Private Equity: A Discussion with CEOs February 25, Moderator: Glenn B. Kaufman Managing Director American Securities Capital Partners, LLC

Transcription

1 Private Equity: A Discussion with CEOs February 25, 2007 Moderator: Glenn B. Kaufman Managing Director American Securities Capital Partners, LLC

2 Introducing the Moderator American Securities Capital Partners (ASCP) Founded in 1947 to invest the Rosenwald family fortune (Sears & Roebuck) Seek investments in market leading companies Specific experience in franchises and restaurants Part of family of funds making investments of $25m to $250m Glenn B. Kaufman Managing Director ASCP Joined ASCP in 1997 after 4 years at Cravath, Swaine & Moore Focuses on business services and consumer companies, including franchises Director of El Pollo Loco, Inc. and Potbelly Sandwich Works Contact Info: Phone: gkaufman@american-securities.com Web-Site: 2

3 3 Introducing the Panelists Peter Cohen President & COO Educate, Inc. Learning Centers Private Equity Owned , 2007 Tom Oreck CEO Oreck Corporation Leading manufacturer of premium vacuum cleaners and air purifiers Private Equity Owned Since 2003 Keith Sirois President & CEO Checkers Drive-in Restaurants, Inc. Restaurants Private Equity Owned Since 2006

4 4 Background: Agenda Types of Capital Available to You How Private Equity Makes Money What Private Equity is Looking For in a Company How to Access the Market for Financing Sources What Matters to You When Assessing Financing Sources

5 5 Deciding to Franchise is a Form of Financing Who Supplies the Capital? Company Owned Company Franchising Franchisee Who realizes the upside? Company Captures 100% Company Retains a Smaller Portion Who Controls the Operations? (includes brand) Company Retains 100% Franchisee with Restrictions

6 All Your Financing Options: From Debt to Equity Benefit from Leverage Debt Adds Financial Risk to the Business Why Use Debt? Retain more of the upside Prudent capital efficiency Reduce Equity Investment Maximize Earnings / Equity Investment Ratio Tax Advantaged Not seeking maximum liquidity Comfortable making interest payments Retain 100% business decision rights Debt holders will place certain restrictions (e.g. max capital spend per year) Maximize Liquidity Equity Shares Upside Why Use Equity? Provides option to maximize liquidity Bring in experienced investors to help grow your business Bring in investors with deep pockets Comfortable sharing in the upside Comfortable sharing the business decision making rights Can range from silent partner to active partner and everywhere in the middle 6

7 7 What is Private Equity? Private Equity Venture Capital Earlier stage; Unproven or growth stage business model Generally growth capital ( into the company ) Ideas (intellectual capital) High business risk; Low/no leverage risk Private Equity ( Buyout ) Later stage; Proven business model Generally replacement capital ( transfer of ownership ) Mature businesses Traditionally slower growth Lower business risk; Offset by (differing degrees of) leverage risk

8 What is Private Equity? Private Equity Venture Capital Venture fund provides expansion capital Takes equity interest in company based on agreed upon valuation Takes seat on board Firms have differing levels of involvement Baja Fresh (Oak) Jamba Juice (Benchmark) Private Equity ( Buyout ) Private equity firm buys interest in company Pays for it partially from its own fund and partially by obtaining loans Takes seat(s) on the board; Often purchase majority interest Firms have differing levels of involvement Ruth s Chris (Madison Dearborn) El Pollo Loco (Trimaran) 8

9 9 Background: Agenda Types of Capital Available to You How Private Equity Makes Money What Private Equity is Looking For in a Company How to Access the Market for Financing Sources What Matters to You When Assessing Financing Sources

10 10 How Private Equity Makes Money Grow Earnings (EBITDA) Increase Valuation Multiple Improve Capital Efficiency and Pay Down Debt Add-on Acquisitions

