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Private Equity Tools for Business Retention and Expansion June 13 th, 2012 John O’Dore, Managing Director Meridian Capital, LLC.

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Presentation on theme: "Private Equity Tools for Business Retention and Expansion June 13 th, 2012 John O’Dore, Managing Director Meridian Capital, LLC."— Presentation transcript:

1 Private Equity Tools for Business Retention and Expansion June 13 th, 2012 John O’Dore, Managing Director Meridian Capital, LLC

2 2 Family Owned Businesses Overview What is Private Equity? What is the role of an Investment Banker? Examples of Private Equity Transactions in Washington State Presentation Overview

3 3 Family Owned Businesses Overview What is Private Equity? What is the role of an Investment Banker? Examples of Private Equity Transactions in Washington State Presentation Overview

4 4 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

5 5 CharacteristicSmall MarketLower-Middle MarketMiddle 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 ProfileOwner-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 GoalLifestyle 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 Capital Access DebtBusiness bankingCommercial bankingCorporate banking EquityPersonal/familyPersonal/private equityPrivate equity Outside Investment Interest MildStrong What is Lower-Middle Market?

6 6 Does this look familiar? Sell to Employee Grow by acquisition Sell for health reasons Sell to Mgmt. Wait until I die Sell to a competitor Sell to Private Equity Defer all decisions Let my kids run it

7 7 What are Business Transition Options? OptionDescription Typical Retained Ownership Buyer Pools 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 N/AAuction / Multiple Buyers Family Transfer Transfer ownership to a family member 0% – 100%Family

8 8 Family Owned Businesses Overview What is Private Equity? What is the role of an Investment Banker? Examples of Private Equity Transactions in Washington State Presentation Overview

9 9 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

10 10 How is a Private Equity Firm Structured? Private Equity Firm (General Partner) 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.) Private Equity Fund (Limited Partnership) Private Equity Fund (Limited Partnership) Company A Company B Company C The Fund’s ownership of the portfolio investments Fund / Investment Management Ownership of the Fund

11 11 Private Equity Transaction Activity Private Equity Investment 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 *As of 3/31/2012

12 12 Private Equity – Available Capital 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 $425 Billion *As of 3/31/2012

13 13 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 Management Depth / Transition Knowledge Capital Balance Sheet and Financing Solutions Industry Experience & Relationships Capital to support expansion initiatives – employee hires, working capital, capital investment Experience executing key strategic initiatives – system integration, geographic expansion, capital decisions Access to management resources required to support next stage of growth Strengthen balance sheet to add stability to operations. Relationships with finance sources Macro level industry knowledge – access/relationships with key target customers or markets

14 14 Company Scale / Momentum Sales < $10M, EBITDA < $2M Limited growth opportunities (flat sales) Sales > $30M, EBITDA > $5M Visible, defined growth opportunities Operations & Management Customer and channel concentration Need for additional financial discipline Lack of management depth Significant capital expenditure requirements Blue-chip, diversified customer base Recurring, highly visible revenue Management depth (institutionalized knowledge) Established systems and procedures Market Trends / Product Offering Small, competitive industry Commoditized product with margin pressure Limited product line Attractive industry dynamics (size, growth prospects, fragmentation) Diverse, differentiated product line Proprietary products or processes What is the Investment Criteria of Private Equity Funds? Limited ProspectsValuation / Attractiveness ScaleStrong Appetite

15 15 Family Owned Businesses Overview What is Private Equity? What is the role of an Investment Banker? Examples of Private Equity Transactions in Washington State Presentation Overview

16 16 CharacteristicBusiness Broker or Friendly Lawyer Middle Market Investment Banker Typical Transaction SizeZero to $50m$10 to $100 million Likely Selling ProcessNegotiatedPrivate Auction Post an Asking PriceYesNo Capital Structure RaisingNoYes Management BuyoutsMaybeYes RecapitalizationsNoYes Board Advisory ServicesNoYes Comparison of M&A Participants

17 17 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

18 18 What are the Key Steps of a Transaction Process? A well run transaction process typically takes 6-9 months Preparatory phase (4 - 6 weeks) Initial due diligence meeting Perform financial analysis Approve buyer list Develop blind investment summary Prepare offering memorandum and supportive marketing materials Key value messages and objectives defined Marketing phase (6 - 8 weeks) Contact prospects Field initial due diligence Introductory meetings with prospects Select prospects to invite to management presentations Identify synergies and choose qualified prospects Structuring & negotiation ( weeks) Solicit letters of intent Negotiate terms Complete due diligence Definitive documentation signed Extract final concessions and value from preferred prospect Buyer/investor meetings (6 - 8 weeks) Management and strategic presentations Discuss potential deal terms and structure Coordinate follow-up due diligence Select prospective buyer to move forward with Develop strategy and exchange due diligence

19 19 Family Owned Businesses Overview What is Private Equity? What is the role of an Investment Banker? Examples of Private Equity Transactions in Washington State Presentation Overview

20 20 Sample Washington State PE Owned Companies

21 21 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 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 Backed management in its acquisition of:

22 22 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 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 Acquired the stock of:

23 23 John O’Dore Managing Director Meridian Capital Office:

24 24 Recapitalization Growth Equity Raise Sample Transactions

25 25 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)Notes / Comments Transaction Enterprise Value$25,000 Negotiated transaction value from M&A process Third-Part Debt$5,000 Pre-Recap Equity Value$20,000 Sold Ownership Percentage70% Retained Ownership Percentage30% Shareholder retains equity upside in business Equity Value Minus: Equity Rollover$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%)$3,000 Private Equity Group - Equity (70%)$7,000 Business gains access to growth resources Third-Party Debt$15,000 No more exposure to personal guarantees $25,000

26 26 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)Notes / Comments Transaction Enterprise Value$25,000 Negotiated transaction value from M&A process Minus: Existing Net Debt$5,000 Pre-Recap Equity Value$20,000 No liquidity for shareholder Private Equity - Growth Capital$5,000 Capital and resources to assist with growth Private Equity Group Ownership20% Shareholder Ownership80% Material retained ownership Pre-Growth Equity Capitalization StructurePost Growth Equity Capitalization Structure Shareholder Equity$20,000Shareholder Rollover Equity (80%)$20,000 Third-Party Debt$5,000Private Equity Group - Equity (20%)$5,000 $0Third Party Debt$5,000 Total Enterprise Value$25,000Total Enterprise Value$30,000


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