managing the business of design & construction It’s Lonely at the Top Exit Strategy Alternatives for Sole Owners and Partn...
ZweigWhite Financial Advisory Services <ul><li>ZweigWhite’s Financial Advisory Services Group provides a diverse range of ...
Learning Objectives <ul><li>The ownership transition challenges and landscape facing AEC and environmental consulting owne...
Internal Ownership Transition <ul><li>Shifting Demographics </li></ul>Visit us at www.zweigwhite.com Percent of Total Popu...
Internal Ownership Transition <ul><li>Options for getting shares into hands of your employees </li></ul><ul><li>Direct Sto...
Internal Ownership Transition  <ul><li>Direct Stock Purchase Plan </li></ul><ul><li>Planned direct sales to key individual...
Internal Ownership Transition <ul><li>Employee Stock Purchase Plan </li></ul><ul><ul><li>423 Plans </li></ul></ul><ul><ul>...
Internal Ownership Transition <ul><li>Employee Stock Ownership Plan (ESOP) </li></ul><ul><li>Qualified retirement savings ...
Internal Ownership Transition <ul><li>Employee Stock Ownership Plan (ESOP) </li></ul><ul><li>ESOP is governed by trustees ...
Internal Ownership Transition <ul><li>Employee Stock Ownership Plan (ESOP) </li></ul>Visit us at www.zweigwhite.com
Internal Ownership Transition <ul><li>Leveraged Recapitalization </li></ul><ul><li>Stock redemption </li></ul><ul><li>Spec...
Internal Ownership Transition <ul><li>Stock Bonus Programs </li></ul><ul><li>Tax deductible expense with no cash outlay </...
Internal Ownership Transition <ul><li>Synthetic Equity Programs </li></ul><ul><li>Phantom Stock </li></ul><ul><ul><li>Rece...
Internal Ownership Transition <ul><li>Stock Options </li></ul><ul><li>Contract for a right to purchase shares  </li></ul><...
Internal Ownership Transition <ul><li>Fair Market Value </li></ul><ul><li>Balances the supply/demand between sellers and b...
M&A Environment <ul><ul><li>Despite global recession and uneven design climate, cautious but resilient M&A and industry co...
M&A Environment <ul><ul><li>Geographic regions: Southeast and Southwest U.S.; metropolitan U.S. cities </li></ul></ul><ul>...
M&A Environment <ul><ul><li>Facilitate ownership transition / maximize shareholder return </li></ul></ul><ul><ul><li>Expan...
Sell Down or Sell Out? Key Differences between an Internal Transition and External Sale:   Visit us at www.zweigwhite.com
What does a typical AEC deal look like? <ul><li>Most are asset purchases rather than stock purchases </li></ul><ul><li>Tra...
Are You “Transaction Ready”? <ul><li>Personal </li></ul><ul><li>Can you make the switch from owner/entrepreneur to employe...
Getting Going – Typical Firm Sale Process <ul><li>Unsolicited Inquiry </li></ul><ul><li>Local/Regional Competitor or Unkno...
Getting Going – Typical Firm Sale Process Illustrative Sale Process Visit us at www.zweigwhite.com
Getting Going - Firm Sale Process <ul><li>Shareholder Objectives </li></ul><ul><li>Maximize valuation </li></ul><ul><li>Ev...
Getting Going - Firm Sale Process <ul><li>Key Transaction Considerations </li></ul><ul><li>Timing issues </li></ul><ul><li...
Closing Thoughts <ul><li>Understand your motivation to sell and ask peers that have gone through it </li></ul><ul><li>Unde...
Dedicated Exit Strategy Seminars & Events <ul><li>Merger & Acquisition Essentials for A/E/P and Environmental Consulting F...
Questions ? Visit us at www.zweigwhite.com
Contact Information <ul><li>Steve Gido, CFA Michael O’Brien, ASA </li></ul><ul><li>(202) 965-4809 (202) 965-4807 </li></ul...
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It’s Lonely at the Top:Exit Strategy Alternatives for Sole Owners and Partners

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Exit Strategy Alternatives for Sole Owners and Partners :
ZweigWhite’s Financial Advisory Services Group provides a diverse range of corporate finance, valuation, ownership transition planning, incentive compensation, and merger & acquisition services for engineering, architecture, and environmental consulting firms, from niche organizations to ENR 500 and publicly-traded firms.

