MERGERS & ACQUISITIONSCORPORATE FINANCE
MARKET INTELLIGENCEBUSINESS VALUATION
EXIT PLANNING
Investment Bankers To The Middle Market
What’s your Business Worth?
MERGERS AND ACQUISITIONSCORPORATE FINANCE
MARKET INTELLIGENCEBUSINESS VALUATION
EXIT PLANNING
Investment Bankers to the Middle Market
HARRY WARDHAMPTON ROADS [email protected]
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Introduction to The McLean Group
Middle-market investment bank with extensive reach and experience. Private Company M&A, Capital Formation Business Valuation Market Intelligence Exit Planning
Broker/dealer serving the middle-market ($5M to $500M in revenue) McLean Securities, a wholly-owned affiliate, is a registered broker/dealer with
FINRA; Member, Securities Investor Protection Corporation (SIPC)1
Headquartered in the Northern Virginia technology corridor near Washington, D.C. with 30 North American offices.
International desk with network of 200 close affiliates in 35 countries.
1. All advisors are fully-licensed to facilitate securities transactions as mandated and actively enforced by government regulatory bodies with unique technical depth – CPAs, CFAs, MBAs, certified negotiators, M&A and valuation experts.
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Objectives:
• Define the Middle Market• Discuss Types of Buyers• Show How Buyers Value a Company• Contrast Seller’s Approach to Value• Discuss the M&A Process
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Defining Our Middle Market:
Revenues from $5 million to $500 million
Less than $5 million: “Mom and Pop” - best served by business brokers;Greater than $500 million: best served by Wall Street and some regional I-banks.
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Buyer Types Help Drive Business Value:
Strategic – Industry Consolidators Operational means: economies of scale, new markets, market share, “synergies”
Financial – Private Equity Financial engineering and operational efficiencies
Roll-up groups Financial engineering
Industry (non-strategic) Bottom-fishers (opportunistic)
Individual Buyers Last ditch effort, very rare in MM
Buyer Type Generates value through…
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Another View of the Buyers
Source: Mergerstat Review
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Business Valuation Basics
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Formal vs. “Street” Valuations
• Formal (Report)
Appraisals of Equity for legal purposes
Several Measures: FMV, Investor Value, Fair Value
Assumes Symmetric knowledge
Cash/Non-contingent Consideration
• M&A (The street) Always Investment Value
of whole enterprise Real-world transaction
comparables Asymmetric Knowledge is
reality Mixed Consideration,
often Contingent
** Appraisals are of little value to a seller: each buyer drives a different value **
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M&A Valuation Dynamics:
BuyersDetalied Calculations
1.DCF / Capitalized Cash Flows
2.Comparable Transactions• Unavoidable!
SellersPreliminary Calculations
1.Comparable Transactions
2.DCF / Capitalized Cash Flows• Understand Buyer’s view
Negotiated Agreement
Buyer’s investment value and synergies balanced with market influences in auction
Key Issue: Who gets the value of buyer’s synergies?
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Buy Side: Discounted Cash Flows (DCF)
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• What? Earnings before interest, taxes, depreciation and amortization (EBITDA);
• Why? EBITDA is a close approximation to cash flow; removes the effects of financing and cap investment decisions
• Who cares? Buyers care because cash-flow comparisons allow them to evaluate alternative investment vehicles that provide cash flows – Bonds 5% (20 times multiple)– Real Estate (commercial) 9% to 11% (11 to 9 times multiple)– Large cap stocks 12% (8 times multiple)– Small cap stocks 21% (4.8 times multiple)
EBITDA: Pre-Tax Cash Flow
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Normalize for “Real” EBITDA
Reported net taxable incomeAdjustments:Add back owner salary > $200K Add back interest long term debt Add non-recurring expenses Add back depreciation Normalized net (EBITDA)
500,000
400,000
50,000 250,000
. 50,000
1,450,00
$
$$$
Or Pre-tax Cash Flow
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• EBIT = Earnings before Interest and Taxes• EBITDA = add depreciation and amortization
(and normalize)
• EBITDA minus Capital Expenditures – Buyer estimates CAPEX to sustain operations
• EBITDA minus CAPEX & Changes in Working Capital (aka Cash Flow to the Firm)
– Need more WC to execute plans? Must reduce cash flow as a buyer
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Cash Flow to the Firm
Standard for seller market multiples >
Standard used by most buyers for
DCF >
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Basic DCF
1. Buyer calculates Cost of Capital *2. Forecast 3 – 5 years cash flows and terminal value3. Discount each year and terminal value by cost of capital
EXAMPLE
Year 1 Year 2 Year 3 Terminal
Forecast cash flow 2,200 2,500 2,900 30,000Present value at 12% 1,964 1,993 2,064 21,353
Sum all DCF’s for Total Enterprise Value: $27,374
* Various Flavors: WACC, Discount Rate, Cap Rate, IRR
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Sell Side: EBITDA Multiples
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Multiple Realities in the Middle Market:
• Usual range 4.5x – 5.5x EBITDA• Possible range 1x - 12x • Higher ranges may be justifiable in hot industries
with high growth rates, and• Lower ranges are more likely in professional services,
resellers, commodity and “buggy whip” businesses).
