Welch & BDC explore creative strategies to eliminate the value gap between buyers and sellers, and the key considerations to avoid potential pitfalls.

1. The Art of Structuring
Your Deal

2. Succession + Exit
Strategies
Sell-side,
Buy-side, and
Transaction
Management
Business Diagnostic,
Models + Growth
Strategies
Financial
Management
Strategic
Management +
Governance
Building Value Capturing Value
Negotiation +
Deal Structuring
Research +
Market Insight
Due
Diligence +
Quality of
Earnings
Bridging the Gap
At WelchGroup Consulting, we believe that the true measure of success is the ability to not only build
value through governance, strategy, and financial management, but to realize and transfer that value
through negotiation, market insight, and transaction management.

3. Managing Director,
WelchGroup Consulting
Stephan May Zoran Vranjkovic
Tax Partner, Welch LLP
Cyril Cochrane
Managing Director, Growth +
Transition Capital, BDC
Panelists

4. Structure
DEAL
Earnouts

5. DICHOTOMY
Maximize value
Cash upfront
Optimistic
projections
Minimize the amount
paid
Use of leverage (VTBs)
Conservative
projections
SELLER BUYER
of Interests

6. Earnouts
An earnout is a contractual provision stating that a seller of a business is to obtain additional
compensation in the future if the business achieves certain financial goals.
of all deals in 2016 included
an earnout component in
the transactions structure
17%
Bridge Valuation
Expectation Gap
Accountability
of Results
Source of
Financing
Defer Seller
Tax Liability
Source: ABA Deal Points Study, 2016

7. Key Structural Considerations
Scope
Key Performance
Indicators
Earnout Period Payout Structure

8. Transaction parameters;
stand alone vs integrated
Understanding
Non-Negotiables
Allocation of Control
Accounting Standards
and Measurements
Projections and
Valuation
Level of Support
SCOPE

9. • Revenue vs. EBITDA vs. Net Income
• Buyers prefer Net Income, sellers prefer revenue, usually compromise on EBITDA
Revenue EBITDA Net Income
Buyer Seller Buyer Seller Buyer Seller
Pros
• Seller focuses
efforts in
increasing top
line
• Not affected by
expenses –
increase top
line, increase
payout
• Reflects
operating
margins
• Tracks
consistency in
margins
• Payout can be
achieved by
increases to the
top line or
improving scale
• All expenses
are reflected
• Incentive on
seller to control
costs
Cons
• Revenues can
be increased
while ignoring
margins
• Incremental
expenses not
reflected in
revenue
• Immediate
pressure to
grow top line
post-
transaction
• Doesn’t reflect
CAPEX spend,
financing costs
and taxes
• Lack of control
over operating
expenses
• Doesn’t reflect
CAPEX spend
• Financing costs
and non-cash
expenditures
(D&A) taken
into
consideration
KPIs

10. Financial vs. Non-Financial Metrics
• Retention of customers
• Signing of key contracts
• Number of products sold
• Launch of a new product
• Development milestones
• Employee retention
2016 2014 2012
Revenue EBITDA Hybrid Other Indeterminable
KPIs
Source: ABA Deal Points Study, 2016

11. 0 5 10 15 20 25 30 35 40
INDETERMINABLE
3 YEARS
2 YEARS
1 YEAR OR LESS
Earnout Period Structures in 2016
EARNOUTPeriod
Source: ABA Deal Points Study, 2016

12. PAYOUT
Cash vs. share issuance vs. hybrid
Structure
Installments vs. lump sum
Adjustments to payments based on
subsequent performance,
indemnification
Partial satisfaction vs. all–or–nothing
$

13. Case Study
BUY-SIDE
Company Overview:
Privately held engineering consulting and
technology solutions provider
Transaction Summary:
• The company will acquire 33% of the outstanding
common equity of target
• Valuation gap between buyer and seller
• This structure allows buyer to assess the
investment before making a full commitment

