7/24/2019
UNDERSTANDING YOUR LIQUIDITY OPTIONS IN TODAY'S MARKET
LIQUIDITY EVENTS: M&A UPDATE & LIQUIDITY OPTIONS
July 24, 2019
TO RECEIVE CPE CREDIT
• Individuals . Participate in entire webinar . Answer polls when they are provided • Groups . Group leader is the person who registered & logged on to the webinar . Answer polls when they are provided . Complete group attendance form . Group leader sign bottom of form . Submit group attendance form to [email protected] within 24 hours of webinar • If all eligibility requirements are met, each participant will be emailed their CPE certificate within 15 business days of webinar
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• Joined BKD Capital Advisors in 2007 • More than 30 years of financial advisory services experience • Founder & Managing Partner Santana Partners, LLC • Partner & Vice President Daniels & Associates, L.P. • Commercial Banker – The Fuji Bank, Ltd.; The Sumitomo Bank, Ltd.; & TONY GIORDANO United Jersey Bank President & Managing • Managed investment & commercial banking transactions totaling over $5.0 Director billion • Experience in many industries, including M&D, food & beverage, technology, Denver telecom, media, retail, hospitality, construction, real estate, health care & insurance • Fordham University – Certificate Program for Advanced Study in Business – Corporate Finance, 1992 • Regis University – MBA, 1987 • Fairfield University – B.S., Marketing, 1984 • FINRA Registered Representative • Series 7, Series 24 & Series 63
About BKDCA TABLE OF CONTENTS Economic Outlook
M&A Trends
Capital Markets
Valuations
Liquidity Options
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ABOUT BKD CAPITAL ADVISORS
BKD, LLP – BREADTH & DEPTH OF RESOURCES
• 40 offices in 18 states • Approximately 380 Partners & Managing Directors • More than 2,700 employees • Seven industry niche groups • Manufacturing & Distribution, Energy, Health Care, Financial Services, Construction & Real Estate, Technology & Telecom & Not-for-Profit • Clients in all 50 states & internationally • End-to-end client service proposition
Key Service Offerings BKD Office BKD/BKDCA Office • Audit & Tax • Forensics & Valuation Services • BKD Capital Advisors • Risk Management • BKD Wealth Advisors • Special Tax Services • Transaction Services
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BKD CAPITAL ADVISORS PROFILE Why BKD Capital Advisors?
• Wholly owned investment banking subsidiary founded in 1994 . Middle market-focused with deep M&D experience • Diverse transaction experience spanning multiple industries, sales channels & . Relationship culture end markets . We are advisors, not facilitators; plan for success . Senior bankers execute transactions • Focused on high-quality middle-market transactions with enterprise values . Tailored approaches to planning & executing from $10 million–$300 million, as well as preparatory consulting engagements . Outstanding domestic & international reach • Active senior banker involvement from start to finish, with support from a highly . Creative approach to positioning & selling “futures” qualified team of junior bankers & associates/analysts . Data- & fact-centric • More than half of our investment bankers are senior bankers . Breadth of complementary BKD services • All engagements include multiple senior bankers
Transaction Type Client Industry Buyer Type
5% 5% 19% 13% 12% Mfg. & Dist. 33% Strategic Sell-Side Health Care 43% M&A Business Services Buy-Side 18% PEG Financial Services M&A Consumer & Retail PE-backed Strategic 38% 82% 32%
ECONOMIC OUTLOOK
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2019 ECONOMIC OUTLOOK: MACRO VIEW Growth • The labor market remains healthy with the June unemployment rate at 3.7 percent, close to its lowest level in 50 years. • The U.S. economy grew at a healthy 3.1% rate in the first quarter of 2019, but signs are mounting that growth will slow through the remainder of the year. • Slight cooling in the manufacturing sector & a drop in trucking shipment are signs of a possible economic slowdown in the future. • ISM Manufacturing Index stood at 51.7 at the end of June—approaching a two-year low—falling from 58.2 in January. When this index falls below 50, the economy is typically contracting. • The Cass Freight Index has tracked below 2018 levels for each month of 2019, most recently posting 1.23 in May, compared to 1.31 a year prior. Key Considerations • In the first quarter, consumer spending, which accounts for 70% of economic activity, slowed to 0.9% rate gain. Economists believe consumer spending will rebound in the second quarter. • Business investment growth nearly doubled from 2017 to 2018 & accounted for almost one third of GDP growth for the year—overall capital spending has fallen in 2019; however, investment in intellectual property research & development increased from Q1 to Q2 of 2019, & is higher than it was in the same quarter a year prior. [1] • While inflation is projected by the Congressional Budget Office to rise to 2.7 percent by 2020, the Bureau of Economic Analysis found that inflation in Q1 of 2019 had fallen under 2.0 percent, below the previous quarter & the 2018 Q1 rate, & below the Federal Open Market Committee’s (FOMC) symmetric 2 percent objective.