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Value Driver Considerations
Growth
Size
Proprietary Assets/Differentiation
Customer/Supplier concentration
Ratio Comparisons
Cyclicality (e.g. construction)
Professional goodwill/key management
dependence
In gov’t contracting: transferability of contracts
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(in the Marketplace)
Normalized net income (EBITDA) $ 6,000,000
Preliminary multiple 6 X
Value of earnings $36,000,000
Excess balance sheet value $ 2,000,000
Value of enterprise$38,000,000Minus Liabilities assumed by buyer, e.g. $ 8,000,000
Value of Equity $30,000,000
In the auction – who knows?
Summing Up: Calculating Preliminary Value
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Owners – Keep an Eye on Your Exit
Always pursue growth (top and bottom line)
Hire, train, incentivize solid people
Keep balance sheet and business entities clean
(consider housing non-core assets in separate entities)
Diversify customer and supplier bases
Shift from tax optimization to value
optimization
View your company through eyes of potential
suitors (e.g. build a complementary niche market)
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Middle Market M&A Process
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The M&A Process, Step by Step:
1. Identify and locate prospective buyers;2. Prepare confidential information memorandum and acquisition profile;3. Distribute acquisition profiles to prospective buyers;4. Secure non-disclosure agreements from interested prospects;5. Distribute the confidential information memorandum;6. Negotiate Indications of Interest (IOIs), hold meetings7. Secure letters of intent;8. Conduct due diligence (by buyer);9. Negotiate and prepare the definitive agreement;10. Closing (sounds easy, but “every deal dies a thousand deaths!”)
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Timing the Sale: A Big Mistake!
$ Sales
Time
Maximum Value
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Beware the Single Offer!
A typical single offeror:A typical single offeror:
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Letters of Intent Are Not Invitations to Further Negotiation
Buyer
Seller
ManagementPresentation
Multiple Offers
LOI NegotiationsExclusivity to Buyer Closing
The Seller’s Advantage Curve
Don’t Hide Problems/Issues:
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Don’t Assume The “Likely” Identity of the Buyer
30 Transactions: were “Most Likely” Buyers the final acquirer?
Source: Goldsmith Agio Helms
Buyer research & effective Auctions:
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Types and Ranges
• Principal elements:– Cash (usually 40% to 80%);– Seller take-back notes (20% to 40%);– Stock (if any, then 20% to 80%), and– Contingent vs. non-contingent consideration
• If any, then 20% to 25% contingent, and• Comfort vs. incentive earn-outs.
M&A Consideration:
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The Top 14 Seller Mistakes:
8. Being represented by an unlicensed broker
9. Communicating your asking price inappropriately
10. Eliminating offshore buyers11. Assuming the type of buyer12. Waiting until management
is ready to retire13. Waiting for next year’s
growth14. Ignoring or over-
emphasizing timing
1. Selling it without representation
2. Selling to a single offeror
3. The poorly constructed earn-out
4. Disclosing an insufficient amount of information in Offering Memo
5. LOI not thorough6. Focusing on history and
numbers instead of future opportunity
7. Mismanaging team, end runs
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National Office Locations
McLean, VA – Headquarters
Anchorage, AK
Asheville, NC
Atlanta, GA
Austin, TX
Baltimore, MD
Boston, MA
Bozeman, MT
Buffalo, NY
Chicago, IL
Cleveland, OH
Columbus, OH
Erie, PA
Green Bay, WI
Hartford, CT
Headquartered in McLean, VA, The McLean Group has built a national presence in middle market investment banking with offices in 30 cities nationwide. Each of The McLean Group’s investment bankers brings a unique breadth of experience and expertise to the firm.
Halifax, Nova Scotia
Lafayette, LA
Miami, FL
Milwaukee, WI
Norfolk, VA
Phoenix, AZ
Reno, NV
Sacramento, CA
San Diego, CA
San Francisco, CA
Silicon Valley, CA
St. Louis, MO
Tallahassee, FL
Tampa, FL
Tulsa, OK
National Offices
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The McLean Group, LLC
7900 Westpark Drive, Suite A320
McLean, VA 22102
703.827.0200
The McLean Group Hampton Roads, VAHarry Ward, Director
3181 Shore Drive
Virginia Beach, VA 23451
757.613.0476