La 13 0194 Pcs Finding the Right Buyer

8/17/2019 La 13 0194 Pcs Finding the Right Buyer

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FPO

Private

Company

Services

Exit Strategies

Finding the right buyer Part two in a series


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PwC Game on: Mega-event infrastructure opportunities2

A series for privately held business owners

Introduction: Realizing shareholder value

We have created this series, Realizing Shareholder Value:Private Company Exit Strategies, to assist privately heldbusiness owners in developing and executing an effectiveexit strategy.

Part 1, Making the Decision to Sell, discussed why enhancing value upon your exit begins with the process of identifying your goals and objectives, both business and personal innature. Your goals and objectives, to a large extent, determinethe best exit strategy and the right type of buyer.

This second installment, Finding the Right Buyer, focuses on your business through the eyes of a potential buyer. Knowingthe goals of each type of buyer will help you identify thebuyer and deal structure that present the best match for your personal goals and/or the one that will more likelyplace a higher value on your business. This installment takes you through various deal alternatives, the pros and cons ofeach, and why you—or a buyer—may have a preference.It also highlights some of the key value drivers that havehistorically received the most attention from the differenttypes of buyers.

Armed with a better understanding of these issues, you canbegin to mentally prepare yourself for the ultimate sale of your business. Effective preparation and execution of yourexit strategy are the topics of subsequent installments in thisseries. Preparing the Business for Sale will discuss valuingand evaluating the business, determining the right time tosell, undertaking a pre-sale checkup and implementation ofcorrective actions, putting together an effective informationand nancial package, conducting sell side due diligence,assessing and addressing Sarbanes-Oxley readiness, andmanaging employee matters in the transaction setting.The Deal Process will cover managing the due diligenceprocess, using advisors effectively, negotiating and getting

to closing, avoiding pitfalls, and structuring a tax-efcientsale. Life After the Deal will discuss estate and tax planningconsiderations, how to handle personal wealth issueseffectively after the sale, and how to handle the effects of various exit strategies.


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Seeing your business through the eyes of a potential buyer | 03

Exploring exit options | 04

Outright sales and market mentality | 05

Corporate partnerships or joint ventures | 09

ESOPs | 10

IPOs | 11

Sale or transfer to family members | 12

Keeping your eye on the goal | 13

About Private Company Exit Strategies

The rst installment, Making the Decision to Sell, discusses why enhancing valueupon the owner’s exit begins with a process of identifying the owner’s business andpersonal goals and objectives—and how, to a large extent, they determine thebest exit strategy and right type of buyer.

The second installment, Finding the Right Buyer, focuses on seeing the businessthrough the eyes of potential buyers and buyer types and on understanding how their

various objectives and value drivers t with the seller’s personal and nancial goals.

The third installment, Preparing the Business for Sale, suggests some tactics toconsider as well as mistakes to avoid in preparing for the sale of a private business.

The fourth installment, The Deal Process, discusses the process of getting from

negotiation to closing and explores ways to avoid pitfalls along the way.

The fth and nal installment in our series, Preparing for Life after the Deal,discusses how to preserve and transfer the wealth generated by the exit from

your business.

To view all published installments in the series, visit www.pwc.com/pcs/exitstrategies.


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3 PwC | Private Company Services

Seeing your business through the eyes of a potential buyer

Any type of potential buyer for abusiness will look for quantitativeand qualitative indications of astrong, successful business, includingcompetitive advantage in themarketplace, diversity of customerbase, and a solid business strategy.Even when an investor intends onbringing in a senior management team,the strength and depth of the overallmanagement group will be a key areaof focus. Human capital topics and

resources have become increasinglyimportant in a competitive,globalized marketplace.

Yet, each potential buyer will weighthe value of each of these componentsdifferently. By better understanding apotential buyer’s philosophy about what drives value, you can understandhow a buyer will assess your businessas a potential acquisition. Additionally,the specic value drivers will likely vary from buyer to buyer. Some of thesedrivers will be measured objectively,some subjectively.

In order to best understand andultimately capture the subjective value(the enhanced value that is perceivedsolely by either one or a group ofparticular buyers), owners should gainan understanding of three differentbroad categories of buyers:

(1) logical strategic or pure-plays—could include your existing competitors,or a company looking to get a footholdin your particular industry; (2) verticalintegrators—potential buyers who canbe identied by looking up and downthe supply chain; (3) nancial buyers—more opportunistic buyers who may ormay not have expertise in your industrybut who may be interested in investingcapital and leveraging operations with debt, with an eye on short-to

medium-term appreciation in theenterprise value of your business orbroader consolidation play.

And, importantly, you will need tounderstand the goals of each of thesepotential buyers and how they developan acquisition strategy and executethe process.