14. Case Study
BUY-SIDE
Consideration + Structure:
• Buyer believes target is worth $600K; seller expects valuation of $1.9mm
• Company pays $200K cash at close and a contingent 3 year consideration (an equity true-up) based on EBITDA growth
• Right of first refusal if seller receives an offer for the remaining equity
• After the first year, buyer has a put option and the seller has a call option to sell / buy the outstanding equity in the company at fair
market value based on an independent valuation
• Acquirer receives perpetual management fee for business development and marketing assistance
Projected
EBITDA
Rolling Avg
EBITDA Multiple
Enterprise
Value
True-up
Payment
Year 1 200 200 4x 800 64$
Year 2 400 300 4x 1,200 132$
Year 3 800 467 4x 1,867 220$
Total Contingent Consideration 416$
Initial Consideration 200$
Total Consideration for 33% 616$
Total Valuation Achieved 1,868$
($)Thousands
Year 0
EBITDA
Multiple
Enterprise
Value
151 4x 605
Equity Value CAD$ %
Seller 405 67%
Buyer 200 33%

15. Case Study
SELL-SIDE
Company Overview:
Privately held communications company
Transaction Summary:
• Company to sell 100% of common
shares
• Valuation gap between buyer and
seller

16. Case Study
SELL-SIDE
Consideration + Structure:
• $20 million cash payment at closing
• 3 year earnout, paying $2.3 million per year, adjusted based on attaining targets
(
Actual Revenue
Revenue Target = Revenue adjustment) +
Actual Gross Profit
Target Gross Profit = Gross Profit adjustment − 200% = Earnout Adjustment X Earnout Base = Earnout Payment
(
$16,000,000
$19,000,000
= 84.2%) +
55%
65%
= 84.6% − 200% = 1 − 31.2% X $2,333,333 = $1,605,333 over 3 𝑦𝑒𝑎𝑟𝑠 = $4,815,999
Formula
Example (Worst case):
440222440222

17. Business
transition
Planning for a successful
business transition

18. A trillion
dollars
of Canadian small
business assets
could be passed to
the next generation
The business transition wave is coming
Small and medium-
sized businesses
constitute about
half of the
Canadian
economy
Canadian SME sector
to experience a
massive turnover
of business
ownership
and assets in Canada
JUST
OVER
75%
Looking ahead 5 years:
of business owners with
a succession plan intend
to exit their business

19. BDC – Growth & Transition Capital 19
BDC offers to entrepreneurs
Advisory services
Financing
Capital

20. BDC – Growth & Transition Capital 20
 Flexible financing to support growth and protect cash flow
 Advisory services on an enterprise-wide range of subjects
 Biggest and most active venture capital investor in Canada
BDC is the only bank devoted
exclusively to entrepreneurs
110+
BUSINESS
CENTRES
2,100
EMPLOYEES
$26B
IN FINANCING
COMMITTED
TO CLIENTS
72
YEARS
OF EXISTENCE
42,000+
CLIENTS
QUICK
STATS
94%
OF BDC CLIENTS
ARE SATISFIED
WITH OUR
SERVICES

21. 21
Our experience
Putting the deal together

22. BDC – Growth & Transition Capital 22
What is a typical financing structure?

23. BDC – Growth & Transition Capital 23
 Type of transaction
 Change of ownership, MBO/MBI, M&A
 Share vs. asset purchase
 Full vs. partial buyout
 Type of company – ie. capital asset heavy vs. capital
asset light
 Health of the balance sheet
 Predictability of revenue and cash flow
 Valuation gaps between purchaser and vendor
Financing structure will depend on a
number of factors

24. BDC – Growth & Transition Capital 24
Not all ownership transitions are alike
37%
17%
13%
3%
30%
Change of ownership
Senior Debt
Purchaser Equity
Vendor Note/Earnout
Working Capital
Mezzanine
24%
3%
17%
15%
41%
M&A
Senior Debt
Purchaser Equity
Vendor Note/Earnout
Working Capital
Mezzanine
28%
8%
17%3%
44%
MBO/MBI
Senior Debt
Purchaser Equity
Vendor Note/Earnout
Working Capital
Mezzanine

