HatchConf Business Value and M&A Process

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  • 1. MERGERS & ACQUISITIONS CORPORATE FINANCE MARKET INTELLIGENCE BUSINESS VALUATION EXIT PLANNING MERGERS AND ACQUISITIONS CORPORATE FINANCE MARKET INTELLIGENCEInvestment Bankers To The Middle Market BUSINESS VALUATION             Investment Bankers to the Middle Market EXIT PLANNING   What’s your Business Worth?     HARRY WARD HAMPTON ROADS OFFICE   757.613.0476 hward@mcleanllc.com      
  • 2. Introduction to The McLean Group  Middle-market investment bank with extensive reach and experience.  Private Company M&A, Capital Formation  Business Valuation  Market Intelligence   Exit Planning  Broker/dealer serving the middle-market ($5M to $500M in revenue)  McLean Securities, a wholly-owned affiliate, is a registered broker/dealer with  FINRA; Member, Securities Investor Protection Corporation (SIPC) 1  Headquartered in the Northern Virginia technology corridor near Washington, D.C. with 30 North American offices.  International desk with network of 200 close affiliates in 35 countries. 1. All advisors are fully-licensed to facilitate securities transactions as mandated and actively enforced by government regulatory bodies with unique technical depth – CPAs, CFAs, MBAs, certified negotiators, M&A and valuation experts. Confidential and Proprietary 2
  • 3. Objectives: • Define the Middle Market • Discuss Types of Buyers • Show How Buyers Value a Company • Contrast Seller’s Approach to Value • Discuss the M&A Process Confidential and Proprietary
  • 4. Defining Our Middle Market:Revenues from $5 million to $500 million  Less than $5 million: “Mom and Pop” - best served by business brokers; Greater than $500 million: best served by Wall Street and some regional I-banks. Confidential and Proprietary
  • 5. Buyer Types Help Drive Business Value: Buyer Type Generates value through… Strategic – Industry Consolidators Operational means: economies of scale, new markets, market share, “synergies” Financial – Private Equity Financial engineering and operational efficiencies Roll-up groups Financial engineering Industry (non-strategic) Bottom-fishers (opportunistic) Individual Buyers Last ditch effort, very rare in MM Confidential and Proprietary
  • 6. Another View of the Buyers Source: Mergerstat Review Confidential and Proprietary
  • 7. Business Valuation Basics Confidential and Proprietary 7
  • 8. Formal vs. “Street” Valuations• Formal (Report) • M&A (The street)  Appraisals  of Equity for   Always Investment Value  legal purposes of whole enterprise  Several Measures: FMV,   Real-world transaction  Investor Value, Fair Value comparables  Assumes Symmetric   Asymmetric Knowledge is  knowledge reality  Cash/Non-contingent   Mixed Consideration,  Consideration often Contingent ** Appraisals are of little value to a seller: each buyer drives a different value ** Confidential and Proprietary
  • 9. M&A Valuation Dynamics: Buyers Sellers Detalied Calculations Preliminary Calculations 1.DCF / Capitalized Cash Flows 1.Comparable Transactions 2.Comparable Transactions 2.DCF / Capitalized Cash Flows • Unavoidable! • Understand Buyer’s view Negotiated Agreement Buyer’s investment value and synergies balanced with market influences in auction Key Issue: Who gets the value of buyer’s synergies? Confidential and Proprietary
  • 10. Buy Side: Discounted Cash Flows (DCF) Confidential and Proprietary 10
  • 11. EBITDA: Pre-Tax Cash Flow• What? Earnings before interest, taxes, depreciation and  amortization (EBITDA);• Why? EBITDA is a close approximation to cash flow; removes  the effects of financing and cap investment decisions• Who cares? Buyers care because cash-flow comparisons allow  them to evaluate alternative investment vehicles that provide  cash flows  – Bonds 5% (20 times multiple) – Real Estate (commercial) 9% to 11% (11 to 9 times multiple) – Large cap stocks 12% (8 times multiple) – Small cap stocks 21% (4.8 times multiple) Confidential and Proprietary
  • 12. Normalize for “Real” EBITDA Or Pre-tax Cash Flow Reported net taxable income 500,000 Adjustments: Add back owner salary > $200K  $ 400,000 Add back interest long term debt      50,000 Add non-recurring expenses         $ 250,000 Add back depreciation        $. 50,000 Normalized net (EBITDA)         $ 1,450,00 Confidential and Proprietary
  • 13. Cash Flow to the Firm • EBIT = Earnings before Interest and Taxes Standard for seller market multiples > • EBITDA = add depreciation and amortization  (and normalize) • EBITDA minus Capital Expenditures  – Buyer estimates CAPEX to sustain operations Standard used by • EBITDA minus CAPEX & Changes in Working  most buyers for DCF > Capital (aka Cash Flow to the Firm) – Need more WC to execute plans?  Must reduce cash  flow as a buyer Confidential and Proprietary 13
