Monthly Economic Monitoring of Ukraine No 231, April 2024
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M&A Presentation to VISTAGE CEO Group
1. M&A Discussion
Di i Prepared for:
M&A Discussion
January 16, 2009
Presented by:
Doug Rodgers, CEO
Rick Thomas, Managing Director
2. The FOCUS Perspective
Middle market investment bank since 1982
We specialize in businesses with revenues or transactions between $5 million and
$300 million
Balanced mix of sell-side, buy-side, and capital raise
Strong Team and Coverage Across US
St T dC A
37 Managing Directors
5 Senior Research Professionals
12 Senior Advisors â Industry Experts
Offices â Washington, DC (corporate HQ), Atlanta, Chicago, Los Angeles and San Francisco
Broad range of industry expertise across Managing Directors, Research Team and
Senior Advisors
Steadily growing due to repeat business, partner growth, referrals
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3. Discussion Topics
Current Market Conditions
Valuation Overview
Preparing To Sell
Growth Through Acquisition
Banking in Todayâs Environment
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5. Current Market and The Outlook
Confusion and uncertainty in the marketplace
Federal government capital injected in financial markets will
make the difference
Expect more government capital entering the market
Financial investors havenât figured out the new world
Strategics understand the market better
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11. Market Summary and a Look Ahead
What is the impact?
Middle market is resilient
Financial buyers have less leverage in the market
Strategic buyers are less affected by debt markets
There are still good opportunities out there for good companies in
the right sectors
Where are things headed?
â09 activity will strengthen because of credit markets coming back
and also f di t
d l for distressed sales
d l
Record number of owners will be exiting in the next several years
In 2010 there will be 750k baby boomers selling vs. 50k in 2006
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13. Valuation
Valuation
Methodologies
Publicly-traded Comparable Discounted
Non-financial
comparable transaction Cash Flow Other
parameters
companies analysis analysis analysis
⢠quot;Public Market ⢠quot;Private Market ⢠DCF and it more
d its ⢠E t
Enterprise value
i l ⢠Li id ti analysis
Liquidation l i
Valuationquot; Valuationquot; elaborate variations related to non-
are the most ⢠Break-up analysis
financial variables
⢠Value based on ⢠Value based on theoretically correct such as subscribers ⢠LBO analysis
market trading multiples paid for way to think about or barrels of oil
multiples of comparable valuation and should ⢠Recap analysis
comparable
bl companies in sale always be considered ⢠Can be used with
⢠Historical trading
companies transactions publicly-traded
⢠Present value of performance
comps, comparable
⢠Includes control projected free cash acquisition analysis,
premium flows or DCF
⢠Most explicitly
incorporates the future
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14. Methodologies
PROS CONS
⢠Captures future outlook ⢠Time consuming and complex
Driven by cash flow, not ⢠Highly sensitive to cost of capital
DCF â˘
and terminal value assumptions
accounting earnings
ti i
⢠Wide range of forecasts possible
⢠Ideal comps rarely exist
⢠Simple method
Tradingg ⢠Potentially distorted by
⢠Relies on actual market
Multiples information
accounting numbers
⢠Disguises lots of assumptions
included by the market
⢠Represents values actually ⢠Comparable universe even more
Transaction paid difficult to define
Comps ⢠Explicitly considers control ⢠Transaction multiples vary
premium greatly over time
⢠Simple and quick to calculate ⢠No indication of profitability or
Focuses on what you are cash flow
Asset â˘
buying ⢠Snapshot in time
Value
⢠Provides an idea of asset ⢠Most businesses are acquired
financing to run, not liquidate
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15. Valuation vs. Price
Ownerâs Expectation
DCF Ego
Market Comps Revenue Replacement
Price
Asset Value Rumors
P
Competitive Advantage Historical Transactions
Hi t i l T ti
Strategic Value Advisors
Buyerâs Valuation
Page 15
16. Market Summary and a Look Ahead
⢠Public Acquirers
⢠Is it accretive?
⢠DCF is widely used
⢠Trading Comps
g p
⢠Seeking a particular piece on the chess board
⢠Private Acquirers
⢠Transaction Comps rule the day!