Source: [1] St. Louis Federal Reserve Bank – “Data Series 387”
2019 ECONOMIC OUTLOOK: POLITICS & PUBLIC POLICY
Taxes • Positive effect on corporate bottom lines from tax reform will continue to be felt in 2019—however, in a smaller magnitude as some of the temporary provisions begin to expire. Political Climate • Continues to be a difficult political climate between Congress & the Administration in addition to moving into the Presidential election cycles—campaigning for the 2020 election is already underway. Trade Policy & Global Outlook • Global conflict over trade—whether tariffs, anti-dumping/countervailing duties (AD/CVD), or international trade agreements—continues to be one of the biggest threats to economic growth. • China GDP slowed to 6.2% in the second quarter, the weakest rate in 27 years, as the country’s trade war with the U.S. took its toll. • Global growth has continued to soften this year. The World Bank has identified subdued investment in emerging markets & rising public debt as key dampeners for growth. • Global growth in 2019 has been downgraded to 2.6 percent, 0.3 percent below previous forecasts. • Other concerns include uncertainty surrounding issues like Brexit negotiations & the Italian budget crisis.
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2019 ECONOMIC OUTLOOK: INTEREST RATES
Credit Market • The current Fed funds rate is set at 2.5 percent—raised by the Board of Governors from 2.25 percent in December of 2018. • On 7/10/19, Federal Reserve Chairman Jerome Powell testifying before the House Financial Services Committee, highlighted ongoing risks to the United States economy from the trade war, low inflation & a global economic slowdown—signaling a rate cut may be likely when the Fed meets again in late July. • On 7/16/19 Chairman Powell repeated his pledge to “act as appropriate” to keep the economic expansion going as his fellow central bankers move toward an expected interest rate cut at the July 30–31 Federal Open Market Committee policy meeting. • The availability of capital & historically low interest rates should continue to support vibrant M&A activity. . 3-month LIBOR as of 7/15/19 is 2.30325%. . Prime rate as of 7/15/19 is 5.50, up from 5.00 one year ago. Leveraged Finance • The increased volatility in equity markets at the end of 2018 had ripple effects in the credit market for deals. • Total leveraged finance volume for the first quarter was $191 billion. This represented a 41% increase from the fourth quarter of 2018 but a decrease of nearly 20% on a year-over-year basis. • A survey of M&A lenders by William Blair found that the perceived condition of the leverage finance market improved over the last quarter, up from 3.9 to 4.2 out of 5.0. • Lenders reported that the two main factors influencing this market are overall economic health & rising interest rates.
CAPITAL MARKETS & M&A TRENDS
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CURRENT M&A CONDITIONS
• We expect middle-market M&A activity in the U.S. will remain active for at least another 12 to 18 months, driven by an abundance of equity looking for deals & accommodating credit markets, among other forces. • Many are assessing strategic options, such as whether to exit, find a partner to help them get their business to the next level or become a consolidator. • Near-term deal activity will continue to be fueled by: • Ongoing access to capital & financing • Strengthened balance sheets of strategic buyers • Increasing private equity activity • U.S. corporations have $927 billion in cash on balance sheets & are increasing acquisition activity. [1] • Private equity firms have $1.2 trillion in capital to invest. [2] • Debt markets are healthy with lenders active & competitive in M&A lending. • The current M&A market presents both opportunities & challenges • Companies with excellent management teams, above average margins, multiple growth opportunities can be highly valued. • Strong competition for quality assets as both corporates & private equity continue to seek deals to fuel growth & deploy capital. • General worldwide macro events & general trends in U.S. economy, reflected in volatility of U.S. debt & equity markets, have a direct impact on M&A market activity. • Assuming a relatively stable economy, we anticipate the remainder of 2019 & 2020 to be an active M&A market with attractive valuation multiples.
Sources: [1] St. Louis Federal Reserve – “Nonfinancial corporate business; checkable deposits and currency; asset, Level”, [2] Preqin – “Private Equity Dry Powder”
STRATEGIC BUYERS
Corporations continue to view acquisitions as an important component of their growth strategy & many are capital-rich, aggressive buyers. • Nearly $1.0 trillion in cash on the balance sheets of U.S. nonfinancial companies rated by Moody’s. • In addition to domestic cash on balance sheets, about 72% of S&P companies also hold cash in offshore tax havens. For all U.S.-based companies, cash held overseas is estimated at approximately $3.5 trillion as of the end of 2018.