  • 14. Basic DCF 1. Buyer calculates Cost of Capital * 2. Forecast 3 – 5 years cash flows and terminal value 3. Discount each year and terminal value by cost of capital EXAMPLE Year 1 Year 2 Year 3 Terminal Forecast cash flow 2,200 2,500 2,900 30,000 Present value at 12% 1,964 1,993 2,064 21,353 Sum all DCF’s for Total Enterprise Value: $27,374 * Various Flavors: WACC, Discount Rate, Cap Rate, IRR Confidential and Proprietary 14
  • 15. Sell Side: EBITDA Multiples Confidential and Proprietary 15
  • 16. Multiple Realities in the Middle Market:• Usual range 4.5x – 5.5x EBITDA• Possible range 1x - 12x • Higher ranges may be justifiable in hot industries with high growth rates, and• Lower ranges are more likely in professional  services, resellers, commodity and “buggy whip”  businesses). Confidential and Proprietary
  • 17. Value Driver Considerations  Growth  Size  Proprietary Assets/Differentiation  Customer/Supplier concentration  Ratio Comparisons  Cyclicality (e.g. construction)  Professional goodwill/key management dependence  In gov’t contracting: transferability of contracts Confidential and Proprietary
  • 18. Summing Up: Calculating Preliminary Value (in the Marketplace) Normalized net income (EBITDA) $ 6,000,000 Preliminary multiple 6X Value of earnings $36,000,000 Excess balance sheet value $ 2,000,000 Value of enterprise $38,000,000 Minus Liabilities assumed by buyer, e.g. $ 8,000,000 Value of Equity $30,000,000 In the auction – who knows? Confidential and Proprietary
  • 19. Owners – Keep an Eye on Your Exit  Always pursue growth (top and bottom line)  Hire, train, incentivize solid people  Keep balance sheet and business entities clean (consider housing non-core assets in separate entities)  Diversify customer and supplier bases  Shift from tax optimization to value optimization  View your company through eyes of potential suitors (e.g. build a complementary niche market) Confidential and Proprietary
  • 20. Middle Market M&A Process Confidential and Proprietary
  • 21. The M&A Process, Step by Step: 1. Identify and locate prospective buyers; 2. Prepare confidential information memorandum and acquisition profile; 3. Distribute acquisition profiles to prospective buyers; 4. Secure non-disclosure agreements from interested prospects; 5. Distribute the confidential information memorandum; 6. Negotiate Indications of Interest (IOIs), hold meetings 7. Secure letters of intent; 8. Conduct due diligence (by buyer); 9. Negotiate and prepare the definitive agreement; 10. Closing (sounds easy, but “every deal dies a thousand deaths!”) Confidential and Proprietary
  • 22. Timing the Sale: A Big Mistake! Maximum Value $ Sales Time Confidential and Proprietary
  • 23. Beware the Single Offer!A typical single offeror: Confidential and Proprietary
  • 24. Don’t Hide Problems/Issues: Letters of Intent Are Not Invitations to Further Negotiation The Seller’s Advantage CurveSellerBuyer Management Multiple LOI Negotiations Exclusivity to Buyer Closin Presentation Offers g Confidential and Proprietary
  • 25. Buyer research & effective Auctions: Don’t Assume The “Likely” Identity of the Buyer30 Transactions: were “Most Likely” Buyers the final acquirer? Source: Goldsmith Agio Helms Confidential and Proprietary
  • 26. M&A Consideration: Types and Ranges• Principal elements: – Cash (usually 40% to 80%); – Seller take-back notes (20% to 40%); – Stock (if any, then 20% to 80%), and – Contingent vs. non-contingent consideration •  If any, then 20% to 25% contingent, and •  Comfort vs. incentive earn-outs. Confidential and Proprietary
  • 27. The Top 14 Seller Mistakes: 1. Selling it without 8. Being represented by an representation unlicensed broker 2. Selling to a single offeror 9. Communicating your asking 3. The poorly constructed price inappropriately earn-out 10. Eliminating offshore buyers 4. Disclosing an insufficient 11. Assuming the type of buyer amount of information in 12. Waiting until management is Offering Memo ready to retire 5. LOI not thorough 13. Waiting for next year’s growth 6. Focusing on history and 14. Ignoring or over-emphasizing numbers instead of future timing opportunity 7. Mismanaging team, end runs Confidential and Proprietary
  • 28. National Office Locations Headquartered in McLean, VA, The McLean Group has built a national presence in middle market investment banking with offices in 30 cities nationwide. Each of The McLean Group’s investment bankers brings a unique breadth of experience and expertise to the firm. National Offices  McLean, VA – Headquarters  Halifax, Nova Scotia  Anchorage, AK  Lafayette, LA  Asheville, NC  Miami, FL  Atlanta, GA  Milwaukee, WI  Austin, TX  Norfolk, VA  Baltimore, MD  Phoenix, AZ  Boston, MA  Reno, NV  Bozeman, MT  Sacramento, CA  Buffalo, NY  San Diego, CA  Chicago, IL  San Francisco, CA  Cleveland, OH  Silicon Valley, CA  Columbus, OH  St. Louis, MO  Erie, PA  Tallahassee, FL  Green Bay, WI  Tampa, FL  Hartford, CT  Tulsa, OK Confidential and Proprietary 28
  • 29. The McLean Group Hampton Roads, VA The McLean Group, LLC Harry Ward, Director 7900 Westpark Drive, Suite A320 3181 Shore Drive McLean, VA 22102 Virginia Beach, VA 23451 703.827.0200 757.613.0476 Confidential and Proprietary  29