Your goals andobjectives, to alarge extent,determine thebest exit strategyand the righttype of buyer.


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Exploring exit options

01Full or partial sale to a third party, with or without an auction

02Corporate partnerships or joint ventures

03Selling the company to employees—employee stock ownership plan (ESOP)

04 An initial public offering (IPO)

05Selling/transferring ownership to family members

It is expected that the vast majority (perhaps 95 percent or more) of family-

dominated businesses not seeking to pass the business on to the next generation will nd that their only viable exit is to sell the business to a third party. There arenancial and practical reasons why a management-led buyout faces challenges intoday’s capital market. And while people may talk about an IPO as an exit from thebusiness, it’s really better characterized as a capital-raising event as opposed to anoptimal liquidity event. Going public may permit an owner to free up only a portionof the personal wealth that is tied up in the company, and a full exit may take yearsor may, in fact, never be achieved.

The best choice for a private company owner will depend on many factors: personalgoals, nancial needs of the owner and the business, and the state of the industry,to name just a few. And each strategy has its advantages and disadvantages.

To identify the right buyer for your business, you rst need to determine

the exit strategy that will best accomplish your goals. Five of the most prevalent primary strategies discussed are:


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Outright sales and market mentality

Selling the business to a third partycreates an opportunity for the ownerof a privately held business to diversifyfrom a concentration of his wealthtied up in the business. From a simplisticperspective, an outright sale may bemade to either a strategic buyer(one who seeks synergies with theseller’s business) or a nancial buyer(one who is more likely focused onshorter term investment goals).

The strategic buyer

The strategic buyer seeks a good t with some aspect of the seller’sbusiness. The strategic buyer frequentlyis in the same business and is tryingto access new markets, increase marketshare, or acquire expertise, patents,or company know-how, includingstrategic management resources.The strategic buyer sees the target asa way to acquire those elements thatt with or enhance its existing business.Often times, this decision stems from

a potential buyer’s analysis that it ischeaper and faster to buy an existingcompany than it is to build or developtheir own from scratch.

The chart highlights some of theelements that strategic buyerstypically seek.

What does a potential buyer seek?

Access to new brands

Reduction in number of competitors

Access to new technologies

Access to distribution channels

Reduction in operating expense

Enhanced reputation

Access to management

or technical talent

Access to new products

Growth in market share

Access to new markets

25%

26%

26%

38%

46%

46%

47%

54%

74%

76%

Note: percent of companies listing the objective

PricewaterhouseCoopers: A Survey of Mergers and Acquisitions


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Strategic buyers in a similar businessprobably have a sense of the seller’snancial performance in certain areas,even though this information is notpublicly available.

When the synergies are signicant,the strategic buyer is often willingto pay more, especially when thoseanticipated benets are specic tothe buyer compared to others andare achievable with relatively littleinvestment or careful integrationplanning. When considering a strategicbuyer, you will want to anticipatethese possible synergies in order tocapture the potential value associated with them.

Owners should consider theramications on employees andstakeholders, if these are importantfactors. You will need to weigh theadvantage of a possibly higher saleprice against the likelihood that thestrategic buyer, as part of achievingits synergies, may eliminate a portionof your existing management teampost-transaction.

The following lists some ofthe advantages and disadvantagesof selling to a strategic buyer.

Advantages

– May provide highest valuation forshareholders in the near term

– May enable the entrepreneur tocompletely walk away (i.e. obtainthe greatest liquidity)

– Potential operating synergies canimprove the business

– Typically, strategic buyers are veryknowledgeable from an operationaland business perspective, facilitatingdue diligence and closing; maybe able to close much faster thannancial buyers

– Qualied buyers may not beconstrained by nancing contingenciesor be at the mercy of the credit markets

Disadvantages

– Management may lose autonomy,lose their jobs, or have their

roles diminished

– Possible negative impact on cultureand morale

– May affect customer loyalty

– Upside value potential may besacriced (unless there is signicantstock or earnout consideration)

– Key concern is being caughtup in bureaucratic delay—“decision paralysis”

– A secondary concern is related toaccess to competitive information,should the deal fall through


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The nancial buyer

The nancial buyer, on the other hand,may not be focused on synergisticopportunities from the immediatetransaction if the company is intendedto be an anchor for an industryacquisition strategy. Once a portfoliocompany is acquired as a platform,nancial buyers become more likestrategic buyers in their approach,and the lines between the classicationsbecome more blurred. By nature, the

nancial buyer hunts for opportunitiesto invest in undervalued companies,provides nancial support, and exitstheir investment for a prot in theshorter to medium term. While somenancial buyers (generally referredto as private equity, venture capital,or investment funds) may focus onparticular industries, nancial buyersare often more generalized in theirtargeting, whereby the attractivenessof the investment opportunity isconsidered as well as the particular

industry of the underlying business.