Domestic Cash on Corporate Balance Sheets – Q1 Cash Repatriated from Overseas by U.S. Firms
1,000.0 $350 $311 $313 972.5 953.4 927.0 $300 800.0 849.4 808.8 $250
$190 688.5 $181 $182 600.0 660.0 $200 $177 $170 644.1 $165 $161 $164 $150 $145 $BB $143
$BB $150 $116 400.0 $92 $100 $70
200.0 $50
$0 - 2012 2013 2014 2015 2016 2017 2018 2019
Source: St. Louis Federal Reserve
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U.S. PRIVATE EQUITY GROUPS
Private equity has become an important capital source for middle-market companies over the last decade. • Growth in capital available to private equity firms has been driven by institutional investors, endowments, pension funds, insurance companies & wealthy individuals who are continuing to embrace private equity as an alternative assets class. • The $1.2 trillion in dry powder currently available to private equity investors represents over $2.0 trillion in purchasing power due to leverage.
U.S. PEG Dry Powder
$1,400
$1,200 $1,154 $1,000 $978 $800 $874 $790 $BB $600 $674 $672 $560 $519 $400
$200
$0 2011 2012 2013 2014 2015 2016 2017 2018
Source: Preqin
LEVERAGED LENDING: CHANGING EXPECTATIONS
• The fourth quarter saw a significant shift in market sentiment, particularly in November & December, as economic & political uncertainty forced lenders to re-evaluate their risk appetite & underwriting guidelines. • Below is survey data collected from lenders on quarterly expectations for the M&A lending environment through Q1 2019.
Pricing Leverage & Terms
100% 100% 51.0% 35.0% 29.0% 25.0% 55.0% 46.0% 34.0% 25.0% 90% 90%
80% 80%
70% 66.0% 70% 65.0% 48.0% 60% 54.0% 60% 43.0%
50% 50% 51.0% 43.0% 40% 40% 41.0%
30% 30%
20% 20%
10% 10% 11.0% 23.0% 9.0% 4.0% 3.0% 23.0% 11.0% 0% 6.0% 0% Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2018 Q3 2018 Q4 2018 Q1 2019
Increase Remain the same Decrease Tighten Remain the same Loosen
Source: William Blair
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LEVERAGED LENDING: LOOKING AHEAD
• The significant percentage of lenders who expect pricing to increase & leverage & terms to tighten in 2019 reflect the market dynamics that closed out 2018. • The markets expect pricing, leverage & terms to either remain the same or further shift in favor of lenders over the course of 2019. • Below is survey data collected from lenders on expectations for the M&A lending environment in 2019.
Pricing Expectations Leverage & Terms Expectations
11.0% 18.0% 19.0% 19.0%
71.0% 61.0%
Increase Remain the same Decrease Tighten Remain the same Loosen
Source: William Blair
DEAL LEVERAGE: MIDDLE MARKET
• Total leverage multiples for middle-market LBOs remained relatively flat in the fourth quarter of 2018, but have increased during Q1 2019.
Leverage Multiples, Transactions Under $1 BB – All Industries
7.0x
6.0x 6.1x 6.0x 5.8x 5.9x 5.6x 5.6x 5.5x 5.4x 5.0x 5.2x 5.3x 5.2x 5.0x 4.9x 4.9x 4.8x 4.7x 4.5x 4.0x 4.2x
3.0x
2.0x
1.0x
0.0x Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019
Sr. Debt/EBITDA Total Debt/EBITDA
Source: William Blair
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DEAL LEVERAGE: LOWER MIDDLE MARKET
• Low interest rates, substantial available capital & a stable economic outlook has resulted in fairly consistent leverage multiples over the past few years with the exception of a small uptick in 2017. • The favorable debt market has stabilized equity commitments in recent years as a percentage of transaction value. • Higher valuation multiples & greater equity contributions in deals have caused expected returns to the private equity funds to decline. • YTD 2019 is through Q1
Equity & Debt Contributions, U.S. PEG Transactions Under $250MM Historical Leverage Multiples, U.S. PEG Transactions Under $250MM
100% 4.5x
90% 4.0x 3.4x 3.3x 3.0x 3.0x 80% 43.0% 43.4% 3.0x 44.9% 44.7% 48.9% 3.5x 70% 3.0x 60% 2.5x 50% 2.0x 40% 43.2% 43.4% 44.6% 45.5% 1.5x 30% 39.8%
20% 1.0x 1.0x 0.9x 10% 0.5x 0.8x 0.8x 0.8x 13.7% 11.8% 10.8% 11.4% 11.1% 0% 0.0x 2015 2016 2017 2018 YTD 2019 2015 2016 2017 2018 YTD 2019
Sub. Debt Sr. debt Equity Sub. debt/EBITDA Sr. debt/EBITDA
Source: GF Data
VALUATIONS
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MIDDLE-MARKET M&A METRICS: VALUATION • Middle-market M&A deal activity has proven to be resilient, with transactions garnering healthy multiples across the spectrum of deal sizes & investors continuing to use high amounts of leverage. • As valuation multiples have increased, private equity firms have had to increase the amount of equity invested in transactions; however, financial buyers still only participate in roughly 17.5% of M&A activity by deal size. • Below are historical data on middle market M&A transactions.
