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The MAC Entrepreneur's Program February 15, 2008


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The MAC Entrepreneur's Program February 15, 2008

  1. 1. The MAC Entrepreneur’s Program February 15, 2008 7:30- 10:30 a.m. Loews Philadelphia Hotel
  2. 2. The Program Agenda <ul><li>Introduction: </li></ul><ul><ul><li>MAC Alliance Entrepreneur’s Series Goals </li></ul></ul><ul><ul><li>Introduction of Presenters/Panelists </li></ul></ul><ul><li>Program: </li></ul><ul><ul><li>Presentations on “Building Your Exit Strategy” </li></ul></ul><ul><ul><li>Extended Panel “Q & A” session </li></ul></ul>
  3. 3. The Entrepreneur Series Goals <ul><li>The Entrepreneur’s Series is a part of MAC Alliance’s continuous learning commitment. </li></ul><ul><li>MAC Alliance’s goal is to serve the investment community by providing access to subject matter expertise, and experience. </li></ul><ul><li>The goal of the Entrepreneur's Series is to develop knowledge around “The Business Life Cycle” – Formation, Growth, and Exit. </li></ul><ul><li>This session focuses on “Building Your Exit Strategy” </li></ul>
  4. 4. Introductions <ul><li>Presenters/Panelists </li></ul><ul><li>Howard Ross – Partner, LLR Partners Inc. </li></ul><ul><li>Karen Batchelder – Managing Director, Private Finance Group, Stifel Nicolaus & Co., Inc. </li></ul><ul><li>Tish Squillaro – Partner, Penn Valley Group </li></ul><ul><li>Robert Krauss – Partner, Ballard Spahr Andrews & Ingersoll, LLP </li></ul><ul><li>Jo Webber – Energy Solutions </li></ul>
  5. 5. Timing Your Exit An Investor’s Point of View Howard Ross Partner LLR Partners Inc.
  6. 6. Factors that impact Exit timing <ul><li>Type of exit </li></ul><ul><li>Economic/market conditions </li></ul><ul><li>Industry dynamics </li></ul><ul><li>Regulatory environment </li></ul><ul><li>Company performance </li></ul><ul><li>Management’s desires </li></ul><ul><li>Pre-emptive offer </li></ul>
  7. 7. Types of Exits <ul><li>Sale </li></ul><ul><ul><li>Financial buyer </li></ul></ul><ul><ul><li>Strategic buyer </li></ul></ul><ul><li>IPO </li></ul><ul><li>Leveraged Recap </li></ul>
  8. 8. Develop an Exit Strategy <ul><li>Exit strategy should be an integral part of due diligence before the investment is made. </li></ul><ul><li>Specific strategy depends on how the various factors unfold – difficult to dictate timing. </li></ul>
  9. 9. Develop an Exit Strategy (Cont.) <ul><li>Be in a state of semi-preparedness: </li></ul><ul><ul><li>Strong operating results and trends </li></ul></ul><ul><ul><li>Cohesive management team with limited turnover </li></ul></ul><ul><ul><li>Strong endorsement of customers </li></ul></ul><ul><ul><li>Annual audit </li></ul></ul><ul><ul><li>Legal house in order </li></ul></ul><ul><ul><li>IP protected </li></ul></ul><ul><ul><li>Tax and regulatory compliance </li></ul></ul><ul><ul><li>Outstanding stock, options and warrants well documented </li></ul></ul>
  10. 10. Optimal Scenario <ul><li>Selling off of two to three years of growth </li></ul><ul><li>Visibility for next one to two years </li></ul><ul><li>Hitting quarterly numbers </li></ul><ul><li>Limited number of add backs to earnings </li></ul><ul><li>Accounting and legal house in order </li></ul><ul><li>Minimal external threats – economy, industry, lawsuits </li></ul><ul><li>Strong market conditions like 2004 through 2006 – strong economy, cheap debt, stock market rising and an abundance of capital in the hands of multiple potential buyers. </li></ul>
  11. 11. Selection and Use of an Investment Banker <ul><li>Karen Batchelder </li></ul><ul><li>Managing Director, Private Finance Group Stifel Nicolaus & Co., Inc. </li></ul>
  12. 12. Why Use an Investment Banker? <ul><ul><li>Prepare your Company for the sale process </li></ul></ul><ul><ul><ul><li>Conduct due diligence -> Identify hidden opportunities and reduce negative surprises </li></ul></ul></ul><ul><ul><ul><li>Review historical financial statements -> Understand business trends and systems </li></ul></ul></ul><ul><ul><ul><li>Review budget and financial projections -> Support valuation </li></ul></ul></ul><ul><ul><ul><li>Draft Confidential Descriptive Memorandum -> Properly position Company </li></ul></ul></ul><ul><ul><ul><li>Establish valuation -> Establish realistic goals </li></ul></ul></ul><ul><ul><ul><li>Prepare management team -> Achieve credibility </li></ul></ul></ul><ul><ul><ul><li>Determine management goals -> Exit or remain involved in the business </li></ul></ul></ul>
