Preparing Yur Cmpany fr Liquidity Event Business Value Drivers Daniel Barder BKD Transactin Services Dallas dbarder@bkd.cm Chris Schumann BKD Transactin Services Indianaplis cschumann@bkd.cm March 19, 2013 T Receive CPE Credit Participate in entire webinar Answer plls when they are prvided If yu are viewing this webinar in a grup Cmplete grup attendance frm with Title & date f live webinar Yur cmpany name Yur printed name, signature & email address All grup attendance sheets must be submitted t training@bkd.cm within 24 hurs f live webinar Answer plls when they are prvided If all eligibility requirements are met, each participant will be emailed their CPE certificates within 15 business days f live webinar 2 1
Preparing Yur Cmpany fr Liquidity Event Business Value Drivers Daniel Barder BKD Transactin Services Dallas dbarder@bkd.cm Chris Schumann BKD Transactin Services Indianaplis cschumann@bkd.cm March 19, 2013 Agenda Market Makers Hw Private Equity Grups (PEGs) Think & Hw It Affects the Value f Yur Business Seller s Mindset & Business Evlutin Cycle The Glden Perid Cncept Business Enhancement What Des Prfessinalizing a Business Mean? 4 2
Market Makers Hw Private Equity Grups (PEGs) Think & Hw It Affects the Value f Yur Business 5 Why Are PEGs S Interested in Buying Yur Cmpany? 6 3
What Are They Buying? 7 Hw D PEGs Evaluate Their Investments in Businesses They Buy? Target Returns = Beta Return + Alpha Return BETA is market rate returns based n risk (think stck market) ALPHA is ability t create abve-market rate returns (think beating stck market) 8 4
Hw D PEGs Evaluate Their Investments in Businesses They Buy? Alpha The value PEGs add by managing, prfessinalizing & grwing the business. This is PEG s secret sauce, aka investment thesis PEGs are lking fr underdevelped cmpanies in niche markets that are fragmented Fr this they will aggressively pay tp dllar. There are a limited number f cmpanies that prvide Alpha pprtunities 9 What Characteristics Are PEGs Lking Fr? Revenue cycle Market share Defensible niche Custmer stickiness Cncentratins Trends Sustainability Management team Capabilities Mtivatin Management systems Infrmatin technlgy Valuatin Reasnable value Fair price future cash flw 10 5
What Is My Cmpany Wrth? EBITDA x Multiple Lks simple, but decisins yu make every day impact what s ging t happen 11 It s All Abut Cash Yur P + L bttm line = Add back interest expense Add back yur taxes Add back yur depreciatin Add back nnrecurring expenses Add back ut-f-perid adjustments Subtract nnrecurring revenues Yur Adjusted EBITDA 12 6
What Determines the Multiple? Market psitin Custmers Industry Gegraphy Management team Equipment/physical plant 13 What Are They Paying? Surce: GF Data Fall 2012 14 7
Seller s Mindset & Business Evlutin Cycle 15 Seller s Mindset Owner s Feelings Fear f unknwn future Fear f lsing meaning & purpse Fear f being taken advantage f Ignrance abut the prcess Cncern fr emplyees Will I receive enugh prceeds t accmplish my gals? My family s gals? 16 8
Seller s Mindset Dgmatic Can t get elsewhere the same returns I m currently receiving frm business (may be a reality in 2013) 17 Business Evlutin Cycle Used by Permissin: Jhn Aplin 18 9
Where Are Yu in This Evlutin? If I sell my business, am I prepared? What d I knw abut what I have? Accidental successes It s all abut me Lack f understanding abut internal ecnmics Undefined r incmplete market strategy Sun & planets rganizatinal structure Unplished Classic entrepreneurial business 19 Business Transitin It s a Prcess Transitin prcess shuld prvide pprtunity t recgnize strengths, deal with weaknesses & imprve peratins & bttm line 20 10
The Glden Perid Cncept 21 The Glden Perid Cncept 22 11
Preparing the Business 23 Sell-Side Due Diligence Why shuld seller cnsider sell-side diligence? Answer: Sell-side diligence is abut helping deal clse at apprpriate value 24 12
Sell-Side Due Diligence When shuld I cmplete sell-side diligence? Answer: Pure financial diligence is typically cmpleted cncurrently with deal bk & distributed t qualified buyers. Wrk is ften dne in cnjunctin with investment bankers Advanced planning may be cmpleted fr sellers lking t imprve their business prir t taking it t market 25 Enterprise Assessment & Data Analytics 26 13
