Transcript Working with Entry-Level Entrepreneurs

Managing Relationships in
Brokerage
Douglas A. Dickey, CPA
DRDA, P.C.
Agenda

Entrepreneurs
– Advisors – Allies or
Roadblocks
– Entrepreneurial Traits

Deal Process
– Buyers Side
– Seller Side

Financing the Deal
– Equity - BORSA
– Debt


Due Diligence
Closing the Deal
Advisors to Entrepreneurs

According to a poll conducted by National
Federation of Independent Business and
Wells Fargo, 84% of small businesses sought
outside advice from:
–
–
–
–
–
–
–
CPA – 59% (Most Trusted Advisor)
Family – 44%
Attorney – 39%
Other Business Owners – 34%
Suppliers – 31%
Stock Broker – 30%
Insurance Agent – 30%
Managing Key Advisors
CPAs - “Most Trusted Advisor”
 Understanding Typical CPAs
 Avoids Risks
 Looks for Problems
 Focus on Past - Not Future
 Look for Reasons to NOT Do
Something, vs Ways to Get it Done

Traits of Entrepreneurs
Action Oriented - Make it Happen
 Go with their Gut
 Product and Sales Focus
 Willing to Take Certain Risks
 Take Control of Situations

Psychology of Entrepreneurs

Entrepreneurs versus Accountants
Communication & Coordination

Accountants are from Mars Entrepreneurs are from Venus

Are backward looking

Are recording, organizing & 
reporting what happened in

the past
Have knowledge of what has

happened
Can produce tremendous

amounts of data
Can produce any type of
report you want, but do not
know what you need




Are forward looking
Envisioning, planning & creating
Have knowledge of what is
planned.
Needs information for decision
making, not data
Does not know what is available
therefore does not know what to
request
Deal Process
Buyer Side
Seller Side
Buyer Side Process
Qualification
Deal Review
Letter of Intent (LOI)
Due Diligence
Financing
Closing
Buyer Qualification
Financial Resources
Personal Financial Information
Buyer Qualification Forms
Experience
Attitude and Motivation
Strategic versus Financial
Deal Review
Matching Buyers to Deals
Finding Good Matches
Deal Size
Industry Experience
Technical Knowledge
Strategic versus Financial
Buyer Presentation
Appropriate Presentation and Disclosure
The Handshake
Getting the LOI signed
Valuation Issues
Personality Issues
Doing Due Diligence
Managing the Advisors
Avoiding the Deal Killers
Creating the Definitive Documents
Financing the Deal
Financing to Increase the Deal Value
Appropriate Financing
3rd Party
Owner Finance
Earnout
Good Financing yields More Bidders
More Bidders yields Higher Price
Financing the Deal
Equity First
Savings
Friends and Family
Investors
Tools like BORSA
Debt to Increase Return on Investment
External Startup Equity is Expensive
Leverage Equity with Debt
BORSA
Business Owners Retirement Savings
Account
Use 401(k), IRA and Pensions as Equity
No Taxes, Penalties or Interest!
Can result in 50+% more Equity in Deal
Facility Comparisons
FullNotification
Factoring
SBA
Lender
7a
Asset
Based
Transfer &
Inv.
Bank ABL
Conventional
Bank
Mezzanine
Start Up
Y
Y
N
N
N
N
Concentration of
Accounts
Y
Y
Y
< 20%
< 20%
< 20%
Inventory
N
Y
Y
Y
Varies
NAP
Balance
Sheet/Income
Statement
N
Compiled
Review
Preferred
Review
Preferred
Varies
Audited
Turnaround Time
3-5 days
3-4 weeks
2-3 weeks
4-6 weeks
3-4 weeks
3-12 weeks
Current Ratio
N/A
> 1.0
> 1.0
> 1.25
> 1.0
> 1.0
Working Capital
N/A
Positive
Positive
Positive
Positive
Positive
Total Liabilities/TNW
N/A
< 4:1
May be
negative
< 5:1
< 3:1
< 5:1
Debt Service
Coverage
N/A
> 1.25
> 0.75
> 1.15
> 1.25
> 1.25
LTV Equity Req'd
N/A
10%
N/A
N/A
20%
N/A
Personal Guarantees
N/A
Y
Y
Y
Y
Negotiable
Collateral
Y
Y
Y
Y
Y
Y
Key Man Insurance
N
Y
N
N
Y
Y
Terms
< 60 days
7-25 yrs
5-25 yrs
5-25 yrs
1-25 yrs
1-5 yrs
Max Loan Amt
Asset Based
$2MM
Asset based
Asset Based
Negotiable
Negotiable
Closing the Deal
Working with Attorneys
Following up on Details
Managing the Buyer and Seller
Keeping the Advisors in Line
Positive Attitudes Close Deals
Seller Side Process
•
•
•
•
•
•
•
Qualification
Listing
Appraisal
Maintenance Period
Letter of Intent (LOI)
Due Diligence
Closing
Seller Qualification
•
•
•
•
•
Seller Goals
Seller Motivation
Financial Position
Timeline
Managing Expectations
Securing the Listing
• Understanding Seller’s Goals
• Know the Seller’s Team
– CPA
– Attorney
– Other Advisors
– This Transaction and Future Referrals
• Collecting Key Information
– Financial and Marketing Information
Appraisals
• Setting Expectations
• Dealing with Advisory Objections
– Normalized Earnings
– Understanding Trends
• Balancing Expectations with Hope
Relationship Management
• Avoiding Seller’s Remorse
– Keeping the Seller Motivated
– Waiting for Offers
• Managing Information Exchange
• Letter of Intent
– Managing Advisors
– Educating / Counseling the Seller
Due Diligence
• Confirming Known Information
– Presentation Creates Image
– Working with Professionals
• Finding Unknowns
– Positive Attitude Toward New Info
– Put Positive People in Place
Closing the Deal
• Working with Attorneys
– Do Not Change the Deal
– No Renegotiation
• Following up on Details
• Managing the Buyer and Seller
– No Runaway Bride or Groom
• Keeping the Advisors in Line
• Positive Attitudes Close Deals
Sourcing Equity and Debt
• Equity is Ownership
– Every Business has Equity
– Even if it is less than Zero
• Debt is Borrowing
– Can be From a Bank or Other Places
– Debt Pays Interest
Sources of Equity
Personal Savings
 Refinance Personal Residence
 Friends and Family
 Private Equity Group
 Capital Markets
 Retirement Funds - BORSA

