2014 Family Wealth Conference

Transcription

1 2014 Family Wealth Conference

2 James Bertram William Blair & Company Sarah Mercurio William Blair & Company Business Succession: Planning the Next Step for Your Most Valuable Asset

3 Summary of Financial and Strategic Alternatives Least Liquidity Achieved Most Status Quo Debt Only Recap Minority Equity Recap IPO Sale to Sponsor Sale to Strategic Buyer Highest Control Maintained Lowest 1

4 Disadvantages Advantages Financial Versus Strategic Buyer Financial Buyers Opportunity to continue to have a meaningful ownership stake Sponsor can bring more than just capital to the table Maintain some degree of influence Strategic Buyers Likely highest valuation Ability to select long-term owner of the business Provides clean break from the business Leveraged capital structure Active ownership style Sponsor with control exit and overall strategy Likely not an opportunity to maintain an ownership stake Might entail changes to the business to achieve synergies 2

5 Valuation Methodologies and Considerations Multiples Approach Cash Flow Approach Comparable Public Companies Analyzed market multiples of selected publically-traded companies that are comparable Discounted Cash Flow Analysis Assess the target s operation earnings and cash flow requirements over a five year period and applied appropriate discount rate reflective of the business Comparable Transactions Analyzed purchase price multiples of merger and acquisition transaction involving targets that are comparable Leveraged Acquisition Analysis Analyzed the values that a typical LBO could be completed under established return parameters Considerations Industry Characteristics and trends Company Growth and Earnings Prospects Customer Quality Potential Merger Savings and Synergies Tax Attributes 3

6 Sale Process Summary Thoughtful and structured, yet flexible process 1 2 Months 1 2 Months 2 3 Months Preparation Drafting Early Discussions Broader Outreach Solicit IOIs Narrow Field Management Presentation Detailed Diligence Drive to Close Preparation Marketing and Initial Diligence Drive Outcome through Competition Tax and estate planning Blair refines story Creation of detailed financial model Finalize buyer list Early outreach via selected fireside chat meetings Early preparation of data room ensures process efficiency Approach key decision makers Share marketing materials following execution of NDA Blair to respond to initial diligence requests Detailed indications of interest Blair to work with client to adjust process as necessary goal to put the best buyers in the position to compete Narrow parties based on fit, valuation ranges, and level of conviction Conduct management presentations Facilitate detailed due diligence Submission of final proposals Identifies committed parties, shortens time to close, and enables negotiation of key contract terms Maintain significant competitive tension 4

7 Areas of Company Preparation for a Transaction Business Financial Accounting and Tax Legal and Other 5

8 Business Considerations Sales Achieve ample channel penetration and balance Ideally with channel leading customers Prove out channel receptivity / success Diversify revenue stream and increase market opportunity Minimize customer concentration Demonstrate broad receptivity by different customers Diversify revenue stream and increase market opportunity Demonstrate product sell-through / velocity success Growth goes beyond channel fill Shows consumer receptivity Key diligence area for most buyers Identify and be able to clearly articulate growth opportunities Understand and quantify market size and growth potential, including bottoms up white space analysis Ability to show significant planning and / or progress against near-term product / packaging extensions and channel expansion opportunities Customer success case studies Identify longer-term growth and acquisition opportunities 6

9 Business Considerations (cont d) Margins Achieve strong gross margins Review manufacturing and distribution efficiency Mix / pricing / SKU rationalization opportunities pursued Ideally generate attractive and/or improving EBITDA margins Capture return / product launch investments Execute cost saving opportunities Operations Expand base of reliable, high quality suppliers Long-term contracts Multiple suppliers if possible Ensure third-party facilities and equipment are in good order Clean and organized No significant projects incomplete / outstanding Other Key management personnel in place Intellectual property protected Consider brand/packaging enhancement initiatives Keep shareholder objectives aligned 7

10 Financial Considerations Historical Income Statements Identify and quantify add-backs and non-recurring items Both positive and negative items Detailed back-up analysis gathered Identify and quantify any pro-forma adjustments that have a meaningful impact on runrate business Mid-year acquisitions or divestitures Discontinued operations Mid-year price increases / decreases Input cost changes Other cost structure changes Projected Income Statements Monthly budget for current year Long-range plan/projections Detailed revenue build-up is key Ability to compare build-up to historical results is helpful Gross margins should reflect mix changes, etc. Detailed SG&A assumptions 8

11 Financial Considerations (cont d) Balance Sheet and Cash Flow Items Monthly balance sheet budget for current year, with detailed build-up for inventory, any supplier advances and revolver balance Long-range plan/projections, including net working assumptions potentially sensitized to commodities pricing environment Detailed capital budgets Breakdown of growth vs. maintenance ROI analysis for significant investments Capital Structure Address any near-term debt maturities to avoid timing pressure on sale process Understand debt pre-payment penalties and sale timing implications 9

12 Accounting and Tax Considerations Internal Systems Maintain ability to generate internal financial reports in a timely manner Ensure accuracy of information Provide sufficient detail to understand key business issues Audited Statements Clean audits from a reputable accounting firm for at least the prior fiscal year (ideally three years) Review audit letters and resolve open issues, weaknesses, etc. Have accountants review proper inventory levels, accruals, etc. Prepare detailed reconciliation between audited and internal financials for past three statements Other Accounting Prepare schedule of off-balance sheet liabilities and other contingencies (e.g., earn-out obligations) Prepare for quality of earnings diligence Tax Resolve outstanding tax issues / obligations Consider tax implications of various transaction structures Quantify value of any significant tax assets (e.g., pass-through structure) 10