⢠DCF is too complicated and too fraught with variables
⢠IRR is also common
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20. Twelve Value Drivers for Businesses
1. The Customer Base
2. History/Reputation/Brand
3. Recurring Revenue
4. Product Breadth & Mix
5 Gross Margin
5.
6. Intellectual Property
7. Human Capital
8. Management Experience and Expertise
9. G & A Leverage
10. Distribution Leverage
11. Sales and Marketing Effectiveness
12 Barriers to Competitive Entry/Competitive Differentiation
12.
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21. Twelve Value Drivers for Businesses
1. The Customer Base
What is the revenue concentration of your customers?
What is the profile of the customer base?
What is the buying trend from these customers over the past five years?
2. History/Reputation/Brand
How long and how stable is the business?
How long have the management team & core customers been involved?
3. Recurring Revenue
This portion of revenue is valued much higher than quot;one-time revenue.quot;
Is there an opportunity to alter the model to increase recurring revenue?
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22. Twelve Value Drivers for Businesses
4. Product Breadth & Mix
Is the suite of products complimentary?
Are there obvious holes in the product suite?
5 Gross Margin
5.
Most important line item on the P&L.
GM compared to industry and is the trend up or down?
6. Intellectual Property
In addition to trademarks, patents and copyrights IP can also be âbusiness
processquot; such as a unique way to generate sales leads.
IP should be thoroughly vetted and reviewed with IP attorneys
attorneys.
Value of IP is often overlooked by sellers.
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23. Twelve Value Drivers for Businesses
7. Human Capital
Buyers often look for situations where mgmt. wants to stay for the long term.
Post-sale integration failures of the past are largely the result of management
departing after the deal is closed.
8.
8 Management Experience and Expertise
Does the mgmt. team have substantial knowledge of a critical product, process or
market segment?
Is sellerâs management team additive to the buyer?
Can the new team grow the organization to the next level?
9. G & A Leverage
Careful planning is necessary in this area prior to the LOI stage.
Buyers tend to overestimate the cost savings of combining companies G&A.
G&A
Transition costs often are underestimated, if not overlooked altogether.
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24. Twelve Value Drivers for Businesses
10. Distribution Leverage
Buyers need to be certain that end user customer requirements are
complementary to using distribution leverage.
Demand should be measured through effective market research.
Sales and training costs need to be taken into account and product installation &
account,
customer service expense of the new products needs to be analyzed
11. Sales and Marketing Effectiveness
Does the companyâs biz dev process enable it to choose itâs future customers?
Who in the company owns the customer relationships?
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25. Twelve Value Drivers for Businesses
12. Barriers to Competitive Entry/Competitive Differentiation
Does the company have a quot;first moverquot; advantage?
Are the companyâs products and services difficult to duplicate?
What barriers protect the companyâs market position?
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27. What does this mean to me?
Two Ways to Grow the Bottom Line
y
GROW
OR REVENUES
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28. What do we mean by Strategic Growth?
Increase sales and profits â clearly!
But thereâs moreâŚâŚ.
Not just getting bigger, itâs about getting stronger
Positioning your company better â market differentiation and market trends
Acquisitions are often a key element
Might mean selling some assets
Keeping in tune with current and long term market pressures
Make your Business Stronger!!
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29. Strategic Growth â Why?
Remain competitive
Buy rather than build new market, product, skill set or geography
Stagnation often leads to demise
Often simply for defensive reasons
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30. Ways to Grow
External Growth
1.
1 Acquisitions
⢠New Products
⢠New Markets
⢠Consolidations
3. Raise Capital
⢠Additional funds
to fuel Sales &Cap-Ex
ORGANIC GROWTH
⢠Funds for acquisitions
& investments
i t t
2. Divest Assets
⢠U proceeds t re-invest
Use d to i t
in core business
The best strategies consider both Organic and External Growth
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31. Traditionally Proactive vs. Reactive
Organic Growth External Growth
Proactive Typically Reactive
Dedicated Resources vs. Often Opportunistic
Steady or gradual Should be proactive
Would we accept sales people âwaiting for the phone to ring?â
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32. Six Proactive Process Steps
1.
