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Liquidity Event Options for Privately Held Business OwnersBKD Corporate Finance Webinar

Tony Schneider

BKD Corporate FinanceIndianapolis, IN

tschneider@bkd.com

July 12, 2012

Tony Giordano

BKD Corporate FinanceDenver, CO

agiordano@bkd.com

Housekeeping Items

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Housekeeping Items

• Other Itemso This presentation will last approximately 50 minutes,

followed by 10 minutes of questions & answerso If your question was not answered, please contact either

today’s presenter (contact information will be provided on the last slide) or our Learning and Development Team at LandD@bkd.com

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Liquidity Event Options for Privately Held Business OwnersBKD Corporate Finance Webinar

Tony Schneider

BKD Corporate FinanceIndianapolis, IN

tschneider@bkd.com

July 12, 2012

Tony Giordano

BKD Corporate FinanceDenver, CO

agiordano@bkd.com

7/12/2012

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Welcome & Overview

• Privately held companies, by their nature, have less perpetuity than their public counterparts

o Founder/CEO energies & shifts in personal desireso Wealth concentration; desire to diversifyo Competitive landscape & cost of growth

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Welcome & Overview

• Ultimately, business owner is confronted with many important decisions, including

o How do I transfer leadership within my company?o How do I monetize value I’ve created in my

business?o What constituencies are important to me as I

orchestrate my life transition? Family, employees, community, customers, vendors,

etc.

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Where BKD Can Assist

• Broad spectrum of experienced personnel, helping clients navigate through succession planning & execute transactions

• BKD’s specific transaction specialty groups includeo BKD Corporate Finance, LLC

Leading advisory group in M&A & capital raising

o BKD’s ESOP Advisory Group Has helped more than 150 companies transition over $2.7B in

wealth by selling 100% of their stock to leveraged ESOP

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BKD Corporate Finance, LLC

• Leading M&A advisory group assisting with company sales & divestures, acquisitions & capital-raising transactions

• Have closed more than $4 billion in transactions

• Typical deal values—$10 - $250(+) million range

• Uniquely qualified & staffed to bring holistic view of liquidity alternatives available

• Pride ourselves in offering solutions that achieve our clients’ objectives

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Polling Question 1

Is it probable that your company’s shareholders will consider monetizing some of their business value within the next five years?•Yes•No•Not Sure

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Liquidity Event Options

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Corporate Value

• Value comes in many shapes & formso Historic valueo Economic valueo Strategic valueo Intangible valueo Synergistic valueo Exploitation value

• Managed competitive negotiation process with multiple buyers conducted by experienced intermediaries typically results in higher values for seller

o Tends to place balance of power in hands of sellero Identifies synergies between buyers & seller & allows seller to negotiate

from position of strength

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Liquidity Event Options

• Sale of 100% (or less) to strategic buyer• Sale of 100% (or less) to financial buyer

o Majority recap o Minority recap

• Leveraged recap• Sale to management team (MBO)• ESOPs

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Strategic Buyers

• Operating companies that provide comparable products & services

o Often competitors, suppliers or customers

• Could also be unrelated to target or its industryo Companies looking to diversify revenue streamso Companies seeking to build upon their business

model &/or competencies to enhance earnings or reduce risks Hillenbrand, Inc. (NYSE: HI) purchase of K-Tron

(NASDAQ: KTII)13

Strategic Buyers

• Buyer motivations are multifaceted & varied, includingo Strategic positioningo Market share; new channelso New products & processeso New customers or deeper penetrationso Technologieso Scale; synergies; earnings enhancementso Management skills; corporate know-howo Diversificationo Accelerated growth & earnings

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Polling Question 2

What attribute of your business do you believe a strategic buyer would find most valuable?• Products offering; Innovation• Strategic Positioning• Market coverage/channels or Customers• Management Team• Superior Earnings Performance

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Strategic Buyers

• Primary advantages o Potentially, deep universe of buyerso Perspectives of risks & returns among candidate buyers

can vary significantlyo Long-term investment horizonso Often lower return hurdleso May be motivated to grow in industry with average or

below-average prospectso Often, can bring deeper management talento Typically, cash buyers with lower transitional demands

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Strategic Buyers

• Issueso Confidentialityo Tire kickers; data seekerso Protecting sensitive performance data, IP, know-howo Industry knowledge—double edge swordo Consolidation more prevalento What is current management’s role going forward?o Is there a good culture fit?o Potential loss of jobs

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Financial Buyers

• Firms with capital & resources that look to buy companies & recognize rewarding investment returns by utilizing value-creation strategies & exit plans

• Financial buyers can vary significantlyo Traditional buyout fundso Firms with “buy & hold” strategieso Firms with existing holdingso Generalists vs. industry-specific fundso Firms with CEO partnerso Special situation funds

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Financial Buyers

• Hold periods often relatively short (generally, 3-7 years, although there are many buy & hold firms)

