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MA Today Technology, Information and Business
Services

• What Sellers Want
• Randall Wright Patterson, President
• Turnaround Crisis Management, Inc.

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MA Issues of Sellers of Underperforming Companies

• Realistic expectations of the seller
• The auction process
• What if there is no EBITDA?
• The need for a stabilized management team
• What to do with the skeletons in the closet
• The due diligence process

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Realistic Expectations of the Seller

• Goal posts are
• Multiple of EBITDA (high side)
• Orderly liquidation value (low side)
• Financially distressed businesses tend to sell at
  the lower end (without a strong auction
  environment)

4
The Auction Process

• An auction environment is critical to the best
  possible purchase price (the puppy dog
  scenario)
• Who to include in the process?
• Strategic vs. financial buyers (80/20 rule)
• Strategic buyers rarely pay for the synergies
  that they bring to the table (without a strong
  auction environment)
• Owners often resistant to including their
  toughest competitor (most likely the best
  candidate)

5
The Auction Process

• Use the right investment banker/broker
• Knowledgeable in the industry
• Handles your size deal
• Has sold other underperforming businesses
• One you can afford
• Never set a price upfront
• Usually either scares buyers off or leaves money
  on the table (will consider any good faith offer
  on the table)
• When it comes to price, the devil is in the
  detail

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What if There is No EBITDA?

• It is what it is - paint a pretty face
• Quality financial information
• Realistic financial projections and budgets (no
  hockey sticks)
• Crisp rehearsed management presentations
• Proforma adjustments (changes implemented)
• Understand synergies of the potential buyers
  (financial vs. strategic buyers)
• The buyer almost never buys what the seller
  thinks hes selling

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Example of an Underperforming Company For Sale

• 300 million international electrical wholesaler
  (28 locations)
• Positives
• Loyal and quality customer base
• Represented quality manufacturers (suppliers)
• Largest supplier (market leader) had exclusive
  territories
• Knowledgeable technical support personnel

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Example of an Underperforming Company For Sale

• Some negatives
• No cash vendors stretched
• Hostile bank no additional borrowability
• Operating losses of 3 million per year
• Poor management
• Poor systems and processes
• Second time to market
• Primary supplier (representing 40 of sales)
  would only transfer franchise to one potential
  buyer
• Owners refused to include its toughest competitor
  on the bidding list

9
Put the Lipstick on the Pig

• Proposed turnaround plan Fcst Actual
• Headcount reduction 1.9M 2.7M
• Increase pricing 1.3M 0.0M
• Sell/close losing branches TBD .3M
  
• Operating efficiencies 2.0M .5M
  
• Corporate exp. reductions .5M 1.1M
• Reduced bank fees/interest 1.5M 0.0M
• Total 7.2M 4.6M

10
Need for a Stabilized Management Team

• Buyers usually are buying people, not just a
  business concept, assets infrastruc-ture (show
  off the team!)
• Hard to maintain/attract talent to an
  underperforming company
• Consider stay bonuses
• Consider interim managers

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Get the Skeletons Out of the Closet Early

• Get the skeletons out of the closet early
• Financial statements (accuracy timeliness)
• Business conditions (telecom inventory)
• Poor business systems processes
• Customer base issues
• Litigation (pending or threatened)
• The buyer has all the leverage at the end of the
  process and will use it
• Buyers will discount the purchase price to cover
  the unknown risk thats okay

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Be Prepared for Due Diligence

• Be prepared for due diligence
• Your investment banker/broker knows what you need
• Prepare in advance the documentation that will
  likely to be requested (due diligence room)
• Make people available
• Dont hide the inevitable (financial results,
  litigation, unrecorded liabilities)
• Time is of the essence!

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Summary

• There are far fewer potential buyers for an
  underperforming company
• The right investment banker/broker is crucial
• It is what it is paint the best picture get
  the bad news out on the table early
• Stabilize the management team and include them in
  the presentations to buyers
• Be very prepared for due diligence to shorten the
  time of the sale process
• Time is of the essence!