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ASA Wisconsin Chapter November Meeting Presentation- (11-07-14)

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Brenen Sieber,Partner with Baker Tilly Virchow Krause, LLP and Managing Director with Baker Tilly Capital, LLC, spoke at our November Chapter Meeting on the Current State of the M&A Market.

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ASA Wisconsin Chapter November Meeting Presentation- (11-07-14)

  1. 1. 1 Baker Tilly Capital, LLC ©Baker Tilly Virchow Krause, LLP M&A Presentation 11/07/14
  2. 2. 2 Introduction
  3. 3. 3 Table of Contents 3 I. Overview of Baker Tilly Capital............................................................... 4 II. Current Market & Trends......................................................................... 8 III. Valuation Considerations........................................................................ 17 IV. Sale Process & Timeline......................................................................... 21
  4. 4. 4 4 Overview of Baker Tilly Capital
  5. 5. 5 Overview of Baker Tilly Capital Subsidiary of Baker Tilly › Baker Tilly is the full service accounting and advisory firm › Ranked as one of the twenty largest certified public accounting firms in the U.S. according to Accounting Today’s “Top 100” list 5 Baker Tilly Capital › Boutique investment bank › Specializing in merger and acquisition, transaction, and corporate finance services. › Completed hundreds of transactions representing billions of dollars › Clients include public companies, privately held companies, and private equity groups We speak your language and identify with your goals to consistently deliver solutions that are just right for you
  6. 6. 6 Overview of Baker Tilly Capital Independent member of Baker Tilly International › World’s 8th largest accounting and business services network. › Represented by 161 firms in 137 countries with more than 26,000 people in 738 offices. › Integrated teams with in-country operations for: Canada, China, Mexico, and UK. Blue shading represents the Baker Tilly International global network.
  7. 7. 7 Baker Tilly Advantages Compliance Services Tax Strategy Services People Services Consulting Services Transaction Services Employee Benefits Services International Trade Investment Advisor Services ˃ Audits, Reviews, Compilations ˃ Specialized Financial Reports ˃ Budget Analysis & Development ˃ Proforma & Projected Financial Statements ˃ Accounting System Review ˃ Internal Audit Review ˃ Tax Planning ˃ Tax Return Preparation ˃ Cost Segregation Studies ˃ Estate Planning ˃ Retirement / Pension Planning ˃ Sales / Use Tax Consulting ˃ State Income and Franchise Tax Planning ˃ Property Tax Consulting ˃ Temporary and Permanent Placement ˃ Direct Hire Placement ˃ Succession Planning ˃ Operations Management ˃ Customer Management ˃ Financial Management ˃ Technology Management ˃ Strategic Sourcing ˃ International Trade – Marketing, Sourcing, Global Strategies, and Compliance ˃ Mergers and Acquisitions ˃ Investment Banking Services ˃ Due Diligence ˃ Valuation Services ˃ Financial Modeling ˃ Business Review Services ˃ Dispute Services ˃ Health & Welfare Employee Benefits Consulting ˃ Independent Insurance Brokerage ˃ Provider Due Diligence ˃ Regulatory Compliance ˃ Risk Management & Insurance Program Review ˃ Market Expansion ˃ Sourcing ˃ Global Strategies ˃ Compliance ˃ Complex Tax Consulting ˃ Transaction Support ˃ In-country Support ˃ International Risk Analysis ˃ Fiduciary Review ˃ Fee-based Independent Investment Consulting ˃ Unlimited Open Access to Investments ˃ Leverage Plan to Reduce Costs ˃ Fiduciary Protection for Plan Sponsor ˃ Employee Education Baker Tilly Capital can provide a greater breadth of services than any other regional investment banking firm
  8. 8. 8 8 Current Market & Trends
