Ownership Succession / Transition Strategies

Transcription

1 ship Succession / Transition Strategies Maner Costerian Solutions Conference November 2017 Tom Ziemba, PhD BDO USA, LLP tziemba@bdo.com BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. Today s Agenda ship transition and succession overview Benefits of having an ownership transition plan Transition alternatives including M&A activity Factors that influence selection of transition alternatives 2 1

2 ship Transition Principles Effective ownership transition addresses owner specific issues, leadership succession, and comprehensive personal and corporate planning. ship succession is accomplished by balancing the interests of all stakeholders to result in a win-win outcome. Most businesses that do not have an ownership succession plan end up selling. 3 Value Creating Capabilities An Integrated Solution Requirements Strategic Goals Leadership Succession Alignment of Rewards Stakeholders Strategy Leadership Executive Compensation 4 2

3 Privately-Held Companies Generational Impact 6 million privately held companies currently operate in the US representing approximately $30 trillion in sales 63 % are owned by baby boomers ranging in age from 53 to 71 5 All baby boomers will turn 70 within the next 17 years which leaves 4 million businesses up to transition or about $10 trillion 80-90% of most owners financial assets are bound up in the business itself (Source: Exit Planning Institute) Leadership Succession 43% of family businesses don t have a succession plan in place, with only 12% making it to the 3 rd generation 55% of private companies have a succession plan in place for at least some senior roles, of these: 15% have a plan in place for ALL senior executives 18% have a plan in place for MOST senior executives 21% have a plan in place for A SMALL NUMBER of senior executives Remainder have a mental image of the plan!!! (Source: PWC) Succession versus Transition Transition Strategy Its all about the perceived enterprise value What is the best approach to unlock the value in the company? 2/3 of business owners of privately-held businesses are not familiar with all of their exit options (Source: Exit Planning Institute) Succession Strategy Its all about the people Can the company thrive until the transition is completed? 39% of companies do not have a single internal candidate who they deem prepared to immediately assume the CEO position (Source: Institute of Executive Development and Stanford University) 6 3

4 Benefits of a Transition Plan An effective ownership transition plan will result in the following benefits: Management Allows ownership to engage advisors (e.g., estate planning) at the right time and in the right sequence Identifies the investment required to maximize ROI Aligns key managers with ownership goals Planning Promotes the development of a strong vision for the Overlays estate planning with company potential Reduces uncertainty and turnover of key management s Provides an opportunity to entertain multiple transition options Maximizes the realized value delivered to the shareholders Addresses family issues in an objective manner Provides a realistic assessment of enterprise value 7 ship Transition owner-investor transfer/ Management 8 4

5 Key Considerations Specific s net worth outside the Likely future tax positions The ability of the to succeed without the owner(s) Family members (next generation) interest in the Capabilities and demographics of key stakeholders (nonowners) Specific The value of the The strength of the business model The growth prospects for the and the industry as a whole The capabilities of the leadership team excluding the owner Top management s interest in the Personal timeline Investment requirements 9 Other Key Considerations desire for a legacy commitment to key people The s vision of their lives without the view and attitude toward risk trust in the key people knowledge about the options 10 5

6 -Investor ownerinvestor Definition transfer / Mgmt. The owner transitions to a governance role and retains ownership. May add personal /borrowed capital to maximize ROI. ADVANTAGES DISADVANTAGES (s) can choose to partially retire, switch to working part-time or fully retire Allows the to continue with a potential for rejuvenation, new ideas, and redirection (s) can retain certain benefits, some compensation, and legacy/identity Top management team may not have capabilities for this option Perceived risk increases when owner(s) relinquish management control Richer compensation package for key employees Can be done without an internal transfer of ownership Must have viable growth oriented business model Potential asset for family members Total value realized over longer time horizon 11 ownerinvestor Definition transfer / Mgmt. When a terminates operations and the owner(s)/shareholders receive the remaining market value of the s assets less liabilities. ADVANTAGES Maintain and control the until final liquidation event DISADVANTAGES Difficult to retain talent requires special compensation plans Often can wind down gradually or quickly, depending on ownership goals Typically results in lower financial return to the owner(s) (e.g., holding costs impact returns) Compensation and benefits provided to owners as long as profitability and cash flow will support the expense (s) do not leave any legacy 12 6

