Show Me The Money

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Birmingham Venture Club board member, Zane Tarence, makes a clear case for why and how entrepreneurs and investors alike, must show us the money,

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Show Me The Money

  1. 1. Show Me The Money A Look at the Capital Markets & How to Access Them
  2. 2. 3 Questions To Explore <ul><li>Is institutional capital available for entrepreneurs in today's market? </li></ul><ul><li>What are the current trends in the private capital markets? </li></ul><ul><li>How does an entrepreneur access this capital? </li></ul>
  3. 3. Four Primary Segments Of The Capital Markets
  4. 4. Investors Are Returning To The Public Equity Markets Source: Investment Company Institute
  5. 5. The Number Of Successful Stock Offerings Is On The Rise… <ul><li>The momentum gained in late 2009 has continued into the new year as investors have an appetite </li></ul>Source: CapitalIQ
  6. 6. Overall Middle Market Deal Volumes Are Beginning To Trend Up… Note: Transactions valued between $10-$250 million Source: CapitalIQ
  7. 7. … And Middle Market Transaction Multiples Are On The Rise Note: Transactions valued between $10-250 million Source: W.Y. Campbell & Company
  8. 8. The Vast Majority Of Private Equity Deals Are In The Middle Market… Lower middle market deals under $50 million remained the most popular during 4Q09 (over 50% of deal flow) Source: PitchBook Platform
  9. 9. There Are Two Categories Of Institutional Buyers & Investors … collectively comprising a very broad universe of potential buyers and investors
  10. 10. Who Are Financial Buyers? Private Equity … Venture Capital … Hedge Funds <ul><li>How Private Equity Groups invest: </li></ul><ul><ul><li>Combination of their own equity plus debt financed by other parties </li></ul></ul><ul><ul><li>Seeks return primarily through capital appreciation realized in exit: </li></ul></ul><ul><ul><li>- Organic growth </li></ul></ul><ul><ul><li>- Expansion through acquisitions </li></ul></ul><ul><ul><li>- Debt retirement </li></ul></ul><ul><ul><li>Secondary focus on interim cash flow: </li></ul></ul><ul><ul><li>- Cash coupons and cash distributions </li></ul></ul><ul><ul><li>- Dividend recaps </li></ul></ul>Private Equity Groups focus on the middle and large markets > 8,000 firms
  11. 11. Private Equity “Overhang” Suggests Money Will Be Invested…
  12. 12. … Based On Financial Incentives For Private Equity Pros <ul><li>Once raised, private equity funds have a “shelf life” </li></ul><ul><ul><li>“ Use it or lose it” </li></ul></ul><ul><ul><li>Private equity players have to put capital to work within specified timeframes </li></ul></ul><ul><li>Private equity firms generate income and cash from these funds through management fees and investment carry </li></ul><ul><ul><li>If capital is not invested then private equity professionals lose their engine to generate income and wealth </li></ul></ul><ul><ul><li>Creates incentive to put money to work before the fuse burns out </li></ul></ul><ul><li>Return of debt to market is expected to release pent-up demand </li></ul>Time fuse on capital
  13. 13. What Financial Buyers Are Looking For <ul><li>Experienced management team with a solid track record </li></ul><ul><ul><li>Depth and breadth of management </li></ul></ul><ul><ul><li>Strong next generation of leadership providing continuity </li></ul></ul><ul><li>Leading and defensible market position in 1+ niches </li></ul><ul><ul><li>Long-standing customer relationships, diversified client base, and low attrition </li></ul></ul><ul><ul><li>Strong recurring revenue base </li></ul></ul><ul><ul><li>Proven sales and marketing channels </li></ul></ul><ul><li>Differentiated offerings + efficient infrastructure = attractive margins </li></ul><ul><ul><li>Key part of customers’ value chain with difficult-to-imitate products and services </li></ul></ul><ul><ul><li>EBITDA margins >10% </li></ul></ul><ul><li>Growth potential through multiple strategic avenues </li></ul><ul><ul><li>Strong “platform” business that can grow organically or through add-on initiatives </li></ul></ul><ul><ul><li>Attractive industry profile and growth outlook </li></ul></ul><ul><ul><li>Ability to realize economies of scale to further drive profitability </li></ul></ul>
  14. 14. Who Are Strategic Buyers? “ Strategics” are operating businesses (public and private) Why do they buy? <ul><ul><li>For growth (compelled by owners/investors)… </li></ul></ul><ul><ul><li>For accretion (1 + 1 = 3, shareholder value creation math)… </li></ul></ul><ul><ul><li>Because it is faster, easier, & cheaper than starting from scratch… </li></ul></ul>How do they buy? Combination of cash, stock, performance earnouts, and management/employee contracts
  15. 15. Strategic Buyers Are Motivated To Put Their “War Chests” To Work Source: CapitalIQ
  16. 16. What Strategic Buyers Are Looking For <ul><li>Revenue and cost synergies that paint a compelling business case </li></ul><ul><ul><li>Improves acquiror’s product and service offerings </li></ul></ul><ul><ul><li>Cultural fit </li></ul></ul><ul><li>Access to new skills and technology </li></ul><ul><ul><li>Highly-trained human capital </li></ul></ul><ul><ul><li>Unique intellectual property , tools, business methods </li></ul></ul><ul><li>Complementary customer base </li></ul><ul><ul><li>Diversified customer base </li></ul></ul><ul><ul><li>Diversified products and services </li></ul></ul><ul><li>Management team and organization culture </li></ul><ul><ul><li>Ability to drive growth post-acquisition </li></ul></ul>
  17. 17. What Are Investors Looking For? <ul><li>future cash flows adjusted for risk and time </li></ul>&quot;Focus solely on the future earning power...&quot; Berkshire Hathaway, Annual Report Profits Time $ $ $ $ $ $ $ $ $ $ $ $ $
  18. 18. <ul><li>The more --- the better </li></ul><ul><li>Trends matter a lot </li></ul><ul><li>Relative to the broader market and competitive landscape </li></ul><ul><li>Dependability and reliability of cash flows </li></ul><ul><li>Consistency of reporting </li></ul><ul><li>3 rd party objective testament is helpful </li></ul>Returns = Cash Flows Cash flows are judged using these two factors: Growth Quality
  19. 19. <ul><li>In the world of investments, return is commensurate with risk </li></ul><ul><li>The greater the risk, the higher the needed return </li></ul><ul><li>This is commonly called the risk-return trade-off </li></ul>Understanding The Role Of Risk From A Market Perspective…
  20. 20. Key Areas Of Focus For Your Company’s Team 6 areas are major determinants of value and are key for generating cash flow Focusing on these areas will improve the value of your business whether or not you are seeking a liquidity event or growth capital
  21. 21. Where Is Your Company In Its Lifecycle? What is the optimal lifecycle “curve” for your company? How can you influence the “slope” of the curve?
  22. 22. Which Curve Are You On Today?

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