The Many Faces of Capital - macpamedia.orgmacpamedia.org/media/downloads/2014BI/Maskell_PPT1pp.pdf · • Management • ESOP Funding • Senior Debt • Seller Financing • Mezzanine

Invaluable Partners. Increasing Business Value.

How to Creatively & Effectively Use Equity, Debt & Alternatives to Grow Your Business

Prepared by Chesapeake Corporate Advisors forMACPA Business & Industry Conference

April 24, 2014

CONFIDENTIAL & PROPRIETARY

The Many Faces of Capital

When to Use Senior Debt, Mezzanine, Private Equity


Objectives for the Day

2

Establish what “Shareholder Value” really means

Review exit/ liquidity options

Discuss capital alternatives for growing/ recapitalizing your business

Reviewing current leverage and capital trends

Review and discuss real life example of creatively using multiple sources of capital

Answer any questions you have


Introduction

3


Definition of Capital

4

Includes all forms of both Debt and Equity


Thought for the Day

5


“Begin with the end in mind.”~ Dr. Stephen Covey

6


Grow or Harvest

7

Invaluable Partners. Increasing Business Value. 8

Grow or Harvest

Organic• Operate “Business as Usual”.

• Revise capital structure to fund internal growth.

• Raise outside capital to accelerate expansion.

Merge/Partner• Strengthen market position.

• Achieve synergies with strategic partners.

• Provide liquidity/exit for shareholders.

• Recapitalization

AcquisitionAcquire companies, business units or assets to:

• Increase market share• Expand geographically• Diversify products/services• Enter new markets/agencies

Sell• Provide immediate liquidity

• Divest non-core operations

• Management or leveraged buyout

• RecapitalizationHarvest

MaximizeValue

Growth


What is Shareholder Value?

9


CCA Shareholder ValueMaturity Model (SVM2)TM

10


CCA’s Shareholder Value Maturity Model (SVM2)TM

Stage 1:Ad Hoc

Stage 2:Formalizing

Stage 3:Developing

Stage 4:Sustaining

Stage 5:High Performing

Vision Founders Intention Conversation with Interested Parties Committed to Writing Professional Input Comprehensive Plan

Organization Casual Evolving Structure Defined Roles & Responsibilities

Established Goals & Accountabilities Competency Driven

Compensation Unpredictable Case by Case Systematized Performance Driven Aligned with Strategy & Results

Customer/Vendor Relationships Indiscriminate Opportunistic Selective Targeted Invested

Reporting Intuitive Historical Driven Forward Looking Predictive Value Driven

Financial Position Checkbook Mentality Leveraged Lender Dependent Managed Balance Sheet Optimum Use of Capital

Profitability Not Existent Sporadic Reinvested Free Cash Exceeds Expectations

Technology & Tools Manual Accounting Based Enabling Processes Decision Support Enterprise Applications

Succession None Personal Intention Exploration of Alternatives

Independent Assessment

Validated & Documented Plan


The Secret Value Formula

12


Understanding Shareholder Value

Sustainable Cash Flow Multiple Equity

ValueCapital

Structure


Harvest Strategy

14


Understand Your Exit Options

15


Sale, Funding, & Transaction Currency Alternatives

Transaction Minority Interest 49%

Majority Interest 51%

External Transaction100%

Internal Transaction100%

Buyers/ Investors

• Family• Management• ESOP• Mezzanine• Private Equity• Venture Capital

• Family• Management• ESOP• Industry• Investor• Private Equity• Venture Capital

• Industry• Investor• Private Equity

• Family• Management• ESOP

Funding

• Senior Debt• Seller Financing• Mezzanine• Private Equity• Venture Capital

• Senior Debt• Seller Financing• Mezzanine• Private Equity

• Senior Debt• Seller Financing• Mezzanine• Private Equity

• Senior Debt• Seller Financing• Mezzanine

Currency

• Cash• Seller Notes

• Cash• Seller Notes• Buyer’s Equity• Earn-outs

• Cash• Seller Notes• Buyer’s Equity• Earn-outs

• Cash• Seller Notes


Growth Strategy

17


Capital Alternatives

18


Capital Alternatives

Senior Debt Mezzanine Debt Private Equity (PE) Venture Capital (VC)

Funding Source Options

• Commercial Bank • Finance Co.

• Specialty Lender• Finance Co.

• Wealthy Individuals• Private Investment

Groups

• Boutique Firm• Regional Firm• Global/National Firm

Advantages

• Favorable Interest Rates• Low Transaction Cost• Retain Control• Limited Management

Vulnerability

• Cost less than PE• No Personal Guarantees• Significant Leverage• No Collateral

Requirements

• Cost less than VC• No Personal Guarantees• Significant Leverage• No Collateral

Requirements• Provide Exit

• No Personal Guarantees• Maximum Leverage• No Collateral

Requirements

Disadvantages

• Limited to Collateral• Limited Leverage• Personal Guarantees

• Cost (ROI 15%-20%)• Equity Dilution

(Warrants) • Management

Vulnerability• Subsequent Transaction

(3-5 years)

• Cost (ROI 20%-25%)• Loss of Control• Equity Dilution • Significant Management


(3-5 years)

• Cost (ROI 35%+)• Loss of Control• Significant Management


(3-5 years)


