Business Succession Planning and Liquidity Options ADV2043 Disclaimer Marshall amp Stevens Inc is an independent valuation and consulting company This report is based on a preliminary review of information provided without verification nor was due diligence completed to document data or ID: 782194
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Advising Business Owners:Business Succession Planning and Liquidity Options
ADV2043
Slide2DisclaimerMarshall & Stevens, Inc. is an independent valuation and consulting company.
This report is based on a preliminary review of information provided without verification nor was due diligence completed to document data or assumptions used; this is intended to provide an illustration of possible alternatives and should not be relied upon for final decision making
Slide3AgendaWho is Marshall & Stevens / MS Capital?What are your clients / business owners most common needs?ValuationTransaction OptionsWhat is happening in the market today?
Insurance Brokerage TransitionsSales OpportunitiesSuccess StoriesThe process and how we work together
Slide4Marshall & Stevens and MS Capital4
Slide5Marshall & Stevens, Inc.
5Marshall & Stevens has been in the financial advisory and valuation business for more than 80 years. Our team is comprised of seasoned valuation, banking and legal professionals - experts who speak the language of the clients we serve; who grasp the nature, subtleties and dynamics of the engagement; and who understand the unique concerns of our client base. We take great pride in our people, our independence and our ability to remain on the cutting edge of issues affecting our clients.Quality Valuation
Quality Decision-makingIndependence & Integrity
Los Angeles
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Chicago
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St. Louis
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Philadelphia
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New York
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Tampa
LOS ANGELES • NEW YORK • CHICAGO • PHILADELPHIA • ST LOUIS • TAMPA
Slide6Marshall & Stevens, Inc.Full-service, independent, national valuation firm
Founded in 19325 offices in major citiesSpecialists in:Financial Opinions, Valuation & ConsultingTangible and Intangible Asset ValuationsBusiness Succession Planning ESOP Formation and ValuationMergers & Acquisitions Corporate Refinance & Reorganizations6
Slide7MS CapitalWorks with the owners and stockholders of privately held businesses to assist in:
Strategic Business PlanningCorporate Finance SolutionsRaising growth and acquisition capitalRecapitalization of the businessInvestment Banking AdvisoryAssist in the sale of the business to a third party such as a strategic buyer or financial buyerAssist in the acquisition of complementary businesses or lines of businessBusiness Succession PlanningESOP Implementation and Consulting Services
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Tax
Real Estate Valuation
Capital Asset Valuation
Fair Value Mark to Market
Equity, Stock, Option and Debt Valuations
Purchase Price Allocation
Impairment Testing
Fresh Start Accounting Valuations
Revenue Recognition
ESOP
Machinery & Equipment
Ghosts Assets Studies
Structured Finance
Insurable Value
Fixed Asset Property Register
Real Estate Valuations & Consulting
Property Tax Consulting
Collateralized Loan Valuations
PPA for Real Estate
FIRPTA
Fractional Interest Analyses
Buy-Side, Sell-Side Consulting
Fairness Opinions
Solvency Opinions
Private Debt & Equity Placement
ESOP Formation and Valuation
Expert Witness Dispute Analysis Infringement Damages Insurance Claims Contract Disputes Bankruptcy LitigationCalifornia Corporate Code § 2000 and §17351 Solvency Opinions Fairness OpinionsFresh Start Accounting Valuations 363 Support Services Fraudulent Transfers & Preference Analyses Expert Testimony Estate & Gift Tax
Corporate Tax Restructuring Ad Valorem Tax Discount Studies Stock Options (IRC 409A)Transfer Pricing Cost Segregation (MACRS) FIRPTA
Financial Reporting
Corporate Finance
Litigation Support
Restructuring
Slide9Representative Clientele
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Slide10What do Business Owners Need?10
Slide11Typical Business Owner Concerns/ObjectivesDevelop an integrated plan meeting their objectives
Complete the plan on their terms while healthy/ableHave a personal exit strategyDiversify investments and create some liquidity Take care of their family, managers, and employeesMinimize personal and corporate taxesRecruit, reward, and retain key peopleMaintain control during transition periodLeave a legacy
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Slide12Business Owners Need an Integrated Business Succession and Estate Plan Proper planning protects the business, accumulated wealth, and retirement
Business succession plan addresses:Ownership successionManagement successionEstate plan includes:Protection of accumulated wealthProviding retirement incomeTransfer of wealth to familyIntegrated plan provides for:Perpetuation of the businessEfficient return OF equity to ownersSecurity in retirement12
Slide13Questions to consider when Creating or Implementing a PlanWhat do you think the business is worth?What is the real value of the entity?Who is the “buyer” of the business?How are they going to pay for the business?