The most marketable businesses to anancial buyer tend to be those withsolid cash ows, a defendable marketposition, lower capital expenditurerequirements, and products andservices in markets that are growing.The ability to leverage the business isa critical factor in driving the price tothese investors, with the health andaggressiveness of the credit marketsa critical factor.

However, the size of the private equitymarket has grown substantially, with fundraising and availability atrecord levels and demand signicantlyexceeding the supply of qualityinvestment targets. The additionalefciency reected in the private equitymarket can benet a seller throughhigher prices.

Though distressed funds constitutea smaller segment of the market,depending on the reasons forthe company’s troubles, operationallyminded nancial buyers may beinterested in pursuing turnaroundsituations or deals with morecomplications.

Typically, nancial buyers are extremelysophisticated in terms of deal structureand diligence. In order to achieve theirtargeted investment returns, they willgenerally nance the acquisition withsignicant leverage (i.e. additionaldebt). As a result, they are moresensitive to issues such as managementquality and depth, sustainableEBITDA (earnings before interest,taxes, depreciation, and amortization),and free cash ow.


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The following lists some of theadvantages and disadvantagesof selling to a nancial buyer.

Advantages

– Current management/shareholdersmay retain upside potential

– Current management/shareholders will likely maintain signicantinvolvement in direction andoperations of the business

– Entails relatively less businessdisruption and effect on customerloyalty and employee morale

– Provides access to “deep pockets”for acquisitions and othergrowth initiatives

– May provide owner with ability torealize additional returns

– Can offer transactionstructure exibility

Disadvantages

– Likely requires ongoing involvementof owner in business going forward inshort term

– Heavy debt requirements may limitcapital available for growth

– Heavy debt load limits marginfor error

– Upside potential is dependentupon strong management directionand growth

– Heavy nancialreporting requirements

– Requires extended due diligenceperiod because of reliance onlender participation


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Corporate partnerships or joint ventures

Entering into a partnership or joint venture may be a growth strategy toconsider if you and another businessidentify mutual synergies to gain; butit also can provide an alternative if you don’t want to sell the companyimmediately, or if one party isnot interested in buying the otherimmediately and wants to explore arelationship rst. Perhaps an otherwisepotential buyer is not interested inbuying because your business is not in

a high-growth phase, yet your businesshas a certain market that is attractive.Or, a potential partner may be a foreigncompany that is seeking a presence inthe United States but does not want anownership stake, or is not yet ready to jump into a new geographical market“with both feet” and wants to stagger itsposition and exposure.

The following lists some of theadvantages and disadvantages ofa corporate partnership or joint venture to consider.

Advantages

– May provide access to new markets

– May expand product offerings

– May deepen relationships with customers

– May provide access to technology,people, material supply, and capacity

– May provide opportunity to acquirepartner or to be acquired in a twostep process

Disadvantages

– Complicated to set up withappropriate detail

– Can be difcult to sustain long term

– Partners may not be contributingequally or may have disparity ineconomic leverage and strength

– The needs and interests of the

parties change


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ESOPs

An employee stock ownership plan(ESOP) is often considered a hybrid exitstrategy, since the owner is selling toa trust that is owned by the employeesbut often still managing the business.It can, however, be an effectivestrategy to generate liquidity andaddress key succession and employeeissues envisioned by an owner orgroup of shareholders. Because of thecomplexities of the duciary issues, valuation, ownership restrictions,

and applicability for multi-nationalcompanies, an ESOP is sometimes foundto be too complex to live with for theamount the company is going to receive,though it can be an excellent vehicle inthe right situation and expectations of value. Tax planners often cite an ESOPcould be ideal for someone lookingto take proceeds from a business toinvest in stock, assuming the price isacceptable to the buyer.

The following lists some of theadvantages and disadvantages ofselling to an ESOP:

Advantages

– Allows owner to pass ownership onto employees/management in a tax-efcient manner

– A corporation can make tax-deductible contributions to the ESOP

– Structured tax benet on repaymentof loan principal

– Allows tax-deferred roll-over of theprice paid for the seller’s stock

Disadvantages

– Possible irregularities of cash owand need for additional nancing dueto requirement to cash out employeesat retirement

– Increases administrative burden,including DOL and IRS requirements,as well as duciary duty to ESOP

– Transaction valuation is generallynot as high as with other optionsdue to reliance on leverage and lackof synergies

– No new equity is provided forbusiness use—possibly limitingfuture growth capital—if ESOPused for liquidity event


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IPOs

A company may begin to think aboutgoing public (offering securities ofthe company for sale to the generalpublic) when the funding required tomeet its business growth objectiveshas exceeded its debt capacity.While under the right circumstances“going public” may be attractive, thecosts of an IPO are high, and sellersrarely have as much control after thetransaction as they expect. Giventhe complexities of today’s nancial

markets and heavy costs of exchangelisted status, an owner should carefullyconsider whether the public marketoption is the most logical in light ofother alternatives.

