Managing Relationships in Brokerage

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Managing Relationships in Brokerage

• Douglas A. Dickey, CPA
• DRDA, P.C.

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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

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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

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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

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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

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Psychology of Entrepreneurs

• Entrepreneurs versus Accountants

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Communication Coordination

• Accountants are from Mars
• 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

• Entrepreneurs are from Venus
• 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

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Deal Process

• Buyer Side
• Seller Side

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Buyer Side Process

• Qualification
• Deal Review
• Letter of Intent (LOI)
• Due Diligence
• Financing
• Closing

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Buyer Qualification

• Financial Resources
• Personal Financial Information
• Buyer Qualification Forms
• Experience
• Attitude and Motivation
• Strategic versus Financial

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Deal Review

• Matching Buyers to Deals
• Finding Good Matches
• Deal Size
• Industry Experience
• Technical Knowledge
• Strategic versus Financial
• Buyer Presentation
• Appropriate Presentation and Disclosure

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The Handshake

• Getting the LOI signed
• Valuation Issues
• Personality Issues
• Doing Due Diligence
• Managing the Advisors
• Avoiding the Deal Killers
• Creating the Definitive Documents

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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

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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

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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

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Facility Comparisons
  Full-Notification 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 lt 20 lt 20 lt 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 gt 1.0 gt 1.0 gt 1.25 gt 1.0 gt 1.0
Working Capital N/A Positive Positive Positive Positive Positive
Total Liabilities/TNW N/A lt 41 May be negative lt 51 lt 31 lt 51
Debt Service Coverage N/A gt 1.25 gt 0.75 gt 1.15 gt 1.25 gt 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 lt 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
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Closing the Deal

• Working with Attorneys
• Following up on Details
• Managing the Buyer and Seller
• Keeping the Advisors in Line
• Positive Attitudes Close Deals

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Seller Side Process

• Qualification
• Listing
• Appraisal
• Maintenance Period
• Letter of Intent (LOI)
• Due Diligence
• Closing

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Seller Qualification

• Seller Goals
• Seller Motivation
• Financial Position
• Timeline
• Managing Expectations

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Securing the Listing

• Understanding Sellers Goals
• Know the Sellers Team
• CPA
• Attorney
• Other Advisors
• This Transaction and Future Referrals
• Collecting Key Information
• Financial and Marketing Information

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Appraisals

• Setting Expectations
• Dealing with Advisory Objections
• Normalized Earnings
• Understanding Trends
• Balancing Expectations with Hope

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Relationship Management

• Avoiding Sellers Remorse
• Keeping the Seller Motivated
• Waiting for Offers
• Managing Information Exchange
• Letter of Intent
• Managing Advisors
• Educating / Counseling the Seller

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Due Diligence

• Confirming Known Information
• Presentation Creates Image
• Working with Professionals
• Finding Unknowns
• Positive Attitude Toward New Info
• Put Positive People in Place

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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

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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

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Sources of Equity

• Personal Savings
• Refinance Personal Residence
• Friends and Family
• Private Equity Group
• Capital Markets
• Retirement Funds - BORSA

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BORSA Sources of Funds

• 401(a) Pensions, Profit Sharing, ESOPs
• 401(k)
• 403(b) Teachers Annuities
• 457 State, County City (government)
• IRAs most all
• Traditional IRAs,Rollover IRAs
• SEPs, SIMPLEs, Roth IRAs
• EXCEPT Inherited Non-spouse IRAs

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How BORSA Works

• Form a new corporation - Newco
• Newco establishes a BORSA Plan
• Prior employer plan rolls over entrepreneurs
  retirement funds to BORSA Plan
• BORSA Plan invests in stock of Newco and funds
  Newco
• Save Money on Taxes, Penalties and Interest!

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BORSA Diagram
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BORSA Savings
BORSATM Tax Savings Married Filing Joint No Dependents Without With Difference/
Distribution Distribution Savings
Wages 100,000 100,000 0
Distribution 0 150,000 150,000
Total Income 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
10 Pre-59 Penalty 0 15,000 15,000
Total Tax/Erosion 14,506 73,892 59,386
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Sources of Debt

• Credit Cards
• SBA Loans
• USDA Business Industry (BI)
• Traditional Bank Financing
• Asset Backed Loans
• Equipment
• Factoring

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Deal Structure

• Type of Transaction
• Asset Sale
• Stock Purchase
• Licensing
• Debt and Equity Mix Vary According to
• Collateral
• Interest Rate
• Deal Size

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Due Diligence Process

• Confirming Known Information
• Presentation Creates Image
• Working with Professionals
• Finding Unknowns
• Positive Attitude Toward New Info
• Put Positive People in Place

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Normal Due Diligence

• Boring Tables of Numbers
• Potentially Confrontational
• Stressfull
• Negative Impression

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DRDA Due Diligence

• Colorful
• Positive
• Informative

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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.
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Buyer Due Diligence

• People Matter
• Buyer Team or Broker Team
• Recommend Advisors
• Good Approach
• Makes Deals Happen
• Manage Timeline to Closing

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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!

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Douglas A. Dickey, CPA
Managing Relationships in Brokerage

• 281-488-2022
• doug_at_drdacpa.com

2525 Bay Area Blvd., Ste. 460 Houston, TX
77058 281/488-2022 Fax [phone]
1011 Tremont Street Galveston, TX
77551 409/765-9311 Fax [phone]