Source: S&P Capital IQ
M&A MARKET DATA: TRANSACTION VALUES BY SECTOR M&A Total Transaction Values by Sector
300
250
200
150
100
50 Transaction size ($BB)
- Communication Consumer Consumer Energy Financials Health Care Industrials Information Materials Real Estate Utilities Services Discretionary Staples Technology
2017 2018 YTD 2018 YTD 2019
Trailing Twelve Months Through June 2019 Sector TV ($MM) Transaction Count TEV/Revenue TEV/EBITDA Communication Services $89,496 1,279 2.25x 12.54x Consumer Discretionary $119,878 2,078 1.242x 11.12x Consumer Staples $42,954 771 0.87x 12.93x Energy $295,859 684 2.79x 8.80x Financials $80,994 1,413 3.46x 28.51x* Health Care $274,697 1,951 4.18x 15.01x Industrials $212,571 3,231 1.00x 10.27x Information Technology $355,495 2,304 2.70x 17.27x Materials $59,084 1,121 1.63x 10.13x Real Estate $225,627 3,623 10.55x 16.29x Utilities $40,600 341 2.19x 6.80x Total $1,797,255 18,796 1.84x 11.54x *Includes outliers
Source: S&P Capital IQ
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LOWER MIDDLE-MARKET DATA: TEV/EBITDA FOR PRIVATE EQUITY TRANSACTIONS
• GF Data Resources is a subscription database that tracks deal activity for approximately 250 middle- market private equity firms. • Transactions in the $10 to $250 million TEV range & at multiples of 3–15x Trailing Twelve Month Adjusted EBITDA are reported (excluding outliers). 2019 year-to-date data is through Q1.
Industry 2003 - 2014 2015 2016 2017 2018 YTD 2019 Total N= Manufacturing 5.9x 6.6x 6.1x 6.8x 7.0x 6.7x 6.1x 1339 Business Services 6.1x 6.4x 7.3x 7.5x 7.2x 7.4x 6.5x 611 Health Care Services 6.8x 7.8x 7.6x 8.1x 7.8x 6.9x 7.2x 301 Retail 6.4x 5.5x 7.0x 7.6x 7.0x 9.2x 6.6x 99 Distribution 6.1x 6.7x 7.5x 7.7x 7.1x 6.2x 6.4x 317 Media & Telecom 7.2x 6.4x 6.6x 8.2x 8.6x NA 7.2x 50 Technology 6.8x 8.0x 7.4x 10.2x 9.6x 7.0x 7.7x 101 Other 5.8x 5.6x 6.9x 6.5x 7.1x 5.4x 6.1x 336 Total N= 3154
Source: GF Data
LOWER MIDDLE-MARKET M&A METRICS: VALUATION • Deal valuations relative to earnings (EBITDA multiples) in the lower middle market are consistently trending upwards, yielding higher premiums when compared to prior years. • Total deal value in the lower middle market has increased in recent years, even as deal volume has fallen. • There is a distinct valuation bias toward larger companies. YTD 2019 is data through Q1.