  9. 9. 9 U.S. Financial Markets U.S. GDP & Stock Growth U.S. GDP Growth Rate › U.S. GDP has improved US GDP Date Growth Rate 30-Jun-2014 4.06% 31-Dec-2013 4.57% 31-Dec-2012 3.47% 31-Dec-2011 3.64% 31-Dec-2010 4.56% 31-Dec-2009 0.11% 31-Dec-2008 -0.92% 31-Dec-2007 4.40% 31-Dec-2006 5.12% 31-Dec-2005 6.52% 31-Dec-2004 6.31% Source: U.S. Bureau of Economic Analysis significantly since the recession, increasing from essentially zero in 2008 & 2009 to 4.1% in June 2014. › It is anticipated the 3rd quarter 2014 GDP growth rate will be approximately 4.6%, more closely aligning to CY 2013. › Using the S&P 500 index as a benchmark, the U.S. stock market is outperforming its pre-recession numbers. › In Sept. 2014 the S&P 500 hit record highs with prices above $2,000, but since has retreated 5.2%. The fed was going to raise interest rates, but that is currently on hold as prices have stabilized. U.S. Historical Stock Prices S&P 500 Date Stock Prices % Change 10-Oct-2014 $1,906 3% 31-Dec-2013 $1,848 30% 31-Dec-2012 $1,426 13% 30-Dec-2011 $1,258 0% 31-Dec-2010 $1,258 13% 31-Dec-2009 $1,115 23% 31-Dec-2008 $903 -38% 31-Dec-2007 $1,468 4% 29-Dec-2006 $1,418 14% 30-Dec-2005 $1,248 3% 31-Dec-2004 $1,212 Source: Yahoo Finance S&P 500 Data
  10. 10. 10 Baby-boomers – Effect on M&A Impending Retirement of the Baby-boom Generation › We live in an aging world with birth rates down and baby boomers retiring (10,000 per day according to Pew Research Center). › We are now on the cusp of what is expected to be the greatest wave of business transition in U.S. history. › A great deal of the assets held by baby boomers (which represent a huge pool of wealth) will be up for sale as they begin to transition from the “working” years to the “Golden” years. › Those near retirement will seek to take some (if not all) of their chips off the table and shift their “business” assets into more diversifiable “liquid” assets. › Below are some compelling statistics surrounding baby boomers: › A survey by another international accounting firm, one third (33%) of global businesses are planning a sale in the next 2 years, and over 50% selling within the next 10 years. › Ninety percent of all businesses with employees are family owned, and one-third of Fortune 500 firms are family controlled. › Children of baby boomers are less likely to take over the family business as only a third of family businesses are successfully transferred to the next generation. › As we are currently experiencing a seller’s market in M&A, this trend could soon see a dramatic shift as more companies are up for sale.
  11. 11. 11 M&A Available Capital Available Capital › American companies are sitting on trillions of dollars worth of cash despite slightly decreasing from 2013 › Investors have demanded a higher return on their investment and M&A remains a key focus to achieve such returns › Deal flow has slowed in Q3 2014 as valuations continue to increase in a sellers market › Although private equity activity is down from Q2 2014, PE firms continue to sit on significant amounts of dry powder which is required to be put to use in the near future › If Q4 2014 activity is in-line with this years previous quarters, 2014 could still set post-crisis highs for both deal flow and capital invested
  12. 12. 12 M&A Market Deal Activity U.S. Middle-Market M&A Activity 3,955 3,849 3,866 3,634 3,598 3,314 5,394 4,559 4,409 2,992 2,267 2,514 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 9/13 YTD 9/14 YTD 6,000 # of Transactions - $500M - $1B # of Transactions - $100M - $499M # of Transactions - <$100M Deal Value 5,000 4,000 3,000 2,000 1,000 0 # of Deals # of Transactions - $500M - $1B 134 143 178 225 120 78 173 151 168 171 120 137 # of Transactions - $100M - $499M 781 795 862 852 598 427 688 760 717 711 511 633 # of Transactions - <$100M 3,040 2,911 2,826 2,557 2,880 2,809 4,533 3,648 3,524 2,110 1,636 1,744 # of Transactions - Middle Market 3,955 3,849 3,866 3,634 3,598 3,314 5,394 4,559 4,409 2,992 2,267 2,514 Deal Value $338 $350 $400 $421 $277 $194 $341 $346 $343 $329 $233 $281 $600 $500 $400 $300 $200 $100 $0 Deal Value Source: Dealogic and Robert W. Baird ▪ Although it was a slow start to 2014 for M&A, deal volume YTD 2014 is up compared to 2013. ▪ Average number of transactions <$100M from 2004–2012 was 3,192 which was down 33.9% in 2013 to 2,110 deals. ▪ Assuming the current run rate of YTD 9/14 transactions <$100M for CY 2014 will be increase 10.2% compared to CY 2013.
