the mac entrepreneur's program february 15, 2008

The MAC Entrepreneur’s Program

February 15, 20087:30- 10:30 a.m.

Loews Philadelphia Hotel

The Program Agenda

Introduction:– MAC Alliance Entrepreneur’s Series Goals– Introduction of Presenters/Panelists

Program:– Presentations on “Building Your Exit Strategy”– Extended Panel “Q & A” session

The Entrepreneur Series Goals

The Entrepreneur’s Series is a part of MAC Alliance’s continuous learning commitment.

MAC Alliance’s goal is to serve the investment community by providing access to subject matter expertise, and experience.

The goal of the Entrepreneur's Series is to develop knowledge around “The Business Life Cycle” – Formation, Growth, and Exit.

This session focuses on “Building Your Exit Strategy”

Introductions

Presenters/Panelists Howard Ross – Partner, LLR Partners Inc. Karen Batchelder – Managing Director, Private Finance

Group, Stifel Nicolaus & Co., Inc. Tish Squillaro – Partner, Penn Valley Group Robert Krauss – Partner, Ballard Spahr Andrews &

Ingersoll, LLP Jo Webber – Energy Solutions

Timing Your Exit An Investor’s Point of View

Howard Ross

Partner

LLR Partners Inc.

Factors that impact Exit timing

Type of exit

Economic/market conditions

Industry dynamics

Regulatory environment

Company performance

Management’s desires

Pre-emptive offer

Types of Exits

Sale– Financial buyer

– Strategic buyer

IPO

Leveraged Recap

Develop an Exit Strategy

Exit strategy should be an integral part of due

diligence before the investment is made.

Specific strategy depends on how the various factors

unfold – difficult to dictate timing.

Develop an Exit Strategy (Cont.)

Be in a state of semi-preparedness:

– Strong operating results and trends

– Cohesive management team with limited turnover

– Strong endorsement of customers

– Annual audit

– Legal house in order

– IP protected

– Tax and regulatory compliance

– Outstanding stock, options and warrants well documented

Optimal Scenario

Selling off of two to three years of growth

Visibility for next one to two years

Hitting quarterly numbers

Limited number of add backs to earnings

Accounting and legal house in order

Minimal external threats – economy, industry, lawsuits Strong market conditions like 2004 through 2006 – strong

economy, cheap debt, stock market rising and an abundance of

capital in the hands of multiple potential buyers.

Selection and Use of an Investment Banker

Karen Batchelder

Managing Director, Private Finance Group Stifel Nicolaus & Co., Inc.

Why Use an Investment Banker?

Prepare your Company for the sale process

Conduct due diligence → Identify hidden opportunities and reduce negative surprises

Review historical financial statements → Understand business trends and systems

Review budget and financial projections → Support valuation

Draft Confidential Descriptive Memorandum → Properly position Company

Establish valuation → Establish realistic goals

Prepare management team → Achieve credibility

Determine management goals → Exit or remain involved in the business

Why Use an Investment Banker? (Cont.)

– Create an efficient process Organize management and the Company Provide dedicated resources Minimize business disruption Set deadlines and maintain momentum Preserve confidentiality and flow of information


Gain access to a broad buyer universe

Provide proprietary resources to identify potential buyers

Deep relationships with private equity firms (financial buyers)

Access to strategic acquirers

Determine type of sale process

Hard or modified auction

Negotiation

Pre-emptive sale


– Increase valuation and optimal deal terms Appropriately position Company Provide buyers with information to assess value Create competitive process Pursue optimal transaction structure and deal terms

Criteria for Selection of an Investment Bank

Middle market sell-side focus Relevant transaction experience Appropriate sized transactions

Relevant industry experience Knowledge of the industry Track record of success

Relationships with buyer universe, financial and strategic Dedicated private equity coverage focus Knowledge of and access to potential strategic acquirers

Criteria for Selection of an Investment Bank (cont.)

Relationships with debt providers

– Experience with entrepreneurial companies Unique issues with closely held businesses

– Preservation of confidentiality– Senior banker commitment

Ensures highest level of experience committed to the transaction

– References– Fee structure

M&A Transaction Process Overview

Due Diligence. Conduct in-depth due diligence.

Valuation. Establish realistic goals and valuation.

Marketing Documents. Prepare comprehensive descriptive memorandum.

Buyer Identification. Research and provide access to a broad range of strategic and financial buyers.

Transaction Strategy. Develop an appropriate transaction strategy and sales process.

M&A Transaction Process Overview (Cont.)

– Lender Pre-Screening. Receive indicative termsfrom multiple lenders.

– Transaction Marketing. Manage an efficient,effective and confidential marketing effort.

– Negotiation. Negotiate optimal Purchase and SaleAgreement terms.

– Closing. Achieve a timely close.

M&A Transaction Process Overview (Cont.)

PREMIUM

BaseValue

Presentation ofInformation,Positioning,

Growth Potential

NegotiationSkills and

Commitmentto Process

MaximumValue

Access to a Wide

Audienceof Buyers/Investors

M&A Process Timetable

Typical sale process is approximately six months

Current market conditions may result in longer processes

Tight credit markets

More stringent lender due diligence

Lengthier buyer due diligence

M&A Process Timetable (Cont.)

Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Initial Planning and Due Diligence

Drafting Memorandum and Transaction Strategy

Development

Finalize Memorandum, Buyers List and

Strategy

Phase I Marketing Phase II Marketing Final

Bids

Negotiation & Closing

Management Team Effect

Tish Squillaro

Partner

Penn Valley Group

Exit Strategy and Management Team Effect

The Goal:– Ensuring that your executive management team is on board with

the exit strategy and will actively participate in the marketing process

– Ensuring that the team will continue to keep their hearts and minds engaged during the transaction process.

The Plan:– The Art of Woo– The “WAM” Factor– Overcoming Resistance

– As the business owner, you need to have a specific, thoughtful plan in place as you prepare to communicate the exit strategy to your management team.

– Your goal will be to encourage a mindset that has your team willing to reach a consensus about the transaction that will give momentum to closing a successful deal.

The Owner’s Role: Assume Nothing/Proceed with Caution/Plan

The Owner’s Role: Assume Nothing/Proceed with Caution/Plan

– You must find a way of gaining support and “sell” the future as an opportunity for those managers who will help you to prepare for the deal and transition the knowledge to the new ownership.

– Your team has to be groomed and grilled thoroughly to ensure that they properly communicate the message to the buyer.

Your Objective: Gain consensus from your team so they will actively support the preparation of the deal and be willing to transition to the new ownership.

The Art of “Woo”*

In their book, The Art of Woo, G. Richard Shell and Mario Moussa discuss the importance of winning others over with “idea selling”. They offer that the ability to gain support and consensus can be achieved using “relationship-based, emotionally intelligent persuasion”.

The Art of “Woo”*

4 Step Approach:I. Polish ideas/survey the landscapeII. Confront barriers (unreceptive, negativity)III. Pitch in a compelling wayIV. Secure individual commitments: research shows you need

to move the individual before you can move the group

Top 3 Mistakes:I. Focus on yourself: assume others care about what is

important to youII. Having no strategy: don’t wing itIII. Ignore the politics: you need to prepare an idea-selling

campaign

The “WAM” Factor

What About Me?: Whether stated or not, this question is front and center on

the minds of your managers. You need to spend time considering what is important to them.– Review your structure to ensure that titles and roles

reflect the contribution of each manager.– Consider having a program in writing outlining what

happens to your team after the transaction.

The “WAM” Factor

– Offer sufficient incentives in the form of options, shares or bonuses.

– A “Stay Bonus” is money well spent, and will encourage your team to stay until the sale is completed.

Budget six months to a year of salary for key people As companies are usually interested in senior managers

of business they acquire, a stay bonus guarantees some continuity, giving new owners a chance to examine your team and decide who is important to the future of the company.

Yes But/What If

Be prepared to overcome resistance:– Before meeting with managers, think of and write down every question

they many possibly ask, using the who, what, why, when and how technique

– Do your homework and make sure you can answer each question in a confident, reassuring manner.

– Next, list any and all objections that come to mind, playing Devil’s Advocate: remember the WAM factor

– Finally, write out your talking points for overcoming each objection.

Summary

PREPARE– Before beginning any discussions, have a plan and prepare your

talking points

PITCH– When discussing with your selected team, be an “influencer”, focus

on what is important to them.

PROCEED– “Rally” your team towards the future, and a successful, profitable

event.

“Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.” Jack Welch

Selection and Use of the Legal Team

Robert Krauss

Partner

Ballard Spahr Andrews & Ingersoll, LLP


Who When Roles Ancillary Value Cost


Who Existing Lawyer Deal Firm Size Experience Geography Separate Counsel for Company, Owners,

Employees


When As Early as Possible Introduction to Investment Bankers Negotiating Investment Banker Agreement Corporate Clean-up

Selection and Use of Legal Team

Roles Deal Structure Deal Agreement/Schedules Indemnification Caps Employment Agreements Carry Buyer’s Financing HSR Getting to Closing


Ancillary Value Deal Tax Planning Personal Tax Planning Transition Issues Introduction to Investment Counsel


Cost Size of Deal Opposing Counsel Complexity Big Ticket Items Budget

The Entrepreneurs Role

Dr. Jo Webber

Main Types of Exit

Planned – IPO– Investment bank driven

Unplanned– Bankruptcy– Strategic pre-emptive

Business as Usual

Deals don’t always close Limit and secure knowledge Balance :

– Bringing in the right people to get the deal done– Distraction and uncertainty

Test of your organizational skills

Three Legged Stool

Owners Customers Employees

You represent the employees and your customers

Lead the Process

Different opinions and ideas Run the process as you run the business Take responsibility and ownership even if it’s

the first time for you Main point of contact for bank, investors and

potential acquirers

Some Elements

The NDA Teaser CIM Acquisition Targets The Management Presentation The Data Room The Scheduling Issues

Plan for the Future

Your Senior Management Team– Uncertainty– Change – Doubt/Concern– “What's the CEO going to do?”

Think through the different scenarios Articulate a plan to your team

Understand the New Owners

Key Objectives Their structure

– Where your company fits in their organization

– Employee fit– Product line fit

Get the Messaging Right

Your company The acquiring company Your customer base Their customer base

The First Six Months

Integration ‘New Company’ Culture New Management Team New Goals New Customers Getting back the balance

Question & Answer Session

Presenters/Panelists – Your “Exit Strategy” Team

Howard Ross – The Investor Karen Batchelder – The Investment Banker Tish Squillaro – The Management Team Coach Robert Krauss – The Lawyer Jo Webber – The CEO/Entrepreneur