When to Use:Senior Debt, Mezzanine Debt,

or Private Equity

20


Venture Capital

Private Equity

Mezzanine Debt

Senior Debt

21

Risk/ Reward Pyramid for Capital Alternatives

Potential Risk and Reward


When to Use Senior Debt

Term Loans are the most well-known type of debt financing available to businesses. Senior debt is typically used when the Company has:

Stable cash flow to cover principal and interest payments over 3 – 7 years Adequate collateral Shareholders who are willing to personally guarantee the loan

When to Use Senior Debt


When to Use Mezzanine Debt

Mezzanine is the most risky and most diverse form of debt financing. Mezzanine debt often carries with it an option to get an equity stake in the company. Mezzanine debt is typically used when the Company has:

Stable cash flow with growth potential Adequate capital to support additional leverage Growth potential above the cost of capital (interest and warrants) Willingness to give up the value of future equity Willingness and ability to accumulate cash or attract other capital to buy-out

mezzanine investor (3 – 7 years)

When to Use Mezzanine Debt


When to Use Private Equity

Private equity is a source of investment capital from high net worth individuals and institutions who are looking for a return on their funds. Private equity is typically used when the Company has:

Stable and sustainable cash flow Significant upside and cash flow potential Growth potential above the cost of capital Common short-term growth goals aligned with PE Future plans to sell or provide liquidity to shareholders (4 – 7 years) Willingness to have “others at the table” and management vulnerability Stockholders wanting/ needing liquidity Interest in stable capital Willingness to have ownership dilution

When to Use Private Equity


Leverage & Capital Trends

25


Leverage & Capital Trends

26

Leverage Drilldown Low Average High

Senior Debt to EBITDA 2.2x 2.5x 3.4x

Sub Debt to EBITDA 0.5x 0.9x 1.3x

Total Debt to EBITDA 3.0x 3.3x 4.1x

GF Data Resources®


Debt Multiples by Year

GF Data Resources®


Leverage Trends by Industry

28

Total Debt/ EBITDA by Industry 2009 2010 2011 2012 2013

Manufacturing 3.1x 3.1x 3.4x 3.5x 3.4x

Business Services 2.9x 3.0x 3.4x 3.3x 3.8x

Health Care Services 2.8x 3.1x 3.7x 3.8x 3.0x

Distribution 3.0x 3.2x 3.3x 3.8x 3.5x

GF Data Resources®


Capital Structures by Year

GF Data Resources®


Total Enterprise Value (TEV) / EBITDA by Year

30

Enterprise Value ‘03 – ‘08 2009 2010 2011 2012 2013

$10M – $25M 5.5x 5.5x 5.2x 5.3x 5.7x 5.9x

$25M – $50M 6.1x 6.0x 6.1x 6.0x 6.2x 6.9x

$50M – $100M 6.6x 6.5x 6.5x 7.1x 6.8x 6.7x

$100M – $250M 7.2x 7.2x 6.5x 7.5x 7.4x 7.1x

Total 6.0x 6.0x 5.9x 6.2x 6.2x 6.5x

GF Data Resources®


Example:Recapitalization of an Electronics Circuit Board

Manufacturing Company

31


Company Profile:

An electronics contract manufacturing and engineering design services company offering Printed Circuit Board (PCB) Assembly, PCB Testing, and PCB Design services.

The Company has the expertise and experience to provide customized engineering and manufacturing solutions across four primary industry segments: Aerospace & Defense, Medical, Communications, and Industrial & Instrumentation.

Objectives:

The controlling stockholders were interested in a liquidity event, while the current President and management team were interested in leading a group to recapitalize the Company and provide the controlling stockholders liquidity.

At the time, the current President had worked to negotiate the terms of the buy-out of the majority stockholders and was seeking third party capital of approximately $9.3 million to complete the transaction.

Case Study – Recapitalization Engagement


Recapitalization Process:

1. Conducted a comprehensive appraisal of the Company, in order to determine the fair market value and the perceived strategic value to a potential investor.

2. Developed an investor profile used to identify and contact potential lenders/ investors acceptable to the Company.

3. Prepared summary level materials (“teaser sheets”) which were distributed to the investor list.

4. Received signed NDA’s, and provided the interested parties with a “Pitchbook”, which detailed the Company’s operations, financials and future growth opportunity.

5. Solicited and evaluated Term Sheets/ Letters of Intent from the selected lenders/ investors.

6. Negotiated on behalf of the Company to receive favorable investment terms and conditions.

7. Assisted with the parties to manage due diligence, and with Counsel to draft, review and negotiate legal documents required for closing.

Case Study – Recapitalization Process


Able to secure $9.3 million in third party financing including:

• Equity• Mezzanine debt • Senior debt (term loan, revolving line of credit

and a capex line)

The transaction provided the founder/ controlling shareholders the liquidity/ exit that they desired while giving the management team and employees the resources to grow the Company much faster than would have otherwise been possible.

The Company’s growth potential was limited by the ownership/ capital structure prior to the transaction. The recapitalization provided the necessary capital to allow the Company to recapitalize itself and to double in size over the next five years (from $25M to $50M).

Case Study – Transaction Outcome


Questions

35

The Many Faces of Capital - macpamedia.orgmacpamedia.org/media/downloads/2014BI/Maskell_PPT1pp.pdf · • Management • ESOP Funding • Senior Debt • Seller Financing • Mezzanine

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