13 Legal and Other Considerations Legal Counsel to (i) review material leases, contracts and supply agreements, (ii) catalog material agreements for future scheduling, (iii) red flag any potential issues and work with management to proactively resolve Consider early renewal of any key contracts that are expected to expire during the process or shortly after anticipated conclusion of sale process (eliminate potential buyer and / or counterparty leverage if agreement needs to be renewed as a condition of the deal) Amend any material agreements that contain provisions prohibiting change of control Evaluate contracts for necessary consents (e.g., leases, customer contacts, bank agreements) Other Consider Phase I Environmental reports on all major facilities (owned, leased or third party) Make sure management contracts are in place for all key personnel Consider instituting transaction incentives/bonuses to ensure alignment Well-organized I-9 records 11

14 Defining your Goals Monetization Strategy Should Match Personal Objectives Business Ownership Debt only Recap Minority Equity Recap IPO Sale to a Sponsor Strategic Buyer Monetization of Financial Assets Personal Objectives Lifestyle Charity Family Legacy Taxes Strategic Planning Considerations What is most important liquidity or control? Do I want to stay involved in the business? How do I diversify and grow my financial assets? How will I meet my current and future liquidity and income needs for my family? How do I want to transfer wealth to my family? How much is too much? What are tax-efficient ways to fund my charitable endeavors? What estate and trust strategies I should consider?

15 Current Tax Environment Estate, Gift and GST Tax TAX TYPE 2014 Rate 2014 Exemption GIFT 40% $5.34M ESTATE 40% $5.34M GST 40% $5.34M ATRA made permanent the gift, estate and GST tax rates and exemption amounts Income Tax Shift in Marginal Rates 39.6% Tax Rate for Incomes Above $406,751 ($457,601 for married filing jointly) New Medicare Taxes Limits on Itemized Deductions and Personal Exemptions Permanent Alternative Minimum Tax Relief Increase in Long Term Capital Gains and Dividend Rates for High Income Earners Changes to Estate Tax

16 $ Million Assets Needed Today to Fund Goals Over 30 Years 1 $25 Million in After-Tax Sale Proceeds Annual Spending Rate 2 : $250K $500K $750K Other Goals $18.5 Lifestyle Spending $6.5 Other Goals $11.5 Lifestyle Spending $13.5 Other Goals $5 Lifestyle Spending $ % Monte Carlo probability of success 2 After taxes and adjusted for 2.0% inflation Based on Wilshire Consulting estimates of the range of returns for the applicable capital markets over the next 30 years. Assumes all proceeds are reinvested in a 60/40 stock/bond mix. Data does not represent past performance and is not a promise of actual future results. See appendix for further details.

17 Planning for the future Maximize wealth transfer by shifting appreciation in assets to future generations without future imposition of estate tax on such appreciation. Transfer through GST, Estate and Gift Tax Planning Utilizing Discount Strategies Utilizing Freeze Strategies (appreciation only gifts) Charitable Strategies $80,000,000 $70,000,000 $60,000,000 $50,000,000 $40,000,000 $30,000,000 Family Trust No Trust $20,000,000 $10,000,000 $- 0 Years 5 Years 20 Years 30 years 40 Years Initial $5 million business interest sold for $10 million after 5 years. Family trust is a irrevocable defective grantor trust. 40% estate tax rate and 5% growth rate. Assume married couple using both exemptions.

18 Planning around Transitions Pre-Transition Mid-Transition Post-Transition Transitions in private companies are not unusual and typically involve changes in ownership or management Transferring ownership / management to the next generation Increasing ownership through new investors Creating liquidity through sale or debt transactions Different planning issues and opportunities arise at each phase of the transition The nature of the transition defines what issues or opportunities should be addressed Meaningful wealth transfer can occur at any phase Coordination around the strategies used to achieve the end goals is key

19 Managing through Change Pre-Transition Mid-Transition Post-Transition Privately held and family owned businesses present unique issues Business is an illiquid asset and the bulk of the family wealth Liquidity for income-replacement and estate tax planning Liability and Asset Protection Retirement income planning Estate Planning & Disposition of Business Business Structure & Valuation Business Succession Wealth Transfer shifting assets pretransition can often provide the most economic benefit Creating Liquidity through a sale or debt transaction Determine and discuss how the transition will affect your family Transition from cash flow lifestyle to balance sheet lifestyle Minimize Income and Capital Gains Taxes Business Valuation Key-Employee Protection and executive compensation Review your financial goals and identify core assets versus excess Create short and long-term asset allocation and investment strategies Create appropriate legal structures Update Estate, GST and Gift Tax Planning Review wealth transfer goals Becoming a Steward of Family Wealth Financial Independence Building a Comprehensive Asset Allocation and Investment Strategy Educating and preparing the next generation through communication and family meeting Creating a legacy through Wealth Transfer and Philanthropy Wealth transfer and charitable giving Income and Estate Tax Minimization and Efficiency

20 Create a Team of Experts Surround your family with a team of specialists who are dedicated to meeting your needs. Your Wealth Planning Goals Business Family Philanthropic Personal Investment Banker Wealth Advisor Accountant Investment Advisor Your Family Attorneys (Corporate; Trusts & Estate) Philanthropic Specialist Insurance Advisor