Keep the End in Mind Starting, Operating, and Exiting Your ABA - PowerPoint PPT Presentation

Keep the End in Mind Starting, Operating, and Exiting Your ABA Business Presented to BHCOE by McLaughlin Advisors, Inc. July 14, 2020

Introduction Building Your Business Primary Strategic Alternatives Agenda Adjusted EBITDA Calculation The Selling Process www.mclaughlinadvisors.com

John McLaughlin (Sioux Falls, SD) McLaughlin • Chancelight – past EVP and current board member Advisors • Behavioral Innovations – past Managing Director and board member • Author of three books and dozens of articles • PhD Educational Administration John Bergstrom (St. Paul, MN) • Investor, entrepreneur, advisor to small businesses • Board member for 25+ growth companies • Education, technology, and marketing focuses • MBA Finance www.mclaughlinadvisors.com

Your Stage as a Business Owner Poll Question Long-planned Just getting In business a Things are transition started few years going great juncture Unsolicited Change in Partnership Business offers have personal difficulties distress arrived circumstances www.mclaughlinadvisors.com

Number of Owners in Business Poll Question 1 2 3 4+ www.mclaughlinadvisors.com

How Many Years Have You Been in Business? Poll Question <2 2-5 6-9 10+ www.mclaughlinadvisors.com

Revenue Growth Profitability Rate Key Interests Geography of Buyers Redundancy Compatibility Systems Consistency Predictability www.mclaughlinadvisors.com

Building Your Business www.mclaughlinadvisors.com

As You Start Your ABA Business • Founders’ ownership equal or a different arrangement Ownership • Possible involvement of passive owners as advisors Considerations • Plans regarding possible additional partners in the future • Need for cash – solved by using debt or selling more ownership www.mclaughlinadvisors.com

As You Start Your ABA Business cont. • Philosophy on life and work Things to • Lifestyle business or an entrepreneurial undertaking • Interplay of compensation levels and profit distributions Discuss in • Do workload levels vary for the owners Advance • Time frame expected • Consider any differences in age or circumstance among owners www.mclaughlinadvisors.com

Legal Agreement Among Owners • Highly advisable • Often called a Buy-Sell Agreement • Lays out • What happens if one of the owners dies, becomes disabled, retires, resigns, or is terminated • How additional owners buy into the business in the future • Periodic valuation of the business is typically established as the basis for any buying or selling of ownership that may occur www.mclaughlinadvisors.com

Primary Strategic Alternatives for Exiting Your Business www.mclaughlinadvisors.com

Variations on Exit Approaches Sell Majority Sell Minority Sell All • Sell less than half, keep control • Sell control, keep minority • Sell 100% for complete transaction • May be part of long-term sale plan • Private equity firm favorite • May remain as employee for transition • Take some money off the table • Retirement planning • Large operator favorite • Method to involve key employees • Keep some taste of upside • Fastest route to complete exit www.mclaughlinadvisors.com

The Value of Your Business Single Most Important Concept in Finance All financial assets are worth exactly the present value of their expected future cash flows. www.mclaughlinadvisors.com

Important Concepts in Valuation • Present value Adjusted for both time and risk • Cash flows Most often estimated based on EBITDA (earnings before interest, taxes, depreciation, and amortization) • Future cash flows Most often estimated by historical actual cash flows with expected growth rate over time Sometimes evaluated based on revenues, which are in turn capable of future cash flows www.mclaughlinadvisors.com

Adjusted EBITDA Calculation Example www.mclaughlinadvisors.com

Actual Actual Forecast $000's 2018 2019 2020 Revenue $ 11,749 $ 12,083 $ 12,532 Margin $ 7,343 $ 7,612 $ 7,958 Op Expenses $ 5,597 $ 5,597 $ 5,602 Operating Income $ 1,746 $ 2,015 $ 2,356 GAAP GAAP Interest $ 124 $ 124 $ 108 Taxes $ 402 $ 402 $ 375 Income Income Net Income $ 1,220 $ 1,489 $ 1,873 - - Statement Statement Modest revenue growth rate - Improving margins of revenue ~63% - Stable operating expenses - Operating income ~17% - Credit line and equipment lease debt - Income taxes paid as C Corporation GAAP Net Income www.mclaughlinadvisors.com

