the mac entrepreneur's program february 15, 2008
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The MAC Entrepreneur’s Program
February 15, 20087:30- 10:30 a.m.
Loews Philadelphia Hotel
The Program Agenda
Introduction:– MAC Alliance Entrepreneur’s Series Goals– Introduction of Presenters/Panelists
Program:– Presentations on “Building Your Exit Strategy”– Extended Panel “Q & A” session
The Entrepreneur Series Goals
The Entrepreneur’s Series is a part of MAC Alliance’s continuous learning commitment.
MAC Alliance’s goal is to serve the investment community by providing access to subject matter expertise, and experience.
The goal of the Entrepreneur's Series is to develop knowledge around “The Business Life Cycle” – Formation, Growth, and Exit.
This session focuses on “Building Your Exit Strategy”
Introductions
Presenters/Panelists Howard Ross – Partner, LLR Partners Inc. Karen Batchelder – Managing Director, Private Finance
Group, Stifel Nicolaus & Co., Inc. Tish Squillaro – Partner, Penn Valley Group Robert Krauss – Partner, Ballard Spahr Andrews &
Ingersoll, LLP Jo Webber – Energy Solutions
Timing Your Exit An Investor’s Point of View
Howard Ross
Partner
LLR Partners Inc.
Factors that impact Exit timing
Type of exit
Economic/market conditions
Industry dynamics
Regulatory environment
Company performance
Management’s desires
Pre-emptive offer
Types of Exits
Sale– Financial buyer
– Strategic buyer
IPO
Leveraged Recap
Develop an Exit Strategy
Exit strategy should be an integral part of due
diligence before the investment is made.
Specific strategy depends on how the various factors
unfold – difficult to dictate timing.
Develop an Exit Strategy (Cont.)
Be in a state of semi-preparedness:
– Strong operating results and trends
– Cohesive management team with limited turnover
– Strong endorsement of customers
– Annual audit
– Legal house in order
– IP protected
– Tax and regulatory compliance
– Outstanding stock, options and warrants well documented
Optimal Scenario
Selling off of two to three years of growth
Visibility for next one to two years
Hitting quarterly numbers
Limited number of add backs to earnings
Accounting and legal house in order
Minimal external threats – economy, industry, lawsuits Strong market conditions like 2004 through 2006 – strong
economy, cheap debt, stock market rising and an abundance of
capital in the hands of multiple potential buyers.
Selection and Use of an Investment Banker
Karen Batchelder
Managing Director, Private Finance Group Stifel Nicolaus & Co., Inc.
Why Use an Investment Banker?
Prepare your Company for the sale process
Conduct due diligence → Identify hidden opportunities and reduce negative surprises
Review historical financial statements → Understand business trends and systems
Review budget and financial projections → Support valuation
Draft Confidential Descriptive Memorandum → Properly position Company
Establish valuation → Establish realistic goals
Prepare management team → Achieve credibility
Determine management goals → Exit or remain involved in the business
Why Use an Investment Banker? (Cont.)
– Create an efficient process Organize management and the Company Provide dedicated resources Minimize business disruption Set deadlines and maintain momentum Preserve confidentiality and flow of information
Why Use an Investment Banker? (Cont.)
Gain access to a broad buyer universe
Provide proprietary resources to identify potential buyers
Deep relationships with private equity firms (financial buyers)
Access to strategic acquirers
Determine type of sale process
Hard or modified auction
Negotiation
Pre-emptive sale
Why Use an Investment Banker? (Cont.)
– Increase valuation and optimal deal terms Appropriately position Company Provide buyers with information to assess value Create competitive process Pursue optimal transaction structure and deal terms
Criteria for Selection of an Investment Bank
Middle market sell-side focus Relevant transaction experience Appropriate sized transactions
Relevant industry experience Knowledge of the industry Track record of success
Relationships with buyer universe, financial and strategic Dedicated private equity coverage focus Knowledge of and access to potential strategic acquirers
Criteria for Selection of an Investment Bank (cont.)
Relationships with debt providers
– Experience with entrepreneurial companies Unique issues with closely held businesses
– Preservation of confidentiality– Senior banker commitment
Ensures highest level of experience committed to the transaction
– References– Fee structure
M&A Transaction Process Overview
Due Diligence. Conduct in-depth due diligence.
Valuation. Establish realistic goals and valuation.
Marketing Documents. Prepare comprehensive descriptive memorandum.
Buyer Identification. Research and provide access to a broad range of strategic and financial buyers.
Transaction Strategy. Develop an appropriate transaction strategy and sales process.
M&A Transaction Process Overview (Cont.)
– Lender Pre-Screening. Receive indicative termsfrom multiple lenders.
– Transaction Marketing. Manage an efficient,effective and confidential marketing effort.
– Negotiation. Negotiate optimal Purchase and SaleAgreement terms.
– Closing. Achieve a timely close.
M&A Transaction Process Overview (Cont.)
PREMIUM
BaseValue
Presentation ofInformation,Positioning,
Growth Potential
NegotiationSkills and
Commitmentto Process
MaximumValue
Access to a Wide
Audienceof Buyers/Investors
M&A Process Timetable
Typical sale process is approximately six months
Current market conditions may result in longer processes
Tight credit markets
More stringent lender due diligence
Lengthier buyer due diligence
M&A Process Timetable (Cont.)
Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Initial Planning and Due Diligence
Drafting Memorandum and Transaction Strategy
Development
Finalize Memorandum, Buyers List and
Strategy
Phase I Marketing Phase II Marketing Final
Bids
Negotiation & Closing
Management Team Effect
Tish Squillaro
Partner
Penn Valley Group
Exit Strategy and Management Team Effect
The Goal:– Ensuring that your executive management team is on board with
the exit strategy and will actively participate in the marketing process
– Ensuring that the team will continue to keep their hearts and minds engaged during the transaction process.
The Plan:– The Art of Woo– The “WAM” Factor– Overcoming Resistance
– As the business owner, you need to have a specific, thoughtful plan in place as you prepare to communicate the exit strategy to your management team.
– Your goal will be to encourage a mindset that has your team willing to reach a consensus about the transaction that will give momentum to closing a successful deal.
The Owner’s Role: Assume Nothing/Proceed with Caution/Plan
The Owner’s Role: Assume Nothing/Proceed with Caution/Plan
– You must find a way of gaining support and “sell” the future as an opportunity for those managers who will help you to prepare for the deal and transition the knowledge to the new ownership.
– Your team has to be groomed and grilled thoroughly to ensure that they properly communicate the message to the buyer.
Your Objective: Gain consensus from your team so they will actively support the preparation of the deal and be willing to transition to the new ownership.
The Art of “Woo”*
In their book, The Art of Woo, G. Richard Shell and Mario Moussa discuss the importance of winning others over with “idea selling”. They offer that the ability to gain support and consensus can be achieved using “relationship-based, emotionally intelligent persuasion”.
The Art of “Woo”*
4 Step Approach:I. Polish ideas/survey the landscapeII. Confront barriers (unreceptive, negativity)III. Pitch in a compelling wayIV. Secure individual commitments: research shows you need
to move the individual before you can move the group
Top 3 Mistakes:I. Focus on yourself: assume others care about what is
important to youII. Having no strategy: don’t wing itIII. Ignore the politics: you need to prepare an idea-selling
campaign
The “WAM” Factor
What About Me?: Whether stated or not, this question is front and center on
the minds of your managers. You need to spend time considering what is important to them.– Review your structure to ensure that titles and roles
reflect the contribution of each manager.– Consider having a program in writing outlining what
happens to your team after the transaction.
The “WAM” Factor
– Offer sufficient incentives in the form of options, shares or bonuses.
– A “Stay Bonus” is money well spent, and will encourage your team to stay until the sale is completed.
Budget six months to a year of salary for key people As companies are usually interested in senior managers
of business they acquire, a stay bonus guarantees some continuity, giving new owners a chance to examine your team and decide who is important to the future of the company.
Yes But/What If
Be prepared to overcome resistance:– Before meeting with managers, think of and write down every question
they many possibly ask, using the who, what, why, when and how technique
– Do your homework and make sure you can answer each question in a confident, reassuring manner.
– Next, list any and all objections that come to mind, playing Devil’s Advocate: remember the WAM factor
– Finally, write out your talking points for overcoming each objection.
Summary
PREPARE– Before beginning any discussions, have a plan and prepare your
talking points
PITCH– When discussing with your selected team, be an “influencer”, focus
on what is important to them.
PROCEED– “Rally” your team towards the future, and a successful, profitable
event.
“Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.” Jack Welch
Selection and Use of the Legal Team
Robert Krauss
Partner
Ballard Spahr Andrews & Ingersoll, LLP
Selection and Use of the Legal Team
Who When Roles Ancillary Value Cost
Selection and Use of the Legal Team
Who Existing Lawyer Deal Firm Size Experience Geography Separate Counsel for Company, Owners,
Employees
Selection and Use of the Legal Team
When As Early as Possible Introduction to Investment Bankers Negotiating Investment Banker Agreement Corporate Clean-up
Selection and Use of Legal Team
Roles Deal Structure Deal Agreement/Schedules Indemnification Caps Employment Agreements Carry Buyer’s Financing HSR Getting to Closing
Selection and Use of the Legal Team
Ancillary Value Deal Tax Planning Personal Tax Planning Transition Issues Introduction to Investment Counsel
Selection and Use of the Legal Team
Cost Size of Deal Opposing Counsel Complexity Big Ticket Items Budget
The Entrepreneurs Role
Dr. Jo Webber
Main Types of Exit
Planned – IPO– Investment bank driven
Unplanned– Bankruptcy– Strategic pre-emptive
Business as Usual
Deals don’t always close Limit and secure knowledge Balance :
– Bringing in the right people to get the deal done– Distraction and uncertainty
Test of your organizational skills
Three Legged Stool
Owners Customers Employees
You represent the employees and your customers
Lead the Process
Different opinions and ideas Run the process as you run the business Take responsibility and ownership even if it’s
the first time for you Main point of contact for bank, investors and
potential acquirers
Some Elements
The NDA Teaser CIM Acquisition Targets The Management Presentation The Data Room The Scheduling Issues
Plan for the Future
Your Senior Management Team– Uncertainty– Change – Doubt/Concern– “What's the CEO going to do?”
Think through the different scenarios Articulate a plan to your team
Understand the New Owners
Key Objectives Their structure
– Where your company fits in their organization
– Employee fit– Product line fit
Get the Messaging Right
Your company The acquiring company Your customer base Their customer base
The First Six Months
Integration ‘New Company’ Culture New Management Team New Goals New Customers Getting back the balance
Question & Answer Session
Presenters/Panelists – Your “Exit Strategy” Team
Howard Ross – The Investor Karen Batchelder – The Investment Banker Tish Squillaro – The Management Team Coach Robert Krauss – The Lawyer Jo Webber – The CEO/Entrepreneur
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