Harvesting your wealth Optimizing shareholder liquidity

EXPLORE THE ARTICLE Executive summary

Realizing an attractive investment return is an aspiration shared by most private business owners. A healthy return on investment (ROI) is the payoff Key points include: for years of hard work, sacrifice, and financial risk. Capturing that value is likely to require many of the same attributes that helped you along the way, • Perspectives on current economic including experience, commitment, discipline, and timing. factors and capital market conditions, But assigning a value to your business may be challenging. The process including factors that may make involves a systematic evaluation of transaction alternatives based on an this year a favorable time for private objective assessment of the value of capital deployed and invested over time, as well your “sweat equity” in the company’s success. Such an assessment company liquidity events. should also consider your company’s achievements, its expectations, and the depth and breadth of potential capital market interest. The analysis should • An essential planning tool: a be conducted with the understanding that nonfinancial and qualitative framework for analyzing, preparing objectives can often significantly influence transaction alternatives. for, and executing a liquidity This paper offers information and insights from investment bankers at transaction, as well as a summary Deloitte Corporate Finance LLC and professionals who assist entrepreneurs presentation of the array of available and business owners as they explore strategic liquidity alternatives. The paper begins with a discussion of transaction timing, transaction drivers, and transaction alternatives. the current capital markets environment. We then delve into specific liquidity alternatives that you can potentially pursue, and we explore how these opportunities can affect liquidity and ownership. Finally, we outline six tax planning concepts that you may want to consider as you prepare to exit or reduce your involvement in the business.

2 Harvesting your wealth: Optimizing shareholder liquidity Contents

Capital markets EXPLORE Timing is everything Transaction drivers OUR TOPICS  conditions

Page 4 Page 6 Page 9

Shareholder liquidity Array of liquidity Shareholder liquidity alternatives alternatives transaction dynamic

Page 14 Page 15 Page 16

Conclusion

Page 18

3 Harvesting your wealth: Optimizing shareholder liquidity Why transaction timing is imperative

A concept in the wealth-harvesting process is that transaction timing, more than any other single factor, will likely drive the increase in a private business Executive summary owner’s wealth from a shareholder liquidity event. Support for this dynamic is found in consistent market evidence regarding company pricing levels, credit market conditions, and legislative and tax policies, informed by years of Deloitte transaction experience.

Timing is everything Both macroeconomic and microeconomic factors that affect enterprise value and private company shareholder ownership can influence timing (Figure 1).

Transaction drivers

Capital markets conditions “The perfect storm” Shareholder liquidity alternatives “Beauty is in the eye of the beholder” Array of liquidity alternatives “The pick of the litter” OPTIMAL: Shareholder liquidity Strong economic conditions and trends transaction dynamic “The Titanic saga” Above-average industry dynamics Strong historical company performance Conclusion Business cycle timing Exciting near-term prospects

Relative dollar value Contacts

Figure 1: Enterprise value timing grid

4 Harvesting your wealth: Optimizing shareholder liquidity

Enterprise value timing factors

Economic Industry conditions dynamics and trends

Company Company near-term performance prospects “The perfect storm”

“Beauty is in the eye of the beholder”

“The pick of the litter” OPTIMAL: Strong economic conditions and trends “The Titanic saga” Above-average industry dynamics Strong historical company performance Business cycle timing Exciting near-term prospects

Relative dollar value

Why transaction timing is imperative (cont.)

Macroeconomic factors are both economic and political, such as global Enterprise value timing factors Executive summary and domestic economic conditions, industry and market dynamics, and legislative and tax policies. These drivers frame the assessment of enterprise value and the relative worth of the financial assets that make up Timing is everything private company ownership. Economic Industry Microeconomic factors that may significantly affect enterprise value conditions dynamics and trends Transaction drivers include the company’s operating performance, financial condition, near-term expectations, management depth, and business succession plans. In addition, qualitative shareholder considerations, such as the Capital markets conditions company’s legacy, family ownership continuity, employee and community Company Company near-term performance loyalty, and investment risk tolerance, can make wealth harvesting even prospects Shareholder liquidity more challenging. alternatives Amid all these factors, the process of determining which shareholder Array of liquidity liquidity alternatives may yield the most advantageous results for private alternatives business owners typically requires experience, commitment, discipline, and favorable timing. A closer look at current macroeconomic factors and Shareholder liquidity capital market conditions should be a helpful starting point. transaction dynamic