For more information visit us at www.zweigwhite.com

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It’s Lonely at the Top:Exit Strategy Alternatives for Sole Owners and Partners

  1. 1. managing the business of design & construction It’s Lonely at the Top Exit Strategy Alternatives for Sole Owners and Partners Presented by: Steve Gido, CFA and Michael O’Brien, ASA ZweigWhite Financial Advisory Services Boston 321 Commonwealth Road Suite 101 Wayland, MA 01778 1-508-651-1559 Washington, DC 1001 19th Street, North Suite 1200 Arlington, VA 20009 1-202-965-3390 Chicago IBM Plaza 330 N. Wabash, Suite 3201 Chicago, IL 60611 1-312-628-5870
  2. 2. ZweigWhite Financial Advisory Services <ul><li>ZweigWhite’s Financial Advisory Services Group provides a diverse range of corporate finance, valuation, ownership transition planning, incentive compensation, and merger & acquisition services for engineering, architecture, and environmental consulting firms, from niche organizations to ENR 500 and publicly-traded firms.  </li></ul><ul><li>Valuation & Ownership Planning Services </li></ul><ul><ul><li>-      Business valuations and appraisals – for internal transfer purposes, M&A transactions, ESOPs, stock incentive programs, formula design, buy/sell agreements, litigation support, estate planning, etc. </li></ul></ul><ul><ul><li>-       Comprehensive internal ownership and exit strategy planning, alternatives and analysis </li></ul></ul><ul><ul><li>-       Fairness and solvency opinions </li></ul></ul><ul><ul><li>-       ESOP consulting and assessment </li></ul></ul><ul><ul><li>-       Incentive compensation implementation, assessment, and benchmarking </li></ul></ul><ul><li>Merger & Acquisition Advisory Services </li></ul><ul><ul><li>-       Firm acquisition searches, outsourced corporate development, and buyside representation </li></ul></ul><ul><ul><li>-       Firm merger/sale services and sellside representation </li></ul></ul><ul><ul><li>-       Asset divestitures and spin-offs </li></ul></ul><ul><ul><li>-       Negotiation, deal structure, and due diligence assistance </li></ul></ul><ul><ul><li>-       Strategic integration planning, support, and consulting </li></ul></ul><ul><ul><li>-       Market and industry research </li></ul></ul>Visit us at www.zweigwhite.com
  3. 3. Learning Objectives <ul><li>The ownership transition challenges and landscape facing AEC and environmental consulting owners and partners today that are seeking to retire </li></ul><ul><li>Discussion of various internal transition alternatives (direct buy-sell, ESOPs, recapitalizations) and the pros/cons of each </li></ul><ul><li>The importance of a thorough firm valuation to manage expectations and minimize surprises </li></ul><ul><li>Should you sell your firm to a larger A/E firm? Getting your firm “transaction ready” and comparing the external sale vs. the internal transition route </li></ul><ul><li>How owners and partners can get going now. What are the steps to move towards a positive succession plan? </li></ul>Visit us at www.zweigwhite.com
  4. 4. Internal Ownership Transition <ul><li>Shifting Demographics </li></ul>Visit us at www.zweigwhite.com Percent of Total Population 20.0% 22.0% 24.0% 26.0% 28.0% 30.0% 2004 2006 2008 2010 2012 2014 2016 2018 2020 Year Percent 55 & Up 35 to 54
  5. 5. Internal Ownership Transition <ul><li>Options for getting shares into hands of your employees </li></ul><ul><li>Direct Stock Purchase </li></ul><ul><li>Employee Stock Purchase Plan (ESPP) </li></ul><ul><li>Employee Stock Ownership Plan (ESOP) </li></ul><ul><li>Leveraged Recapitalization </li></ul><ul><li>Stock Bonus Programs </li></ul><ul><li>Synthetic Equity Plan (Conversion) </li></ul><ul><li>Stock Options </li></ul><ul><li>Merger and Acquisition </li></ul>Visit us at www.zweigwhite.com
  6. 6. Internal Ownership Transition <ul><li>Direct Stock Purchase Plan </li></ul><ul><li>Planned direct sales to key individuals </li></ul><ul><ul><li>Non-dilutive </li></ul></ul><ul><li>Sales of shares from treasury </li></ul><ul><ul><li>Dilute ownership (not value) </li></ul></ul><ul><ul><li>Takes longer to reduce major shareholders’ interest </li></ul></ul><ul><ul><li>Be mindful of IRC Section 302 </li></ul></ul><ul><li>Formalized sales of shares over time </li></ul><ul><li>Communicates long-term opportunity for expanded ownership </li></ul>Visit us at www.zweigwhite.com