  13. 13. Why Use an Investment Banker? (Cont.) <ul><ul><li>Create an efficient process </li></ul></ul><ul><ul><ul><li>Organize management and the Company </li></ul></ul></ul><ul><ul><ul><li>Provide dedicated resources </li></ul></ul></ul><ul><ul><ul><li>Minimize business disruption </li></ul></ul></ul><ul><ul><ul><li>Set deadlines and maintain momentum </li></ul></ul></ul><ul><ul><ul><li>Preserve confidentiality and flow of information </li></ul></ul></ul>
  14. 14. Why Use an Investment Banker? (Cont.) <ul><ul><li>Gain access to a broad buyer universe </li></ul></ul><ul><ul><ul><li>Provide proprietary resources to identify potential buyers </li></ul></ul></ul><ul><ul><ul><li>Deep relationships with private equity firms (financial buyers) </li></ul></ul></ul><ul><ul><ul><li>Access to strategic acquirers </li></ul></ul></ul><ul><ul><li>Determine type of sale process </li></ul></ul><ul><ul><ul><li>Hard or modified auction </li></ul></ul></ul><ul><ul><ul><li>Negotiation </li></ul></ul></ul><ul><ul><ul><li>Pre-emptive sale </li></ul></ul></ul>
  15. 15. Why Use an Investment Banker? (Cont.) <ul><ul><li>Increase valuation and optimal deal terms </li></ul></ul><ul><ul><ul><li>Appropriately position Company </li></ul></ul></ul><ul><ul><ul><li>Provide buyers with information to assess value </li></ul></ul></ul><ul><ul><ul><li>Create competitive process </li></ul></ul></ul><ul><ul><ul><li>Pursue optimal transaction structure and deal terms </li></ul></ul></ul>
  16. 16. Criteria for Selection of an Investment Bank <ul><ul><li>Middle market sell-side focus </li></ul></ul><ul><ul><ul><li>Relevant transaction experience </li></ul></ul></ul><ul><ul><ul><li>Appropriate sized transactions </li></ul></ul></ul><ul><ul><li>Relevant industry experience </li></ul></ul><ul><ul><ul><li>Knowledge of the industry </li></ul></ul></ul><ul><ul><ul><li>Track record of success </li></ul></ul></ul><ul><ul><li>Relationships with buyer universe, financial and strategic </li></ul></ul><ul><ul><ul><li>Dedicated private equity coverage focus </li></ul></ul></ul><ul><ul><ul><li>Knowledge of and access to potential strategic acquirers </li></ul></ul></ul>
  17. 17. Criteria for Selection of an Investment Bank (cont.) <ul><li>Relationships with debt providers </li></ul><ul><ul><li>Experience with entrepreneurial companies </li></ul></ul><ul><ul><ul><li>Unique issues with closely held businesses </li></ul></ul></ul><ul><ul><li>Preservation of confidentiality </li></ul></ul><ul><ul><li>Senior banker commitment </li></ul></ul><ul><ul><ul><li>Ensures highest level of experience committed to the transaction </li></ul></ul></ul><ul><ul><li>References </li></ul></ul><ul><ul><li>Fee structure </li></ul></ul>
  18. 18. M&A Transaction Process Overview <ul><ul><li>Due Diligence. Conduct in-depth due diligence. </li></ul></ul><ul><ul><li>Valuation. Establish realistic goals and valuation. </li></ul></ul><ul><ul><li>Marketing Documents. Prepare comprehensive descriptive memorandum. </li></ul></ul><ul><ul><li>Buyer Identification. Research and provide access to a broad range of strategic and financial buyers. </li></ul></ul><ul><ul><li>Transaction Strategy. Develop an appropriate transaction strategy and sales process. </li></ul></ul>
  19. 19. M&A Transaction Process Overview (Cont.) <ul><ul><li>Lender Pre-Screening. Receive indicative terms from multiple lenders. </li></ul></ul><ul><ul><li>Transaction Marketing. Manage an efficient, effective and confidential marketing effort. </li></ul></ul><ul><ul><li>Negotiation. Negotiate optimal Purchase and Sale Agreement terms. </li></ul></ul><ul><ul><li>Closing. Achieve a timely close. </li></ul></ul>
  20. 20. M&A Transaction Process Overview (Cont.)