Conclusion

Contacts

5 Harvesting your wealth: Optimizing shareholder liquidity Economic influences: A brightening picture

From a macroeconomic standpoint, resumption of growth in developed economies has significantly improved Executive summary the global economic outlook (Figure 2). Modest tightening in US monetary policy is shifting the flow of capital away from emerging economies, causing a slowdown in these markets.1

Timing is everything

January 2007–January 2011 January 2011–March 2016

Transaction drivers 40.0% 80.0%

60.0% 20.0% Capital markets conditions 40.0% 0.0% Shareholder liquidity 20.0% alternatives -20.0% 0.0%

-40.0% Array of liquidity -20.0% alternatives

-60.0% -40.0% Shareholder liquidity Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 transaction dynamic S&P 500 S&P Europe 350 S&P 500 S&P Europe 350

Conclusion Figure 2: Domestic and European economic environment Source: CapIQ.

1 International Monetary Fund, “Understanding the Slowdown in Capital Flows to Emerging Markets” in World Economic Outlook: Too Slow for Too Long, April 2016 Contacts

6 Harvesting your wealth: Optimizing shareholder liquidity Economic influences: A brightening picture(cont.)

Recovery has finally begun in the Eurozone. Many investors, however, Executive summary maintain mixed perspectives on growth prospects and sustainability in some countries (e.g., Spain, Italy, Greece, and Ireland) as the European Central Bank strategy continues to evolve in response to market dynamics. Asian Timing is everything economies, meanwhile, continue to seek a balance of promoting growth while curbing inflation. Africa is the fastest-growing continent, with real incomes increasing 30 percent in the past 10 years and gross domestic Transaction drivers product (GDP) expected to rise six percent per year over the next decade.2

In the United States, macroeconomic conditions seem to be slightly Capital markets conditions improving despite uncertainty created by both lawmakers and broader global issues. Domestic businesses have performed moderately over the Shareholder liquidity past year, with the S&P 500 Index losing less than one percent in 2015. alternatives Many investors are looking to the new Federal Reserve Board leadership for clues regarding how the central bank will transition to a more traditional Array of liquidity stance without causing the economy to revert to a slow-growth path. alternatives Strong corporate performance has begun to improve economic conditions Shareholder liquidity for some individuals, as employment levels approach pre-recession peaks. transaction dynamic With the Federal Reserve continuing its accommodative stance, the The upshot improvements in US economic fundamentals have the country potentially Developed countries are driving Conclusion positioned for stronger growth going forward. current economic growth amid relatively strong investor confidence and increasing Contacts 2 McKinsey & Company, “What’s Driving Africa’s Growth?,” June 2010 corporate profits.

7 Harvesting your wealth: Optimizing shareholder liquidity Current economic environment

2015 report on America’s economic engine In an April 2015 survey, 525 U.S. mid-market executives provided input on the economy, their companies, and plans for growth. Executive summary More than Almost 3/4 of survey respondents indicated their Timing is everything one-third of companies generate revenue respondents outside the United States predicted Transaction drivers growth in excess of 3.5% Nearly two-thirds of respondents Capital markets conditions say they have noticed an increase in voluntary staff departures Shareholder liquidity alternatives The three greatest obstacles to my company’s growth in the next 12 months are... Array of liquidity alternatives Uncertain economic outlook 38% Shareholder liquidity Weak market demand transaction dynamic 35% Cost of raw materials Conclusion and other inputs 27%

Contacts Source: Deloitte Mid-Market Perspectives: 2015 report on America’s economic engine.

8 Harvesting your wealth: Optimizing shareholder liquidity Capital market signals: Broad advances and continuing opportunity

Competition to complete deals has remained strong over the last several quarters, leading to strong valuations among both financial and strategic acquirors. Executive summary Financial sponsors are increasingly bidding up valuations as they seek returns for large amounts of capital they have raised. In the fourth quarter of 2015, the median purchase multiples for strategic buyers and financial sponsors were 12.0x and 13.6x EBITDA for the latest 12 months reported earnings before interest, depreciation, and tax expense, respectively. Timing is everything

Transaction drivers 175%

150% Capital markets conditions

125% Shareholder liquidity 113% alternatives 100% 100%

Array of liquidity 75% alternatives

50% Shareholder liquidity Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 transaction dynamic 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015

Strategic Financial sponsor Conclusion

Figure 3: Median acquisition multiples for strategic versus financial buyers Contacts Source: Capital IQ.