The following lists some of theadvantages and disadvantagesof an IPO.

Advantages

– Provides access to long-term capital

– Improves nancial position

– Provides liquidity for shareholders

– Prestige and public awareness

– Increases ability to attract and retainkey personnel via stock options

– Additional currency for futureacquisitions

Disadvantages

– Lack of operating condentiality

– Pressure for short-term performance

– Reduced business exibility

– Initial and ongoing cost; Sarbanesrequirements and internal control

– Executive compensation scrutiny

– Potential liability to public shareholders


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12Private company exit strategies: the deal process

Sale or transfer to family members

A sale or transfer of the business tothe next generation is often an issue ofestate planning rather than structuringa transaction. How and when you willrelinquish management control to thenext generation is also a primary issue with this exit option.

The following lists some of theadvantages and disadvantages ofselling or transferring a businessto family members.

Advantages

– Allows family members to enjoyfruits of owner’s labor

– May allow for involvement of otherkey managers

– Owner’s legacy lives on

– Minimal cultural disruption

– Tax advantaged transfer can beaccomplished with proper planning

Disadvantages

– IRS scrutinizes family transfersof ownership

– Estate transfer may requiresignicant funding for estate tax

– May need to prove the price paidis reasonable if the IRS auditsthe transaction

– Salary continuation agreementsneed to be established in light of value paid for the seller’s stock


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Keeping your eye on the goal

Identifying the right buyer is dependentupon, rst, identifying your goals. Do you want to retain a nancial stake afterthe sale in order to participate in someupside potential? Or are you ready tocompletely cash out? Do you want toretire or do you want to remain involvedin the business? If you want to remainengaged, what amount of control would you like to retain and for how long?

Finding the right buyer for yourbusiness is possible only when you havethoroughly considered your objectivesand priorities, both business andpersonal and both nancial (liquidity,sale price, taxation/estate planning)and non-nancial (succession,legacy and reputation, employee andstakeholder concerns, family dynamics,and other special interests).

The right buyer is often the one who will attach the optimal value to yourbusiness. But choosing the deal that’sright for you may not be all aboutmoney. If you wish to protect yourlegacy, you might look for a buyer who will keep your name on the door,or who won’t re key employees forthree years, or who will not close yourplant and take all of the productionto another country.

Only you can decide which of thecriteria are the most important in your denition of value. While sucha decision may not be simple orstraightforward, gathering informationon the pros and cons of each option as well as the likely process that will needto be undertaken is a smart way tohelp you reach such a determination.


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This document is provided by PricewaterhouseCoopers LLP for general guidanceonly, and does not constitute the provision of legal advice, accounting services,investment advice, written tax advice under Circular 230 or professionaladvice of any kind. The information provided herein should not be used as asubstitute for consultation with professional tax, accounting, legal, or othercompetent advisors. Before making any decision or taking any action, you shouldconsult with a professional advisor who has been provided with all pertinent factsrelevant to your particular situation. The information is provided ‘as is’ with noassurance or guarantee of completeness, accuracy, or timeliness of the information,and without warranty of any kind, express or implied, including but not limited to warranties or performance, merchantability and tness for a particular purpose.

For more information about PricewaterhouseCoopers’ Private Company Servicespractice, visit www.pwc.com/pcs.


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This publication has been prepared for general information on matters of interest only and does not constitute professionaladvice on facts and circumstances specific to any person or company. You should not act upon the information contained inthis publication without obtaining specific professional advice. No representation or warranty (express or implied) is given asto the accuracy or completeness of the information contained in this publication. The information contained in this materialwas not intended or written to be used—and cannot be used—for purposes of avoiding penalties or sanctions imposed byany government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees and agents shall not beresponsible for any loss sustained by any person who relies on this publication.

© 2013 PwC. All rights reserved. “PwC” and “PwC US” refer to PricewaterhouseCoopers LLP, a Delaware limited liabilitypartnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is aseparate legal entity. This document is for general information purposes only, and should not be used as a substitute forconsultation with professional advisors. LA-13-0194

www.pwc.com

For further information, please contact:

J. Fentress Seagroves Jr. Principal, Transaction Services

NY ofce: ( 646) 471 4190 ATL ofce: (678) 419 4189 Mobile: (678) 361 8708 email Fax: (813) 207 3499 Fax: (678) 419 [email protected]

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La 13 0194 Pcs Finding the Right Buyer