Private Equity Tools for
Business Retention and
Expansion
June 13th, 2012
John O’Dore, Managing Director
Meridian Capital, LLC
Presentation Overview
• Family Owned Businesses Overview
• What is Private Equity?
• What is the role of an Investment Banker?
• Examples of Private Equity Transactions in
Washington State
2
Presentation Overview
• Family Owned Businesses Overview
• What is Private Equity?
• What is the role of an Investment Banker?
• Examples of Private Equity Transactions in
Washington State
3
What’s happening out there?
• Substantial number of retirement age business owners:
•
Baby boomers own over 9 million companies in the US, including over 80% of
middle-market companies representing approximately $5 trillion in assets
• Significant number of business owners will be faced with crucial business
transition decisions over the next 10 years
• Several macro trends are driving strong M&A and business transition activity:
o Scheduled Capital Gains increase from 15% to 23.8%
o Acquisitive corporate and PE buyers due to strong cash positions
o Improved revenue and earnings visibility coming out of the recession
• Many business owners defer decision making until it’s too late, leading to
suboptimal transaction outcomes
4
What is Lower-Middle Market?
Characteristic
Small Market
Lower-Middle Market
Middle Market and Up
Revenue Size
<$10 million
$10 - $100 million
$100 million - $1 billion
EBITDA Size
<$1 million
$1 million - $15 million
$15 million - $50 million
Ownership Profile
Owner-managed
Owner-managed,
professionally managed
Professionally managed
Owner or Manager
Capital Motives
To manage cash in business,
not balance sheet
To manage the business, not
the balance sheet
To manage net assets on the
balance sheet
Ownership Goal
Lifestyle
Lifestyle – entity wealth
creation
Entity wealth creation
System, Process
Sophistication
Entry level, held with select
employees
Adequate to strong system
capabilities and procedures
Sophisticated,
institutionalized
Debt
Business banking
Commercial banking
Corporate banking
Equity
Personal/family
Personal/private equity
Private equity
Outside Investment
Interest
Mild
Strong
Strong
Capital Access
5
Does this look familiar?
Sell to a
competitor
Defer all
decisions
Let my kids
run it
Sell for health
reasons
Grow by
acquisition
Sell to
Private Equity
Wait until
I die
Sell to Mgmt.
Sell to
Employee
6
What are Business Transition Options?
Typical Retained
Ownership
Option
Description
Sell or Divesture
Sale of the business to a
strategic or Private Equity
Fund buyer
0% – 15%
Strategic Acquirers, Private
Equity Firms, Family Offices,
Diversified Holding
Companies
Recapitalization
Transfer minority or majority
ownership to a financial
investor
30% – 70%
Private Equity Firms
Management
Buy-Out (MBO)
Sell the business to the
management team, potentially
with the backing of a financial
investor
0% – 40%
Management Team
Dissolution
Terminate operations and
liquidate assets
Family Transfer
Transfer ownership to a family
member
N/A
0% – 100%
Buyer Pools
Auction / Multiple Buyers
Family
7
Presentation Overview
• Family Owned Businesses Overview
• What is Private Equity?
• What is the role of an Investment Banker?
• Examples of Private Equity Transactions in
Washington State
8
What is a Private Equity Fund?
• An asset class of equity securities which are invested directly into operating
companies, often using debt packages to leverage purchase capacity
• Private Equity Funds generally focus on well established businesses while
Venture Capital or Angel Investors focus on early stage companies
• Compensated through the cash-on-cash return and value growth of
companies
•
Fund managers receive a percentage of the ‘above average’ return their
investments generate
• There are over 1,000 mid-market PE funds in the U.S. with varying investment
focuses based on business size, profitability, industry, transaction structure,
and management dynamics
9
How is a Private Equity Firm Structured?
Private Equity Firm
(General Partner)
Limited Partners (Investors)
(public pension funds, corporate pension funds, insurance
companies, high net-worth individuals, family offices, endowments,
foundations, fund-of-funds, sovereign wealth funds, etc.)