TEV/EBITDA Multiples by Year – All Industries
10.0x
8.0x 9.1x 9.3x 9.3x 9.0x 9.3x 8.5x 8.0x 7.5x 7.4x 6.0x 7.0x 6.9x 7.2x 6.9x 7.2x 7.1x 6.4x 6.8x 6.7x 6.6x 5.8x 6.2x 6.1x 6.2x 6.1x 4.0x
2.0x
0.0x 2003-2014 2015 2016 2017 2018 YTD 2019
$10-25MM $25-50MM $50-100MM $100-250MM
TEV/EBITDA Multiples by Transaction Type, TEV/EBITDA Multiples by Transaction Type, Add- Platform Transactions – All Industries On Transactions – All Industries
10.0x 12.0x 10.0x 8.0x 9.1x 9.3x 9.3x 8.9x 9.2x 10.8x 8.1x 7.4x 8.0x 6.0x 7.1x 8.1x 8.1x 6.2x 6.3x 6.6x 6.6x 6.6x 8.0x 8.0x 7.9x 5.8x 5.9x 5.7x 6.0x 7.1x 4.0x 6.5x6.4x 6.5x 6.1x 4.0x 5.8x 5.8x 6.0x 2.0x 2.0x 0.0x 0.0x 0.0x 0.0x 2016 2017 2018 YTD 2019 2016 2017 2018 YTD 2019
$10-25MM $25-50MM $50-100MM $100-250MM $10-25MM $25-50MM $50-100MM $100-250MM Source: GF Data
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COMPONENTS OF VALUE
1 Negotiating Process
2 Marketing
Recast Financial 3 Performance/Projections/Positioning
4 Capital Markets & M&A Activity
5 Business Fundamentals
6 Industry Fundamentals
VALUATION CONTINUUM
Valuation Range Premium Valuation Probability “Base” Asset “Outlier” Valuation Premium Valuation Valuation
Base Valuation Factors Premium Valuation Factors “Outlier” Valuation Factors • Average Business Risk • Attractive Growth Prospects • Strong Strategic Position • Stable Business Model • Scale; Margin Expansion Possibilities • High Organic Growth with Inorganic Growth Opportunities • Defensible Market Niche • Market/GNP Growth Prospects • Readily Scalable Business Model • Solid Management • Demonstrated Strength of Management • Excellent Management • Attractive Asset Base or Intellectual • Auction Style, Disciplined Sales Process • Below Average Business Risk Property
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LIQUIDITY OPTIONS
STRATEGIC OPTIONS • BKDCA’s Strategic Options Analysis (SOA) is an ANALYSIS excellent tool that can provide clients with the information they need to consider their succession plans & understand their liquidity options. Key components provided include • A market analysis • Review of investment considerations & potential red flags • Estimated valuation range (after tax proceeds analysis) based on market analysis • Discussion of liquidity event options • Full sale • Majority or minority recapitalization • Management buyout • Dividend recap • ESOP (ESOP Group) • Growth investment option • Discussion of process & timing
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STRATEGIC BUYERS
• Operating companies that provide comparable products & services • Often competitors, suppliers or customers • Could also be unrelated to target or its industry • Companies looking to diversify revenue streams • Companies seeking to build upon their business model &/or competencies to enhance earnings or reduce risks • Buyer motivations are multifaceted & varied, including • Strategic positioning • Market share; new channels • New products & processes • New customers or deeper penetrations • Technologies • Scale; synergies; earnings enhancements • Management skills; corporate know-how • Diversification • Accelerated growth; seeking higher margins & earnings
STRATEGIC BUYERS
• Primary advantages • Potentially, deep universe of buyers • Perspectives of risks & returns among candidate buyers can vary significantly • Long-term investment horizons • Often lower return hurdles (typically meaning higher valuations) • May be motivated to grow in industry with average or below-average prospects • Often, can bring deeper management talent • Typically, cash/stock buyers with lower transitional demands • Issues • Confidentiality • Tire kickers; data seekers • Protecting sensitive performance data, IP, know-how • Industry knowledge—double-edge sword • Consolidation more prevalent • What is current management’s role going forward? • Is there a good culture fit? • Potential loss of jobs
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FINANCIAL BUYERS
• Firms with capital & resources that look to buy companies & utilize value-creation strategies • Private Equity Groups can vary significantly • Traditional buyout funds • Firms with “buy & hold” strategies • Firms with existing holdings • Generalists vs. industry-specific funds • Firms with CEO partners • Special situation funds • Hold periods often relatively short • Generally, 3–7 years, although there are many “buy & hold” firms • Family Office • Typically longer holding period than traditional private equity fund • Leverage is often deployed to enhance returns • Financial buyers usually become strategic buyers as they execute their growth strategies • Add-on acquisition vs. platform acquisition • PEGs have closed roughly 15%–20% of middle-market deals in past 10 years
FINANCIAL BUYERS
• In general, PEGs have been successful investors in middle market • Disciplined buyers (pay for quality; shy from average) • Deploy resources to assist growth • Success has led to expanding universe of PEGs with large pool of capital • Current overhang is roughly $1.2 trillion • Primary advantages • Large universe of efficient buyers • Hot deals can garner aggressive bidding • Equity stakes for incumbent management; noteworthy wealth creation • Use solid capital resources to pay for excellence • Very focused growth agendas in need of management teams & infrastructure • Issues • More need to sell industry attributes; due diligence scrutiny • Use of leverage • Aggressive growth & earnings enhancements is hard work • Must have capable management team • Possibility of near-term & medium-term sale
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RECAPITALIZATIONS • A portion of equity is purchased & selling shareholder(s) often retain meaningful stake & continue to operate company.