BKD Data Analytics Data Analytics Fur-Step Prcess 27 Enhancing Business Executin Strategy Elements Hw t Prfessinalize a Business Build upn yur cre strengths ( secret sauce ) Define market strategy Size bx (physical element) Tame cmplexity (prcess element) Ability t manage cmplexity & scale Managing by grup thery (prduct lines, prperty, values) Manage prcesses, nt peple (peple element) Create culture f change Prcess defines rganizatin, nt functin Create standard wrk Successfully apply infrmatin technlgy (IT element) 28 14
Enterprise Value Prject (24 36 Mnths frm Planned Transactin) Objectives Cause wner t think like a buyer Exhibit track recrd Prfessinalize Attract quality buyers Use runway t imprve EBITDA margins Enhance peratins infrastructure Demnstrate sustainability Highlight transferability Situatinal each cmpany 29 Business Enhancement Apprach 30 15
Business Enhancement What Des Prfessinalizing a Business Mean? 31 Mld a Strng Management Team Success f cmpany shuld depend n entire rganizatin, nt a few peple Lss f ne r tw key persnnel shuld nt negatively affect cmpany Need strng secnd-in-cmmand & junir-level management 32 16
Business Plan Develp business plan reasnable & attainable assumptins Clearly define internal & external grwth pprtunities Identify & explain peratin r margin imprvements (investment in technlgy, imprved supplier terms) Identify capital expenditures Identify capital requirements (internal CF, utside capital) Hit yur numbers 33 Financial Statements Effective financial cntrls Audited r reviewed financial statements GAAP internal financial statements Dependable accunting department Gives sense f security, credibility Lwers due diligence csts Lwers hldbacks 34 17
Invest in the Future Putting ff needed expenses may nt add value Review & address peratinal prcesses Ensure systems & cntrls are in place Invest in technlgy r equipment Give best appearance pssible Als applies t investment in human capital 35 Management Other persnnel Imprve Margins & Prfitability Eliminate unprfitable prducts &/r custmers Examine expenses (excessive, persnal/family-related, nnrecurring expenses) Review & imprve supplier cntracts Sell divisins r lcatins if they significantly lwer earnings & are nt strategic Manage wrking capital 36 18
Custmer Cncentratin T much revenue with t few custmers can give appearance that business may be risky Imprve quality (prfitability) & diversificatin f custmers Attempt t get sales cntracts r agreements Be prepared fr hldbacks in transactin 37 Balance Sheet Clean up Wrking capital Obslete inventry Lans t sharehlders Will clarify assets & liabilities in transactin 38 19
Cntrlled Ownership Different wners = different bjectives Beneficial t buy ut minrity sharehlders Can ensure smther transactin & may increase value 39 Pre-Due Diligence Litigatin Crprate recrds Cntracts Financial recrds Allw time t fix what might impact value 40 20
Timing If selling yur cmpany is yur exit plan, timing can be single mst imprtant factr t cnsider Buy lw, sell high applies t business sales as well Sell n yur wn terms In difficult market, deal structure & partner ging frward are critical Dn t be a lne ranger 41 Daniel Barder Transactin Services dbarder@bkd.cm Chris Schumann Transactin Services cschumann@bkd.cm 21
Cntinuing Prfessinal Educatin (CPE) Credits BKD, LLP is registered with the Natinal Assciatin f State Bards f Accuntancy (NASBA) as a spnsr f cntinuing prfessinal educatin n the Natinal Registry f CPE Spnsrs. State bards f accuntancy have final authrity n the acceptance f individual curses fr CPE credit. Cmplaints regarding registered spnsrs may be submitted t the Natinal Registry f CPE Spnsrs thrugh its website: www.learningmarket.rg. The infrmatin in BKD webinars is presented by BKD prfessinals, but applying specific infrmatin t yur situatin requires careful cnsideratin f facts & circumstances. Cnsult yur BKD advisr befre acting n any matters cvered in these webinars. 43 CPE Credit Up t 1 CPE credit will be awarded upn verificatin f participant attendance; hwever, credits may vary depending n state guidelines Fr questins, cncerns r cmments regarding CPE credit, please email the BKD Learning & Develpment Department at training@bkd.cm 44 22