Actual Actual Forecast $000's 2018 2019 2020 Net Income $ 1,220 $ 1,489 $ 1,873 EBITDA From GAAP income Interest $ 124 $ 124 $ 108 Calculation statement Taxes $ 402 $ 402 $ 375 Depreciation $ 208 $ 195 $ 201 Part of operating expenses Amortization $ 45 $ 44 $ 43 EBITDA $ 1,999 $ 2,254 $ 2,600 www.mclaughlinadvisors.com

Actual Actual Forecast $000's 2018 2019 2020 EBITDA $ 1,999 $ 2,254 $ 2,600 Non-Cash Compensation $ 21 $ 54 $ 25 Adjusted Excess Owner Compensation $ 132 $ 140 $ 145 Cost Take-Outs $ 200 $ 200 $ 200 EBITDA Personal Expenses $ 48 $ 45 $ 35 Adjusted EBITDA $ 2,400 $ 2,663 $ 3,005 with - Non-cash expense for employee stock options Add-Backs - Difference between market and actual salary - Savings from centralized finance and accounting - Personal expenses inadvertently included - Adjusted EBITDA www.mclaughlinadvisors.com

Actual Actual Forecast 2018 2019 2020 Notes $000's GAAP Income Statement Revenue $ 11,749 $ 12,083 $ 12,532 Modest revenue growth rate Margin $ 7,343 $ 7,612 $ 7,958 Margin approx 63% of revenue and improving Op Expenses $ 5,597 $ 5,597 $ 5,602 Stable operating expenses Operating Income $ 1,746 $ 2,015 $ 2,356 Operating income approx 17% of revenue Interest $ 124 $ 124 $ 108 Credit line and equip lease debt Taxes $ 402 $ 402 $ 375 Income taxes paid as C Corp Net Income $ 1,220 $ 1,489 $ 1,873 GAAP Net Income EBITDA Calculation Interest $ 124 $ 124 $ 108 From GAAP income statement Taxes $ 402 $ 402 $ 375 From GAAP income statement Depreciation $ 208 $ 195 $ 201 Part of operating expenses Amortization $ 45 $ 44 $ 43 Part of operating expenses EBITDA $ 1,999 $ 2,254 $ 2,600 Adjusted EBITDA with Add-Backs Non-Cash Compensation $ 21 $ 24 $ 25 Non-cash expense for employee stock options Excess Owner Compensation $ 132 $ 140 $ 145 Difference between market and actual salary Cost Take-Outs $ 200 $ 200 $ 200 Savings from centralized finance & accounting Personal Expenses $ 48 $ 45 $ 35 Personal expenses inadvertently included www.mclaughlinadvisors.com Adjusted EBITDA $ 2,400 $ 2,663 $ 3,005

The Selling Process www.mclaughlinadvisors.com

Sale Process Approaches Passive Active Broker Tactics Wait for ideal buyer Respond to inquiries, Hire a business broker or to express interest attend conferences, reach investment banker to out to buyers manage process www.mclaughlinadvisors.com

Types of Potential Buyers Strategic Investment Existing Operators Firms Relationships Key Employee National Brand Private Equity Firm Competitor Regional Operator Unfunded Sponsor Entrepreneur Healthcare Provider Wealthy Family www.mclaughlinadvisors.com

In Preparation for Exiting Clean up Make Enhance Organizational Tough decisions you’ve BCBA productivity structure been putting off Focus Extend Consider On the goal – operate Contracts with agencies Real estate options like you’re not selling and school districts www.mclaughlinadvisors.com

Where McLaughlin Provides a strategic Helps prepare during Advisors assessment of value and the year prior to the sale exit options process Adds Value Helps start your business Helps start your with the exit in mind business with the exit in mind Supports you through Helps hire brokers and the sale process other professionals www.mclaughlinadvisors.com

Thank you. For more information related to this presentation, please visit: www.mclaughlinadvisors.com www.mclaughlinadvisors.com