• Popular for owners who desire to diversify their personal wealth, yet remain active in growing the business & recognizing future wealth. • Selling majority stake – Advantages • Provide liquidity to ownership • Retain minority equity position that could potentially double or triple in value in 5 to 10 years • New investors provide capital/resources & will work with management to formulate growth plan & assist in execution • Key management remains with company (2- to 3-year transition period) with board representation • If platform transaction, company typically continues to operate independently • Selling majority stake – Issues • New investor now controls company • New investor will most likely leverage balance sheet (but operating risk now lies with new investor) • Could experience major restructuring if acquired by portfolio company • Selling minority stake – Advantages • Ownership retains control • New investor can provide resources (financial & operating) • Selling minority stake – Issues • Will most likely see lower enterprise valuation due to minority investment • Operate with some leverage • Investor will have some minority protections (first right of refusal, preemptive rights, anti-dilution provisions, redemption rights, board representation, etc.)
RECAP EXAMPLE – 25% ROLLOVER Majority Recapitalization: 25% Equity Rollover Scenario
Assumed EBITDA at Close 7,000,000 Financing Sources Senior Bank Debt 3.00x Valuation Multiple 7.00x Subordinated Debt 1.00x Buyer Equity Investment 75% Total Enterprise Value 49,000,000 Existing Shareholder Equity Rollover in NewCo 25% *Assuming the Company is Cash and Debt Free at transaction close
Pro Forma Capital Structure Post Transaction
Sources Uses Senior Debt 23,000,000 Cash at Closing to Existing Shareholder 43,750,000 Subordinated Debt 7,000,000 Shareholder Rollover Equity 5,250,000 Buyer's Equity Investment 15,750,000 Estimated Transaction Expenses (Legal, Accounting, Financing) 2,000,000 Existing Shareholder Rollover Equity 5,250,000 Total 51,000,000 51,000,000
Existing Shareholder Equity % Post Transaction 25% Business Growth Post Transaction: 25% Equity Rollover Scenario EBITDA @ Close 2019P 2020P 2021P 2022P Total Recast EBITDA (Projected) 7,000,000 7,750,000 8,500,000 9,250,000 10,000,000 Growth Rate YOY n/a 10.7%9.7%8.8%8.1%
Pro Forma Capital Structure Post Transaction Annual Debt Repayment / Amortization % 15% 15% 15% 15% 15% Pro Forma Total Debt (15% Annual Amortization) 30,000,000 25,500,000 21,000,000 16,500,000 12,000,000
Valuation Multiple 7.0x 7.5x 8.0x 8.5x 9.0x Total Enterprise Value 49,000,000 58,125,000 68,000,000 78,625,000 90,000,000 Implied Total Equity 21,000,000 32,625,000 47,000,000 62,125,000 78,000,000
Implied Existing Shareholder Equity Value 5,250,000 8,156,250 11,750,000 15,531,250 19,500,000 Implied Existing Shareholder Annual Return on Equity N/A 55% 44% 32% 26% Implied IRR / CAGR 39%
Total Value to Existing Shareholders 49,000,000 51,906,250 55,500,000 59,281,250 63,250,000
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RECAP EXAMPLE – 35% ROLLOVER Majority Recapitalization: 35% Equity Rollover Scenario
Assume d EBI TDA a t Close 7,000, 000 Financing Sources Senior Bank Debt 3.00x Valuation Multiple 7.00x Subordinated Debt 1.00x Buyer Equity Investment 65% Total Enterprise Value 49,000,000 Existing Shareholder Equity Rollover in NewCo 35% *Assuming the Company is Cash and Debt Free at transaction close
Pro Forma Capital Structure Post Transaction Sources Uses Senior Debt 23,000,000 Cash at Closing to Existing Shareholder 41,650,000 Subordinated Debt 7,000,000 Shareholder Rollover Equity 7,350,000 Buyer's Equity Investment 13,650,000 Estimated Transaction Expenses (Legal, Accounting, Financing) 2,000,000 Existing Shareholder Rollover Equity 7,350,000 Total 51,000,000 51,000,000 Existing Shareholder Equity % Post Transaction 35%
Business Growth Post Transaction: 35% Equity Rollover Scenario EBITDA @ Close 2019P 2020P 2021P 2022P Total Recast EBITDA (Projected) 7,000,000 7,750,000 8,500,000 9,250,000 10,000,000 Growth Rate YOY n/a 10.7% 9.7% 8.8% 8.1% Pro Forma Capital Structure Annual Debt Repayment / Amortization % 15% 15% 15% 15% 15% Pro Forma Total Debt (20% Annual Amortization) 30,000,000 25,500,000 21,000,000 16,500,000 12,000,000 Valuation Multiple 7.0x 7.5x 8.0x 8.5x 9.0x Total Enterprise Value 49,000,000 58,125,000 68,000,000 78,625,000 90,000,000 Implied Total Equity 21,000,000 32,625,000 47,000,000 62,125,000 78,000,000 Implied Existing Shareholder Equity Value 7,350,000 11,418,750 16,450,000 21,743,750 27,300,000 Implied Existing Shareholder Annual Return on Equity N/A 55% 44% 32% 26% Implied IRR / CAGR 39%
