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Jordan,Knauff & CompanyINVESTMENT BANKERS
Fall 2016
Before We Begin: Smartphones
© Jordan, Knauff & Company. Proprietary and Confidential. 2
Jordan,Knauff & CompanyINVESTMENT BANKERS
Introduction: Bill Snow
Investment banker
SpeakerAuthor
© Jordan, Knauff & Company. Proprietary and Confidential. 3
Jordan,Knauff & CompanyINVESTMENT BANKERS
Today’s Agenda Part I• What is investment banking?• Buying and selling companies • Misconceptions • Hiring an investment banker
Part II• The M&A process
Part III• Valuation
Part IV• The team• Documents• Negotiating
Part V• Managing expectations• Report card• Are you prepared?
© Jordan, Knauff & Company. Proprietary and Confidential. 4
Special bonus: A liberal sprinkling of anecdotes
Part IWhat is investment banking?MisconceptionsBuy and selling companies Hiring an investment banker
© Jordan, Knauff & Company. Proprietary and Confidential. 5
–Prepare–Control –Frame –Define
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Understanding the M&A Process
What is Investment Banking?
Broker?Role reversal Shopping cart Thesis
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© Jordan, Knauff & Company. Proprietary and Confidential. 8
M&A is not nebulous
© Jordan, Knauff & Company. Proprietary and Confidential. 9
A huge universe of business owners
Retaining i-bankers, you know, just in
case
Buyer
Buyer
Buyer
Buyer
BuyerBuye
r
Buyer
Something
happens
Done deal!
Investment banker
Hanging around, waiting for a fee if
something happens
Jordan,Knauff & CompanyINVESTMENT BANKERS
M&A is a Process
Business owner
© Jordan, Knauff & Company. Proprietary and Confidential. 10
Investment bankerHandles the process, the materials, business terms
Private equity firm
Corporate buyer
PE backed company
Typical consultants include:LawyerLegal termsAccountant/auditorInventory, Quality of Earnings, Bank Reconciliation
The Client The QB The Buyers
The buyer is the new owner, makes all decisions.
The investment banker is persona non grata
The Sudden Stop
Common Misconceptions
Easy Knowing buyers Industry experience Magic words Ask price Commodity work Realtor
© Jordan, Knauff & Company. Proprietary and Confidential. 11
Jordan,Knauff & CompanyINVESTMENT BANKERS
Buying and Selling – Often Counterintuitive Typical misconceptions
© Jordan, Knauff & Company. Proprietary and Confidential. 12
Selling is difficult Buying is easy!
Jordan,Knauff & CompanyINVESTMENT BANKERS
The Reality of Buying & Selling
© Jordan, Knauff & Company. Proprietary and Confidential. 13
Easy, Straightforward Selling a companyContacting buyersReally easyFinding a buyer “interested” in doing a deal
DifficultBuying a companyContacting sellers
DifficultBuying a company
Really, Really DifficultClosing a deal that makes sense for the seller
Jordan,Knauff & CompanyINVESTMENT BANKERS
Buyers – What Not To Do! The perfect
target…for me
Harvard Seal
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Let’s take a look an example - Exhibit 1
Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Pushing a Deal Packaging
company New Years Eve Pay off letter Sideways
© Jordan, Knauff & Company. Proprietary and Confidential. 15
Jordan,Knauff & CompanyINVESTMENT BANKERS
Picking an M&A Investment Banker
© Jordan, Knauff & Company. Proprietary and Confidential. 16
What we think is important
Knowing a lot of buyers
Industry experience
“Magic words”
Determining the right “ask” price
Low cost provider
What is actually important
How the buyers list is created
What is actually important
How the buyers list is created
Ability to “clear the market”
What is actually important
How the buyers list is created
Ability to “clear the market”
Techniques to enhance value
What is actually important
How the buyers list is created
Ability to “clear the market”
Techniques to enhance value
Handling the “ask” price question
What is actually important
How the buyers list is created
Ability to “clear the market”
Techniques to enhance value
Handling the “ask” price question
Negotiating prowess
Anecdote – Are you experienced? Really?
© Jordan, Knauff & Company. Proprietary and Confidential. 17
LOST BROKER
An Investment Banker is not a Realtor
© Jordan, Knauff & Company. Proprietary and Confidential. 18
Jordan,Knauff & CompanyINVESTMENT BANKERS
Fees• Monthly
retainer• Success fee Expenses
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Warning! – Willingness to work without a monthly retainer
Jordan,Knauff & CompanyINVESTMENT BANKERS
Techniques to Pick the Right Advisor Chemistry Negotiating
prowess The process Enhancing
valuation Check references
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Checking References
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Remember: Ask questions that give you usable data
Instead of asking“What did they charge?”
“How long did it take?”
“Do they know a lot of buyers?”
“Did they get the highest price?”