  13. 13. 13 M&A Market Deal Valuation LTM Sep U.S. Middle Market Enterprise Value to Median EBITDA, EBIT, and Revenue Multiples Transaction Size 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 EV/EBITDA <$100M 7.6x 9.2x 8.1x 8.5x 7.8x 7.0x 7.0x 8.3x 7.1x 6.8x 7.8x $100M - $499M 9.0x 9.9x 9.2x 11.2x 11.1x 8.1x 10.1x 9.3x 9.1x 9.5x 9.9x $500M - $1B 10.3x 10.1x 12.0x 10.8x 10.6x 7.8x 9.0x 9.9x 8.7x 8.4x 8.6x Middle Market 8.6x 9.7x 9.2x 9.9x 9.5x 7.6x 8.6x 9.2x 8.1x 8.4x 8.8x EV/EBIT <$100M 9.6x 10.8x 10.0x 10.8x 10.1x 7.8x 10.3x 11.3x 10.3x 12.5x 11.3x $100M - $499M 11.7x 13.5x 13.3x 14.5x 13.7x 11.0x 12.2x 12.8x 13.0x 13.7x 13.8x $500M - $1B 14.0x 13.8x 17.0x 16.1x 13.7x 13.6x 13.4x 12.9x 13.8x 13.6x 11.7x Middle Market 11.2x 12.4x 12.5x 12.8x 11.6x 9.7x 11.3x 12.1x 11.9x 12.5x 12.5x EV/Revenue <$100M 0.95x 0.95x 0.96x 0.92x 0.91x 0.80x 0.94x 1.00x 0.81x 0.83x 0.82x $100M - $499M 1.34x 1.31x 1.24x 1.27x 1.30x 1.22x 1.24x 1.39x 1.36x 1.43x 1.43x $500M - $1B 1.33x 1.55x 1.69x 1.51x 1.42x 1.46x 1.56x 1.04x 1.23x 1.36x 1.64x Middle Market 1.11x 1.10x 1.08x 1.01x 1.00x 0.90x 1.07x 1.14x 1.00x 1.01x 1.09x Source: Capital IQ and Robert W. Baird & Co. ▪ Deal multiples of EBITDA have remained stable for lower middle market companies and are starting to see a slight uptick in 2014 ▪ Multiples of companies less than $25 million transaction value typically realize a lower multiple range
  14. 14. 14 M&A Market Deal Financing 0.9x 3.0x Middle Market - Debt Multiples 1.0x 1.0x 0.8x 1.1x 2.4x 2.4x 2.6x 2.7x Equity and Debt Contributions 35.5% 37.0% 37.0% 38.4% 40.3% 13.9% 15.0% 16.1% 12.3% 16.9% 100.0% 80.0% 60.0% 40.0% 20.0% ▪ Middle market debt markets have stabilized, with capital markets and banks showing an appetite for risk with quality deal attributes 5.0x 4.0x 3.0x 2.0x 1.0x 0.0x 2010 2011 2012 2013 2014 YTD Sr Debt/EBITDA Sub Debt/ EBITDA 50.7% 48.0% 46.8% 49.3% 42.7% 0.0% 2010 2011 2012 2013 2014 YTD Equity Sub Debt Senior Debt
  15. 15. 15 M&A Current Trends M&A Current Status › Deal activity rebounded strongly in Q2 2014 and the uptick is expected to continue throughout the second half of 2014 › High level of capital in the market place ready to be put to use for both strategic and financial buyers › Aggressive financing markets with interest rates at historical lows › Strong macro-economic conditions has helped renew market confidence › Low supply and strong demand for quality companies have continued to push multiples upward › High competition for sell-side engagements due to limited supply › Potential success in receiving mandate can be challenging without prior relationship
  16. 16. 16 M&A Future Trends M&A Future Outlook › Previously challenging environment starting to pick up again based on recent data. › Strategic and financial buyers have large cash reserves and excess capital. › Credit on favorable terms is readily available. › Demographics point toward greater sell-side transactions, transfers of wealth from the baby boomer group as they move into retirement age. › Opportunities in emerging markets. › CEO confidence seems to be on the rise. › Increasing valuations. › China should continue to be a buyer of resources and intellectual property. › Weaker yen means Japan could be a strong acquirer on international growth. › Increased deal activity expected in the following sectors: › Industrial/Manufacturing › Food & Beverage › Health Care › Energy
  17. 17. 17 17 Valuation Considerations
  18. 18. 18 Determining Value What is a company’s value? › Traditional seller value expectations › Country club value (two companies are never identical) › A number ($5 million for each of four children or what the seller needs to retire) › Logical (see valuation chart on next page) › Discounted cash flow model based on projections › Multiple of EBITDA, revenues, cash flow › Asset value › Most logical › What a buyer will pay for a business, combined with a strategic process to drive value by maximizing negotiating leverage and competition among buyers The market will determine value – just like in real estate. A business can be cleaned up by understanding attributes that drive interest and value.