9 Harvesting your wealth: Optimizing shareholder liquidity Capital market signals: Broad advances and continuing opportunity (cont.) 40.0% 80.0%

16.0x 60.0% 20.0%

40.0% 11.7x 0.0% 12.0x 11.5x Credit markets can exert considerable influence on equity securities pricing. Generally, as credit becomes more 10.8x 20.0% 9.9x 9.6x 9.7x 9.8x Executive summary accessible and is available at lower cost to companies, stockholders can expect to achieve a higher equity value. 9.2x 9.4x -20.0% 3 7.9x According to Thomson One, debt capital is more accessible today than in any0.0% time since 2008. Middle-market 8.0x debt multiples continued to expand through 2015 (Figure 4). Capitalization of leveraged buyouts relied on more -40.0% Timing is everything conventional debt over the same period, with both metrics declining slightly-20.0% during 2012. It is no coincidence that 4.0x middle-market-60.0% debt multiples are trending with small-cap stock pricing. Access-40.0% to lower-cost debt often enables equityJan-2006 owners toJan-2007 enhance investmentJan-2008 returnJan-2009 through Jan-2010 effective use of financialJan-2011 leverage. Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Transaction drivers S&P 500 S&P Europe 350 S&P 500 S&P Europe 350 0.0x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Capital markets conditions $350.0 $316.8 $Bil No. deals $300.0 1,500 12,000 Shareholder liquidity alternatives $250.0 $233.8 $225.4 1,125 9,000 $200.0 $174.8 $163.3 $167.7 Array of liquidity $150.0 $130.9 alternatives $102.7 750 6,000 $100.0 $74.6 $79.7 $64.1 Shareholder liquidity $50.0 transaction dynamic 375 3,000 $0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Buyouts/corporate finance Venture capital Growth Secondary and other Fund of funds Conclusion 0 0 7.0x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Enterprise value ($ bil) Number of deals 6.0x 5.6x Figure 4: US financial sponsor fundraising ($ in billions) 5.3x 5.3x Contacts 4.7x 0.4x 4.8x 5.0x 4.7x 4.5x 4.5x 0.2x 4.2x 4.3x 0.1x Source: Dow Jones 4.2xPrivate Equity Analyst, Preqin Research. 0.2x 3 0.4x 0.6x Thomson4.0x One Research. 0.8x 0.8x 0.8x 3.3x 0.8x 0.5x 3.0x 0.7x 5.2x 5.1x 5.1x 4.6x 2.0x 4.3x 4.2x 3.7x 3.8x 3.8x 10 Harvesting your wealth: Optimizing shareholder liquidity 3.5x 3.4x 1.0x 2.5x 0.0x 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Senior debt Subordinated debt

175%

150%

125% 113% 100% 100%

75% 40.0% 80.0%

16.0x 60.0% 20.0%

40.0% 0.0% 12.0x 11.5x 11.7x 10.8x 20.0% 9.9x 9.6x 9.7x 9.8x 9.2x 9.4x -20.0% 7.9x 0.0% 8.0x

-40.0% -20.0% 4.0x Capital market-60.0% signals: Broad advances-40.0% Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 S&P 500 S&P Europe 350 S&P 500 S&P Europe 350 0.0x and continuing opportunity (cont.) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$350.0 $316.8 $Bil No. deals $300.0 1,500 12,000 As credit access becomes more widespread, relative equity values will likely increase. Also, the cost and terms for $250.0 $233.8 $225.4 Executive summary securing debt capital may impact the value of shareholder equity in a private middle-market company. The pricing 1,125 9,000 $200.0 $174.8 of business acquisitions$163.3 typically moves in tandem with credit markets (Figure 5). This relationship can be observed $167.7 in$150.0 a capital-cost context. When financing leverage is reasonably accessible and available at lower historical costs, $130.9 Timing is everything the price paid for majority equity investments tends to increase.$102.7 That is because a larger percentage of the overall 750 6,000 $100.0 $74.6 $79.7 purchase price can be paid with low-cost debt capital. The current health of $64.1the credit markets suggests a strong outlook$50.0 for M&A pricing. Transaction drivers 375 3,000 $0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Buyouts/corporate finance Venture capital Growth Secondary and other Fund of funds 0 0 Capital markets conditions 7.0x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 5.6x Enterprise value ($ bil) Number of deals 6.0x 5.3x 5.3x Shareholder liquidity 4.7x 4.7x 0.4x 4.8x 5.0x 4.5x 4.5x 0.1x 0.2x alternatives 4.2x 4.2x 4.3x 0.4x 0.6x 0.2x 4.0x 0.8x 0.8x 0.8x 3.3x 0.8x 0.5x Array of liquidity 3.0x 0.7x alternatives 5.2x 5.1x 5.1x 4.6x 2.0x 4.3x 4.2x 3.5x 3.7x 3.4x 3.8x 3.8x Shareholder liquidity 1.0x 2.5x transaction dynamic 0.0x 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Conclusion Senior debt Subordinated debt Figure 5: Leverage multiples