“Did they do a good job?”
You should ask“Based on the end result, was their work worth what you paid?”
You should ask“Based on the end result, was their work worth what you paid?”“Did they do what they said they’d do?”
You should ask“Based on the end result, was their work worth what you paid?”“Did they do what they said they’d do?”“Did they attend all meetings with buyers? If not, why?”
You should ask“Based on the end result, was their work worth what you paid?”“Did they do what they said they’d do?”“Did they attend all meetings with buyers? If not, why?”“Did the buyer try to re-trade the deal? How did your banker handle it?”
You should ask“Based on the end result, was their work worth what you paid?”“Did they do what they said they’d do?”“Did they attend all meetings with buyers? If not, why?”“Did the buyer try to re-trade the deal? How did your banker handle it?”“Could you have done this without them, on your own?”
Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Efficacy of QuestionsHow many miles to the nearest Blockbuster?
© Jordan, Knauff & Company. Proprietary and Confidential. 22
Jordan,Knauff & CompanyINVESTMENT BANKERS
Lurking Problems Quality of Earnings Inventory The “ask price” question Owner succession Rent and accrued vacation Absent key team members Deal “re-trade” Working capital adjustment -
Exhibit 2
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Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Working Capital• Packaging distributor• Just-in-Time (JIT)• Sales • Working capital
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How to calculate average working capital?
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Part II Coming Up!The M&A Process
Jordan,Knauff & CompanyINVESTMENT BANKERS
Part II: The Step by Step M&A Process
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Jordan,Knauff & CompanyINVESTMENT BANKERS
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Preparing For a Sale Owner…make thyself expendable Fix up the balance sheet
Cut dead weight Increase sales The add-back machine
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Avoid Serial for Breakfast Parallel, not serial Advisors Chain of command
Jordan,Knauff & CompanyINVESTMENT BANKERS
Process Overview 1. Create a Target List2. Make Contact 3. Send the Teaser4. Assure Confidentiality5. Send the Deal Book6. Obtain Indications of
Interest (IOI)
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7. Meet With Buyers8. Obtain Letters of Intent
(LOI) 9. Undertake Due Diligence10.Draft a Purchase
Agreement 11.Close the Deal12.Handle Post-Closing
Events
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 1: The Target List Sell Side• Suspects• Prospects • Collaborative Process• Approval
Buy Side•What does target get?• Criteria
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 2: Contact! Buyers want to be contacted!
Sellers, meh Auction?AlchemyScreeners
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 3: The Teaser Anonymous executive summary Just enough info to “tease” recipient
Be careful!
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 4: Confidentiality
Sign a Confidentiality Agreement (CA)Buyer agrees to keep quietNo harm
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 5: The “Book” Various namesSecurity Huge amount of info
Enough to make an offer
Staggered release
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Step 6: Indication of Interest Dating phase – can see others
Valuation rangeNon-bindingExclusivity? No
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Step 7: Management Meeting “Wizard of Oz”Seller provides update Facilities visitSandbox
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 8: Letter of Intent (LOI) Getting engagedFirm offerExclusivity? YesBinding? NoPick the “best” one
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 9: Due Diligence Kimono timeFull disclosure…mostly
Confirmatory only!
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 9: Due Diligence, cont. Send in the cavalcade of consultantsSecure online data room
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 10: Purchase Agreement Marriage licenseFinal documentBinding!FairnessSame time as due diligence
Red line ping-pong
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 11: Closing Wedding dayFlow of fundsSign this……and sign thatMere formality
Jordan,Knauff & CompanyINVESTMENT BANKERS
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Step 12: Post Closing Stuff AnnouncementCollect final payments
IntegrationContinued involvement
© Jordan, Knauff & Company. Proprietary and Confidential. 43
Coming up, Part IIIValuation
Jordan,Knauff & CompanyINVESTMENT BANKERS
Valuation is a complex mathematical formula…
© Jordan, Knauff & Company. Proprietary and Confidential. 44
…that largely depends upon what side I’m representing
What is Valuation?Confluence of cash flow and timeSome methods include–EBITDA basis–Contribution margin–Asset value–Multiple of gross profit–Multiple of revenue–Discounted cash flow
© Jordan, Knauff & Company. Proprietary and Confidential. 45
Jordan,Knauff & CompanyINVESTMENT BANKERS
Valuation = Multiple X EBITDA
© Jordan, Knauff & Company. Proprietary and Confidential. 46
Business Owner POV
SimpleStraightforward…
…and not the full story!
Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Form of Consideration• Marketer of medical data • Accepted $33M deal• Lower offers were better, why?
