WEALTH DIVERSIFICATION, OWNERSHIP TRANSITION AND LIQUIDITY OPTIONS FOR ENTREPRENEURS A Private Equity Perspective TBD
FLORIDA CAPITAL ADVISORS Our Firm Advise on growth strategies, maximizing enterprise value and managing wealth inside the business Evaluate various ownership transition & liquidity options Network of strategic partners based on client need Our Clients Privately owned companies with annual sales between $5-$150 million Various industries Typically first generation owned or in the process of transitioning ownership to the next generation or management Our Focus Maximize and protect the value of the business Ensure the business owner is financially secure Integrate business equity into personal financial and estate plan Stay engaged throughout the various stages of the process 1
CLIENT PROFILE Entrepreneur or professional services business Large percentage of net worth tied to value of the business No access to traditional public capital markets Owner transition and liquidity strategy not developed for the business Shareholder liquidity needs driven by investment diversification or other external circumstances Shareholder has been approached by financial/strategic buyer and are seeking advice and assistance Partial or complete next generation or senior management ownership transition 2
OUR SERVICES Advisory Senior Debt Capital Provider Comprehensive assessment of the business to determine areas detracting from enterprise value Enterprise value enhancement and corporate growth strategies Develop and evaluate ownership transition and liquidity strategies Coordinate the business owner s advisory team Refinance current senior debt in capital structure Finance purchases of equipment, real estate and working capital for growth strategies Whole company acquisitions Provide financing for shareholder buy-ins, buy-outs Leveraged dividend recapitalizations, share buy backs and funding qualified plan contributions 3
OUR PROCESS Understanding of business/personal goals and objectives Personal financial needs analysis Assessment of key enterprise value drivers to determine value gaps Maximize and protect value the of the business Develop a plan to integrate business equity into personal financial and estate plan goals 4
BUSINESS OWNER CONSIDERATIONS Demographics First baby boomers turned 65 in 2011, 10,000 turn 65 every day, the youngest are now 51 Boomers own > 50% of the private businesses in the U.S. 75% plan to transition over the next 10 years; 48% in the next 5 years Challenges 75%+ of owner s wealth is tied to the value of the businesses Earnings do not automatically translate to enterprise value Business is not investable - transparency and perceived risk Large number of businesses will be entering the market in the next few years Drivers and Influences Want to be less active in daily operations Unsolicited offer Family member or key members of management want to buy the business Life after business plan and legacy issues 5
BUSINESS OWNER CONSIDERATIONS Passion for the business Owner s health Commitment to growth and value creation Willingness to take on risk Industry outlook Competition Growth opportunities Barriers to entry Macro economic environment Availability of private capital Lending environment for transactions Capital gain taxes 6
FINANCIAL SECURITY FOR THE ENTREPRENEUR Income Value of the Business Net proceeds of the business, after all taxes and expenses of sale, invested in a portfolio of diversified securities Earn outs, release of holdbacks/escrows Income Value of Qualified Retirement Plans Income Value of Investment Real Estate Income Value of Investments Accounts 401k plan, IRA traditional and Roth Defined benefit plans Net operating income Net proceeds of sale-diversified portfolio Realistic assumptions of portfolio earnings, withdrawals and inflation 7
VALUE ENHANCEMENT PLANNING Purpose Benefit Running the business using best practices Create value in good times and bad Maximize and protect the value of the business Contingency planning for illness, burnout, divorce, death or shareholder disagreements Harvest wealth tied up in the business Ensure personal income to meet goals De-risk the business More control over the business and when you transition ownership Contingencies for unplanned events 8
VALUE ENHANCEMENT PLANNING The Steps Desired Outcome Assemble business and personal data for analysis Comprehensive assessment of the business with owners and management Gain insight into business value and current level of personal assets outside the business Identify areas detracting from value and decrease enterprise risk Develop action plans with owners, management and advisory team Maximize and protect business value 9
CREATING INVESTABLE VALUE VALUE DRIVERS Personal Business Operations Industry/Market Legal/Regulatory Financial Economic/M&A Cycle Age/motivation/health of owner Owner relevance to the business Customer/vendor relationships and diversification Senior management, sales and marketing teams Brand, product differentiation, innovation Recurring revenue, margin advantage Documented processes, transparency into the business Industry outlook, growth opportunities, barriers to entry Lawsuits/litigation, product liability, environmental issues Protection of patents, trademarks, IP, contracts Revenue size, track record Company records/financials follow best practices Credit availability and private capital 10