  21. 21. M&A Process Timetable <ul><ul><li>Typical sale process is approximately six months </li></ul></ul><ul><ul><li>Current market conditions may result in longer processes </li></ul></ul><ul><ul><ul><li>Tight credit markets </li></ul></ul></ul><ul><ul><ul><li>More stringent lender due diligence </li></ul></ul></ul><ul><ul><ul><li>Lengthier buyer due diligence </li></ul></ul></ul>
  22. 22. M&A Process Timetable (Cont.)
  23. 23. Management Team Effect <ul><li>Tish Squillaro </li></ul><ul><li>Partner </li></ul><ul><li>Penn Valley Group </li></ul>
  24. 24. Exit Strategy and Management Team Effect <ul><li>The Goal: </li></ul><ul><ul><li>Ensuring that your executive management team is on board with the exit strategy and will actively participate in the marketing process </li></ul></ul><ul><ul><li>Ensuring that the team will continue to keep their hearts and minds engaged during the transaction process. </li></ul></ul><ul><li>The Plan: </li></ul><ul><ul><li>The Art of Woo </li></ul></ul><ul><ul><li>The “WAM” Factor </li></ul></ul><ul><ul><li>Overcoming Resistance </li></ul></ul>
  25. 25. <ul><ul><li>As the business owner, you need to have a specific, thoughtful plan in place as you prepare to communicate the exit strategy to your management team. </li></ul></ul><ul><ul><li>Your goal will be to encourage a mindset that has your team willing to reach a consensus about the transaction that will give momentum to closing a successful deal. </li></ul></ul><ul><li>The Owner’s Role: Assume Nothing/Proceed with Caution/Plan </li></ul>
  26. 26. The Owner’s Role: Assume Nothing/Proceed with Caution/Plan <ul><ul><li>You must find a way of gaining support and “sell” the future as an opportunity for those managers who will help you to prepare for the deal and transition the knowledge to the new ownership. </li></ul></ul><ul><ul><li>Your team has to be groomed and grilled thoroughly to ensure that they properly communicate the message to the buyer. </li></ul></ul><ul><li>Your Objective: Gain consensus from your team so they will actively support the preparation of the deal and be willing to transition to the new ownership. </li></ul>
  27. 27. The Art of “Woo”* <ul><li>In their book, The Art of Woo , G. Richard Shell and </li></ul><ul><li>Mario Moussa discuss the importance of winning </li></ul><ul><li>others over with “idea selling”. They offer that the </li></ul><ul><li>ability to gain support and consensus can be achieved </li></ul><ul><li>using “relationship-based, emotionally intelligent </li></ul><ul><li>persuasion”. </li></ul>
  28. 28. The Art of “Woo”* <ul><ul><li>4 Step Approach : </li></ul></ul><ul><ul><li>Polish ideas/survey the landscape </li></ul></ul><ul><ul><li>Confront barriers (unreceptive, negativity) </li></ul></ul><ul><ul><li>Pitch in a compelling way </li></ul></ul><ul><ul><li>Secure individual commitments: research shows you need to move the individual before you can move the group </li></ul></ul><ul><ul><li>Top 3 Mistakes: </li></ul></ul><ul><ul><li>Focus on yourself: assume others care about what is important to you </li></ul></ul><ul><ul><li>Having no strategy: don’t wing it </li></ul></ul><ul><ul><li>Ignore the politics: you need to prepare an idea-selling campaign </li></ul></ul>
