Presenting a live 90-minute webinar with interactive Q&A Structuring Acquisitions of Family-Owned Businesses: Valuation, Due Diligence, Deal Structure, Operational Transition and More THURSDAY, JUNE 23, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Eva Davis, Co-Chair , Private Equity, Winston & Strawn LLP , Los Angeles Lawrence M. Kern, Partner, Winston & Strawn LLP , Chicago Nishen Radia, Managing Partner, FocalPoint Partners LLC , Los Angeles Margaret Shanley, Principal, Transactional Advisory Services Practice Leader, CohnReznick LLP , Los Angeles Rachel Ingwer, Associate, Winston & Strawn LLP , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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S t r u c t u r i n g t h e A c q u i s i t i o n o f F a m i l y - O w n e d B u s i n e s s e s : V a l u a t i o n , D u e D i l i g e n c e , D e a l S t r u c t u r e , O p e r a t i o n a l T r a n s i t i o n a n d M o r e Eva Davis , Winston & Strawn LLP Rachel Ingwer , Winston & Strawn LLP Larry Kern , Winston & Strawn LLP Nishen Radia , FocalPoint Partners LLC Margaret Shanley , Cohn Reznick LLP 5 5 5
S t r u c t u r i n g T h e A c q u i s i t i o n O f A F a m i l y O w n e d B u s i n e s s • Setting the Stage: The M&A Market in 2016 (or, What’s Driving the Buyers?) • Stage I: Rationale and Strategy for a Sale of Family-Owned Business (or , What’s Driving the Sellers ?) • Stage II: Getting Ready: Likely Timeline for Buyers and Sellers • Stage III: Key Legal, Tax and Estate Planning Considerations for M&A of Family-Owned Business • Stage IV: Due Diligence Best Practices • Stage V: Maximizing Closing Cash and Valuation Challenges and Solutions 6
T h e M & A M a r k e t i n 2 0 1 6 ( o r , W h a t ’ s D r i v i n g t h e B u y e r s ? ) 7 7
U . S . M & A M a r k e t O v e r v i e w The first quarter of 2016 has largely continued the positive trends seen in a strong 2015 for M&A, as U.S. companies have continued to drive their quest for growth through inorganic acquisitions TOTAL U.S. M&A ACTIVITY Takeaways from Q1 2016 Total M&A Deal Flow ($ in Billions) Number of Deal With a continued abundance of capital combined with a shortage • Value Deals 6,000 $600 of high quality assets in market, deal volume declined slightly in Q1 5,000 $500 2016 as compared to 2015 levels. However, the first quarter of 2016 4,000 $400 experienced elevated average valuations, with this metric rising for 3,000 $300 the fourth straight quarter 2,000 $200 This rise in valuations represents a continuation of a trend seen in • 1,000 $100 2015, as an abundance of private equity and debt fueled activity 0 $0 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 16Q1 Frothy capital markets have also continued to enable independent • $100M-$250M $250M-$500M $500M-$1B sponsors to emerge again, driving increased competition amongst buyers for deals >$1B Deal Value KEY M&A TRENDS TO WATCH FOR IN THE REMAINDER OF 2016 Optimal Financing Conditions are Likely to Support Deals The Primary Drivers of Acquisition (1) Despite high stock prices and climbing valuations among private • Expand customer base 37% companies, overall financial conditions for U.S. companies have Enter new lines of business 37% rarely been as favorable for those interested in pursuing M&A Expand geographic reach 36% Companies have record cash reserves, which tend to immunize • Enhance intellectual property or acquire … 34% them against possible interest rate hikes Opportunistic - target becomes available 25% This overall trend of stronger corporate balance sheets has already • Financial buyer looking for profitable … 20% manifested itself in elevated valuations in the first quarter of 2016, Acquiring additional elements of the supply … 16% and will continue to buoy the M&A markets for the remainder of Respond to activist investors 13% the year Defend against competition 7% (1) Based on a KPMG survey, where respondents were asked to select up to three categories Source: Pitchbook 8
R a t i o n a l e a n d S t r a t e g y f o r a S a l e o f F a m i l y - O w n e d B u s i n e s s ( o r , W h a t ’ s D r i v i n g t h e S e l l e r s ? ) 9 9
R a t i o n a l e F o r E x p l o r i n g A S a l e To A F i n a n c i a l S p o n s o r THOUGHTS AND COMMENTS Transaction could provide “second bite of the apple” Limited confidentiality issues with financial buyers • • and additional upside to current shareholders Numerous PEGs with expertise and useful insight into key • Opportunity to re-incentivize key personnel and benefit industry trends and drivers • from the size and scale of a larger organization Opportunity for non-shareholder management team to • gain “sweat equity” or ownership through some sort of The Company would become a part of the financial • Management Incentive Plan (MIP) 5-10% MIP is sponsor’s portfolio and growth plan, which could customary provide it with additional resources for future growth and add on acquisitions ILLUSTRATIVE ANATOMY OF A LEVERAGED RECAPITALIZATION (1) Shareholders can sell 89% of the business, but effectively own 20% of the recapitalized entity after an equity rollover Proceeds at Close Valuation Transaction Debt $44,000,000 Total NewCo Debt: ~4.0x EBITDA $44,000,000 (4x EBITDA) $44,800,000 Buyer Equity: ~80% of Sell 80% New Entity Enterprise Value ($44,800,000 at close) $100,000,000 Total Cash Proceeds at Close $88,800,000 Equity Keep 20% $11,200,000 Seller Equity: ~20% of $56,000,000 ($11,200,000 rollover) NewCo Private equity acquirers have been aggressively bidding for assets, competing with strategic buyers (1) Illustration assumes a valuation based off of $11 million of Adjusted EBITDA 10
R a t i o n a l e f o r E x p l o r i n g a S a l e t o a S t r a t e g i c B u y e r FAIRLY STRAIGHTFORWARD TRANSACTION STRUCTURE ITEMS FOR SHAREHOLDER'S CONSIDERATION The Company may be an attractive opportunity given • its market leading position and unique business model Valuation Transaction Simplest way for the Company’s shareholders to sell • the business free and clear Enterprise Value $100,000,000 100% Sale $100,000,000 Opportunity to re-incentivize key personnel and (paid at close) • benefit from the size, scale, and industry expertise and connections of a larger acquirer Negotiate employment contracts, performance based Additional • incentives, escalating deal bonus, etc. Escalating Deal Bonus Potential Performance Incentives Proceeds Confirmatory style due diligence, as the buyer likely • Company Stock (Post-close) has an understanding of the business and industry challenges ADDRESSING CONCERNS How can business disruptions be avoided Well organized flow of information Strict set of process steps with information gates to control buyer behavior Tailored marketing process to fit the client’s confidentiality requirements How is confidentiality managed throughout the Buyers list will be thoroughly assessed, outside inquirers are fully qualified process Be upfront on all key issues thoroughly prepared marketing documents Fully negotiated LOI and marked up purchase agreement prior to signing How can re-trading be prevented Proactively communicated changes in Company operations or financial performance Keep market interest high – Always have a strong back up buyer Strategic buyer transactions can be more difficult to close, but often result in favorable financial terms relative to private equity buyers 11
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