7 Employee Stock ship Plan () ownerinvestor Definition Companies provide their employees with stock ownership, often at no up-front cost to the employees, as both a reward and motivational tool. shares are part of an employee s compensation or retirement package. (Source: transfer / Mgmt. ADVANTAGES DISADVANTAGES (s) do not have to sell a majority interest. Can be expensive to maintain Allows owner(s) to cash out immediately or over time Requires owner(s) to reduce pay to reasonable market levels if they are paid above market Can be used in combination with other plans Committee requirements Tax advantage to the seller, depending on the type of ownership structure of the Reduces the amount of money a can contribute to other qualified retirement programs Allows employees to purchase with tax deductible contributions to the Employee-owned companies tend to perform well Reduces the ownership opportunities for other buyers/investors Requires threshold cash flow and profitability to make an viable in the long-term 13 Definition happens when two firms, often of about the same size, agree to go forward as a single new company. Both companies' stocks are surrendered and new company stock is issued in its place. Acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. ADVANTAGES transfer / Mgmt. DISADVANTAGES ownerinvestor Continuity of the in some form within the context of the new entity The post-merger entity will typically have greater resources and a stronger business model Talent retention and culture integration are issues Move from a family/owner focused structure to a corporate organizational structure Provides better retirement or return on capital if other alternatives are not attractive Adjustments made to compensation and retirement Facilitates the owner s retirement or redefinition of his/her role Increased formality in operating agreements, employment agreements, etc. 14 7

8 Definition Sale and transfer of total ownership to an outsider. Typically, the current owner has opportunities for larger financial gain. transfer / Mgmt. ownerinvestor An outsider" refers to several types of potential buyers including: competitors, private equity groups, suppliers, individual investors, etc. ADVANTAGES Maximizes return for the owner(s) DISADVANTAGES Employment brand undergoes change Potential continuity of the company and continued employment Full exit opportunity, however, the future role of owners dependent on buyer interests Typically reduces compensation of current owner(s) during transition Requires multiple advisors to execute the deal Satisfaction from building or managing an asset that is attractive in the marketplace Change in culture from owner(s) to new owner(s) Timing may not sync with retirement plan 15 BDO Capital Advisors: Target Market Sell-Side M&A Clients Quality companies commanding 8.0x EBITDA or more. What are some key attributes? - Good management - Stable to growing revenue and profitability - Stable to growing industry-end markets - Future earnings visibility - Minimal customer, supplier concentration - High-quality financial information/supportable EBITDA adjustments - Minimal surprises low/no contingent liabilities - Strong competitive market position - Well thought out growth strategy 16 8

9 M&A Market Overview U.S. Middle Market M&A Activity Continues to Level Off The M&A market is cyclical with a variety of factors impacting activity The last up-cycle lasted three years ( ) - average cycle 4.5 years Drop in 2016 largely due to election and economic uncertainty Supply/demand imbalance continues, creating attractive liquidity options for sellers U.S. Annual Middle Market M&A Activity 350,000 8, ,000 7,000 Implied Enterprise Value ($ in millions) 250, , , ,000 50,000 6,000 5,000 4,000 3,000 2,000 1,000 Number of Transactions 0 0 Implied Enterprise Value ($M) Number of Announced Deals Source: S&P Capital IQ; includes deals <$500M *YTD through 9/30 17 M&A Market Overview Timing the M&A Cycle to Maximize the Value of a Sale M&A market cycles result in dynamic pricing sellers should time the cycle to maximize value Market conditions also influence structure, terms, and closing rates Abundant capital and not enough quality opportunities have raised prices and lowered deal volume U.S. Annual Middle Market EV/EBITDA Multiples 11.0x 10.4x EV/EBITDA 10.0x 9.0x 8.0x 9.5x 9.0x 9.1x 8.4x 8.1x 8.1x 8.1x 9.0x 9.1x 9.9x 10.0x 7.7x 8.7x 9.2x 8.4x 8.8x 9.3x 8.3x 8.5x 9.5x 7.0x 6.0x YTD* 2017 Median EV/EBITDA 9.5x 9.0x 9.1x 8.4x 8.1x 8.1x 8.1x 9.0x 10.4x 9.1x 9.9x 10.0x 7.7x 8.7x 9.2x 8.4x 8.8x 9.3x 8.3x 8.5x 9.5x % Change YOY -5% 1% -7% -4% 0% 1% 11% 15% -12% 8% 1% -23% 14% 6% -9% 5% 6% -11% 3% Source: S&P Capital IQ; Represents deals valued <$500 with EV/EBITDA multiples between 3x and 20x *YTD through 9/