Ownership of the Fund
Private Equity Fund
Fund / Investment
Management
(Limited Partnership)
The Fund’s ownership of
the portfolio investments
Company A
Company B
Company C
10
Private Equity Transaction Activity
PE Deal Flow Overview
• Over 3,000 PE firms are active in the US – 83% of 2011 transaction activity invested in
companies with transaction value under $250M
• 1Q 2012, U.S. PE firms completed 321 deals (72 on West Coast), totaling $55B in value
• 2012 YTD activity diversified across a variety of sectors with Business Products and Services
(33%) and Consumer Products and Services (18%) representing highest transaction volume
Private Equity Investment Activity
561
600
475
500
437
397
400
$140
348
331
420
491
444
413
$120
426
$100
321
318
$80
300
$60
Capital Invested ($B)
# of Deals Closed
200
$40
100
$20
$49
$22
$28
$51
$64
$80
$66
$118
$86
$81
$83
$89
$55
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
3Q
4Q
1Q
0
$0
2009
2010
2011
2012
*As of 3/31/2012
11
Private Equity – Available Capital
PE Fundraising and Uncommitted Capital
• Significant available capital in PE market – record $425B capital overhang
• Over $100B in capital is nearing the end of its investment horizon – firms are highly motivated to
invest capital, driving activity and valuations
• PE fundraising remains strong with 26 funds closing during 1Q 2012 with $20 billion in commitments,
on par with the second half 2011
Private Equity Available Capital
$600
$75
$500
$60
$425 Billion
$400
$45
$300
Cumulative Overhang ($B)
$30
$200
Capital Raised ($B)
$15
$100
$75
$35
$12
$30
$30
$22
$28
$10
$30
$27
$17
$19
$20
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
3Q
4Q
1Q
$0
$0
2009
2010
2011
2012
*As of 3/31/2012
12
How Do PE Firms Add-Value?
The right private equity partnership provides capital and/or other resources to help address a variety of
common growth and business transition challenges.
Growth Capital
Capital to support expansion initiatives – employee
hires, working capital, capital investment
Knowledge Capital
Experience executing key strategic initiatives – system
integration, geographic expansion, capital decisions
Management Depth / Transition
Access to management resources required to support
next stage of growth
Balance Sheet and Financing Solutions
Strengthen balance sheet to add stability to
operations. Relationships with finance sources
Industry Experience & Relationships
Macro level industry knowledge – access/relationships
with key target customers or markets
13
What is the Investment Criteria of Private Equity Funds?
Limited Prospects
Valuation / Attractiveness Scale
Strong Appetite
Company Scale / Momentum
• Sales < $10M, EBITDA < $2M
• Sales > $30M, EBITDA > $5M
• Limited growth opportunities (flat sales)
• Visible, defined growth opportunities
Operations & Management
• Customer and channel concentration
• Blue-chip, diversified customer base
• Need for additional financial discipline
• Recurring, highly visible revenue
• Lack of management depth
• Management depth (institutionalized knowledge)
• Significant capital expenditure requirements
• Established systems and procedures
Market Trends / Product Offering
• Small, competitive industry
• Commoditized product with margin pressure
• Attractive industry dynamics (size, growth
prospects, fragmentation)
• Limited product line
• Diverse, differentiated product line
• Proprietary products or processes
14
Presentation Overview
• Family Owned Businesses Overview
• What is Private Equity?
• What is the role of an Investment Banker?
• Examples of Private Equity Transactions in
Washington State
15
Comparison of M&A Participants
Characteristic
Business Broker or
Friendly Lawyer
Middle Market
Investment Banker
Typical Transaction Size
Zero to $50m
$10 to $100 million
Likely Selling Process
Negotiated
Private Auction
Post an Asking Price
Yes
No
Capital Structure Raising
No
Yes
Management Buyouts
Maybe
Yes
Recapitalizations
No
Yes
Board Advisory Services
No
Yes
16
The Role of an Investment Bank
• Manage the transaction process
• Evaluate potential buyers/investors
• Strategically position the Company to attract prospects, an ideal
structure, and a premium valuation
• Create and manage a competitive atmosphere
• Advise on complex transaction issues and structures
• Negotiations and due diligence
17
What are the Key Steps of a Transaction Process?
Preparatory
phase
Marketing
phase
Buyer/investor
meetings
Structuring &
negotiation
(4 - 6 weeks)
(6 - 8 weeks)
(6 - 8 weeks)
(8 - 16 weeks)
• Initial due diligence
meeting
• Contact prospects
• Management and
strategic presentations
• Solicit letters of intent
• Discuss potential deal
terms and structure
• Complete due diligence
• Perform financial analysis
• Approve buyer list
• Develop blind investment
summary
• Prepare offering
memorandum and
supportive marketing
materials
Key value messages
and objectives
defined
• Field initial due diligence
• Introductory meetings with
prospects
• Select prospects to invite
to management
presentations
• Coordinate follow-up due
diligence
Identify synergies
and choose qualified
prospects
Develop strategy and
exchange due
diligence
• Negotiate terms
• Definitive documentation
signed
• Select prospective buyer
to move forward with
Extract final
concessions and
value from preferred
prospect
A well run transaction process typically takes 6-9 months
18
Presentation Overview
• Family Owned Businesses Overview
• What is Private Equity?
