CEPA Flashcards
What are the 5 D’s?
Death
Divorce
Disability
Distress
Disagreement
Why are owners leaving money on the table?
They are focused on income generation not enterprise value
The advisor of the future:
Focuses on value creation
Acts as quarterback of team
Oversees master plan
Helps other advisors get engaged
What is the mission of EPI and CEPAs?
Change the outcome
How does EPI and CEPAs change the outcome?
Create awareness
Fostering team play
Adopting a process
What percentage of private businesses are owned by baby boomers?
63%
What percentage of baby boomers plan to transition over the next 10 years?
76%
How many business owners profoundly regret selling their business?
3 of 4
What percentage of businesses on the market don’t sell?
70-80%
What percentage of family owned businesses survive the 2nd generation?
30%
What is the purpose of exit planning?
Maximize value of business at time of exit
Minimize taxes
Ensure owner can accomplish all personal/financial goals
What does exit planning include contingencies for?
Illness
Buronout
Divorce
Death
What percentage of business owners have done no exit planning at all?
49%
What is the first paradigm shift that needs to be made?
Exit planning is a good business strategy
What are the 5 stages of exit planning?
Identify
Protect
Build
Harvest
Manage
What are the 4 capitals?
Human
Customer
Structural
Social
What are the 3 legs of the stool?
Business
Personal
Financial
What are the the paths of relentless execution?
Vision
Alignment
Accountability
Rhythm
How much of a business owners wealth is normally tied up in their business?
70-90%
Why focus is value (versus just income)?
You can have both income and value, but need to focus on value first
Focusing on value drives all other positive outcomes
What are the 2 types of business owner styles?
Lifestyle
Value creator
What is intellectual capital?
The sun of everything everybody knows that gives it a competitive edge
What percentage of a company’s value rests within its intangible assets versus tangible assets?
80%
Why was value acceleration created?
To focus on management of intangible assets
Gives the owner holistic view of their entire net worth
What are the 3 gates of the Value Acceleration Method?
1-discover
2-prepare
3-decide
The value acceleration methodology is based on a management philosophy called what?
Business enterprise
In what gate is the triggering event delivered?
1
What is the total timeframe it typically takes to move a business owner through the full value acceleration Methodology process?
3.5 years or more
What is the definition of estate planning?
Process of planning for and documenting the transfer of assets with minimal taxes and transfer costs
How can business interests be sold to a third party or transferred to family or key employees?
Sale
Gifts
Trusts
Partnerships
What is the primary objective for most irrevocable trusts or FLPs?
Remove the business (or other asset) and future appreciation out of the estate
Are assets contributed at FMV into a FLP?
NO
What is a continuum that includes balancing equity, asset, and jurisdictional changes?
Asset protection
What percentage of entrepreneurs donate money to charity?
90%
What percent of HNW individuals give to 5 or more charities?
51.8%
What kind of assets can be gifted?
Cash
Marketable securities
Illiquid assets
Insurance policies
Accounts that create income for a beneficiary
What are considered illiquid assets?
C corp
S corp
LLC
LP
residential or commercial RE
mineral rights
Personal property
In 2016 charitable gifts exceeded what amount?
$390 billion
What percent of entrepreneurs company profits were reported as dedicated to charitable income?
3%
What percent of HNW individuals are interested in receiving help to understand what assets to contribute to philanthropy?
70%
What are 2 most highly valued gifts made to foundations/trusts/charitable organizations?
Business or business stock and real estate
How many US companies will try to exit by 2030?
250k or 5M-100M in sales
How many of the 250k companies will be deemed market ready to sell in 2030?
50k
How many business sales out of 250k will transact in 2030?
30k
How many out of 250k businesses will sell with concessions by 2030?
16k
How many businesses out of 250k on market in 2023 will sell at their desired value?
14k
Are public or private companies viewed as less risky?
Public
What are the four categories to increase enterprise value internally?
Revenue growth
Operating margin
Asset efficiency
Business architecture
What is the timeframe should most private companies can increase their value and should begin value growth?
3-5 years
How are risk and discount rate compared to each other when valuing businesses?
The lower the discount rate, the lower the risk and vice versa
What is business road mapping?
Periodic assessment of a business enterprise and development of prioritized initiatives to strengthen the business
In the value growth process, the advisor should encourage their business owner client to primarily focus on what?
Internal and external qualitative factors
What is a deliverable?
Report, meeting, workshop, or event that represents the conclusion of an assessment, step, stage, task or action
What does a deliverable represent?