  29. 29. The “WAM” Factor <ul><li>W hat A bout M e?: </li></ul><ul><li>Whether stated or not, this question is front and center on the minds of your managers. You need to spend time considering what is important to them. </li></ul><ul><ul><li>Review your structure to ensure that titles and roles reflect the contribution of each manager. </li></ul></ul><ul><ul><li>Consider having a program in writing outlining what happens to your team after the transaction. </li></ul></ul>
  30. 30. The “WAM” Factor <ul><ul><li>Offer sufficient incentives in the form of options, shares or bonuses. </li></ul></ul><ul><ul><li>A “Stay Bonus” is money well spent, and will encourage your team to stay until the sale is completed. </li></ul></ul><ul><ul><ul><li>Budget six months to a year of salary for key people </li></ul></ul></ul><ul><ul><ul><li>As companies are usually interested in senior managers of business they acquire, a stay bonus guarantees some continuity, giving new owners a chance to examine your team and decide who is important to the future of the company. </li></ul></ul></ul>
  31. 31. Yes But/What If <ul><li>Be prepared to overcome resistance: </li></ul><ul><ul><li>Before meeting with managers, think of and write down every question they many possibly ask, using the who, what, why, when and how technique </li></ul></ul><ul><ul><li>Do your homework and make sure you can answer each question in a confident, reassuring manner. </li></ul></ul><ul><ul><li>Next, list any and all objections that come to mind, playing Devil’s Advocate: remember the WAM factor </li></ul></ul><ul><ul><li>Finally, write out your talking points for overcoming each objection. </li></ul></ul>
  32. 32. Summary <ul><li>PREPARE </li></ul><ul><ul><li>Before beginning any discussions, have a plan and prepare your talking points </li></ul></ul><ul><li>PITCH </li></ul><ul><ul><li>When discussing with your selected team, be an “influencer”, focus on what is important to them. </li></ul></ul><ul><li>PROCEED </li></ul><ul><ul><li>“ Rally” your team towards the future, and a successful, profitable event. </li></ul></ul><ul><ul><li>“ Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion .” Jack Welch </li></ul></ul>
  33. 33. Selection and Use of the Legal Team <ul><li>Robert Krauss </li></ul><ul><li>Partner </li></ul><ul><li>Ballard Spahr Andrews & Ingersoll, LLP </li></ul>
  34. 34. Selection and Use of the Legal Team <ul><li>Who </li></ul><ul><li>When </li></ul><ul><li>Roles </li></ul><ul><li>Ancillary Value </li></ul><ul><li>Cost </li></ul>
  35. 35. Selection and Use of the Legal Team <ul><li>Who </li></ul><ul><li>Existing Lawyer </li></ul><ul><li>Deal Firm </li></ul><ul><li>Size </li></ul><ul><li>Experience </li></ul><ul><li>Geography </li></ul><ul><li>Separate Counsel for Company, Owners, Employees </li></ul>
  36. 36. Selection and Use of the Legal Team <ul><li>When </li></ul><ul><li>As Early as Possible </li></ul><ul><li>Introduction to Investment Bankers </li></ul><ul><li>Negotiating Investment Banker Agreement </li></ul><ul><li>Corporate Clean-up </li></ul>
  37. 37. Selection and Use of Legal Team <ul><li>Roles </li></ul><ul><li>Deal Structure </li></ul><ul><li>Deal Agreement/Schedules </li></ul><ul><li>Indemnification </li></ul><ul><li>Caps </li></ul><ul><li>Employment Agreements </li></ul><ul><li>Carry </li></ul><ul><li>Buyer’s Financing </li></ul><ul><li>HSR </li></ul><ul><li>Getting to Closing </li></ul>