© Jordan, Knauff & Company. Proprietary and Confidential. 47
Jordan,Knauff & CompanyINVESTMENT BANKERS
Valuation = (Multiple X adjusted EBITDA)
+ cash – debt +/- working capital
adjustment
© Jordan, Knauff & Company. Proprietary and Confidential. 48
Investment Banker POV
Obviously better
Jordan,Knauff & CompanyINVESTMENT BANKERS
Valuation = (Multiple X adjusted EBITDA)
+ cash – debt +/- working capital adjustment
+ enhancers - detractors
© Jordan, Knauff & Company. Proprietary and Confidential. 49
Valuation – Fuller Perspective
Jordan,Knauff & CompanyINVESTMENT BANKERS
Revenue – bigger is betterGrowth – faster is betterProfits – $1M EBITDA, $3M
EBITDA, $5M EBITDA, $10M EBITDA
EBITDA margin – 10% usually very good, 15% outstanding
Minimal CAPEXStrong, capable management
team– “not going anywhere”
Customer relationships– Long term, no concentrations
Simple and understandable business model
Design skillsQuality accounting systems &
proceduresBuying/sourcing/pricing expertise © Jordan, Knauff & Company. Proprietary and Confidential. 50
Enhancers to Valuation Include:Inventory management– Just in TIME (JIT)– Presell orders
Fragmented industryLarge market ($1B+)Expansion opportunities– Geographic– Customers/markets– Products
Barriers to entryLimited cyclicalityLow regulatory riskUnique expertise– Intellectual Property (patents,
trade secrets)– Sales/marketing approach
Use of TechnologyFacilities/warehouse/
distribution center
Jordan,Knauff & CompanyINVESTMENT BANKERS
© Jordan, Knauff & Company. Proprietary and Confidential. 51
Detractors to Valuation Include:A “motivated” sellerOwner viewed as integral to
successManagement– Lack of bench strength/managers
about to retire– Lack of succession plan
Market is declining/out of favorLack of profitsLow marginsDeclining revenuesCustomers– Concentration– Financial weakness
Large CAPEX needs
Poor labor/union relationsUnproductive employeesPoor systemsExcessive bad debtUnsellable inventoryLow barriers to entryOverly complex productLong sales cycleSeasonalitySmall marketMarket dominated by large
player(s)Bad reputation for qualityDirty, unorganized facility/offices
Jordan,Knauff & CompanyINVESTMENT BANKERS
Valuation – Is That All There Is?
© Jordan, Knauff & Company. Proprietary and Confidential. 52
Jordan,Knauff & CompanyINVESTMENT BANKERS
Valuation = (Multiple X adjusted EBITDA)
+ cash – debt+/- working capital adjustment)
+ enhancers - detractors
+ pro-forma benefit of combined entities
© Jordan, Knauff & Company. Proprietary and Confidential. 53
Pro-forma Valuation
Is paying 15X for a $5M EBITDA company reasonable?
© Jordan, Knauff & Company. Proprietary and Confidential. 54
Pro-forma Ice Bucket Challenge
Jordan,Knauff & CompanyINVESTMENT BANKERS
Combined
100,000$ 50,000 50,000 40,000 10,000$
Kate & Zuzu's Bait Shop & Sushi Imporium
Pro-forma Example
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If Kate acquired Zuzu, what multiple makes sense?
Kate's Bait Shop
Zuzu's Sushi Imporium
Rev 50,000$ 50,000$ COGS 25,000 25,000 GP 25,000 25,000 Expenses 20,000 20,000 EBITDA 5,000$ 5,000$
Pro-forma
105,000$ 48,000 57,000 37,000 20,000$
Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Nurses’ Scrubs Pro-forma
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Seller• Sales decline• Marketing miscues• Losing money ($3M)
Buyer– PE backed – Profitable
Buyer paid $13M – why?
Exhibit 3© Jordan, Knauff & Company. Proprietary and Confidential. 57
Valuation Presented In A Pitch
Jordan,Knauff & CompanyINVESTMENT BANKERS
© Jordan, Knauff & Company. Proprietary and Confidential. 58
EBITDA Multiple Risk Profile Characteristics
1 High Risk Business out of control / Failure likely. Crisis Management is the norm.
2 Risky Small margins, depends very much on owner relationships, owner not staying on. Not growing - status quo.
3 Acceptable RiskMarket risk but acceptable. Below average margins. Other risks concerning marketability, owner staying, no growth, etc. Gives market share and sustainable future cash flows.
4 Low Risk Growing, average profits, good client base and some management. Not dependent solely on owner. Management stays.
5 Minimal Risk Growing, above average profits, diverse client base, management plan, processes, procedures, etc. Management stays.
6 Slam Dunk Risk Profile 4 and 5 plus management has shown propensity to grow firm, good solid profits, lots of growth potential, and management stays
Quantifying Valuation – Buyer’s POV
Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Facilities Enhanced Valuation
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Seller had (maybe) ~$2M EBITDA Buyer paid $17.5M Why?
Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Systems Enhanced Valuation
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Seller less than $1M EBITDA Big concentration Buyer paid nearly 5X Why?
Jordan,Knauff & CompanyINVESTMENT BANKERS
Solving Valuation DifferencesEarn outSeller noteUsing stockLess than 100%
© Jordan, Knauff & Company. Proprietary and Confidential. 61
Jordan,Knauff & CompanyINVESTMENT BANKERS
Net Proceeds Calculator
Exhibit 4
© Jordan, Knauff & Company. Proprietary and Confidential. 62
Part IV is next!
© Jordan, Knauff & Company. Proprietary and Confidential. 63
The Team, Documents Negotiating
Jordan,Knauff & CompanyINVESTMENT BANKERS
The Team
Typical consultants include–Legal–Accounting/auditing–Wealth management–Investment banker
© Jordan, Knauff & Company. Proprietary and Confidential. 64
Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – The Wrong Advisor• Lawyer with no M&A experience.
© Jordan, Knauff & Company. Proprietary and Confidential. 65
Benefits of an Intermediary
© Jordan, Knauff & Company. Proprietary and Confidential. 66
Jordan,Knauff & CompanyINVESTMENT BANKERS
Investment Banker vs Business Broker Deal size Business type Staff and resources Sophistication Involvement
© Jordan, Knauff & Company. Proprietary and Confidential. 67
Sundry Team Members – depends on deal
– Marketing– IT/Database– Environmental
© Jordan, Knauff & Company. Proprietary and Confidential. 68
Chain of CommandPoor communication Establish Chain of Command
Pick up the phone!
© Jordan, Knauff & Company. Proprietary and Confidential. 69
M&A Documents
Indication of Interest IOI - Exhibit 5
Letter of Intent (LOI) - Exhibit 6
Purchase Agreement - Exhibit 7
© Jordan, Knauff & Company. Proprietary and Confidential. 70
Keys to Negotiating Success
Weak or strong hand Remember the goal Decision maker Rollercoaster ride ABC – Always Be Closing
© Jordan, Knauff & Company. Proprietary and Confidential. 71
Anecdote: How Strong is Your Hand?
Drink dispensing equipmentBuyer “re trade”Inventory$1.6M on due diligence
© Jordan, Knauff & Company. Proprietary and Confidential. 72
What was the result?
Negotiating Techniques
How do Buyers make a bid? Term sheet – Exhibit 8 What motivates/scares other
side?
© Jordan, Knauff & Company. Proprietary and Confidential. 73
Jordan,Knauff & CompanyINVESTMENT BANKERS
Anecdote – Find (the other side’s) Motivation Buyer• Made numerous offers
© Jordan, Knauff & Company. Proprietary and Confidential. 74
Seller• Son-in-law - doubled
business• Liked his independence
What got the deal done?
Negotiating Techniques (cont’d)
Successful tacticsCommon negotiating mistakes
Good faithSideways
© Jordan, Knauff & Company. Proprietary and Confidential. 75
Part V - Concluding
© Jordan, Knauff & Company. Proprietary and Confidential. 76
Managing expectations
Report cardAre you prepared?
Jordan,Knauff & CompanyINVESTMENT BANKERS
Managing Expectations• Tax preparation• Wealth planning• Hockey stick• Trust the process
© Jordan, Knauff & Company. Proprietary and Confidential. 77
Where we are today
Where we know you can take
the business after you
buy it
Anecdote – Bird in Hand; No Tax Plan
• Light industrial staffing• The “yeah yeah yeahs”
© Jordan, Knauff & Company. Proprietary and Confidential. 78
Jordan,Knauff & CompanyINVESTMENT BANKERS
Report Card for Your Business Are you prepared to
sell?• Revenue• Growth• EBITDA• Owner• Margin• Audits• CAPEX• Providing documents• Secret sauce
© Jordan, Knauff & Company. Proprietary and Confidential. 79
Are you prepared to buy?• Money• Targets• Thesis
Jordan,Knauff & CompanyINVESTMENT BANKERS
Opportunity KnocksContacted by Buyer• Not unique• Meeting protocol• Proprietary – who benefits?
© Jordan, Knauff & Company. Proprietary and Confidential. 80
Contacted by Seller• Good and bad• Bake off
Jordan,Knauff & CompanyINVESTMENT BANKERS
Last Anecdote – Your Reputation Buyer Unsuccessful acquisition attempts
Insular industry“Lookers but not serious.”
© Jordan, Knauff & Company. Proprietary and Confidential. 81
Jordan,Knauff & CompanyINVESTMENT BANKERS
Thank you!If you have any questions, please feel free to contact me at your convenience:
William R. SnowManaging DirectorJordan, Knauff & Company200 W. Madison St. Suite 980Chicago, IL [email protected]://www.linkedin.com/in/billsnow
© Jordan, Knauff & Company. Proprietary and Confidential. 82