Total Value to Existing Shareholders 49,000,000 53,068,750 58,100,000 63,393,750 68,950,000
RECAP EXAMPLE – 75% RETAINED Minority Recapitalization: 75% Equity Retained Scenario
Assumed EBITDA at Close 7,000,000 Financing Sources Senior Bank Debt 3.00x Valuation Multiple 5.50x Subordinated Debt 1.00x Buyer Equity Investment 25% Total Enterprise Value 38,500,000 Existing Shareholder Equity Rollover in NewCo 75% *Assuming the Company is Cash and Debt Free at transaction close
Pro Forma Capital Structure Post Transaction Sources Uses Senior Debt 23,000,000 Cash at Closing to Existing Shareholder 30,625,000 Subordinated Debt 7,000,000 Shareholder Rollover Equity 7,875,000 Buyer's Equity Investment 2,625,000 Estimated Transaction Expenses (Legal, Accounting, Financing) 2,000,000 Existing Shareholder Rollover Equity 7,875,000 Total 40,500,000 40,500,000
Existing Shareholder Equity % Post Transaction 75%
Business Growth Post Transaction: 75% Equity Retained Scenario EBITDA @ Close 2019P 2020P 2021P 2022P Total Recast EBITDA (Projected) 7,000,000 7,750,000 8,500,000 9,250,000 10,000,000 Growth Rate YOY n/a 10.7% 9.7% 8.8% 8.1% Pro Forma Capital Structure Annual Debt Repayment / Amortization % 15% 15% 15% 15% 15% Pro Forma Total Debt (20% Annual Amortization) 30,000,000 25,500,000 21,000,000 16,500,000 12,000,000 Valuation Multiple 5.50x 7.50x 8.00x 8.50x 9.00x Total Enterprise Value 38,500,000 58,125,000 68,000,000 78,625,000 90,000,000 Implied Total Equity 10,500,000 32,625,000 47,000,000 62,125,000 78,000,000 Implied Existing Shareholder Equity Value 7,875,000 24,468,750 35,250,000 46,593,750 58,500,000 Implied Existing Shareholder Annual Return on Equity N/A 211% 44% 32% 26% Implied IRR / CAGR 65%
Total Value to Existing Shareholders 38,500,000 55,093,750 65,875,000 77,218,750 89,125,000
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LEVERAGE RECAP
• Leverage recap (leverage company & pay dividend/buy out shareholders) • Advantages • Do not give up any equity (potentially minority stake – 25%) • Allows for liquidity event to owners without a sale • Issues • Have to service debt prior to distributions • Financial covenants can impact operating flexibility • Company more susceptible to macro events—industry or macro economic events • Risk of bankruptcy
MBOS
• Owners often recognize team’s leadership contributed greatly to his or her wealth creation. • High-performing teams in solid companies can execute rewarding deals. • Personal capital investments do not need to be large, but they do need to be meaningful. • Capital resources (senior/junior debt & private equity) to facilitate deals for solid, well-managed companies. • Main element in MBO is control & continuity of management & business operations. • Equity rewards can be far more rewarding if team controls deal & pursues capital partners in competitive process • Advantages • Reward most meaningful long-term contributors • Operating team remains in control of process • Company maintains culture & community presence • Due diligence issues are rare, as are purchase price modifications • Can retain small equity stake in Newco • Balance sheet integrity can be maintained • Issues • Lack of strategic value • Requires capable team with demonstrated results • Team needs to have clear vision & articulate a compelling plan • Operate with some leverage
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ESOPS
• Advantages • Retain control & continue to run company (regardless of level of ESOP ownership) • Favorable tax treatment • Reduce or even eliminate corporate income tax • Company repays acquisition debt with pre-tax dollars • Interest & principal on acquisition debt is tax deductible • Preserve culture, jobs & community • Provide stockholder liquidity (over time) tax efficiently • Reward key management & long-term employees • Uniquely position company for growth via acquisitions • Issues • Sell company at fair market value; could potentially “leave money on the table” • Stockholder liquidity may be realized over time, not immediate
LIQUIDITY EVENTS CONCLUSIONS
• Often once-in-a-lifetime decision • Issues are complex & impact many who have contributed to success of enterprise • Emotional aspects are real • Getting it right is perfect stepping stone to next chapter of life • There are no go-to plans or established formulas/rules • Assessing client’s situation, objectives, dynamics of company & its industry are critical steps • Approach should be tailored to client’s desires
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TIMING
SELL-SIDE PROCESS
BKDCA believes that the key to a successful transaction is keeping all parties on a highly disciplined timeline, with clear & well-defined milestones. It is critical to avoid “deal drift”.
