Buy a small firm

“BUYING A SMALL FIRM” ENTREPRENEURSHIP FORUM Graziadio School of Business and Management June 18, 2005 catalysts for corporate finance table of contents firm overview client profile global capital practices m&a landscape selected transactions Opportunities to acquire a business company overview Global Capital is a leading financial intermediary specializing in M&A and corporate finance services for middle market companies. headquartered in Irvine, California satellite offices in San Diego, San Francisco, Chicago, Hong Kong, and Shanghai M&A, debt and equity capital, trade finance, and financial restructuring services specialize in middle market companies with revenues between $5 and $150 million entrepreneurial, results oriented senior team firm compensation tied to client success client profile mature private companies divisions of larger public companies emerging growth companies manufacturing, distribution and service companies shareholder objectives include liquidity growth capital strategic partnerships Practice Areas Mergers & Acquisitions Corporate Finance (Debt & Equity) International Trade Finance Financial Restructuring Services m&a landscape volatile industry Investment climate Financing availability (equity and debt) strategic buyers accelerate growth take advantage of synergies (revenue and cost) financial buyers ~ 1,200 lbo / private equity firms in US Source funds from pension funds, insurance cos & university endowments buy, build (while deleveraging) & sell representative transactions Attributes of an Entrepreneur • • • • • • • Creative Self-Directed Doer as Well as Thinker Leadership Qualities High Energy Level Risk Taker Strong Self Image Cartoon Buy, Build, & Sell – Rationale • Faster, more predictable than start-ups – avoid “infant mortality” issues • Build wealth on scale not available from employment • Benefit from capital gains tax treatment • Risk adjusted return on capital • Control associated with active management • Personal satisfaction of building an enterprise Why Buy A Company? Pros •Avoid Infant Mortality •Autonomy •Income Potential •BUILD EQUITY VALUE •Risk Cons •Lack of Security • Requires Soul Searching / Personal and Spousal Commitment / Buy-in Key Questions • Who are you? – Hired hand (employee) – Entrepreneur (owner) – Consultant (advisor) • Why own a business? – Create wealth – Independence – Run the show How Do I Get Into Business? Start-up vs. Purchase Business risk Financial risk Financing Dilution Management Type of Business Inv. cycle Inv. Payoff Start-up High High Mostly equity Higher Recruit Hi-tech Longer Higher Acquisition Low Medium Mostly debt Lower Incumbent Mundane Shorter Lower Deal Process Major Steps in an Acquisition •Contact / Information Sharing •Evaluation •Letter of Intent / Term Sheet •Due Diligence •Negotiate Asset or Stock Purchase Agreement •Additional Due Diligence •Closing •Transition How to Generate Deal Flow •Profile Acquisition Target (Industry, Size, Location) •Construct Buyer Profile (Talents, experience, $) •Identify and Contact Indirect Sources (Brokers, Attorneys, CPAs…) •Establish program to identify and contact candidates How to Evaluate Candidates •Industry and Company Attractiveness •Profitability (Including Trend) •Competitive Position •OWNER’S EXPECTATIONS AND REASON FOR SALE - avoid big time sinks •Ability of buyer to add value Valuation Economics The Income Statement Drives Valuation The Balance Sheet Drives Deal Structure For Owner / Operator: Income generated by business must: 1) Pay new owner (often below customary salary) 2) Provide Entrepreneurial return on equity investment 3) Service bank and seller note Four Alternatives… 1. Search Fund 2. Management Buyout (“MBO”) 3. Partner with a Private Equity Firm 4. “Go it Alone” Partner with a Private Equity Partner Private Equity Firms need outstanding management teams (they are not operators) Advantages: 1) bigger deals; 2) less financial risk; 3) experienced partners Disadvantages: 1) share control and upside Lots of talented Managers looking for Jobs running such companies. Ways to differentiate: 1) Bring a deal (Further developed the better) 2) Interest in Investing personal $ Post Acquisition – Build Value • “Value based management” – Strategic planning and business operation – Maximize company value • Deliberately measure and monitor value • Align management incentives with shareholder goals • Identify logical buyers and their hot buttons • Too late to start thinking about valuation at time of sale Post Acquisition – Build Value Decreased Risk = Increased Value • Establish contracts: - Customers - Suppliers - Employees • Diversify customer base: - Reduce industry concentration - Reduce geographic concentration Selling the Company • Guidelines for selling – Planning – Preparing – Implementing Selling the Company • Planning for the sale – Start right after closing – Establish goals for sales, EBITDA and value – Maintain a list of potential buyers • Strategic • Financial (PEG’s) – Always ask yourself: • “What changes can we make that will make the company more attractive to potential buyers?” – Retain an experienced investment banking firm Selling the Company • Preparing for the sale – – – – – – Implement strategies to create value Strengthen the management team Communicate with your key customers & people Improve management information systems Have at least 3 years of annual audits Leave something on the table • Be sure there is “upside” for potential buyers Selling the Company • Implementing the sale – Have a major league team on your side • The importance of experienced legal counsel – Set tight timetables – Focus operating managers on running the business • Be sure to “hit your numbers” – Disclose everything – Don’t get too greedy – Be ready for surprises How has the environment changed over time? Buying in the 21st Century 1980 Valuations Debt financing Equity financing Sellers Buyers Inv. Bankers Low Expensive Scarce Many Few Few High Inexpensive Abundant Few Many Many 2005 Buy a Small Firm: Case Examples •Manufacturer of Material Handling Containers •Directory Publishing Company (MBO) •Smoke Alarm Testing Company •Manufacturer of Hinges (Furniture Industry) •Outsourced Data Centers (MBO) •Power Management (UPS) (MBO) •Airline Industry Software (MBO) Discussion: Q & A