What the client pays for
What should the deliverable lead the client to?
The next stage of work
How many actions should be completed every 90 days in gate 2?
No more than 5 personal and 5 business
How often do triggering events get owners to take action?
70% of the time
What is strategic value
Simple math
What is the formula for strategic value
Cash and sales x market multiplier
Where a business places in the range of value is determined by what?
Business attrativeness score
Exit readiness score
Financial benchmarking
What is the common sense scoring system
Premium-72%+
Mid-51-66%
Discount-50% or less
Target-67%
In gate 2 what deliverables can you use?
Master plan
Validation
Five business action items
What does SMART stand for?
Specific
Measurable
Aspirational
Realistic
Time based
How long does a vision take to implement?
3-10 years
What 4 words should be used to test an owners vision?
Belief
Passion
Opportunity
Focus
Creating action plans is associated with which activity of relentless execution?
Alignment
Protecting value is the first step of what?
Building value
What are the 4 cornerstones of relentless execution?
Vision
Alignment
Accountability
Rhythm
What does STEP stand for?
Spiritual
Things
Experiences
People
What is the price at which the property would change hands between a hypothetical willing buyer and hypothetical willing seller; when the former is not under any compulsion to buy and the latter is under no compulsion to sell
Fair market value
What is the value to a particular investor based on individual investment requirements and expectations?
Investment value
What is the value that an investor considers, on the basis of an evaluation of available facts, to be true or the real value that will become the market value when other investors reach the same conclusion?
Intrinsic or fundamental value
What is the valuation discount of fair value?
The price that would be received to sell an asset or paid to transfer a liability to an orderly transaction between actual market participants at the measurement date
What is the litigation definition of fair value?
With respect to the dissenters shares, means restore me to equity with the valuation on an enterprise level with no discount for lack of marketability
What is emotional value?
What a buyer and seller perceive
Most commonly an unrealistic seller expectation
What are the types of buyers and sellers?
Hypothetical buyer and seller
Financial buyer
Strategic buyer
Family members
The 3 schools of business include:
Investment banking
Formal FMV
Smallest companies rules of thumb
What gates are the Relentless execution in?
Vision-1
Alignment-1
Accountability-2
Rhythm-2
What are the drivers and influences of vision?
Personal identity
Financial security
Health status
Family responsibilities
Partner and family situations
What are the conflicting value systems?
Management
Family
Owner
When is a good time to establish goals and objectives with a business owner within the value acceleration method?
After discovering and discussing themes from the triggering event with the business owner
What gate is creating an action plan part of?
1
What is the final outcome of the first 2 cornerstones of relentless execution?
An action plan
What is the key to passing through gate 1 into gate 2?
An action plan
What should be the first type of action to be completed when prioritizing business actions?
Create a contingency plan
What gate is delivering the action plan completed in?
2
What is the 4th core concept of value acceleration?
Once the action plan is created it needs to be relentlessly executed
What is a specific set of behaviors and techniques that companies need to master in order to have a competitive advantage?
Relentless execution
What is a systematic process that rigorously discusses the how’s and what’s, questioning, tenaciously, following through and ensuring accountability?
Relentless execution
What is the relentless pursuit of reality, coupled with processes for constant improvement?
Relentless execution
What is a method to systematically assess accomplishments and disappointments to determine why we were successful or not successful in accomplishing the 90 day priority?
Accountability
What workshops are useful to reinforce action?
Monthly 1:1
Monthly team accountability
90 day renewal
Annual retreat
Most private equity firms are managed how?
Privately
Not in the on a day to day basis
Can a private equity firm be a strategic buyer?
Yes!
What is the formula for investment criteria
Firms charter + firms partners
What are examples of outright sales?
Corporate divestitures
Owner retirement
Management buy-ins
For businesses- what are the investment risk factors?
Customers
Industry and end markets
Suppliers
Competition
Management and financials
Private equity groups look to invest in what types of businesses?
Manufacturing
Distribution
Service
Main advantage of a strategic buyer
Willingness to pay a premium for control
Limited dependence on owner
Shorter time to exit
Main disadvantages of strategic buyer
Confidentiality issues
Employee layoffs
Culture shocks
Main disadvantages of financial buyers
Complex financial structures
Highly leveraged
Difficult due diligence
What is the greatest unaddressed issue in the business world today? It’s absence is the single biggest obstacle of success
Execution
What are the first types of actions a business owner should focus on when setting priorities in an action plan?
