M&A Process Oct 2015

Jordan, Knauff & Company
INVESTMENT BANKERS
The M&A Process:
Selling a Business
October 2015

INVESTMENT BANKERS
Page 2
Agenda
 Intro
 Quick market update
 Preparing for a sale
 The M&A sale process
 Thoughts on valuation

INVESTMENT BANKERS
Page 3
Bill Snow
 Managing Director, Jordan, Knauff &
Company
• Middle market ($10M to $300M) investment
banking firm
 Author of Mergers & Acquisitions For
Dummies
 26 years experience
– Lots of errors, no trials

INVESTMENT BANKERS
Page 4
M&A: Fall2015
 Crazy time - Plenty-o-demand
• Thank you Federal Reserve, you crazy bubble maker you
 Supply is the problem
• Tons of dough chasing precious little supply = valuations
through the roof
• Anecdotally speaking – buyers losing out after bidding
7X, 8X even higher
 What do with proceeds?
• Iffy market returns
• ZIRP = “what the heck do I do with the pile of money I’d
get from selling my business?”
 Taxes
• Everyone cites as big factor, it’s not
• Lower better (of course) but if people want to do a deal,
they’ll do it
 Multiples – a function of many things
• Buyer want/need,Ahab, strategic fit, seller desperation

INVESTMENT BANKERS
Page 5
Preparing For a Sale
 Owner…make thyself
expendable (p 40)
 Fix up the balance sheet (pp
35-6)
• Pay down debt (p 37)
• Inventory should be saleable (p 36)
• Improve AR collections (p 36)
 Cut dead weight (p 38)
 Increase sales (p 39)
 The add-back machine (pp 146-7)

INVESTMENT BANKERS
Page 6
Avoid Serial for Breakfast
 You can do things in
parallel fashion!
• Time is now to begin planning
• Avoid “run business/sell business/do
something with dough”
 With a little help from your
friends (pp 79-88)
• Wealth Manager - first stop (pp 83-84)
• Lawyer - deal guy, not contract guy, not a
litigation guy (pp 86-7)
• Accountant (p 87-8)
• Investment banker (p 84-6)
 Set the chain of command (pp 43 & 92)
 Outside advisors and insiders (p 90)

INVESTMENT BANKERS
Page 7
KnowYour Process!
The Generally Accepted…
…Bill Snow Infused…
…12-Step M&A Process!

INVESTMENT BANKERS
Page 8
Step 1:TheTarget List (pp 46 & 95-101)
 Universe of Suspects
• 200 to 300
 Winnowed down to a list of prospects
• Approximately 100
 Collaborative Process
• Investment banker does the heavy lifting
 All prospects approved by Seller
• No need to constantly run back to Seller

INVESTMENT BANKERS
Page 9
Step 2: Contact! (pp 46 & 102-18)
 Broad auction vs. negotiated transaction
 The alchemy of phone and email
 Getting past screeners
 Buyers want to be contacted
• But don’t over play it
• Beware the Ides of Hyperbole

INVESTMENT BANKERS
Page 10
Step 3:TheTeaser (pp 47 & 121-24)
 Anonymous executive
summary
• Overview of the business -
does not expose company
identity
• Summary financial info
 Just enough info to “tease”
recipient
• “I wanna learn more!”
 Selling a business is sensitive
• May be harmful to Seller if competitors learn of the pending
transaction, however, competitors may be the right fit – be careful!

INVESTMENT BANKERS
Page 11
Step 4: Confidentiality (pp 47 & 124-29)
 If Buyer wants to learn more
• Sign a Confidentiality Agreement (CA)
 Buyer is legally required to NOT…
• Reveal confidential info
• Contact Seller
• Even mention discussions are ongoing!
 Is Buyer harmed by divulging he’s buying?
• It doesn’t
 Tip: attach the CA to the teaser

INVESTMENT BANKERS
Page 12
Step 5:The “Book” (pp 47-8 & 131-53)
 Many names
• CIM, COM, Information Package
• Digital (watermark provides level of
security)
 Huge amount of info
• Narrative (history, products, sales &
marketing, employees)
• Financial info
• Assets, facilities
 Enough to make an offer
 Staggered release
• Customer names, asset detail, other
info, not released (yet)

INVESTMENT BANKERS
Page 13
Step 6: Indication of Interest (pp 48 & 155-61)
 Written document
• Valuation range
• Non-binding
 Warning!
• Do not grant exclusivity at this point!
• Do not proceed to a meeting without
knowing what a Buyer is prepared to
pay

INVESTMENT BANKERS
Page 14
Step 7: Management Meeting (pp 48 & 163-72)
 “Wizard of Oz” moment
• 2D to 3D, B&W to color
 Seller provides update since
book was published
• Primarily financial, sales guidance
• Any other pertinent updates
 Facilities visit
• May or may not be important
• Seller may want to conduct meeting on neutral ground
 The all important Q&A session
• Do both sides play well in the sandbox? Chemistry?