25. 25
Mezzanine financing
Maximum repayment flexibility
 Advantage of equity financing
with a debt instrument
 Customized repayment terms
adapted to your cash inflows
to protect your working capital
 Balloon payments, balloon with
free cash flow sweeps and/or
regular monthly payments
 Non-dilutive capital

26. BDC – Growth and Transition Capital – Business transition 26
Example of mezzanine financing
Client profile
IT Service
Project
50% MBO
 Founded in 1997 by two
college buddies. Naively had
no shareholder agreement.
Dispute between
shareholders led to protracted
legal battle and ultimately a
court-imposed shotgun
clause.
Benefits for
the business
 Given the nature of the
business, our client had
limited tangible assets and
there was only a modest
level of senior financing
available to assist with the
acquisition

27. BDC – Growth and Transition Capital – Business transition 27
 Return calculated on a
combination of a fixed interest rate
+ a bonus at maturity based on
the value of the company. Value
to be determined by a pre-
negotiated valuation formula.
 Partial balloon (70% of loan
amount) principal payment
payable at maturity.
 Cash sweeps available to reduce
balloon payment.
 3 year term on senior debt.
 Mezz: principal repayment starting
36 months post-closing to allow
senior debt to be repaid.
Some specifics
Project Amount Financing Amount
Acquisition of 50% of the shares $4,200,500
Growth &Transition Capital $1,500,000
Senior debt $1,250,000
Working Capital $850,500
Investment from new shareholders $600,000
TOTAL $4,200,500 TOTAL $4,200,500
Example of mezzanine financing

28. BDC – Growth & Transition Capital 28
 Continuity of
management
 Exiting shareholder
compensation available
for debt servicing
 Complementary vs.
stacked financing
 Execution of business
plan with little deviation
 Balloon repaid from new
senior loan facility
The good scenario
Reasons why this was a highly successful ownership
transition :

29. BDC – Growth & Transition Capital 29
Example of mezzanine financing
Client profile
HVAC
contracting
Project
Change of ownership
 Founded in 1974 by two
brothers who now wish to
retire. Purchasers are
experienced entrepreneurs
who have had success in a
variety of business
enterprises.
Benefits for
the business
 Other than service vehicles,
very limited capital assets.
Mezz funding bridged the
gap between other sources
of financing.
 History of steady and
predictable cash flow
supported more traditional
repayment terms for debt.

30. BDC – Growth & Transition Capital 30
 Return calculated on a
combination of a fixed interest rate
plus an annual royalty on revenue.
Overall return will be dependent
on company performance.
 Partial balloon (65% of loan
amount) principal payment
payable at maturity.
 Cash sweeps available to reduce
balloon payment.
 5 year term on senior debt.
 Mezz: principal repayment starting
24 months post-closing.
 Vendor note is postponed for 5
years. Interest permitted.
Some specifics
Project Amount Financing Amount
Acquisition of 100% of the shares $7,400,000
Growth &Transition Capital $2,250,000
Senior debt $2,900,000
Vendor Note $740,000
Working Capital $760,000
Investment from new shareholders $750,000
TOTAL $7,400,000 TOTAL $7,400,000
Example of mezzanine financing

31. BDC – Growth & Transition Capital 31
 Change of management /
culture
 Embarked on an aggressive
revenue growth strategy post-
close which eroded margins
 Investment in growth strategy
(opening new location,
staffing, equipment, etc.) was
not properly planned or
funded, leading to operating
losses
 Stacked financing left little
room for error and when
losses were incurred, lender
covenants were breached
 Deviated from business plan
presented for financing (ie.
unfunded expansion costs)
The bad scenario
Reasons why this ownership transition is facing challenges:

32. BDC – Growth & Transition Capital 32
A change of ownership
is more than just a new owner
6 key findings of BDC’s Change of Ownership study
Synergies are harder to achieve
than planned
Transitions by insiders tend
to perform better
Forecasts need to be conservative
A change of ownership puts pressure
on a company’s finances:
61% of companies did not achieve
expected financial performance
1 year after transition
The new management team is the
foundation of future success
Good due diligence leads
to good transitions 6
4
2
3
1
5