OWNERSHIP TRANSITION & LIQUIDITY OPTIONS Inside Family or Management Buyout Pros: legacy, less disruption Cons: illiquid buyer, lower price, may lack CEO qualities Sale to Existing Partners Pros: well informed buyers, lower cost Cons: buy/sell restrictions Leveraged Dividend or Share Buy Back Pros: liquidity without dilution Cons: leverage could constrain growth Sale to Employees (ESOP) Pros: tax efficient to seller, employee benefit Cons: expensive, fiduciary liabilities Outside Sale to Third Party strategic or financial Pros: higher price, more cash, quicker exit Cons: long process, confidentiality issues Recapitalization minority or majority ownership transfer Pros: allows for partial exit, owner equity diversification, second bite of the apple Cons: Loss of control Orderly Liquidation asset value exceeds going concern value i.e. no good will Pros: sum of parts greater than whole, efficient Cons: lost jobs, tax implications for C corps 11
THE ENTREPRENEUR'S ADVISORY TEAM Business Wealth Management Banker Attorney CPA Maximize and protect enterprise value Prepare the business for a transaction or ownership transition Evaluate ownership transition and liquidity options Coordinate and lead the advisory team Develop a cash flow and income plan to ensure the business owner is financially prepared for ownership transfer Build a diversified investment portfolio, risk management, estate planning Interface with other advisors Loans to fund growth, ownership transfers or restructure existing debt Provide insight to how other companies in your industry are performing Address buy/sell issues Estate planning Negotiation of the LOI, purchase & sale agreement, closing documents Address financial reporting and statement issues or concerns Advise on tax-efficient ownership transfer strategies and other tax issues 12
KLH CAPITAL OVERVIEW Established Firm Targeted Strategy Value Added Partners Tampa, FL based team Manage $165mm in assets Currently investing out of $91mm SBIC fund Highly flexible capital base 30 year track record in the lower middle market 130+ transactions Owner-operator recapitalizations Management-led buyouts Generational transitions $10-100mm revenue Management teams with large equity stakes Longer-term focus Strategic planning and development Support and development of executive team Development information infrastructure of technology Support of add-on strategy Network of industry leaders and contacts 13
WHAT IS PRIVATE EQUITY? Investors that make investments into private companies (not publicly traded) Capital for private equity is raised from high net worth individuals/families or institutions Money can be used to accomplish a myriad of goals and objectives in the context of a deal 14
THE CORRELATION WITH EXIT PLANNING COMBINE PRIVATE EQUITY WITH EXIT PLANNING Company hires Investment Bank to find Future Suitor Equity Value Company is established Next generation enters the family business Company hires Exit Planning Advisor Incremental Wealth Creation Company partners with Private Equity Firm Time Bringing on a private equity group can be a fundamental step towards achieving the maximum wealth creation over the long run. 15
FUNDAMENTAL M&A TRANSACTION OPTIONS Most Outright Sale Sell 100% of company Majority Recap Sell > 50% of company KLH Focus Liquidity Minority Recap Sell < 50% of company Debt Recap Subordinated debt Least Control Most 16
STEP ONE: IDENTIFYING GOALS & OBJECTIVES Retirement Business owner wants to retire in 5 10 years, wants to maximize the value of his business over that time frame Shareholder Buyout Family Transfer Management Buyout Business owner needs to buyout (inactive, retiring, nonperforming) partner and bring in capital to help him grow Patriarch of the family company wants to retire, but doesn t trust 2nd generation to run the company with all his net worth on the line Inactive business owner wants to sell the company to his management team 17
STEP TWO: TAILORING A SOLUTION The following highlight several alternatives a private investor can provide shareholders contemplating a transaction: Equity Recapitalization Restructure the capitalization of the business to best position the company for future growth Provide liquidity or an exit for certain shareholders Restructure management incentives Provide necessary capital and resources to pursue organic and acquisition based growth Management Buyout / Buy-in Generate liquidity and financial security Create equity incentive for management Transfer leadership and operational control to management Avoid undue tax burden Strategic Sale Generate liquidity based on today s performance - Goal being cash maximization Option to retire immediately Management loses operational control Family legacy at risk Business operates as division Family Succession Transfer wealth and/or equity ownership to the next generation Ensure continuity of culture and strategic direction of the business Generate liquidity and financial security Avoid undue tax burden 18