  19. 19. 19 What is the Company Worth? Bridging Valuation › Examine key metrics of valuation for specific industry › In depth analysis of quality of customer relationships and suppliers › Key end markets served › Strength of backlog and contracts › Growth opportunities › Geography › Recurring service & revenue › Analyze non-operating and non-recurring expenses for potential add-backs to EBITDA
  20. 20. 20 Attributes that Drive Interest and Value Company Characteristics Increases Value Decreases Value General Business Attributes Market Position Industry leader in an identified niche Small player in highly competitive market Product Differentiation Proprietary and/or branded products, registered IP Commodity products and/or contract manufacturing Industries Served Attractive, growing, diverse industries Mature, cyclical, concentrated industries Growth Opportunities Strong organic growth prospects and excess capacity Weak organic growth prospects and nearing full capacity Infrastructure / Capex Up-to-date, well maintained equipment and technology Deferred maintenance with significant capex required Financial Attributes TTM Revenue Over $20 million in annual revenues or large for market Under $20 million in annual revenue or small for market TTM Adjusted EBITDA Over $3 million in EBITDA or high for market Under $3 million in EBITDA or low for market Historical Rev. & EBITDA Trends Consistent growth and profitability Declining or volatile earnings, losses or recent turnaround Asset Base Adequate asset base to support leverage Inadequate asset base to support leverage Capital Expenditures Low annual capital investment requirements Highly capital intensive Customer Attributes Customer Concentration Diverse customer base (no customer > 15% of sales) High customer concentration (customers > 30%) Recurring Revenue High amount of recurring rev., multi-year customer contracts High customer turnover with low recurring revenue Length of Relationship Average top customer relationship > 5 years Average top customer relationship < 5 years Management & Workforce Management Team Talented young team with desire to continue post sale Key management retiring / leaving after sale Average Employee Tenure High tenure / low turnover Low tenure / high turnover Union Non-union workforce Unionized workforce
  21. 21. 21 21 Sale Process & Timeline
  22. 22. 22 Starting the M&A Process Seller Advantages Motivations Buyer Motivations • Owner succession planning • No heirs or family transition • Entrepreneur need of capital or shift in focus • Industry consolidation • Increased geographic reach with larger partner • Market value • Transition to employees Disadvantages • Growth through: • Acquisitions • Geographic expansion • Products/Services • Diversification • Technological advancement • Industry consolidation
  23. 23. 23 Sale Phases and Timeline Phase 2 Marketing Program Implementation Phase 4 Contract Negotiations Phase 3 Respond to Buyers Due Diligence Phase 1 Education & Document Prep › Gather information about your company › Review market and industry data › Discuss best options for strategy › Create Confidential Information Memorandum (CIM) › Develop database of potential buyers › Proactively approach buyers › Send out teasers and Non-Disclosure Agreements (NDAs) › Manage distribution of CIMs › Qualify interest levels › Respond to buyer due diligence requests › Convey company’s strengths and opportunities › Lead pre-negotiations › Facilitate non-binding Letter of Intent (LOI) › Conduct early negotiations › Maximize value of transaction › Understand and communicate economic and tax considerations › Negotiate LOI to address buyer terms and conditions › Close successful acquisition 4 Weeks 6 Weeks 5 Weeks 5 Weeks
  24. 24. 24 Sale Process and Timeline 24 # of Weeks Strategic Planning 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Client / management discussions Gather business & financial information Marketing strategy development Compile buyers list Materials Authoring Confidential Information Memorandum (CIM) Authoring teaser Create Non-Disclosure Agreement (NDA) Prepare data room materials Select phase II buyers Marketing Contact buyers Issue teasers Issue Confidential Information Memorandums (CIMs) Buyer follow-ups Negotiation and Due Diligence Detailed analysis of buyer Further negotiate terms and structure Select preferred buyer Finalize Transaction Draft and execute definitive agreement Conduct due diligence Close transaction
  25. 25. 25 25 Questions

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