INVESTMENT BANKERS
Page 15
Step 8: Letter of Intent (LOI) (pp 48 & 199-210)
 Firm offer
• Specific valuation
• Steps to close
• Still non-binding
 Exclusivity
• Probably will be granted by Seller
 How will Buyer finance
transaction?
 Pick the “best” one

INVESTMENT BANKERS
Page 16
Step 9: Due Diligence (pp 49 & 211-27)
 Open the kimono time
• My publisher hated that phrase
 Full disclosure
• Contracts, financials, employee
info, etc
• Customer data, recipes,
formulas, trade secrets,
software code, etc. should be
among the last info provided

INVESTMENT BANKERS
Page 17
Step 9: Due Diligence, cont. (pp 49 & 211-27)
 Cavalcade of consultants
• Auditors (earnings tests, inventory)
• Lawyers
• Sundry (marketing, database, IT,
environmental)
• Consultants to consultants
 Secure online data room
• Central repository, Security (watermark)
• Seller controls the process of what
information is shared…and when

INVESTMENT BANKERS
Page 18
Step 10: Purchase Agreement (pp 49 & 229-42)
 Final document
• Binding (at last!)
 First draft can often frame the
discussion
• Buyer usually provides first draft (no law
against Seller trying to)
• Keep it fair (one sided documents slow
down the process)
 Drafted in parallel with due diligence
 Beware of redline ping-pong
• Pick up the phone

INVESTMENT BANKERS
Page 19
Step 11: Closing (p 49 & 245-52)
 Flow of funds statement
 Sign this and sign that
 Closing should be a
mere formality
• All work should be done
prior to closing

INVESTMENT BANKERS
Page 20
Step 12: Post Closing Stuff (pp 49-50 & 253-60)
 Collecting final
payments
• Earn outs, notes, etc
 Integration issues
 Continued
involvement
• Employment or
consulting

INVESTMENT BANKERS
Page 21
Understanding the M&A Process means…
 You will be prepared
• You’ll know what comes next instead of being surprised
 You will control the proceedings
• Proactive vs. reactive
 You will frame the discussion
• The other side will be responding to you
 You get to define the value proposition
• The other side isn’t going to make your case

INVESTMENT BANKERS
Page 22
Valuation is a complex mathematical formula…
 That largely depends
upon what side I’m
representing
 What is it?
• How is it determined?
• What enhances it?
• What hurts it?

INVESTMENT BANKERS
Page 23
Valuation #1
In the eyes of many business owners,
Valuation =
[Range of Multiples] X EBITDA

INVESTMENT BANKERS
© Jordan, Knauff & Company. Proprietary and Confidential. 24
Valuation #1 is simple, straightforward…
 Timing of payments
– Is Seller getting paid at close? Over time?
 Form of consideration
– Cash at closing
– Contingent payments are at risk of retrade by Buyer
 Stock in the acquiring company?
 Seller note – in other words, is Seller financing the transaction? Lowers net present value
 Earn out – Performance risk
 Working capital adjustment
– AR/AP
– Inventory
 Stock vs. Asset
– Does it really make a difference?
 Talk with your tax advisor
…and often not the full story

INVESTMENT BANKERS
Page 25
Valuation #2
For many investment banking creatures,
Valuation =
{[Range of Multiples] X adjusted EBITDA} +
cash – debt +/- working capital adjustment

INVESTMENT BANKERS
Valuation #2 – Investment Bankers
 “Add Backs” are expenses that will go away after a change of ownership or one
time only expenses that won’t be incurred again.
– Adjustments to Owner’s Compensation
 Might also include payroll taxes and benefits
– Severance and lawsuit settlement
– Personal expenses - FAAP
 The Clubs (country, hunting, health, etc.)
 Car expenses
 Family members
 Travel, meals, entertainment
– Rent
 Are your facilities owned or leased? Are you paying over/under or at market rates?
 Working Capital
– “Normal is expected”
– Any issues with AR/AP, inventory?
Get to Adjusted EBITDA by Adding Back Expenses

INVESTMENT BANKERS
Page 27
Valuation #3
In a more complete understanding,
Valuation =
{[Range of Multiples + enhancers -
detractors] X adjusted EBITDA} + cash –
debt +/- working capital adjustment

INVESTMENT BANKERS
Valuation #3
Enhancers to Valuation
Growth
Profits
Management team
Customer relationships
– “Long & Strong”
– No concentrations
Non-competes with sales force
Unique expertise
– Intellectual Property (patents, trade secrets)
– Sales/marketing approach
Use of Technology
Physical plant/offices/files
– Organized?
– Clean and tidy?
Detractors to Valuation
Management
– Lack of bench strength/managers about to
retire
– Lack of succession plan
Market is declining/out of favor
Customers
– Concentration
– Financial weakness
Lack of non-competes with sales force
Poor labor/union relations
Unproductive employees
Dirty, unorganized facility/offices

INVESTMENT BANKERS
Page 29
What can the owner do?
 Tout enhancers
 Fix or address the detractors
• Bad financials? - start now
• Market decline? - time is not your friend, act now
• Customer concentration/weakness - find new or stronger ones!
• Union/labor relations - tricky, need long term plan
• Lack of non completes - tricky, need to offer something
• Senior staff ready to retire - groom young ones or hire new ones
• Unkempt/deteriorating physical plant - clean it up, fix it, or throw it out!

INVESTMENT BANKERS
Page 30
Thank you for listening
Contact info:
Bill Snow
Managing Director
312-254-5904
200 W. Madison St
Suite 980
Chicago, IL 60606
wsnow@jordanknauff.com

M&A Process Oct 2015

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