Equicapita - Succession planning and the value of your business

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Equicapita is a Calgary-based nano-gap private equity fund focusing on acquiring Canadian SMEs that can generate strong, sustainable cash flow from their operations in niche markets. Equicapita generally seeks to acquire businesses: at what it believes are reasonable prices; with a demonstrated history of free cash flow greater than $1 million per annum; with a durable competitive advantage; that operate in industries that Equicapita believes have sound long-term macro prospects; with ongoing participation of senior personnel; with the ability to maintain the cash flow without disproportionate amounts of new capital; where Equicapita can partner with management and align their interest with Equicapita through tools such as earn-outs, vendor take backs and management incentive plans; to be held for the long term; where there is some potential to grow sustainable free cash flow, but where that growth is not essential to generate suitable returns.

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Equicapita - Succession planning and the value of your business

  1. 1. 1How Does A Succession Plan Enhance Value How Does A Succession Plan Enhance Value A succession plan is one of the foundational elements of a company with a long term vision, even Fortune 500 companies must have succession plans in place to ensure their longevity. Of course a succession plan for a private company will likely differ from that of a Fortune 500 company but many of the same elements will be present in both. Distribution of ownership or exit strategy This will relate to whether or not the succession plan is one where ownership will remain in the family or with the current shareholder group and their family, or whether the succession will include a sale to a third party – be it a strategic purchaser, a financial purchaser or the management team. Who will take over leading the business as CEO or president? Whether you plan to keep the ownership internal or move it external, the CEO cannot remain at the helm forever and a new one must be chosen, searched for or groomed. Someone has to lead the business in order for it maintain and grow the value, and for it to execute on its short and long term goals and objectives. Business maximization strategy Only the best run and most profitable companies will ever actually sell. In order to ensure your company sells the implementation of business maximization strategies will contribute to the business selling and for highest price. Business maximization strategies include: 1. Business growth plans including expansion of market share, as well as increased diversification of customer mix 2. Sale of non-core assets or underperforming product lines or divisions 3. Implementation of a formal continuous improvement program n Reduction of operating and input costs n Reduction of discretionary expenses 4. Management training programs to increase the competence, responsibility and effectiveness of the management team (once the current owner exist the business) Role of key employees n Key employees are crucial to the health and longevity of any business and it is important to include them as part of the overall succession strategy. Furthermore by including the employees as part of the process not only will you probably get better buy-in but your will likely remove the cancer of rumors and speculation of what will happen with the business and the uncertainty related to their jobs. n As a way of mitigating risk to the business of losing a key employee through the speculation and uncertainty of a transaction, it is best to keep key people ‘in the loop’ on what is going on and what the overall plan. n A further way to protect the business is obtain key man life insurance, on key employees, in case of an untimely death. Business valuation How do you know what a good price is for your business until you get an objective and definitive perspective on what the value of the business. This is an important and necessary first step of any succession plan.
  2. 2. 2How Does A Succession Plan Enhance Value This coupled with the business maximization strategy, will determine the baseline value for the business and programs to put in place to increase the overall value of the business. The mechanics of the sale This includes the details of the three most common scenarios: 1. Outright sale n How much would you be willing to provide as financing (vendor note, second mortgage on real estate) and would you be willing to take consideration other than cash as a way to increase the overall proceeds (earnout, shares in the purchase company) n What is being sold – the shares, the operating assets, everything including company owned real estate. 2. Management buyout n Same as above, including do you want to sell 100% of the company or do you want to retain a component of the business to facilitate the purchase. 3. Transition to family members n How will you ensure you get some cash out of your business? n What type of financial assistance you will provide to facilitate the transaction and provide comfort to the financial institutions that the business will succeed once you have exited the business. n Timeline A clear plan should be in place that includes a detailed timeline so that that the people involved know what to expect and what will be involved in the program. To the extent possible fuzzy generalities should be avoided since there will be nothing to stick to when the process begins. n Contingency considerations and Progress monitoring To paraphrase Robert Burns - The best laid plans often go awry – it is important to: 1. Contingency planning – if the key shareholder or owner becomes suddenly sick or dies, the business may be in jeopardy due to the delay in transitioning key relationships, responsibilities or other roles. One of the best ways to deal with these contingencies is key man insurance that would fund the business in case of such a loss. The second way is to not delay in grooming your successor. 2. Monitor the progress of plan along the way to see if things are moving along as planned. If things do get off track, know how to get them back on track
  3. 3. 3How Does A Succession Plan Enhance Value ABOUT EQUICAPITA Equicapita is a private equity fund that acquires established, private, small and medium sized enterprises (“SMEs”) located primarily in Western Canada. Equicapita’s investment drivers are to acquire operating companies at attractive valuations, with a history of generating sustainable cash flow and proven management teams. Equicapita believes that there is: - a generational opportunity to acquire ‘baby boomer’ SMEs; and - a funding gap in the $2 to $20 million enterprise value range. The retirement of baby boomer business owners has been described as triggering one of the biggest transfers of corporate assets on record in Canada. This creates an environment with an abundance of opportunities to acquire SMEs with long-term operating histories, at attractive cash flow multiples. Equicapita provides investors with access to this alternative asset class via an efficient RRSP eligible structure. DISCLAIMER The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and Equicapita and its affiliates make every effort to ensure that the contents hereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither Equicapita nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which maybe contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to Equicapita and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting Equicapita or its relevant affiliate directly.

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