• Leverage is often deployed to enhance returns

• Financial buyers usually become strategic buyers as they execute their growth strategies

• PEGs have closed roughly 10%-20% of middle market deals in past 10 years

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Financial Buyers

• In general, PEGs have been successful investors in middle market

o Disciplined buyers (pay for quality; shy from average)o “Inspire” performance (“scoreboard & clock” theory)o Plan for outcome; execute for results

• This success has led to expanding universe of PEGs & large pool of capital to deploy

• Current overhang is roughly $425 billion

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Polling Question 3

What are your observations/perceptions of private equity buyers?• Effective drivers of value creation• Lead value creation, but question strategies and

tactics• Inadequate stewards of long-term value creation• N/A

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Financial Buyers

• Primary advantageso Large universe of efficient buyerso Hot deals can garner aggressive biddingo Equity stakes for incumbent management;

noteworthy wealth creationo Solid capital resourceso Pay for excellenceo Very focused growth agendaso Need management teams & infrastructure

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Financial Buyers

• Issueso More need to sell industry attributes; due diligence

scrutinyo Use of leverageo Aggressive growth & earnings enhancements is hard

worko Must have capable management teamo Center of influence?o Possibility of near-term & medium-term sale

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Recapitalizations

• Portion of equity is purchased & selling shareholder(s) often retain meaningful stake & continue to operate company

• Popular for owners who desire to diversify their personal wealth, yet remain active in growing business & recognizing future wealth

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Majority Recap

• Selling majority stake o Advantages

Provide liquidity to ownership by buying out existing investors Retain minority equity position that could potentially double or

triple in value in 5 to 10 years New investors provide capital/resources & will work with

management to formulate growth plan & assist in execution Key management remains with company (2- to 3-year transition

period) with board representation If platform transaction, company typically continues to operate

independently

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Majority Recap

• Issueso New investor now controls companyo New investor will most likely leverage balance sheet

(but operating risk now lies with new investor)o Could experience major restructuring if acquired by

portfolio company

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Minority Recap

• Sell minority equity stakeo Advantages Ownership retains control New investor can provide resources (financial &

operating) o Issues Will most likely see lower enterprise valuation due to

minority investment Operate with some leverage

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Leverage Recap

• Leverage recap (leverage company & pay dividend/buy out shareholders)

o Advantages Do not give up any equity (potentially minority stake – 25%) Allows for liquidity event to owners without a sale

o Issues Have to service debt prior to distributions Financial covenants can impact operating flexibility Company more susceptible to macro events—industry or macro

economic events Risk of bankruptcy

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MBOs

• Owners often recognize team’s leadership contributed greatly to his or her wealth creation

• High performing teams in solid companies can execute rewarding deals

• Personal capital investments do not need to be large, but they do need to be meaningful/painful

• Capital resources (Sr. & Jr. debt & private equity) to facilitate deals for solid, well-managed companies

• Main element in MBO is controlo Equity rewards can be far more rewarding if team controls deal &

pursues capital partners in competitive process29

MBOs

• Advantages o Operating control continuity & stabilityo Reward most meaningful long-term contributorso Company maintains culture & community presenceo Due diligence issues are rare, as are purchase price

modificationso All cash, FMV deals do not have to be compromisedo Can retain small equity stake in Newcoo Balance sheet integrity can be maintained

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MBOs

• Issueso Lack of strategic valueo Requires capable team with demonstrated resultso Team needs to have clear vision & articulate a

compelling plan

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ESOPs

• Advantageso Retain control & continue to run company (regardless of

level of ESOP ownership)o Favorable tax treatment

Reduce or even eliminate corporate income tax Company repays acquisition debt with pre-tax dollars Interest & principal on acquisition debt is tax deductible

o Preserve culture, jobs & communityo Provide stockholder liquidity (over time) tax efficientlyo Reward key management & long-term employeeso Uniquely position company for growth via acquisitions

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ESOPs

• Issueso Sale company at fair market value; could potentially ‘leave money on the table’

o Stockholder liquidity may be realized over time, not immediate

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Liquidity Events Conclusions

• Often once-in-a-lifetime decision• Issues are complex & impact many who have contributed to

success of enterprise• Emotional aspects are real• Getting it right is perfect stepping stone to next chapter of

life• There are no go-to plans or established formulas/rules

o Assessing client’s situation, objectives, dynamics of company & its industry are critical steps

o Approach should be tailored to client’s desires

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Polling Question 4

If you were to consider a nonfamily liquidity event, which option do you believe would be the likely path?• Sale to a Strategic Buyer• Sale to a Financial Buyer• Recap• Management Buyout• ESOP

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Current Market Conditions

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Current Market Conditions

• Challenges of last recession have caused many to take very strategic look at their industry

o What are growth prospects of industry?o What will it take to get to or remain competitive force in

industry?o How will profits be affected by changing landscape?