175% Contacts

Source: Standard150% & Poor’s Leveraged Commentary and Data.

125% 113%

11 Harvesting your wealth: Optimizing shareholder liquidity 100% 100%

75% 40.0% 80.0%

16.0x 60.0% 20.0% Capital market signals: Broad advances,

40.0% 0.0% 12.0x 11.5x 11.7x 10.8x some caution,20.0% and continuing opportunity9.9x 9.8x 9.6x 9.7x 9.2x 9.4x -20.0% 7.9x 0.0% 8.0x

-40.0% -20.0% 4.0x -60.0% M&A activity-40.0% and credit market trends suggest that the capital markets are favorable for companies seeking to raise capital (Figure 6). Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 S&PExecutive 500 S&Psummary Europe 350 S&P 500 S&P Europe 350 0.0x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$350.0 Timing is everything 40.0% 80.0% $316.8 Median US enterprise value to EBITDA multiples $Bil Total US M&A volume and value ($ in billions) No. deals $300.0 16.0x 1,500 12,000 60.0% 20.0% $250.0 $233.8Transaction drivers $225.4 40.0% 11.5x 11.7x 1,125 9,000 0.0% $200.0 12.0x $174.8 $163.3 10.8x $167.7 20.0% 9.9x 9.6x 9.7x 9.8x $150.0 9.2x $130.9 9.4x -20.0% Capital markets conditions 7.9x 0.0% $102.78.0x 750 6,000 $100.0 $74.6 $79.7 $64.1 -40.0% -20.0% $50.0 Shareholder liquidity 4.0x 375 3,000 -60.0% -40.0% $0.0 alternatives Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 2005Jan-2013 Jan-20142006 Jan-20152007 Jan-20162008 2009 2010 2011 2012 2013 2014 2015 S&P 500 S&P Europe 350 S&P 500 S&PBuyouts/corporate Europe 350 finance Venture capital Growth Secondary and other Fund of funds 0.0x 0 0 7.0x Array of liquidity 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 alternatives Enterprise value ($ bil) Number of deals 6.0x 5.6x Figure 6: M&A market trends 5.3x 5.3x $350.0 4.7x 4.7x 0.4x 4.8x $316.8 5.0x 4.5x 4.5x 0.1x 0.2x Shareholder liquidity $Bil 4.2x 4.3x No. deals 4.2x 0.2x $300.0 0.4xtransaction 0.6x dynamic 1,500 12,000 4.0x 0.8x 0.8x 0.8x 3.3x 0.8x 0.5x $250.0 $233.8 $225.4 3.0x 0.7x $200.0 Conclusion 5.2x 1,125 5.1x 9,5.1x000 $174.8 4.6x $163.3 2.0x 4.3x 4.2x $167.7 3.5x 3.7x 3.4x 3.8x 3.8x $150.0 $130.9 1.0x 2.5x $102.7 750 6,000 $100.0 $74.6 $79.7 Contacts $64.1 0.0x $50.0 2004 2005 2006 2007 2008 Source:2009 Thomson 2010 Financial. 2011 2012 2013 2014 2015 375 3,000 Senior debt Subordinated debt $0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Buyouts/corporate finance Venture capital Growth Secondary and other Fund of funds 175% 0 0 7.0x 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 12 Harvesting your wealth: Optimizing shareholder liquidity Enterprise value ($ bil) Number of deals 5.6x 150% 6.0x 5.3x 5.3x 4.7x 4.7x 0.4x 4.8x 5.0x 4.5x 4.5x 0.1x 0.2x 4.2x 4.2x 4.3x125 % 0.4x 0.6x 0.2x 4.0x 0.8x 0.8x 113% 0.8x 3.3x 0.8x 0.5x 100% 100% 3.0x 0.7x 5.2x 5.1x 5.1x 4.6x 2.0x 4.3x 4.2x 75% 3.5x 3.7x 3.4x 3.8x 3.8x 1.0x 2.5x 0.0x 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Senior debt Subordinated debt