SHAREHOLDER GOALS & OBJECTIVES Thesis Operational Control Pro-Forma Ownership Restructure the capitalization of the business to best position the company for future growth Provide liquidity or an exit for certain shareholders Restructure management incentives Provide necessary capital and resources to pursue organic and acquisition based growth Equity partner is majority shareholder with board control Management stays in place with operational control Continuity of culture Ownership retained for 2nd bite of the apple Equity incentives would remain in place (or begin) for key employees 19
CASE STUDY: RECAPITALIZATION AS A PHASED EXIT Big Idea: Client sells a portion of their ownership now, brings on partner to help grow the business and setup for 2 nd bite at the apple in the future Sponsor acquires majority position in the company to provide diversification of shareholder(s) wealth Owner retain ownership stake and continue growing the company with a 2 nd bite of the apple in mind Existing management team/owner retains operational control day-to-day Owner- Operator Majority Recapitalization Private Equity Group Owner Minority 20
CASE STUDY: RECAPITALIZATION AS A PHASED EXIT Company Description Provider of outsourced fabrication, maintenance, and field services to the mining, chemical, power, and general manufacturing industries Transaction Summary The owner was seeking a liquidity event to plan for retirement and desired to bring on a growthoriented financial partner The Company was able to give equity to an industry veteran who became President Post-Investment Summary Management partnered with KLH Capital to support their growth strategy and pursue select acquisitions Post transaction, the Company brought on a new CFO and controller to implement a new IT infrastructure and to improve financial tracking We are evaluating a number of add-on acquisitions to help bring on new service offerings Mid-State expects to grow EBITDA by more than 20% in FY 2015 21
CASE STUDY: SALE TO NEXT FAMILY GENERATION Big Idea: Client sells the company to the next generation in their family to facilitate a liquidity event and allow for equity participation for G2 Sponsor backs family members to buy-out current majority shareholders Family members are often times members of the management team Provides ability for G2 to build wealth via gifted sweat equity Removes conflicts of interest within different generations Patriarch Owns Majority Succession Private Equity Group Next Generation 22
CASE STUDY: SALE TO NEXT FAMILY GENERATION Company Description Distribution business specializing in force protection, emergency response, and niche maritime products and services Transaction Summary Inactive shareholder (G1) owned 50% of the business and wanted to be bought out Through this ownership transition, Management (G2) was able to retain a significant equity position in the Company Post-Investment Summary KLH Capital partnered with Management to develop the business organically and through acquisitions Immediately post transaction, KLH Capital assisted with the implementation of new ERP and CRM systems and helped recruit and develop additional sales professionals FRS acquired Hazmat IQ, a leading provider of specialty hazardous material training to federal, state, and local first responders, in early 2013 23 The Company expects double digit growth during 2015
CASE STUDY: MANAGEMENT BUYOUT Big Idea: Client sells the company to the Management team to facilitate a liquidity event and allow for equity participation to Management Sponsor backs current management team to buy-out current majority shareholders (active or inactive) Management typically doesn t possess personal wealth to purchase Provides ability for management to build wealth via gifted sweat equity Exiting Seller Owns Majority Mgmt Buyout Private Equity Group Mgmt Team 24
CASE STUDY: MANAGEMENT BUYOUT Company Description A national full-line distributor of petroleum handling equipment for petroleum marketers, wholesalers, and technicians Transaction Summary The President of the business was seeking a liquidity event in order to retire KLH Capital facilitated a transaction that allowed Management to gain a large equity stake in the Company Post-Investment Summary KLH Capital partnered with Management to develop the business organically and through acquisitions KLH Capital helped to secure a robust line of credit to ensure adequate working capital availability for implementing Management s growth initiatives Post transaction, the Company expanded its warehouse and office space and brought on new sales professionals including a Vice President of Sales and Marketing 25
THE CORRELATION WITH EXIT PLANNING COMBINE PRIVATE EQUITY WITH EXIT PLANNING Company hires Investment Bank to find Future Suitor Equity Value Company is established Next generation enters the family business Company hires Exit Planning Advisor Incremental Wealth Creation Company partners with Private Equity Firm Time Bringing on a private equity group can be a fundamental step towards achieving the maximum wealth creation over the long run. 26
Q&A Chuck Owston 407-540-5802 (Office) 407-810-8330 (Mobile) cowston@flcb.com www.flcbadvisors.com Kyle Madden 813-222-0160 (Office) 603-345-6303 (Mobile) kyle@klhcapital.com www.klhcapital.com 27