• Many are making decision of whether they should be, or could be, a consolidator

• Others are assessing strategic alternatives

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General M&A Trends

• Overall market conditionso Recent M&A cycles have been 5 to 7 years & we are in

middle stages of next cycle

o M&A conditions improved in 2011 & trends indicate accelerated activity in second half of 2012

o Lenders have been active in M&A lending with competitive pricing available

o Potential increase in capital gains tax rates should influence activity in 2012

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U.S. M&A Activity

Source: Dealogic; Mergers & Acquisitions market analysis, Q1 2012

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General M&A Trends

• Private equity firms have significant capital to invest

• S&P 500 companies have $2 trillion in cash on balance sheets & are increasing acquisition activity

• Current M&A market presents both opportunities & challenges o Companies that maintained or improved earnings over last 12 to 24

months are highly valued in today’s M&A environment

o Pent up demand for acquisitions for both strategic & financial buyers/investors

o Uncertainty surrounding European debt crisis & general trends in U.S. economy reflected in volatility of U.S. debt & equity markets—direct impact on M&A market

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$425B of Private Equity Cash to Invest

Source: Pitchbook

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Private Equity EBITDA Multiples

Source: GF Data Resources, May 2012

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Credit Markets

Source: Dealogic; Mergers and Acquisitions market analysis, Q1 2012

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Credit Markets

Source: GF Data Resources, May 2012

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Conclusion

• We understand o Privately held businesses & different succession

alternatives availableo Importance of tailoring succession solution that fits

client’s unique goals & objectiveso Importance of coordinating with estate, tax &

overall wealth planning• BKD can provide seamless approach to solving our

clients’ succession needs

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QUESTIONS?

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About BKD Corporate Finance, LLC

• Subsidiary of BKD, LLP• 18-year history

• Member of FINRA & SIPC

• Professional team includeso Investment bankers

o Financial analysts

o Market analysts

BKD Corporate Finance Profile

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Breadth & Depth of Resources

• 30 offices in 12 states

• Approximately 250 partners

• More than 2,000 employees

• Six industry niche groupso Manufacturing & Distribution, Construction & Real Estate,

Energy, Financial Services, Health Care & Not-for-Profit

• Clients in all 50 states & internationally

• End-to-end client service proposition49

Our Services

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• Client revenue range—$5 million to $2 billion• National & international buyers• Praxity Alliance

o Global alliance of more than 100 independent firms in 72 countries

o Allows BKDCF & its clients direct access to foreign markets & potential counter parties

• More than $4 billion in transaction value• Hundreds of engagements• Many transactions significantly exceeded client

value expectations

Experience

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Experience

o Manufacturingo Business Services/Consultingo Wholesale Distributiono Oil & Gaso Health Careo Food Processing &

Distributiono Auto Parts Distributiono Flexible Packagingo Telecom & Technologyo Transportation

o Constructiono Building Materialso Printingo Financial Institutionso Scrap Processingo Chemical o Grocery & Convenience

Storeso Restauranto Retailo Advertising

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Experience – Recent Transactions

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Performance & Reliability

“McKesson is paying a substantial premium for the McQueary’s business. The purchase price of the deal was $190 million, implying a price/revenue ratio of 0.27x. This ratio is more than twice the comparable figures of other recent acquisitions, such as D&K by McKesson or Bellco by AmerisourceBergen. I presume an EBITDA (earnings before interest, tax, depreciation and amortization) multiple would reflect a similar 2x+ premium.”

— Adam J. Fein, Ph.D., Founder & PresidentPembroke Consulting, Inc.

Has been acquired by

The undersigned acted as financial advisor to McQueary Bros. in this

transaction

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“BKD Corporate Finance did an outstanding job helping us restructure our existing debt and secure new growth capital. Because of our rapid expansion, we were beginning to outgrow our current lenders. We needed a new lender that could refinance our existing debt and support our aggressive business plan. The BKDCF team was instrumental in this process and we couldn’t be happier about the way things have played out. BKDCF was able to create a competitive process that provided us with multiple options to consider with competitive terms. We would certainly recommend BKDCF for any business owner or management team needing help refinancing or seeking growth capital for their business.”

— Clint Lopez, CFO, ABox4U, LLC

Performance & Reliability

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The Strategic Process

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BKDCF Services

• Preparing company for transaction• Maintaining confidentiality• Analyzing & recasting historical & projected

financial statements• Identifying right buyers• Creating competitive negotiation

environment• Managing due diligence process• Running process that results in timely &

orderly closing—exceeding client expectations

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BKD Corporate Financebkdcorporatefinance.com

Thank You

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Continuing Professional Education (CPE) Credits

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situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting

on any matters covered in these webinars.

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CPE Credit

• This presentation may be eligible for CPE credit upon verification of participant attendance; however, credits may vary depending on state guidelines

• For questions or comments regarding CPE credit, please email BKD Learning & Development Department at training@bkd.com

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