11 3 Examples (5x Entry / No Leverage / No Taxes) Year 1 Year 2 Year 3 Sale: $10 Case #1 No Growth / No Change in Valuation Multiple Revenue Less: COGS Less: SG&A EBITDA $100 ($75) ($15) $10 $100 ($75) ($15) $10 $100 ($75) ($15) $10 Sale: 5.0x Cumulative Cash: $30 Total Receipts: $80 Total Investment: $50 Return on Capital: 1.6x Year 1 Year 2 Year 3 Sale: $13 Case #2 5% Growth / No Change in Valuation Multiple Revenue Less: COGS Less: SG&A EBITDA $100 ($75) ($15) $10 $105 ($79) ($15) $11 $110 ($83) ($15) $13 Sale: 5.0x Cumulative Cash: $34 Total Receipts: $97 Total Investment: $50 Return on Capital: 1.9x Year 1 Year 2 Year 3 Sale: $10 Case #3 No Growth / 1.5x Increase in Valuation Multiple Revenue Less: COGS Less: SG&A EBITDA $100 ($75) ($15) $10 $100 ($75) ($15) $10 $100 ($75) ($15) $10 Sale: 6.5x Cumulative Cash: $30 Total Receipts: $95 Total Investment: $50 Return on Capital: 1.9x 11

12 12 Impact of Leverage (No Tax) Investment Total Valuation (same for each) Total Loan Size: Scenario #1: No Debt $100 $0 Scenario #2: 50% Debt $100 $50 Total Equity: Return (1 Year) EBITDA (same for each): Interest Rate: Interest Amount: $100 $10 0% $0 $50 $10 8% $4 Total Return: $10 $6 Return on Capital Total Return: Total Equity: $10 $100 = 10% $6 $50 = 12%

13 13 Background: Agenda Types of Capital Available to You How Private Equity Makes Money What Private Equity is Looking For in a Company How to Access the Market for Financing Sources What Matters to You When Assessing Financing Sources

14 14 What Do Private Equity Investors Look For? Value Characteristics Stable & Predictable Cash Flows 1) Low Downside Risk Opportunity to Grow Cash Flows 2) High Upside Potential Strong Management and Business Model

15 Characteristics Private Equity Seek in a Company: Generic Value Characteristics Stable & Predictable Cash Flows Company Characteristics Strong underlying demand Sustainable competitive advantage Diversification (Product & Customer) Opportunity to Grow Cash Flows Strong Management and Business Model Growth underlying demand Opportunity to increase market share New market or products Increase operational efficiency Add-on acquisitions PE professionals are generally investors, not operators Look to strength of CEO & quality of team 15

16 Characteristics Private Equity Seek in a Company: Franchises Value Characteristics Stable & Predictable Cash Flows Company Characteristics Same Store Sales Traffic*, Price, Mix Strong economics to franchisees & strong relationships Regulatory compliance Opportunity to Grow Cash Flows Strong Management and Business Model New units / markets / products New concepts or concept extensions Increase operational efficiencies PE professionals are generally investors, not operators Look to strength of CEO and quality of team 16

17 17 Background: Agenda Types of Capital Available to You How Private Equity Makes Money What Private Equity is Looking For in a Company How to Access the Market for Financing Sources What Matters to You When Assessing Financing Sources

18 18 How to Access the Markets Direct In General: Reach out to or be reached by different private equity firms Degree of interest and type of firm will turn on size of company Generally franchisor will be more attractive than franchisee (but many franchisees will attract interest) Characteristics: No direct economic costs, but no leverage of intermediary shouldering some of effort May work best for companies with sufficient infrastructure Often done by smaller companies and companies less focused on valuation maximization as top priority Outside Assistance: Companies can benefit from advice of trusted council and accountants Important to make sure advisors are sufficiently sophisticated in this area

19 19 How to Access the Markets Through an Intermediary In General: Many investment banks and brokers exist for companies at virtually every size Intermediaries can be sought out or may contact you Characteristics: Take fee: Often some upfront component but frequently mostly on success Nature of intermediary will often turn on size of company / transaction Their efforts to find a buyer should be structured by you to meet your goals Often organize processes which may yield leverage of a competitive process Outside Assistance: Reference checks are critical

20 20 Background: Agenda Types of Capital Available to You How Private Equity Makes Money What Private Equity is Looking For in a Company How to Access the Market for Financing Sources What Matters to You When Assessing Financing Sources

21 21 What Should Matter to You When Selecting a Partner Check track record of Acquisitions More successful Less successful Check track record as a partner Ask for prior and current CEO references Firms have different styles, cultures, approaches How does their investment time horizon match your goals and expectations? Get behind the marketing See who you know in common to conduct backchannel reference checks Look at the materials they provide to their investors Assess specific expertise ask them questions How well do they understand what you are trying to accomplish? Can they assist you with intellectual capital in reaching your goals This decision is not just about $$$

22 Private Equity: A Discussion with CEOs 22