10 M&A Market Overview Outlook M&A fundamentals point to increased deal making in Q and 2018 The abundance of capital pursuing a limited number of acquisition opportunities has created a supply/demand imbalance likely to bring more sellers to market Hope for a stronger U.S. economy and signs of a pickup globally Robust corporate earnings Continued upsurge in public equity markets Excess cash on corporate balance sheets $906 billion in global private equity dry powder Healthy debt market, but rising interest rates Valuation multiple expansion Possible lowering of tax rates may trigger an increase in volume Potential for decrease in regulatory burden Optimistic business environment with increasing confidence 19 Transfer / Mgmt. Buyout Definition Provides an opportunity for the to continue by transitioning ownership to family members or existing management. Typically, the owner(s) have more control over the transaction, share distributions, and time frame of the takeover. transfer / Mgmt. ownerinvestor ADVANTAGES Can phase out gradually or using benchmarks DISADVANTAGES Need to share confidential financial information ship control until ownership reduced to less than 50% Retain reasonable compensation, benefits and perks during transition, i.e., car, health insurance, etc. Continue to be a resource for family members Requires strong talent or family executives (s) typically take a reduced price for the business over an external sale The financial security is less than an external sale if paid over time (assuming you can sell) Retain key employees/managers (buyers) Financing is usually leveraged 20 10

11 ship Transition Plan 1. Articulate owner values and perspective Personal views Stakeholder views 2. Create a vision and strategic plan potential Strategic investment assumptions Competencies and differentiators Competitive position 3. Determine the value of the Current Under strategic plan assumptions 21 ship Transition Plan 4. Build a capital plan Investments Operating requirements Funding of owner requirements family requirements 5. Update the wealth management plan Personal assets versus company assets Retirement income stream requirements 6. Develop succession/retention plans for key people Employment Agreement that provides COC, severance, outplacement Long-term incentives that align with interests of ownership Retention and transaction award plans Executive team assessments, development, and succession 22 11

12 ship Transition Plan 7. Create a governance or transition structure Advisory Board business and personal Formal board Family office 8. Establish benchmarks targets to trigger transition strategy Strategic goal achievement Macro economic issues Business outlook/trends Wealth management requirements Family milestones 23 What makes the most sense for my? (s) Values ship Transition Sale to Family/ Management Buyout - Investor I want the transition of ownership to be gradual I want my employees/family to collectively own the I would like to maintain control of my I am looking for the largest return possible I want the ownership transition to be as simple as possible It is important that my maintains its culture/identity Liquidate The value of the company is on the decline Note: This list is intended only as a guideline. There are many other factors that come into play (value of business, taxes, spouses, willingness of buyers, etc.) when deciding on the best plan for your business

13 Tom Ziemba, Ph.D. EXPERIENCE SUMMARY Tom Ziemba, Ph.D., is a Managing Director in BDO s Strategic Services Practice in Chicago. He has over 20 years of consulting and corporate experience in a number of industry segments. He assists clients in building governance capabilities, strategic positioning, succession and ownership transition planning, leadership team development, and designing executive and Board compensation programs. Dr. Ziemba has advised CEOs, Boards and executive teams on developing strategies to build organizational capabilities and developed the value creating capabilities program to assist business owners in building an ownership succession strategy. Prior to joining BDO, Dr. Ziemba held practice leader positions in national consulting firms including: RSM, the Mercer Consulting Group, and the Compensation and Performance Management Practice at KPMG. Managing Director Strategic Services Telephone : Mobile: tziemba@bdo.com He also held executive positions at BMO Harris Bank in Chicago, New Medico Rehabilitation Center, and the Campbell Soup. PROFESSIONAL AFFILIATIONS World at Work National Association of Corporate Directors CEO Network Society of Industrial/Organizational Psychologists EDUCATION Ph.D., Organizational Psychology, Illinois Institute of Technology M.S.I.R. Loyola University, Chicago B.S. Loyola University, Chicago 25 13