  38. 38. Selection and Use of the Legal Team <ul><li>Ancillary Value </li></ul><ul><li>Deal Tax Planning </li></ul><ul><li>Personal Tax Planning </li></ul><ul><li>Transition Issues </li></ul><ul><li>Introduction to Investment Counsel </li></ul>
  39. 39. Selection and Use of the Legal Team <ul><li>Cost </li></ul><ul><li>Size of Deal </li></ul><ul><li>Opposing Counsel </li></ul><ul><li>Complexity </li></ul><ul><li>Big Ticket Items </li></ul><ul><li>Budget </li></ul>
  40. 40. The Entrepreneurs Role Dr. Jo Webber
  41. 41. Main Types of Exit <ul><li>Planned </li></ul><ul><ul><li>IPO </li></ul></ul><ul><ul><li>Investment bank driven </li></ul></ul><ul><li>Unplanned </li></ul><ul><ul><li>Bankruptcy </li></ul></ul><ul><ul><li>Strategic pre-emptive </li></ul></ul>
  42. 42. Business as Usual <ul><li>Deals don’t always close </li></ul><ul><li>Limit and secure knowledge </li></ul><ul><li>Balance : </li></ul><ul><ul><li>Bringing in the right people to get the deal done </li></ul></ul><ul><ul><li>Distraction and uncertainty </li></ul></ul><ul><li>Test of your organizational skills </li></ul>
  43. 43. Three Legged Stool <ul><li>Owners </li></ul><ul><li>Customers </li></ul><ul><li>Employees </li></ul><ul><li>You represent the employees and your customers </li></ul>
  44. 44. Lead the Process <ul><li>Different opinions and ideas </li></ul><ul><li>Run the process as you run the business </li></ul><ul><li>Take responsibility and ownership even if it’s the first time for you </li></ul><ul><li>Main point of contact for bank, investors and potential acquirers </li></ul>
  45. 45. Some Elements <ul><li>The NDA </li></ul><ul><li>Teaser </li></ul><ul><li>CIM </li></ul><ul><li>Acquisition Targets </li></ul><ul><li>The Management Presentation </li></ul><ul><li>The Data Room </li></ul><ul><li>The Scheduling Issues </li></ul>
  46. 46. Plan for the Future <ul><li>Your Senior Management Team </li></ul><ul><ul><li>Uncertainty </li></ul></ul><ul><ul><li>Change </li></ul></ul><ul><ul><li>Doubt/Concern </li></ul></ul><ul><ul><li>“What's the CEO going to do?” </li></ul></ul><ul><li>Think through the different scenarios </li></ul><ul><li>Articulate a plan to your team </li></ul>
  47. 47. Understand the New Owners <ul><li>Key Objectives </li></ul><ul><li>Their structure </li></ul><ul><ul><li>Where your company fits in their organization </li></ul></ul><ul><ul><li>Employee fit </li></ul></ul><ul><ul><li>Product line fit </li></ul></ul>
  48. 48. Get the Messaging Right <ul><li>Your company </li></ul><ul><li>The acquiring company </li></ul><ul><li>Your customer base </li></ul><ul><li>Their customer base </li></ul>
  49. 49. The First Six Months <ul><li>Integration </li></ul><ul><li>‘New Company’ Culture </li></ul><ul><li>New Management Team </li></ul><ul><li>New Goals </li></ul><ul><li>New Customers </li></ul><ul><li>Getting back the balance </li></ul>
  50. 50. Question & Answer Session <ul><li>Presenters/Panelists – Your “Exit Strategy” Team </li></ul><ul><li>Howard Ross – The Investor </li></ul><ul><li>Karen Batchelder – The Investment Banker </li></ul><ul><li>Tish Squillaro – The Management Team Coach </li></ul><ul><li>Robert Krauss – The Lawyer </li></ul><ul><li>Jo Webber – The CEO/Entrepreneur </li></ul>