There are generally two reasons companies spend money on capital expenditures (capex): to grow the business, and to maintain the business. Once a company determines it needs to make a capex investment it must decide how to pay for the capex, either using company cash or debt. Let’s explore each...

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Valuation

WHAT IS THE IMPACT OF SUPPLIER CONCENTRATION ON BUSINESS VALUE? Concentration in the acquisition world is a bad word. Businesses with high supplier concentration attract fewer buyers and this lowers the price. What’s too high? Having a supplier with 40% of your business is too high. Diversify if at all possible. When buyers look at a company for sale,...

By: ROSE STABLER

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Sale Process

WHAT SHOULD I LOOK FOR WITH NON-CASH CONSIDERATION? Receiving consideration other than cash is not uncommon. In fact, it is very rare that vendors receive all cash for their business. Different forms of non-cash consideration include a seller's note, an earnout or, in your case, stock in the buyer's company. The three most important things that you... By: JOHN CARVALHO | President,

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VIDEO: WHAT IS GOODWILL? Goodwill refers to the value of intangible assets in a business. In this video, John Carvalho, president of Stone Oak Capital and co-founder of Divestopedia.com,... By: DIVESTOPEDIA TEAM

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THE VALUE OF INVESTMENT BANKERS: BUSINESS OWNERS’ PERSPECTIVE A recently published Fairfield University whitepaper is the first comprehensive study quantifying the value of the services provided by an investment bank during the...

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Jey Arul is the President of VR Business Sales in Edmonton, Alberta. VR is a business brokerage firm that assist entrepreneurs and business owners with business financing, business valuation and business sales. Latest article The ABCs of Earnouts

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Greg Tobben is a partner and co-founder of Access Capital Partners, an investment bank exclusively focused on raising capital for independent sponsor acquisitions. He has extensive experience in investment banking, capital markets advisory and real estate, including sell-side, strategic advisory, turnarounds and capital markets transactions.Greg graduated from The University of Missouri, Columbia, with a dual concentration in Finance and Real Estate. He holds his FINRA Series 63 and 79 Registrations. Latest article How Do Independent Sponsors Differ from Traditional Private Equity Buyers?

BRAD MEWES

Brad Mewes is the founder of Supplement!, a strategic, financial and M&A advisory firm specializing in the automotive aftermarket industry worldwide. He has been featured in publications globally including ABRN, Driving Sales News, Aftermarket Business World, Repairer Driven News, Ratchet + Wrench, Australasian Paint and Panel, and Motor China Magazine.Brad has an MBA from the University of California, Irvine with an emphasis in Finance. He graduated in the top 10% of his class. Brad received his undergraduate degree in International Economics with a concentration in Latin American Business from George Washington University in Washington, DC where he graduated with honors (cum laude). He has lived in both Mexico and Chile and has completed assignments in 14 countries on three different continents. Brad speaks

Spanish fluently.

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