Phase I: Preparation Phase II: Marketing Phase III: Evaluation Phase IV: Negotiations & Closing Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Phase I Phase II Phase III Phase IV
Pre-Marketing Financial Diligence
Draft CM & Finalize Buyers List
Prepare Online Data Room
Receive Market Indication of Interest Management Visits
Marketing Process Marketing Solicit & Buyer Diligence Negotiate Letter of Confirmatory Diligence Intent Prepare for Market Document & Negotiate Market Transaction Negotiate & Close Close
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SELL-SIDE PROCESS
• BKD Capital Advisors works closely with the Company to understand the business, its value drivers & any potential issues Phase I: • Analysis & development of marketing materials, including the Executive Profile & CM Preparation • Research & development of list of potential buyers, focusing on high-probability strategic & financial buyers • Potential buyer list reviewed & approved by client
• BKDCA confidentially initiates dialogue with prospective buyers; Executive Profile deployed Phase II: • Interested parties sign an NDA &, as appropriate, receive the CM Marketing • BKDCA answers questions from prospective buyers regarding the company, the process & desired deal structure • Target date of IOI submission established; IOI’s provide deal structure & range of value
• BKDCA & the client review IOIs & determine the top candidates based on perceived “fit” with the client’s objectives • Top candidates are invited to attend management presentations; opportunity to showcase the company as well as learn more about the Phase III: prospective buyers Evaluation • Top candidates are granted access to additional company information to firm up the valuation & deal structure that they will include in LOI • Prospective buyers submit their LOI; BKDCA works with the client to determine which ones have the greatest merit
• BKDCA helps negotiate terms with the selected buyers to maximize value for the client; once terms are accepted, LOI is executed • Buyer’s diligence initiated, including a detailed review of business & financial information; Quality of Earnings report (“QoE”) likely to be Phase IV: performed Negotiation • Buyer will request access to key personnel at the company; however, the most sensitive discussions are delayed & Closing • Buyer’s legal team drafts documents & negotiates with the Company’s legal team; BKDCA will work closely with Company legal team to ensure the terms of the LOI are fully represented & remains actively engaged, as needed, through closing
CONTINUUM OF SUCCESSION PLANNING
• In addition to traditional tax & audit services, BKD provides a continuum of succession planning services. BKD can assist with its broad spectrum of experienced personnel, helping clients navigate through succession planning & execute transactions, including our BKDnext Advisors.
BKD BKD ESOP Transaction Advisory Group Services Group
• Identify & prioritize • Mergers & • ESOP feasibility • Buy-side due • Personal financial business issues acquisitions study diligence planning • Implement a plan • Capital raising • Accounting & tax for • Sell-side due • Retirement planning to achieve long- • Debt & equity ESOP structuring diligence • Investment term succession & recapitalizations • Other consulting • Quality of Earnings management continuity goals • Management services for ESOPs reports • Education planning buyout • Data analytics • Estate & legacy • Strategic planning planning • Survivor assistance
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Questions?
CONTINUING PROFESSIONAL EDUCATION (CPE) CREDIT
BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.
The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.
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CPE CREDIT
• CPE credit may be awarded upon verification of participant attendance • For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at [email protected]
Thank You!
For a complete list of our offices & subsidiaries, visit bkd.com or contact:
Tony Giordano President & Managing Director, BKD Capital Advisors [email protected] 303.861.4545
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