Show Me The Money

A Look at the Capital Markets & How to Access Them

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3 Questions To Explore

Is institutional capital available for entrepreneurs in today's market?

What are the current trends in the private capital markets?

How does an entrepreneur access this capital?

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Four Primary Segments Of The Capital Markets

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Investors Are Returning To The Public Equity Markets

Source: Investment Company Institute

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The Number Of Successful Stock Offerings Is On The Rise…

Source: CapitalIQ

The momentum gained in late 2009 has continued into the new year as investors have an appetite

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Overall Middle Market Deal Volumes Are Beginning To Trend

Up…

Note: Transactions valued between $10-$250 millionSource: CapitalIQ

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…And Middle Market Transaction Multiples Are On The Rise

Note: Transactions valued between $10-250 millionSource: W.Y. Campbell & Company

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The Vast Majority Of Private Equity Deals Are In The Middle

Market…

Lower middle market deals under $50 million remained the most popular during 4Q09 (over 50%

of deal flow)8

Source: PitchBook Platform

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There Are Two Categories Of Institutional Buyers & Investors

…collectively comprising a very broad universe of potential buyers and investors

Who Are Financial Buyers?

Private Equity … Venture Capital … Hedge Funds

How Private Equity Groups invest:Combination of their own equity plus debt financed by other parties

Seeks return primarily through capital appreciation realized in exit: - Organic growth - Expansion through acquisitions - Debt retirement

Secondary focus on interim cash flow: - Cash coupons and cash distributions - Dividend recaps

Private Equity Groups focuson the middle and large markets

> 8,000 firms

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Private Equity “Overhang” Suggests Money Will Be

Invested…

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…Based On Financial Incentives For Private Equity Pros

Once raised, private equity funds have a “shelf life”– “Use it or lose it” – Private equity players have to put capital

to work within specified timeframes

Private equity firms generate income and cash from these funds through management fees and investment carry – If capital is not invested then private

equity professionals lose their engine to generate income and wealth

– Creates incentive to put money to work before the fuse burns out

Return of debt to market is expected to release pent-up demand

Time fuse on capital

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What Financial BuyersAre Looking For

Experienced management team with a solid track record– Depth and breadth of management– Strong next generation of leadership providing continuity

Leading and defensible market position in 1+ niches– Long-standing customer relationships, diversified client base,

and low attrition– Strong recurring revenue base– Proven sales and marketing channels

Differentiated offerings + efficient infrastructure = attractive margins– Key part of customers’ value chain with difficult-to-imitate

products and services– EBITDA margins >10%

Growth potential through multiple strategic avenues– Strong “platform” business that can grow organically or

through add-on initiatives– Attractive industry profile and growth outlook– Ability to realize economies of scale to further drive

profitability

Who Are Strategic Buyers?

“Strategics” are operating businesses (public and private) Why do they buy?

For growth (compelled by owners/investors)…

For accretion (1 + 1 = 3, shareholder value creation math)…

Because it is faster, easier, & cheaper than starting from scratch…

How do they buy?Combination of cash, stock, performance earnouts,

and management/employee contracts

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Strategic Buyers Are Motivated To Put Their “War Chests” To

Work

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Source: CapitalIQ

What Strategic BuyersAre Looking For

Revenue and cost synergies that paint a compelling business case

– Improves acquiror’s product and service offerings

– Cultural fit

Access to new skills and technology– Highly-trained human capital– Unique intellectual property, tools, business

methods

Complementary customer base– Diversified customer base– Diversified products and services

Management team and organization culture– Ability to drive growth post-acquisition

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What Are Investors Looking For?

future cash flows adjusted for risk and time

"Focus solely on the future earning power..." Berkshire Hathaway, Annual Report

Pro

fits

Time

$ $ $ $ $ $ $ $ $ $ $ $ $

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Growth The more --- the better

Trends matter a lot

Relative to the broader market and competitive landscape

Quality Dependability and

reliability of cash flows

Consistency of reporting

3rd party objective testament is helpful

Returns = Cash Flows

Cash flows are judged using these two factors:

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In the world of investments, return is commensurate with risk

The greater the risk, the higher the needed return

This is commonly called the risk-return trade-off

Understanding The Role Of RiskFrom A Market Perspective…

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Key Areas Of Focus For Your Company’s Team

6 areas are major determinants of

valueand are key for

generatingcash flow

Focusing on these areas will improve the value

of your business whether or not you are

seeking a liquidity event or growth capital

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§ Credit Cards

§ Angel

§ Friends & Family

§ Inheritance

Credit Cards

HELOC

Retirement Funds (401k/IRA)

Friends & Family Equity

MARKETINVOLVEMENT

§ Bank Debt (personally guaranteed)

§ Revenue/Cash Flow

§ Factoring

· Minority Equity

· Mezzanine Debt

· Sale Leaseback

· Series A-D

· IPO

§ Recapitalization

§ Strategic Sale

§ J oint Venture

MATURITY / TIME

MATURATION

GROWTH

ADOPTION

START-UP

VALUE

Optimal Time to

Buy/Invest

Opt

imal T

ime

to Sell

Where Is Your Company In Its Lifecycle?

What is the optimal lifecycle “curve” for

your company?

How can you influence the “slope” of the

curve?

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Which Curve Are You On Today?

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Valu

e

Time

Inflection Point

3) Steady-state/Declining Growth

2) Slow Growth

1) Accelerated Growth

2) Slow Growth

FuturePast