Mitigating risk
How should you plan and execute according to value acceleration?
Plan backward
Execute forward
Protecting value is the first step to what?
Building value
When conducting a series of post triggering event workshops, which workshop would an owner share their vision?
Strategic framework 1
What is a specific set of behaviors and techniques that companies need in order to have a competitive advantage?
Relentless execution
What does the WOW curve chart?
A business owners enthusiasm over time
The value acceleration methodology is based on a management philosophy called what?
Master planning
Can a private equity firm be a strategic buyer?
YES!
On test
Are ESOPS primarily or exclusively invested in employer stock?
Primarily
Can have other investments
Who owns shares of an ESOP?
Trustee for benefit of employees
esop eligibility
One years of service
21 years old
1000 hours minimum
Or 3 year cliff
What are the 3 parts to an ESOP transaction?
Owner
Companies
Employees
Are participants buying the shares in an ESOP?
No-they are beneficiaries of the trust
What percent of owners have a formal transition team?
14%
What are the pros of teamwork?
More connected product
Mindshare
Referrals
Emotional intelligence
What are the cons of teamwork?
Slower
Group think
More expensive
More complicated
What makes a team effective?
Trust
Conflict
Commitment
Accountability
Results
What are the organizing principles of the CEPA team? And who is at the center?
The 3 legs of the stool
The business owner and their family
What exit option most often presents a deal structure that favors the buyer
Financial third party
After investing in a business what is a typical timeframe before the private equity group exits that business themselves
3-7 years
What do accounting systems typically focus on?
Tangible assets
Why was value acceleration created?
To focus on managing intangible assets
What is a process that focuses on value growth, and aligning business, personal and financial goals?
Value acceleration methodology
What are the main characteristics of a lifestyle business?
Good income
Can’t be sold
Owner dependent
What are the main characteristics of a value creator business?
Premium income
Sold at a premium
Owner independent
What are the 4 major areas in wealth management we can’t control?
Taxes
Time horizon
Inflation
Rate of return
What are the 4 areas in wealth management that we can control?
Cash flow
Risk management
Distribution of money for life
Investments
What percent of business owners do not have a written financial plan?
75%
The value acceleration methodology is based on a management philosophy called what?
Master planning
What are benefits of focusing on value?
Very predictable results
Gets employees thinking like owners
Mitigates risk
What percentage of privately held businesses that are offered for sale each year ultimately do not sell?
80%
What are the triggering events for a buy-sell agreement?
Death
Disability
Divorce
Offer by outside party to buy owners interest
Termination of owners employment
When would you use a IDGT?
When the client has a high basis asset and is looking to transfer that outside their estate for estate tax purposes
What are the tax effects of the NING?
incomplete for gift tax purposes
Complete for income tax purposes
What are the tax effects of the IDGT?
Incomplete for income tax purposes
Complete for estate tax purposes
How does the intermediated installment sale trust work?
Defers capital gains taxes on the sale of almost any type of highly appreciated asset
Is asset protection a process or an event?
Process
What are the best ways to accomplish asset protection?
Insurance
Legal docs
Asset placement
Jurisdiction
Beneficiary trusts
Is asset protection a form of insurance?
Yes
How does asset protection level the playing field?
Avoids lawsuits
Settle a dispute for less than owed
What is a strategy that makes assets difficult or impossible to reach?
Asset protection
Why do some charitable organizations say no to some direct gifts?
Doesn’t further mission
Excessive cost burden
Mortgaged property
Unidentified market
Location
Family considerations
HNW individuals give how many times the amount to charity?
10 times
What percent of HNW individuals intent to increase their giving or maintain it in the next 3 years?
83%
What is a personal, financial, business assessment correlated to the business range of value?
Triggering event
All engagements should begin with what?
A triggering event
What is the formula for value?
R/EBITDA or R/SALES x multiple
What is the number of a business that is calculated by adjusting the financial statements, called financial recasting
Real number
Can a business control its range of value?
No. Determined by a private capital market
What determines where you land in your range of value?
Attractiveness and readiness scores
When talking about readiness, is the decision to grow or sell a state of fact or a state of mind?
State of fact
Over what timeframe does a private company have the opportunity to double their value?
3-5 years
What are the 3 approaches when determining market value?
Income
Market
Asset
What are the 2 income approaches to valuation?
Discounted cash flow
Capitalized earnings method
When do you use capitalized earnings method for valuing a business?
Steady predictable company
History to demonstrate
When do you use discounted cash flow for valuing a business?