BORSA – Sources of Funds
401(a): Pensions, Profit Sharing, ESOPs
 401(k)
 403(b) Teachers’ Annuities
 457 State, County & City (government)

– most all
 Traditional IRAs,Rollover IRAs
 SEPs, SIMPLEs, & Roth IRAs
 EXCEPT Inherited Non-spouse IRAs
 IRAs
How BORSA™ Works
o Form a new corporation - Newco
o Newco establishes a BORSA™ Plan
o Prior employer plan rolls over entrepreneur’s
retirement funds to BORSA™ Plan
o BORSA™ Plan invests in stock of Newco and
funds Newco
o Save Money on Taxes, Penalties and Interest!
BORSA™ Diagram
Prior Employer Rollover Cash
Retirement Plan
BORSA™
Plan
Corporate Stock to
BORSATM
Cash to
Purchase
Shares
Newco
C-Corp.
BORSA™ Savings
BORSATM Tax Savings
Married Filing Joint
No Dependents
Wages
Without
With
Difference/
Distribution
Distribution
Savings
100,000
100,000
0
0
150,000
150,000
100,000
250,000
150,000
Standard Deduction
9,700
9,700
0
Personal Exemption
6,200
4,340
1,860
Taxable Income
84,100
235,960
151,860
Income Tax
14,506
58,892
44,386
0
15,000
15,000
14,506
73,892
59,386
Distribution
Total Income
10% Pre-59 Penalty
Total Tax/Erosion
Sources of Debt
Credit Cards
 SBA Loans
 USDA Business & Industry (B&I)
 Traditional Bank Financing
 Asset Backed Loans