175%

150%

125% 113% 100% 100%

75% Capital market conditions

Important considerations for private business Executive summary owners include: The upshot • Continued broad advances in public market equities over the past several months indicate investor confidence and willingness to Stock market confidence, credit availability, Timing is everything incur some risk for a potentially higher investment return. and M&A activity bode well for private • Recent M&A activity has remained steady among smaller business owners who are considering private companies. Transaction drivers liquidity alternatives. • Credit availability and debt costs are currently favorable for privately held, middle-market company transactions. Capital markets conditions

Shareholder liquidity alternatives

Array of liquidity alternatives

Shareholder liquidity transaction dynamic

Conclusion

Contacts

13 Harvesting your wealth: Optimizing shareholder liquidity A framework for assessing and executing a shareholder liquidity transaction

The preceding review of key macroeconomic factors and other transaction-timing issues that affect enterprise value serves as a basis for assessing your Executive summary alternatives for strategic shareholder liquidity. Building on that foundation, the high-level “Strategic Alternatives Framework” below offers insights into numerous decisions and milestones you may encounter along the path to harvesting wealth. The framework begins with a timing assessment and then evolves into a broader, disciplined process. This multifaceted approach, which is analogous to creating a successful business enterprise, has three stages: Timing is everything vision, strategy and objectives, and game plan and execution.

Transaction drivers

Capital markets conditions Stage 1: Vision Stage 2: Strategy and objectives Stage 3: Game plan and execution

This is a preparatory phase. Market intelligence, empirical In many private company transactions, this stage is a matter A clear picture of transaction alternatives should evidence, and detailed analysis provide a platform for of applying market and industry knowledge, transaction emerge at the conclusion of Stage 2: which transactions Shareholder liquidity lining up relevant liquidity alternatives and making creativity, and financial engineering. Armed with Stage 1 are financially attractive; how each provides for the alternatives informed decisions. information and analysis, your corporate finance adviser objectives originally identified; and the likelihood that the can inject experience and ideas into the process. transaction will close or the shareholder liquidity event Stage 1 actions can include: will be consummated. In Stage 3, your corporate finance • Defining and prioritizing financial and qualitative Array of liquidity Stage 2 actions can include: adviser can apply collected information, client feedback, objectives. alternatives • Arraying potential liquidity alternatives that are aligned and market experience to help fashion a transaction • Assessing macro factors, including current geopolitical, with Stage 1 actions. marketing strategy and execution timeline. capital market, and industry conditions, and • Discerning the benefits and considerations for each Shareholder liquidity determining a near-term direction. alternative in relation to stated objectives. Stage 3 actions can include: • Assembling an experienced transaction team that can • Analyzing company performance and financial transaction dynamic • Analyzing the alternatives on a financial “apples-to- tackle the breadth of transaction marketing and condition and formulating a supportable estimate of apples” basis to reduce decision-making complexity. execution processes. the company’s near-term prospects. • Articulating a game plan to execute the alternative(s) • Maintaining transaction momentum. Conclusion • Establishing an optimal “net proceeds basis” tax most desired by the shareholders. position for shareholders. • Retaining transaction flexibility to effectively respond Valuation estimates for the relevant strategic alternatives are to market feedback. typically shaped by market forces. Since the capital markets • Communicating milestones in a timely manner to Contacts are generally considered to be highly efficient, the present board decision makers and shareholders. value of net proceeds estimates for liquidity alternatives often fall within a predictable range. Because of this, factors • Creating an efficient negotiating process to retain, such as transaction risk, governance concerns, and other leverage, and properly document deal terms. nonfinancial objectives take on added significance as the choice of a shareholder liquidity path nears.