Cyclical company
Projection of growth looks like hockey puck
What time period does DCF look over?
3-5 years
Why don’t some people like DCF?
Can be a crystal ball approach and more complex
Is the capitalized earnings method based on past or future performance?
Past
What are the 2 market approaches to valuation?
Public company guideline method
Guideline transaction method
What is the public company guideline method based on?
The pricing multiples of publicly traded companies
What is the guideline transaction method based on?
Sale of an entire company to a buyer
What are the 3 asset approaches to valuation?
Reported book value
Adjusted book value
Premise of value
What kind of companies is the asset approach to valuation good for?
Companies that have heavy equipment
What does the asset approach to valuation look at?
Real value of fixed assets
What are the advantages and disadvantages of a stock sale?
Advantages:
Capital gain treatment
Simple and easy
Disadvantages:
Need for additional warranties
Liability concerns
No step up in cost basis
What are the advantages and disadvantages of an asset sale?
Advantages:
Reduces reps and warranties
Avoid contingent liability
Step up in cost basis
Refuse unwanted assets
Disadvantages:
Potential double tax
What are the gate 2 deliverables?
Monthly 1:1
Monthly team accountability workshop
90 day renewable workshop
Spin off projects
What are the gate 3 deliverables?
Keep or sell workshop
Exit option analysis
Spin off projects
What are gate 1 deliverables?
Triggering event
Personal/business envisioning statement
Team education
Strategic roadmap 1 and 2
Management alignment
Metrics/dashboard
Rhythm
In what gate do you utilize a business valuation?
1
What are the 3 schools of valuation?
Formal FMV
smallest company rules of thumb
Investment banking
Are companies under 2M in revenue suitable for formal valuation?
No
3 ways to increase enterprise value
Increase earning
Reduce risk
Position as best in class
***reducing risk has greater value than increasing earnings
Top value drivers of a business?
Recurring revenue
Owner independence
Concentration
Succession planning
Financial systems and reporting
Value acceleration must deliver atleast 2 of the 3 what crucial benefits?
Clarity
Liquidity
Legacy
What is the purpose of an action plan?
Create a roadmap showing you how to realize your vision
How should you prioritize your action items?
De-risking
Strategy
Efficiency
Growth
Culture
How do you build an action plan and align it with goals and objectives (in order)?
Vision
Themes
Projects
Tasks
Milestones
Deliverables
When is an opportunity assessment completed?
Before scoreboard and team accountabilities are developed
After the personal vision is established and 90 day personal actions are selected
What is a continuous loop of prioritizing, executing, measuring, reconnecting, and recalibrating every 90 days?
90 day sprints
What percent of business owners indicates they have not established a formal transition advisory team?
74%
What are 5 core characteristics of an effective team?
Trust
Conflict management
Commitment
Accountability
Results
What percent of business owners want to do an inter generational transfer versus how many actually do so?
50% want to
30% actually do so
What are the ways that you can sell your business to a third party?
Strategic buyer
Financial buyer
Private equity group
How do you value a business for a private equity group?
EBITDA x Multiple
What is a firms charter?
Is what private equity groups tell their LPs what they do
What is the typical company size for a private equity group?
$10-100 million with EBITDA of $2 million +
In which type of equity transaction does the owner or shareholder end with the most liquidity but the least control?
Outright sale
What is our role in third party sales abs M&A process?
Maintain confidentiality
Create active market
Maximize value
Does maximizing value of a business always mean the highest price?
No
What is the micro business market?
Less than $5 million in sales
What is the middle business market?
$5 million to $1 billion
M&A documents (in order)
Acquisition profile/teaser
Non disclosure agreement
Confidential information memorandum
Indication of interest/letter of intent
What is in the confidential information memorandum?
Preliminary due dilligence document
Sales document
Communicates opportunities vs weaknesses
Doesn’t hide problems or issues
Who is the direct negotiator for business terms in third party sales and M&A?
Investment banker
What are 2 fatal mistakes in third patty sales and M&A?
Don’t confuse team members and their roles
Avoid end runs
What is a family enterprise?
Family business
Family wealth
What is a family Geogram?
Graphical representation of a family tree that displays detailed data ton relationships among individuals
What is a dynamic process that occurs over a long period of time?
Continuity
A family enterprise can be described as a what?
System
In a typical leveraged ESOP formation, who would a bank directly loan money to?
The company NOT the trust
What is the standard transition time for implementing an ESOP
4-6 years