33. 33
Business
transition planning
A guide for entrepreneurs
free
eBook
www.bdc.ca/businesstransitionguide

34. bdc.ca/capital
1-888-INFO-BDC
BDC
BDC_ca
BDC Thank you.
Cyril Cochrane
Managing Director
Growth & Transition Capital
T: 613-995-4084
E: cyril.cochrane@bdc.ca

35. Structuring
TAX

36.  $835,000 lifetime exemption
 Deduction available to individuals resident in Canada throughout the year
 Disposition of shares
 Qualified small business corporation (QSBC) shares at time of disposition
 Potential tax savings – up to $223k per exemption
Exemption
CAPITAL GAIN

37. 37
Exemption
CAPITAL GAIN
 QSBC
 at time of sale, CCPC all or substantially all (90%) of assets used principally
(50%) in an active business carried on primarily (50%) in Canada;
 shares were not owned by an unrelated person in 24 months preceding sale;
and
 in 24 months preceding sale, CCPC with more than 50% of assets used
principally (50%) in an active business carried on primarily (50%) in Canada
 Trust planning to multiply access to CGE
 Buyer should also consider future exit

38. 38
 Holdco may have excessive
non-business assets
 CGE only available to
individuals (sale must be by
trust or individuals)
 Best case – one CGE available
Structures - CGE?
CORPORATE
Holdco
Common Shares
Common Shares
X
Opco

39. 39
X Family
Trust
Common shares
Common shares
Structures - Multiple CGE’s
CORPORATE
X Family X
Holdco
Opco
 Trust may sell Opco shares
 X and family may access CGE
 Surplus funds may accumulate
in Holdco

40.  Bump in cost of assets
 ½ year CCA
 Goodwill
 Allocation of purchase price
 No risk of hidden liabilities
Transactions - Purchaser
ASSET

41.  Recapture
 No CCA
 Goodwill
 Allocation of purchase price
 Personal tax to extract funds from corporation
 Greater tax liability
Transactions - Vendor
ASSET

42.  No bump in cost of assets (other than non-depreciable capital assets)
 Acquisition of control issues
 Risk of hidden liabilities
Transactions - Purchaser
SHARE

43.  Capital gain
 Capital gains exemption
 Tax minimization
 Tax deferral
Transactions - Vendor
SHARE

44.  Combination of asset and share sale
 Purchaser – advantages of asset purchase (CGE)
 Vendor – advantages of share sale (tax basis step-up)
 Many variations depending on specific circumstances
 Common characteristics:
 Vendor sells shares of Target corporation to purchaser
 Target corporation sells assets to purchaser
Sales Transactions
HYBRID

45. 45
TargetCo
PurchaserVendor
Common shares
 Purchaser purchases TargetCo
 Salary or dividends to purchaser
 Left with 47% after-tax
Interest-bearing
note
$$$
Inefficient Tax Example
FINANCING STRUCTURE

46. 46
TargetCo
AcquireCo
PurchaserVendor
Common shares
Common shares
 AcquireCo purchases TargetCo
 Debt owing by AcquireCo
 Amalgamate
$$$ Interest-
bearing note
Efficient Tax Example
FINANCING STRUCTURE

47. 47
Amalco
PurchaserVendor
Common
shares
 Debt owing by Amalco
 Left with 85%/73% after-tax
Interest-bearing
note
$$$
Efficient Tax Example (Cont’d)
FINANCING STRUCTURE

48. Managing Director, WelchGroup
Consulting
smay@w-group.com
P: 613-236-9191 ext. 250
Stephan May Candace Enman
President, WelchGroup Consulting
cenman@w-group.com
P: 613-236-9191 ext. 195
Cyril Cochrane
Managing Director, Growth + Transition Capital,
BDC
mailto:cyril.cochrane@bdc.ca
P: 613-995-4084
Contact Us
Zoran Vranjkovic
Tax Partner, Welch LLP
zvranjkovic@welchllp.com
P: 613-236-9191 ext. 282

49. Questions