14 Harvesting your wealth: Optimizing shareholder liquidity Understanding the array of available transaction alternatives

The dichotomy between achieving various levels of liquidity (cash at close) and retaining control and maintaining corporate governance stability produces Executive summary creative tensions among the array of strategic alternatives. Figure 7 describes some relevant strategic alternatives, in ascending order of their capacity to provide cash at close.

Timing is everything STATUS QUO This is a benchmark scenario in which the company continues to operate under its current game plan. Shareholders do not pursue a transaction in this scenario, retaining all of their ownership in expectation of future value realization. While the Status Quo scenario is the antithesis of ownership diversification, as investment remains concentrated in one asset, it provides the basis against which all other strategic initiatives can be compared. Transaction drivers DEBT RECAPITALIZATION This strategy provides modest shareholder liquidity, typically 25 percent to 35 percent of enterprise value. It is the most straightforward liquidity initiative and rarely dilutes existing shareholder equity. Little governance change occurs related to this transaction. Capital markets conditions EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) This initiative typically represents a partial liquidity event, generally 30 percent to 50 percent of enterprise value. It is the only legislated tax-advantaged sale of equity a Shareholder liquidity private company shareholder can realize. To encourage sharing of future appreciation in company equity with its employees, the ESOP transaction enables shareholders to alternatives receive their sale proceeds sheltered from capital gains tax. Also, the company sponsoring the ESOP and supporting the purchase of shareholder equity attains a tax

Corporate governance continuity Corporate shelter on the repayment of debt assumed for share purchase. Little governance change occurs related to this transaction. Currently, there appears to be only nominal potential that ESOP tax advantages will be compromised. Array of liquidity alternatives MINORITY RECAPITALIZATION A more ambitious shareholder liquidity event, minority recapitalization typically provides cash proceeds of 20 percent to 49 percent of enterprise value. It is often pursued in companies with more pronounced need for shareholder equity monetization, insufficient borrowing capacity, or equally critical need for cash to fund both growth opportunities and future operations. Corporate governance will become more restrictive, as minority equity investors will require some board rights and protections as Shareholder liquidity part of their participation. transaction dynamic MAJORITY RECAPITALIZATION This liquidity initiative will produce a change of control transaction, creating shareholder liquidity of 60 percent to 80 percent of enterprise value. Incoming private equity Conclusion investors will demand board control in exchange for granting existing shareholders the right to monetize most of their current value. Typically, because most of existing shareholders’ current value has been monetized, the company’s growth prospects will provide them with an exciting opportunity for a “second bite of the apple” without the commensurate investment risk.

Contacts STRATEGIC SALE Sale of the company, by nature, creates a 100 percent liquidity event for existing shareholders. This initiative will generally provide shareholders the highest enterprise value, as the opportunity to accrue incremental synergistic value is factored into the negotiated sale process. The sale of the company represents an exit from the business, and future corporate governance will reside entirely with the buyer. Changeof control

Figure 7: Strategic alternatives array: Dichotomy of share ownership and liquidity

15 Harvesting your wealth: Optimizing shareholder liquidity Anticipating the dynamics of shareholder liquidity transactions

After determining which strategic liquidity alternative is an appropriate fit, Maintaining flexibility Executive summary you can work with corporate finance advisers to execute actions in pursuit Maintaining transaction flexibility throughout the liquidity process can of your goals. In many instances, creating broad investor interest and increase investment competitiveness. An example of this is preserving competition for the right to participate will increase the value and results of the board’s ability to transition to internal liquidity strategies, frequently Timing is everything a shareholder liquidity transaction. referred to as “hedge strategies,” such as debt recapitalization or an ESOP transaction. The corporate finance advisor can contribute to this result by helping prepare Transaction drivers your company for market and soliciting investment interest from an array of While typically providing less liquidity, these strategies do not require a potential investors and buyers. change of control or material corporate governance alterations. The hedge is derived by maintaining the ability to effectively execute a material liquidity Capital markets conditions Steps in this process include: event (dividend distribution or tax-advantaged ESOP transaction) if the board • Identifying capital market and strategic buyer candidates thought to is underwhelmed with the market test response. be interested in the company, including subordinated debt, mezzanine Shareholder liquidity alternatives capital, private equity, and strategic partners. Typical capital sources for hedge strategies are excess corporate cash, • Developing an information memorandum that highlights the company’s senior-based asset and cash-flow lenders, and subordinate debt and Array of liquidity investment attributes. mezzanine providers. When executing a market test/hedge strategy, the alternatives • Conducting a “market test” to gauge preliminary pricing and terms ability to seamlessly transition to a transaction alternative without losing deal for the minority recapitalization, majority recapitalization, and company momentum can reduce the risk of an aborted shareholder liquidity event. Shareholder liquidity transaction dynamic sale alternatives. • Delivering preliminary market test results for the board’s consideration.

