Date post: | 14-Jan-2015 |
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3 Questions To Explore
Is institutional capital available for entrepreneurs in today's market?
What are the current trends in the private capital markets?
How does an entrepreneur access this capital?
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The Number Of Successful Stock Offerings Is On The Rise…
Source: CapitalIQ
The momentum gained in late 2009 has continued into the new year as investors have an appetite
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Overall Middle Market Deal Volumes Are Beginning To Trend
Up…
Note: Transactions valued between $10-$250 millionSource: CapitalIQ
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…And Middle Market Transaction Multiples Are On The Rise
Note: Transactions valued between $10-250 millionSource: W.Y. Campbell & Company
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The Vast Majority Of Private Equity Deals Are In The Middle
Market…
Lower middle market deals under $50 million remained the most popular during 4Q09 (over 50%
of deal flow)8
Source: PitchBook Platform
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There Are Two Categories Of Institutional Buyers & Investors
…collectively comprising a very broad universe of potential buyers and investors
Who Are Financial Buyers?
Private Equity … Venture Capital … Hedge Funds
How Private Equity Groups invest:Combination of their own equity plus debt financed by other parties
Seeks return primarily through capital appreciation realized in exit: - Organic growth - Expansion through acquisitions - Debt retirement
Secondary focus on interim cash flow: - Cash coupons and cash distributions - Dividend recaps
Private Equity Groups focuson the middle and large markets
> 8,000 firms
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…Based On Financial Incentives For Private Equity Pros
Once raised, private equity funds have a “shelf life”– “Use it or lose it” – Private equity players have to put capital
to work within specified timeframes
Private equity firms generate income and cash from these funds through management fees and investment carry – If capital is not invested then private
equity professionals lose their engine to generate income and wealth
– Creates incentive to put money to work before the fuse burns out
Return of debt to market is expected to release pent-up demand
Time fuse on capital
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What Financial BuyersAre Looking For
Experienced management team with a solid track record– Depth and breadth of management– Strong next generation of leadership providing continuity
Leading and defensible market position in 1+ niches– Long-standing customer relationships, diversified client base,
and low attrition– Strong recurring revenue base– Proven sales and marketing channels
Differentiated offerings + efficient infrastructure = attractive margins– Key part of customers’ value chain with difficult-to-imitate
products and services– EBITDA margins >10%
Growth potential through multiple strategic avenues– Strong “platform” business that can grow organically or
through add-on initiatives– Attractive industry profile and growth outlook– Ability to realize economies of scale to further drive
profitability
Who Are Strategic Buyers?
“Strategics” are operating businesses (public and private) Why do they buy?
For growth (compelled by owners/investors)…
For accretion (1 + 1 = 3, shareholder value creation math)…
Because it is faster, easier, & cheaper than starting from scratch…
How do they buy?Combination of cash, stock, performance earnouts,
and management/employee contracts
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What Strategic BuyersAre Looking For
Revenue and cost synergies that paint a compelling business case
– Improves acquiror’s product and service offerings
– Cultural fit
Access to new skills and technology– Highly-trained human capital– Unique intellectual property, tools, business
methods
Complementary customer base– Diversified customer base– Diversified products and services
Management team and organization culture– Ability to drive growth post-acquisition
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What Are Investors Looking For?
future cash flows adjusted for risk and time
"Focus solely on the future earning power..." Berkshire Hathaway, Annual Report
Pro
fits
Time
$ $ $ $ $ $ $ $ $ $ $ $ $
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Growth The more --- the better
Trends matter a lot
Relative to the broader market and competitive landscape
Quality Dependability and
reliability of cash flows
Consistency of reporting
3rd party objective testament is helpful
Returns = Cash Flows
Cash flows are judged using these two factors:
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In the world of investments, return is commensurate with risk
The greater the risk, the higher the needed return
This is commonly called the risk-return trade-off
Understanding The Role Of RiskFrom A Market Perspective…
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Key Areas Of Focus For Your Company’s Team
6 areas are major determinants of
valueand are key for
generatingcash flow
Focusing on these areas will improve the value
of your business whether or not you are
seeking a liquidity event or growth capital
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§ Credit Cards
§ Angel
§ Friends & Family
§ Inheritance
Credit Cards
HELOC
Retirement Funds (401k/IRA)
Friends & Family Equity
MARKETINVOLVEMENT
§ Bank Debt (personally guaranteed)
§ Revenue/Cash Flow
§ Factoring
· Minority Equity
· Mezzanine Debt
· Sale Leaseback
· Series A-D
· IPO
§ Recapitalization
§ Strategic Sale
§ J oint Venture
MATURITY / TIME
MATURATION
GROWTH
ADOPTION
START-UP
VALUE
Optimal Time to
Buy/Invest
Opt
imal T
ime
to Sell
Where Is Your Company In Its Lifecycle?
What is the optimal lifecycle “curve” for
your company?
How can you influence the “slope” of the
curve?
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