  7. 7. Internal Ownership Transition <ul><li>Employee Stock Purchase Plan </li></ul><ul><ul><li>423 Plans </li></ul></ul><ul><ul><li>Direct purchase of shares </li></ul></ul><ul><ul><li>Discounted up to 15% </li></ul></ul><ul><ul><li>Discriminatory </li></ul></ul><ul><ul><li>Dilutive </li></ul></ul>Visit us at www.zweigwhite.com
  8. 8. Internal Ownership Transition <ul><li>Employee Stock Ownership Plan (ESOP) </li></ul><ul><li>Qualified retirement savings plan under IRC 401a </li></ul><ul><li>Beneficial owners of the sponsoring stock </li></ul><ul><ul><li>Similar to mutual funds </li></ul></ul><ul><ul><li>Not shareholders of the company! </li></ul></ul><ul><li>Offers tax advantages to sellers, employees, and company </li></ul><ul><ul><li>1042 Rollover </li></ul></ul><ul><ul><li>Tax deductible Principal </li></ul></ul><ul><ul><li>Deferred tax to beneficiaries </li></ul></ul><ul><li>Non-discriminatory </li></ul><ul><li>Great tool for managing stock redemptions </li></ul>Visit us at www.zweigwhite.com
  9. 9. Internal Ownership Transition <ul><li>Employee Stock Ownership Plan (ESOP) </li></ul><ul><li>ESOP is governed by trustees </li></ul><ul><li>Department of Labor governs the administration of ESOPs </li></ul><ul><li>Implementation and administration of ESOP will require services of an experienced benefits consultant </li></ul><ul><li>Stock must be valued annually for ESOP purposes by a qualified independent appraiser </li></ul><ul><li>More firms opting for S-ESOP </li></ul>Visit us at www.zweigwhite.com
  10. 10. Internal Ownership Transition <ul><li>Employee Stock Ownership Plan (ESOP) </li></ul>Visit us at www.zweigwhite.com
  11. 11. Internal Ownership Transition <ul><li>Leveraged Recapitalization </li></ul><ul><li>Stock redemption </li></ul><ul><li>Special dividends </li></ul><ul><li>Bank note versus shareholder note </li></ul><ul><ul><li>Mitigate bankruptcy risk </li></ul></ul><ul><ul><li>Easier to fund </li></ul></ul><ul><ul><li>Not much less risk than being a shareholder </li></ul></ul><ul><ul><li>Excess cash? </li></ul></ul><ul><li>Sole owner versus large shareholder </li></ul><ul><li>IRC Section 302 </li></ul>Visit us at www.zweigwhite.com
  12. 12. Internal Ownership Transition <ul><li>Stock Bonus Programs </li></ul><ul><li>Tax deductible expense with no cash outlay </li></ul><ul><li>Sales of shares from treasury </li></ul><ul><ul><li>Dilute ownership (not value) </li></ul></ul><ul><li>Did they “Buy” it? </li></ul><ul><li>Psychology of buying shares versus “Given” shares </li></ul><ul><li>Ownership starter? </li></ul>Visit us at www.zweigwhite.com
  13. 13. Internal Ownership Transition <ul><li>Synthetic Equity Programs </li></ul><ul><li>Phantom Stock </li></ul><ul><ul><li>Receive “Units” representing value equal to appreciated increase in equity </li></ul></ul><ul><li>Stock Appreciation Rights </li></ul><ul><ul><li>Right to monetary equivalent </li></ul></ul><ul><li>Great tool for providing upside without giving up ownership </li></ul><ul><li>Less favorable tax consequence </li></ul><ul><li>Discriminatory </li></ul><ul><li>IRC Section 409a </li></ul>Visit us at www.zweigwhite.com
  14. 14. Internal Ownership Transition <ul><li>Stock Options </li></ul><ul><li>Contract for a right to purchase shares </li></ul><ul><li>Five to seven years of vesting </li></ul><ul><li>Great recruiting/retention tool </li></ul><ul><li>Ownership is not transferred (until exercised) </li></ul><ul><li>Long-term objective </li></ul><ul><li>Be aware of taxes </li></ul>Visit us at www.zweigwhite.com
  15. 15. Internal Ownership Transition <ul><li>Fair Market Value </li></ul><ul><li>Balances the supply/demand between sellers and buyers </li></ul><ul><li>Creates transparency on how value is determined (independence) </li></ul><ul><li>Create shareholder value accountability for management </li></ul><ul><li>Mitigates against value manipulation </li></ul>Visit us at www.zweigwhite.com