1 Develop partner criteria
2. Create introductory materials
3. Organize a list of prospects
PLAN
4. Research these prospects thoroughly
R h h h hl
5. Actively contact prospects
6. Meet with 5 to 10 prospects to gain perspective
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33. Focus Buy-Side Process
Typical Metrics Transaction Funnel Activity by Stage
100 + potential targets Prospect and target profiles
Reviewed & approved by
Research client
Detailed blind letter and call
30 + phone conversations
Conducted by FOCUS Partner
15+ profiles
Qualify Typical profile report, written
before NDA, is 1-2 pages
10+ meetings Client selects targets for
Meet meetings
Client selects top-priority
3-5 qualified âfinalistsâ
q Close q
qualified targets
g
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35. Asked to move your loan, due to company performance
Loan covenant default(s): in other lending environments would most likely be waived or
amended, stemming from:
Erosion in profitability or operating losses
p y p g
Slower earnings growth resulting in failure to meet minimum EBIT or EBITDA covenant
step-ups
Stagnant net cash flow growth or significant slowing in collections (Days Sales
Outstanding increases) resulting in failure to meet required reduction to loan agreementâs
agreement s
leverage ratio(s), âsweepâ agreement or principal outstanding
Accounting issues: specifically related to SFAS 157 (mark to market requirement),
particularly with regard to any / extent of impairment to Accounts Receivable, Inventory, and
Intangible assets
May result in dispute with outside auditors and opinion, review or âManagement Letter
unacceptable to lender(s)
p ( )
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36. Asked to move your loan, due to issues at the bank
Shift In Portfolio Management:
The bank has decided to decrease its exposure to your industry sector, because it
perceives a higher degree of risk than when the loan was originally extended, (such as if
GM, and Chrysler represent the majority of your business)
If your bankâs regulators mandate a shift in acceptable loan type concentration
The bank wishes to reduce its exposure to your industry sector to appease brokerage
analysts during investor presentations
Example, during its quarterly earning call, the CEO announces, âLess than 2.0% of our
commercial loan portfolio is exposed to the residential building market.â
Capital Adequacy:
Losses incurred by bank activities unrelated to your loan or industry sector reduce equity
(Tier I Capital) leading to deterioration in its Tier I Capital Ratio
Current regulatory definition of âW ll C it li dâ b k i 6 0% of Ri k W i ht d
C t l t d fi iti f âWell Capitalizedâ bank is 6.0% f Risk Weighted
Assets or higher
Marketâs definition, which is what bankâs CEO must manage to, is no less than 8.0%,
but many feel is >10.0%
Proxy for Tier I Capital Ratio = Shareholders Equity/ (Total Assets â Cash â Government Securities)
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37. Asked to move your loan, due to issues at the bank
Personnel Turnover:
Industry consolidation or declining profitability resulting in staff reductions including your
companyâs relationship manager and related lending team.
New loan officer may not understand your business, lack experience, previously had a
negative experience(s) with your industry, lack chemistry...
But most important, he has no personal investment in your relationship and, in fact, has a
vested interest in purging the inherited loan p
p g g portfolio of any ârisk p
y pointsâ within a relatively
y
short period of time of assuming responsibility for your relationship.
Change In Underwriting Standards leading to failure to renew upon maturity:
Prior to 2007, we saw banksâ senior debt advance ratios equal to 3.5x - 4.5x EBITDA and
with an additional turn of 1.0x in subordinated debt.
Current market terms, if available, range between 1.5x â 2.5x of senior debt with some
availability for subordinated debt depending upon composition of assets and p
y p g p p profitability
y
trends.
Reduced advance rates against Accounts Receivables and Inventory as banks seek
greater asset coverage / risk reduction in future credit extensions.
Lack of competitive pressure from multiple competing lenders enables this trend
multiple, trend.