 Equipment
 Factoring
Deal Structure

Type of Transaction
 Asset
Sale
 Stock Purchase
 Licensing

Debt and Equity Mix Vary According to:
 Collateral
 Interest
Rate
 Deal Size
Due Diligence Process
• Confirming Known Information
– Presentation Creates Image
– Working with Professionals
• Finding Unknowns
– Positive Attitude Toward New Info
– Put Positive People in Place
Normal Due Diligence
• Boring Tables of Numbers
• Potentially Confrontational
• Stressfull
• Negative Impression
Fre ight
R e pa irs
T e le phone
Le ga l fe e
Adve rtising
Auto Expe nse
D ue s & Sub.
Posta ge
Ma inte na nce
Lice nse s & Fe e s
Inte re st Othe r
Consulting Fe e s
2,520
2,076
1,521
2,434
76
104
382
3,605
213
9,009
1,440
183
746
478
2,062
150
47
1,200
109
5,000
1,920
713
1,100
525
143
99
225
1,467
100
128
3,750
1,800
244
718
624
1,526
126
-
1,920
1,935
1,288
1,983
104
162
1,251
122
-
2,510
2,949
959
67
2,040
99
114
1,467
450
2
-
DRDA Due Diligence
• Colorful
• Positive
• Informative
Sales
Sales vs Profit
Profit
Percent
$16,000,000
20.0%
18.0%
$14,000,000
Sales
16.0%
$12,000,000
14.0%
$10,000,000
12.0%
10.1%
8.9%
$8,000,000
10.0%
8.1%
7.1%
$6,000,000
$4,000,000
Asset Financing
$2,000,000
2 ,0 0 0 ,0 0 0
6.8%
Optimal Profit Improvement
Net Fixed Assets
2,500,000
Current Liabilities
Long Term Liabilities
4.0%
Profit
2000
2001
0.0%
2002
2003
Dollars ($)
1,8 0 0 ,0 0 0
1,6 0 0 ,0 0 0
1,4 0 0 ,0 0 0
1,2 0 0 ,0 0 0
2.0%
1,949,653
2,000,000
$-
Current Profit
Optimal Profit
6.0%Optimal Improve.
50% Optimal Improve.
8.0%
2004
1,624,711
1,462,240
1,500,000
1,299,768
1,787,182
1,835,585
1,682,620
1,529,654
1,376,689
1,000,000
1,223,723
611,862
1,0 0 0 ,0 0 0
688,344
764,827
841,310
917,793
500,000
8 0 0 ,0 0 0
76,045
6 0 0 ,0 0 0
85,551
95,056
104,562
114,067
0
4 0 0 ,0 0 0
80%
90%
100%
Percent of Normal
2 0 0 ,0 0 0
0
2000
2001
2002
2003
2004
110%
120%
Sample List of Due Diligence Request
A CD copy of Quick Books
Compensation schedules for employees
Bank statements for the previous 12 months
Articles of Incorporation
Records indicating orders, back orders and
WIP
Corporate by laws
List of all products and their costs
List of owners and their percentage of
ownership
Special discounts
Employment agreements written or verbal
Profit margins based on wholesale and retail
markets
Contingent or off balance sheet assets or
liabilities
Aged Accounts Receivable
Any existing buy/sell agreements
Aged Accounts Payable
options to purchase stock
Physical Inventory count
rights of first refusal
Income tax returns from inception of the
company
List of current Distributors
Equipment list with related depreciation
schedules.
Copies of Distributor Agreements
Copies of all leases and rental agreements.
Buyer Due Diligence
• People Matter
• Buyer Team or Broker Team
• Recommend Advisors
– Good Approach
– Makes Deals Happen
• Manage Timeline to Closing
Seller Due Diligence
• Good Preparation
– Well Organized
– Well Documented
– Makes Good Impression
– Fewer Problems and Surprises
• Be Ready Before the Buyer Asks
– Avoiding the Deal Killers
• Keep It Positive!
Managing Relationships in Brokerage
Douglas A. Dickey, CPA
281-488-2022
[email protected]
2525 Bay Area Blvd., Ste. 460
1011 Tremont Street
Houston, TX 77058
Galveston, TX 77551
281/488-2022 * Fax 281/488-5764
409/765-9311 * Fax 409/765-9393