  16. 16. M&A Environment <ul><ul><li>Despite global recession and uneven design climate, cautious but resilient M&A and industry consolidation activity is continuing in 2009 </li></ul></ul><ul><ul><li>Some buyers are pulling back the reigns on M&A and expansion goals; others see “value play” opportunities given more realistic valuations </li></ul></ul><ul><ul><li>More sellers emerging with challenging design and economic climate and reality of favorable capital gains tax treatment expiring in 2010 </li></ul></ul><ul><ul><li>Prior “Seller’s Market” of higher valuations shifting to “Buyer’s Market” given economic landscape and supply/demand imbalance – buyers are being choosier in terms of criteria, valuations, and strategic intent </li></ul></ul><ul><ul><li>Internal ownership transition plans becoming more difficult to accomplish </li></ul></ul><ul><ul><li>Long-term, U.S. market will continue to be attractive to Canadian, Australian, and European buyers, spurring more cross-border deals </li></ul></ul><ul><ul><li>Have witnessed sizable deals that are changing competitive landscape, but seeing more “niche” tuck-in deals given current conditions </li></ul></ul>Current M&A Climate Visit us at www.zweigwhite.com
  17. 17. M&A Environment <ul><ul><li>Geographic regions: Southeast and Southwest U.S.; metropolitan U.S. cities </li></ul></ul><ul><ul><li>Services: civil, environmental, geotechnical, structural </li></ul></ul><ul><ul><li>Markets: federal, healthcare, mining, energy/oil & gas, power/utilities, state/municipal, water resources, water/wastewater, natural resources, infrastructure, green building (MEP), and transportation </li></ul></ul><ul><ul><li>Size: 15-150 employees, $2-$20M net revenue </li></ul></ul><ul><ul><li>Developed client base </li></ul></ul><ul><ul><li>Technical staff with broad project management and marketing expertise </li></ul></ul>Desired Criteria by Buyers Visit us at www.zweigwhite.com
  18. 18. M&A Environment <ul><ul><li>Facilitate ownership transition / maximize shareholder return </li></ul></ul><ul><ul><li>Expand firm’s resources (managerial, marketing, financial, personnel) </li></ul></ul><ul><ul><li>Increase opportunities for staff </li></ul></ul><ul><ul><li>Provide impetus for growth </li></ul></ul><ul><ul><li>Manage growth </li></ul></ul><ul><ul><li>Provide new services to existing client base </li></ul></ul><ul><ul><li>Provide existing services to new client base </li></ul></ul><ul><ul><li>“ Fire sale” or distressed situation for survivability </li></ul></ul><ul><ul><li>43% of ZweigWhite’s 2009 Merger & Acquisition Survey of A/E/P and Environmental Firms respondents indicated considering a firm sale, an all-time high </li></ul></ul>Sale Rationale Visit us at www.zweigwhite.com
  19. 19. Sell Down or Sell Out? Key Differences between an Internal Transition and External Sale: Visit us at www.zweigwhite.com
  20. 20. What does a typical AEC deal look like? <ul><li>Most are asset purchases rather than stock purchases </li></ul><ul><li>Transactions are often mix of cash, buyer’s stock, & installment notes </li></ul><ul><ul><ul><li>Example - $2.2M Valuation </li></ul></ul></ul><ul><ul><ul><li>$750k cash at closing </li></ul></ul></ul><ul><ul><ul><li>$250k stock at closing </li></ul></ul></ul><ul><ul><ul><li>$1.2M in three annual installments of $400k each (w/interest) </li></ul></ul></ul><ul><li>Earnouts, or pay for performance clauses, remain popular to close manageable valuation gaps, but can be a barrier to integration </li></ul><ul><li>Employment agreements and compatible salary/incentive compensation structures are key </li></ul>Visit us at www.zweigwhite.com
  21. 21. Are You “Transaction Ready”? <ul><li>Personal </li></ul><ul><li>Can you make the switch from owner/entrepreneur to employee? </li></ul><ul><li>Realize possible loss of control, flexibility, lifestyle, benefits, title, role, etc. </li></ul><ul><li>Age, family, health concerns, 2 nd tier capability/leadership all factors </li></ul><ul><li>Many owners share they work harder during and after the sale than before it! </li></ul><ul><li>Organizational </li></ul><ul><li>How is your financial history and trends? Growing? Profitable? How’s backlog? </li></ul><ul><li>Do you have organized financial, legal, personnel, and operational records? </li></ul><ul><li>Are there any pending liability issues ( personnel issues, pending lawsuits, software licensing deficiencies, etc.) </li></ul><ul><li>How would you break the news to employees and clients? Reactions? </li></ul><ul><li>Be able to articulate your firm’s capabilities and strategic rationale to a buyer! </li></ul>Visit us at www.zweigwhite.com