Conclusion

Contacts

16 Harvesting your wealth: Optimizing shareholder liquidity Anticipating the dynamics of shareholder liquidity transactions (cont.)

Elements of this strategy include: Executive summary • Defining and prioritizing shareholder financial and qualitative objectives. The upshot • Establishing optimal shareholder tax positioning on realized transaction proceeds. Shareholder liquidity transactions Timing is everything • Testing the capital and strategic markets for pricing and terms related can be life-changing events. It’s essential to a change of control transaction. to approach the process strategically—to Transaction drivers • Advancing dividend distribution and ESOP transaction financial metrics, understand the many alternatives available while concurrently pursuing market test alternatives. and what factors affect their potential • Comparing market test-solicited pricing and transaction terms with the Capital markets conditions economics and governance terms of the hedge strategies. risks and rewards. A defined structure for • Selecting the transaction alternative for the shareholder liquidity event assessing, analyzing, and making decisions Shareholder liquidity that appears to achieve the most favorable results. alternatives related to a transaction can be a defining • Focusing adviser resources on effectively consummating the difference in the outcome you experience. Array of liquidity selected transaction. alternatives

Shareholder liquidity transaction dynamic

Conclusion

Contacts

17 Harvesting your wealth: Optimizing shareholder liquidity Conclusion

Now may be the time to begin Executive summary harvesting your wealth Macroeconomic and capital market conditions in 2016 appear to be favorable with respect to a critical ingredient that private company owners Timing is everything look for when considering a shareholder liquidity transaction: transaction timing. If you decide to explore the many alternatives available to you for Transaction drivers such a transaction, prepare yourself for an exciting but demanding process.

At the same time, if you leverage a disciplined transaction approach, along with the experience and resources of a well-regarded corporate financial Capital markets conditions adviser, you can address many of the risks that lead to surprises and disappointment. Such an approach can help you gain a clear understanding Shareholder liquidity of what to anticipate from a liquidity event, choose a path that’s likely to alternatives produce the ROI you expect, and gain insights into important decisions and milestones you are likely to face on your path forward. Array of liquidity alternatives

Shareholder liquidity transaction dynamic

Conclusion

Contacts

18 Harvesting your wealth: Optimizing shareholder liquidity Contacts

About Deloitte Corporate Finance LLC Executive summary Deloitte Corporate Finance LLC (DCF) provides strategic advisory services DCF’s investment banking and M&A advice that help corporate, entrepreneurial and private equity clients create and act upon opportunities for liquidity, growth and long-term advisory services include: Timing is everything advantage. With an in-depth understanding of the marketplace and access to a global network of investment bankers, we help clients confidently • Mergers & Acquisitions pursue strategic transactions in both domestic and global markets. DCF, Transaction drivers – Sell-side advisory and together with the Corporate Finance Advisory practices within the Deloitte Touche Tohmatsu Limited network of member firms, include in excess of divestiture services Capital markets conditions 1,900 professionals, who work collaboratively across 150 international locations. With our significant experience providing investment banking – Buy-side advisory services services across key industries, we are able to offer our clients solutions that Shareholder liquidity • Capital Advisory Services help them to achieve their strategic objectives. For more information, visit alternatives www.investmentbanking.deloitte.com. • Employee Stock Ownership Plans

Array of liquidity Contact our corporate finance professionals: Corporate Finance alternatives Lou Paone Managing Director • Board and Strategic Advisory Services Shareholder liquidity transaction dynamic Deloitte Corporate Finance LLC [email protected]

Conclusion John Deering Managing Director Deloitte Corporate Finance LLC Contacts [email protected]

19 Harvesting your wealth: Optimizing shareholder liquidity To learn more, visit our web site at: www.investmentbanking.deloitte.com

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