PRIVATE EQUITY MAY BE YOUR BEST EXIT STRATEGY

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This presentation explores the economics behind the sale of a privately held company to a Private Equity Group. The common thinking is that the business seller will realize greater sales proceeds from a Strategic Buyer. We will provide an example of how a seller can actually improve on their results by selling to a Private Equity Group. Certain company characteristics and industry factors help determine which buyer category will provide the seller with the best outcome

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By: davekauppi (37 month(s) ago)

Selling Your Software Company: How the M&A Process really works, and what you can do to Win. https://www.amazon.com/dp/B01M59QA02

Presentation Transcript

MidMarket Capital:

MidMarket Capital Private Equity May Be Your Best Business Exit Strategy

PRIVATE EQUITY WORKS VERY WELL WHEN:

PRIVATE EQUITY WORKS VERY WELL WHEN Growth Capital Needed Partners retirement schedule differs Small Differential in Strategic Buyer Offer and Private Equity Offer 85% of Family Net Worth in the Business Nearing Retirement – Take Chips off the Table

PRIVATE EQUITY MAY NOT BE THE BEST CHOICE WHEN:

PRIVATE EQUITY MAY NOT BE THE BEST CHOICE WHEN Your industry multiples are high You are looking for strategic multiples not supported by cash flow or EBITDA Your business potential is not yet reflected in your financial performance You want to exit ASAP The market is willing to pay you for synergies, future growth potential or intellectual capital

PRIVATE EQUITY GROUPS PREFER COMPANIES THAT HAVE:

PRIVATE EQUITY GROUPS PREFER COMPANIES THAT HAVE Strong management willing to stay Niche market leading share Rapidly growing market Established Brands Strong and diverse customer base Sales/Distribution expertise Expansion potential with additional capital A minimum EBITDA level (private equity firm specific) Management teams interested in retaining an ownership stake

HYPOTHETICAL TRANSACTION THE BACKGROUND:

HYPOTHETICAL TRANSACTION THE BACKGROUND The business owner is 60 years old $25 million in revenue and producing an EBITDA of $3 million. major capital expenditure required he should be diversifying his assets He loves his business and is not ready to retire.

PRIVATE EQUITY DEAL STRUCTURE:

PRIVATE EQUITY DEAL STRUCTURE Sale price $15 million Total debt used to fund the transaction (65%) $9.75million Total equity investment required $5.25 million Private equity firm portion (70%) $3.675 million Owner reinvestment portion (30%) $1.575 million

CREATING VALUE FOR THE OWNER:

CREATING VALUE FOR THE OWNER Company selling price $15 million Owner equity reinvestment $1.575 million Owner pre tax cash proceeds $13.425 million  Owner value creation Value of 30% interest in $18 million company $5.4 million Add cash proceeds from the sale $13.425 million   Total post sale value $18.825 million

THE FINANCIAL HERO PHASE 1:

THE FINANCIAL HERO PHASE 1 Secured his family’s financial future Took majority of your chips off the table under favorable circumstances Create a pool of liquid assets to allow your financial professionals to implement a diversification strategy You are still the boss You have a deep pockets financial partner focused on growth and profitability Receive a generous employment contract and bonus Solidify your exit timeframe

THE PRIVATE EQUITY PARTNERSHIP:

THE PRIVATE EQUITY PARTNERSHIP Make 3 Add-on Acquisitions totaling $8 million Match the Equity Participation at 30% PEG leverages 65% debt Total Equity Required $2.8 million The owner is invited to invest back into each acquisition at the same leverage rate so $840K additional equity required Seller retains 30% equity in the Company

THE SECOND SALE – A SECOND BITE OF THE APPLE:

THE SECOND SALE – A SECOND BITE OF THE APPLE After 5 years the Private Equity Partner decides it is time to exit Options are IPO, sell to a strategic industry player or sell to another private equity group Now Company Revenues are at $75 million They get interest from several industry players and decide to sell out to the best one in a soft auction process$65 million The valuation multiples have improved over the original acquisition multiples because of the size, improved profit margins and product and customer diversification

THE “MATHEMAGIC OF A SUCCESSFUL PRIVATE EQUITY TRANSACTION:

THE “MATHEMAGIC OF A SUCCESSFUL PRIVATE EQUITY TRANSACTION Owner pre tax cash proceeds original transaction $13.425 million Owner pre tax cash proceeds second transaction $19.5 million Less invested equity in add-on acquisitions $ .84 million   Total pre tax cash proceeds from both exits $32.085 million

CONCLUSION:

CONCLUSION Exit on owner’s terms when business is healthy and performing well Reduced financial risks substantially by providing liquid assets for a diversification strategy Reduced risks with a deep pockets partner with operating improvements Secured growth capital without risking any personal assets Eased into retirement over 5 years with pay and bonus Sold before the baby boomer rush put downward pressure on business selling prices Sold prior to the increase in LT Gains Tax

CONTACT INFORMATION:

CONTACT INFORMATION Dave Kauppi Managing Director MIDMARKET CAPITAL, INC. ph (630)325-0123 fax (630) 230-3052 cell (630)215-3994 davekauppi@midmarkcap.com www.midmarkcap.com

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