• What is the role of an Investment Banker?
• Examples of Private Equity Transactions in
Washington State
19
Sample Washington State PE Owned Companies
20
WA State – PE Case Studies – National Frozen Foods
Transaction Background
• Endeavour partnered with management to recapitalize family
business in 2008
• Family retained partial ownership and received liquidity
• 600 full-time and 1,400 season employees
• Substantial investments in systems and WA (Chehalis, Moses
Lake, and Quincy) and OR (Albany) facilities
• Endeavour assisted in developing international export strategy to
maintain business level in difficult economy
Backed management in
its acquisition of:
About National Frozen Foods
National Frozen Foods (National) processes and freezes
vegetables at facilities throughout Washington and Oregon.
National was founded in 1912 and is one of the oldest and largest
frozen vegetable processing companies in the U.S.
About Endeavour Capital
PNW-based PE firm with $1 billion in capital under management.
Focus on partnering with management teams of industrial and
consumer companies located on the West Coast.
Frozen vegetable
processor with facilities
in WA and OR
21
WA State – PE Case Studies – Vaupell
Transaction Background
• Acquired by HIG Capital in 1998 (still a portfolio company)
• Through multiple acquisition and investments in organic growth,
employment (750 employees) and revenue ($150 million) have
grown exponentially since investment
• Company’s primary manufacturing facility is in Seattle (90,000 sq.
ft.), with second WA state facility opened in Everett in April 2012
(70 new WA jobs)
• Community partnership with North Seattle Community College to
promote engineering and trade-labor training
Acquired the stock of:
About Vaupell
Based in Seattle, WA, Vaupell is one of the leading value-added
suppliers of highly engineered injection molded advanced polymer
materials for use in aerospace and medical applications.
About H.I.G. Capital
Florida-based PE firm with $1.5 billion in capital under
management. Focus on partnering with management teams of
profitable and well-managed manufacturing or service businesses.
A leading aerospace
polymer component
supplier
22
John O’Dore
Managing Director
Meridian Capital
Office: 206.224.6152
Email: jodore@meridianllc.com
23
Sample Transactions
•
•
Recapitalization
Growth Equity Raise
24
Transaction Mechanics – Sample Recapitalization
Assumptions
•
•
$5 million pre-recap net debt, $15 million in post recap net debt
Shareholders sells 70% of shares, reinvests 30%
Preliminary Transaction Proceeds ($ 000's)
Transaction Enterprise Value
$25,000
Third-Part Debt
$5,000
Pre-Recap Equity Value
Sold Ownership Percentage
Retained Ownership Percentage
Equity Value Minus: Equity Rollover
Notes / Comments
• Negotiated transaction value from M&A process
$20,000
70%
30%
• Shareholder retains equity upside in business
$3,000
• Rollover receives benefit of financial leverage
Proceeds - Preliminary Transaction
$17,000
• Material liquidity created for shareholder
Post Recap Transaction Structure
Shareholder Rollover Equity (30%)
Private Equity Group - Equity (70%)
Third-Party Debt
$3,000
$7,000
$15,000
• Business gains access to growth resources
• No more exposure to personal guarantees
$25,000
25
Transaction Mechanics – Growth Equity Raise
Assumptions
•
•
$5 million pre-recap net debt
$5 million growth equity investment from PE group
Growth Equity Investment ($ 000's)
Transaction Enterprise Value
Minus: Existing Net Debt
$25,000
$5,000
Pre-Recap Equity Value
$20,000
Private Equity - Growth Capital
Private Equity Group Ownership
Shareholder Ownership
$5,000
20%
80%
Notes / Comments
• Negotiated transaction value from M&A process
• No liquidity for shareholder
• Capital and resources to assist with growth
• Material retained ownership
Pre-Growth Equity Capitalization Structure
Shareholder Equity
$20,000
Third-Party Debt
$5,000
$0
Post Growth Equity Capitalization Structure
Shareholder Rollover Equity (80%)
$20,000
Private Equity Group - Equity (20%)
$5,000
Third Party Debt
$5,000
Total Enterprise Value
Total Enterprise Value
$25,000
$30,000
26