For Growth or Sale - Is Private Equity Right for You? = Private Equity 101

For Growth or Sale –Is Private Equity Right for You?

Session 1 – Private Equity 101February 13, 2014

Boris GremontManaging Partner

DemystifyingPrivate Equity101:

Willie Sutton

$

Billion

What is Private Equity?

FirstMyth

Debt

SecondMyth

Layoffs

ThirdMyth

Flip it

STEADYGROWTH

HIGHRISK

FINANCIALGROWTH STRATEGIC

Carpeting Trends

201: The Deal

301: Obstacles

David H. OdenPartner

What Does the Deal Look Like?

• Step 1: Confidentiality Agreement– Agree to keep proprietary information confidential– Can’t use the information except to analyze the purchase

– Non‐solicitation of employees

What Does the Deal Look Like?

• Step 2: Letter of Intent (LOI)– Describes all material terms

• Deal structure• Purchase price• Other matters

– Too long v. too short• Does it cover all “deal killers”?

– Legally binding v. non‐binding– Your point of greatest leverage

What Does the Deal Look Like?

• Step 3: Due Diligence– Seller should fully cooperate– Bad news will come out – get ahead of it– Customer contact?

What Does the Deal Look Like?

• Step 4: The Purchase Agreement– Stock purchase– Asset purchase– Merger– Why and who cares?– Common elements and indemnity

What Does the Deal Look Like?

• Ancillary Items– Employment Agreements– Consulting Agreements– Non‐compete Agreements– Financial Advisory Agreements

What Does the Deal Look Like?

• Realistic Timetable– Controlled by Buyer– Frequent Seller frustration– 2‐3 months– May take longer if……

Daniel BoarderTransaction Advisory Services 

Senior Manager

Maximizing Value Prior to Engaging in a Transaction

• Understanding the two components of valuation– EBITDA– Multiple

Maximizing Value Prior to Engaging in a Transaction

• EBITDA– Repeatable cash flows– Quality of Earnings – Cash vs. Accrual basis of accounting

– Quality of Assets (Net Working Capital)

Maximizing Value Prior to Engaging in a Transaction

• Multiple– Market – What are similar companies selling for?– Systems/data & Professionalization– Operations

• Customer concentration• Vendor concentration• Market – Is the sales market increasing/decreasing• Backlog and ability to meet customer demands

Deb PurvinSenior Vice President – Corporate Banking

How Does the Deal Get Done?

How Does the Deal Get Done?Highly Structured, Leveraged Finance

“…when a company is purchased with a combination of equity andsignificant amounts of borrowed money, structured in such a way that thetarget’s cash flows or assets are used as the collateral (or “leverage”) tosecure and repay the money borrowed to purchase the target company.

“As financial sponsors increase their returns by employing a very highleverage (i.e. a high ratio of debt to equity), they have an incentive toemploy as much debt as possible to finance an acquisition.”

Source: Wikipedia

How Does the Deal Get Done?

High yield / Mezzanine debtSource: Wikipedia

How Does the Deal Get Done?

What SURPRISES Business Owners?“You’re not in Kansas anymore”

• Pace• Structure and Controls• Internal / Organizational

How Does the Deal Get Done?

• Pace

How Does the Deal Get Done?

• Structure and Controls

– Lots of Variables…– Multiples, Industry, EBITDA, etc.– Every Transaction is Unique– “He who has the money, makes the rules”

How Does the Deal Get Done?

• Internal / Organizational Issues

– Operational Changes– Management and Accountability

WHY Does the Deal Get Done?

WHY Does the Deal Get Done?

Jon P. KarpTax and Consulting Partner

Maximizing Value Prior to Engaging in a Transaction

• Tax Implications of Transaction– Tax due diligence – State and Federal– LLC/Partnership– Corporations– NOL Limitations

Maximizing Value Prior to Engaging in a Transaction

• Advance Tax Planning– Ownership structure– Estate planning and gifting – wealth preservation

Q&A, Next Steps

• Next Steps = Attend Sessions 2 & 3

– Session 2: April 3, 2014– Session 3: May 8, 2014