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The Presentation
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- 5. Initial Evaluation: The First Look Company Industry Financial •Management team (bench strength) • Value proposition and differentiation • Business model economics • Relationships with customers and suppliers • Organizational model (e.g., incentive compensation) • Competitive dynamics • Industry size and growth • Cyclicality • Fragmentation vs. consolidation • Identification of key risks • Comparable company analysis • Financial model (historical and projected) • Working capital • Capital expenditures • Capital structure and leverage • Investment security • Target returns • Valuation 5
- 6. Valuation: In the Eye of the Beholder • Discounted Cash Flow analysis – Incorporates the theory of a Discounted Cash Flow analysis –Importance of sensitivity/scenario/simulation modeling – Focus on Free Cash Flow and debt covenants • Public Company and Transaction Comparable Analysis – Only as good as the comparability of the companies used – May need to interpolate between multiple sets of comps • Value of Assets – Consider value based on assets rather than cash flow Valuation is an art not a science 6
- 7. Due Diligence: Trust but Verify • Management – Background and reference checks –In‐depth interviews – Employment agreements • Company and Industry – Speak with industry experts, customers and suppliers – Validate company value proposition and industry dynamics – Quantify possible risks • Accounting • Independent accounting review • Legal • Identify any outstanding litigation and potential liabilities • Intellectual property and patents • Insurance • Understand scope of coverage required and currently in place 7
- 8. Case Study: Financing LBO $0.0 $20.0 $40.0 $60.0 $80.0 $100.0 Uses Sources and Usesin a Leverage Buyout $Millions Sources Purchase Price $100.0 Million Fees and Expenses $100.0 Million Senior Debt Equity Subordinated Debt Key Terms • Type of security (preferred equity or common) • Pay‐in‐Kind (“PIK”) Coupon • Term of loan • Amortization schedule • Rate • Covenants • Often a “bullet” loan • May ask for warrants • Often a “bullet” loan • May ask for warrants 8
- 9. Value Creation: Ideas into Action • Board of Directors representation – Identify new Directors with relevant experience who can assist the Company –Develop a “100 day plan” • Augmenting the Management Team – If necessary, recruit new CEO/ CFO – Identify functional areas to add additional talent – Incentive key players • Execution of the growth strategy – Buy and Build: Add‐on acquisitions – Accelerating Growth: Investments in new products or markets – Transformation: Professionalize operations 9
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- 14. Exits: Realizing the Investment • Initial Public Offering (“IPO”) • Sale to strategic buyer (e.g., industry competitor) •Sale to another Private Equity Fund (“Financial buyer”) • Sale to management (Management buyout or “MBO”) • Recapitalization (raise debt and provide a dividend to the equity sponsors) 14
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