  22. 22. Getting Going – Typical Firm Sale Process <ul><li>Unsolicited Inquiry </li></ul><ul><li>Local/Regional Competitor or Unknown “Knock on the Door” </li></ul><ul><li>One on one discussion – is buyer right cultural match? Are you getting best price/terms? Is synergy potential there? </li></ul><ul><li>Active Representative Process </li></ul><ul><li>Identify buyer universe </li></ul><ul><li>Contact CEOs/Presidents at selected firms </li></ul><ul><li>Distribute confidentiality agreements and sale memorandum </li></ul><ul><li>Arrange introductory meetings for management teams </li></ul><ul><li>Assist with valuation range, deal structure, and employment issues </li></ul><ul><li>Work with legal and accounting teams </li></ul><ul><li>Negotiation until deal closure </li></ul>Visit us at www.zweigwhite.com
  23. 23. Getting Going – Typical Firm Sale Process Illustrative Sale Process Visit us at www.zweigwhite.com
  24. 24. Getting Going - Firm Sale Process <ul><li>Shareholder Objectives </li></ul><ul><li>Maximize valuation </li></ul><ul><li>Evaluate relative merits of different forms of consideration </li></ul><ul><ul><li>Preference for cash and /or equity from strong, growing AEC firms </li></ul></ul><ul><ul><li>Consideration of earnouts to bridge valuation gaps </li></ul></ul><ul><ul><li>Salary, bonus, and perquisites to management and staff </li></ul></ul><ul><ul><li>Evaluation of tax strategies to maximize transaction proceeds </li></ul></ul><ul><li>Make progress on a timely basis to maximize senior management’s options </li></ul><ul><li>Preserve confidentiality to minimize disruptions </li></ul><ul><li>Orderly transition and integration of employee and client base </li></ul>Visit us at www.zweigwhite.com
  25. 25. Getting Going - Firm Sale Process <ul><li>Key Transaction Considerations </li></ul><ul><li>Timing issues </li></ul><ul><li>Transaction structure </li></ul><ul><li>Appropriate buyer universe </li></ul><ul><ul><li>Strategic / cultural fit and similar vision and design philosophy </li></ul></ul><ul><li>Valuation </li></ul><ul><ul><li>Opportunity to access new client/market base </li></ul></ul><ul><ul><li>Geographic and service diversity </li></ul></ul><ul><ul><li>Cost savings and synergy potential </li></ul></ul><ul><ul><li>Ongoing senior management participation </li></ul></ul><ul><li>Disclosure and confidentiality </li></ul>Visit us at www.zweigwhite.com
  26. 26. Closing Thoughts <ul><li>Understand your motivation to sell and ask peers that have gone through it </li></ul><ul><li>Understand the buyer’s motivation to acquire you </li></ul><ul><li>Be aware that AEC transactions are “holistic” and integration of two disparate firms can be powerful, yet disruptive </li></ul><ul><li>Realize things will be different – most employees and clients don’t like unexpected change! </li></ul><ul><li>Know that you don’t have to sell (or buy) but realize your competition isn't standing still </li></ul>Visit us at www.zweigwhite.com
  27. 27. Dedicated Exit Strategy Seminars & Events <ul><li>Merger & Acquisition Essentials for A/E/P and Environmental Consulting Firms </li></ul><ul><ul><li>October 28, Las Vegas, NV </li></ul></ul><ul><li>Valuation & Ownership Transition for A/E/P and Environmental Consulting Firms </li></ul><ul><ul><li>October 28, Las Vegas, NV </li></ul></ul><ul><ul><li>December 2, West Palm Beach, FL </li></ul></ul><ul><li>2009 AEC Mergers & Acquisitions Summit – December 3-4 – Ritz Carlton, West Palm Beach, FL </li></ul><ul><li>www.zweigwhite.com/events </li></ul>Visit us at www.zweigwhite.com
  28. 28. Questions ? Visit us at www.zweigwhite.com
  29. 29. Contact Information <ul><li>Steve Gido, CFA Michael O’Brien, ASA </li></ul><ul><li>(202) 965-4809 (202) 965-4807 </li></ul><ul><li>[email_address] [email_address] </li></ul>Visit us at www.zweigwhite.com

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