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38. Best to Have Alternatives
Maintain Multiple Lending Relationships:
Have at least two bank relationships, three is even better, if access to bank funding - particularly for
seasonal needs - is critical to your company operations. The banks should be of different types, say
one regional bank, one local bank, and one nationwide player depending on your particular operating
needs.
Arm Your Relationship Manager:
Concentrate sufficient non-lending (non-capital attracting) business (operating accounts, deposits, cash
management services, foreign exchange, etc.) with your most trusted lenders to provide your banker
with relationship and profitability arguments in support of your credit facilityâs renewal
Identify Al
Id if Alternative Funding Sources:
i F di S
If your business is heavy in Accounts Receivable, and / or Inventory identify non-bank asset-based
lenders that serve your industry, contact them, and seek a proposal, or at least identify two that would
like your business. If bank underwriting standards squeeze your cash availability, these lenders
generally have higher advance ratios
ratios.
Accounts Receivable Insurance:
Consider this as a way to reduce your, and your lenderâs, risk, as well as potentially increasing your
advance ratio with your lender
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39. Best to Have Alternatives (continued)
Act Like / Treat Your Banker Like An Investor
What is the financial condition of your bank?
Bank holding companyâs debt rating?
Did your bank announce receipt / turn-down of TARP funding during the past 60 days?
Healthier banks are less likely to base decisions on some of the factors referenced above.
Some useful metrics that are generally available for publicly-traded bank holding companies:
o Tier I Capital > 8.0% - 10.0% of assets and risingg
o Positive Earnings
Think of your lender as you would a shareholder / board member
Proactively inform it of your business and financial condition and their respective outlooks including
outlooks,
negative prospects and their causes
Proactively review loan covenants with specific focus on financial covenants â breach likely?
o Try not to inform âafter the factâ
Maintain personal contact, especially if as CEO you have delegated the role in the past
contact if, CEO,
Meet you relationship managerâs management
Build The Relationship:
Give him some new business leads
Offer to be a reference for him when he is courting new business
Be sure more than one executive with your company has a relationship with him
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40. Focus Speaker Bios
Doug Rodgers â CEO & Managing Partner â doug.rodgers@focusbankers.com
Executive level management experience in software, information technology, aerospace, e-commerce, real
estate and construction, manufacturing and distribution, serving both commercial and g
g g government clients. He
serves FOCUS clients across many industries emphasizing merger and acquisitions opportunities.
Served as the President and CEO of Corcentric, Inc, an e-commerce services provider spin off from Litton
Enterprise Solutions. As the first CEO of the company, he raised both venture and debt capital and led the
company to achieve 500,000 electronic transactions annually with a transaction volume of $180 million, including
over 30 Fortune 1000 trading partners
Mr. Rodgers is an active pilot, with ATP and jet ratings, a BS in Aerospace Engineering and MBA coursework. He
was educated at the U.S. Air Force Academy and the University of Kansas, and was a 13 year member and local
President of YPO, and currently is a member of the World Presidents Organization.
Rick Thomas â Managing Director â rick.thomas@focusbankers.com
i k th @f b k
Over fifteen years of consulting, management and M&A advisory experience in the manufacturing, distribution,
software and packaging industries.
Significant M&A expertise for publicly and privately held companies in the middle market, several of which have
annual revenues in excess of $1 Billion.
Manufacturing Engineer for General Motors Corporation â BS in E i
M f t i E i f G lM t C ti i Engineeringi
Lecturer to hundreds of owners, CEOâs and CFOâs on M&A best practices and previously an adjunct faculty
member for The George Washington University School of Business and Public Management.
Rick has also served as a U.S. representative to South African companies in the capacity of advisor and
consultant on business partnering and financing for small and middle market companies.
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41. Closing and Contact Info
For detailed information on FOCUS, please visit our Website:
www.focusbankers.com
Summary of publicly announced transactions
List of currently active sectors
Detailed biographies of our professional staff
Office locations and contact information
Archives of the monthly newsletter, publications and sector research
Easy online subscription to free monthly newsletter
Form for submitting online inquiries
1133 20th Street, Suite 200
Washington, DC 20036
202 470 1976 phone
202 785 9413 fax
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