How long is it going to take you/heirs to get your money?How much money are you really going to receive?How much are you going to pay in taxes?Is the transaction really going to work?13
Slide14Valuation14
Slide15Types of ValuationCalculation of ValueThis is a service intended to provide a basis for planning purposes onlyTypically completed to evaluate a business prospect and a determine a realistic range of value as part of an initial review or for the funding of insurance such as This is
NOT an appraisal nor certified valuation; the calculation cannot be used for documentation of any transaction, audit, tax filing, or other purposePreliminary ValuationAppropriate when a planning strategy is developed and a specific conclusion of value is needed to complete the planning processIt provides a documented value with supporting schedules but without a complete narrative report and all supporting documentation required for a transaction, audit, tax filing, or other purpose.Complete ValuationNeeded when a specific transaction is imminent and a narrative report with all supporting schedules and documentation consistent with industry standards is required with a closing/government filing to be completed within three months
Slide16Applicable Standard of ValueFair Market ValueFair ValueGoing Concern Value
Liquidation valueBook ValueInvestment ValueIntrinsic or Fundamental Value
Slide17Components of a Fair Market Value AppraisalMarket AnalysisComparable Company
Comparable Transactions Asset ApproachIncome Approach
Slide18Valuation basicsFactors we consider: Revenue Ruling 59-60-The nature of the business and the history of the enterprise from its inception;The economic outlook in general and the conditions and outlook of the specific industry in particular;
The book value of the equity and the financial condition of the business;The earning capacity of the Company;The dividend-paying capacity of the Company;Whether or not the enterprise had goodwill or other intangible value;Prior sales of the stock and the size of the block of stock to be valued; andThe market price of stocks and the sizes of companies engaged in the same or a similar line of business having their stocks actively traded on an exchange or over-the-counter market.
Slide19Typical Valuation Adjustments
Slide20Factors Impacting DiscountsDiscount for lack of control (DLOC)Ability of buyer of the subject interest to impact decisions regarding:Mergers/AcquisitionsHiring of management
Level and frequency of distributionsCompany’s capital structureEtc.
Slide21Factors Impacting DiscountsDiscount for lack of marketability (DLOM)Distribution policy. High distributions = lower discountLiquidity of interestAttractiveness of inside assets
Size of interestETC21
Slide22Transaction Options22
Slide23Full Company SaleSale of the Company involves, in general, the below processes:Internal due diligence
Gathering and analyzing financial, corporate, and all other pertinent data from CompanyConfidential Offering Memorandum (pitch book)Developing and building confidential investment overview of all customary aspects about the Company a buyer can use to evaluate and propose purchasing offerMarketing PhaseSolicit interest from potential acquirers among financial and/or strategic buyersClosingNegotiations, formal due diligence, and close of transaction
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Slide24Strategic vs. Financial Buyers:Financial buyers, such as private equity groups, typically focus on investments/acquisitions they can help grow and exit after 3 to 5 years (sometimes longer) and realize their returns. Financial investors also look to improve efficiency and the bottom line at any cost. In addition, financial buyers can be highly risk adverse, will negotiate lowest price possible and tend to limit the upfront capital in the transaction.
Strategic buyers are typically corporations looking to acquire new technology, expand geographical footprint, achieve synergistic growth/efficiencies, or simply wanting to eliminate competition. However, strategic buyers tend to pay a higher price than financial buyers and take a long-term stance when investing.TimelineTypically, company sales take anywhere between 3 to 6 months and even longer24Full Company Sale
Slide25Management BuyoutIf there exist able and interested management to lead the Company there is potential to have a management lead buyout of ownership from current shareholders. The process resembles a Company sale but can be much more expedient and could be accomplished with traditional debt or mezzanine financing.
New management can pursue debt from traditional lenders for lower costs; however, stringent and personal guarantees are often required but the Company’s assets can be pledged as collateral and the Company may service debt; typical rates tend to be in the single digits.25
Slide26Mezzanine debt generally has a 5-7 year maturity with a balloon payment at maturity. In comparison senior debt typically amortizes and would get paid in full before the mezzanine debt. The mezzanine financing usually includes an equity kicker in the form of a warrant. The warrant provides the investor with an opportunity to buy capital stock of the borrower for a nominal exercise price. This is the means for the investor to increase the internal rate of return on the investment.
Although mezzanine debt is more expensive than bank debt, the terms are not as rigid. Generally has the same covenant package as the bank deal, with lesser financial covenants and baskets.Process TimelineThe process of a management buyout tends to be much quicker than a company sale; there’s still a need for informal upfront due diligence and preparation of presentation materials, but lenders (traditional or not), tend to focus much more on the Company’s ability to service the debt, which often times is a reflection of historical performance. 26Management Buyout
Slide27Dividend RecapitalizationA dividend recapitalization involves similar aspects to acquiring more Company debt to payout a dividend to its shareholders yet allowing the owners to retain control of the Company.
Dividend payouts are taxed the same as capital gains at 15%. The process will still involve going to the debt markets thus have similar traits (procedures, cost of capital, requirements/covenants) as leveraged buyout strategies (traditional or mezzanine) particular to management buyouts.Possible Collateral of CompanyTypical loan amounts can be expected to be around 2 to 3 times EBITDA levelsWith the company’s relative trailing twelve months EBITDA levels near $450k, there can be expectations to service an infusion of debt relatively between $1 million to $2 million27
Slide28Employee Stock Ownership PlanAn Employee Stock Ownership Plan (ESOP) allows you to:Sell all or a portion of your businessCreate liquidity for a variety of shareholdersGet Fair Market Value for the shares
Allows you to retain management controlDepending on the structure of the transaction, indefinitely defer capital gains taxNot bring in an outside party as part of the ownership structureTax qualified defined contribution plan28
Slide29Market Conditions29
Slide30Market DynamicsCurrently in the sellers market
$1.5 trillion of money looking for a homePEG’s are moving downstream to acquire smaller companies, and actually calling into companies directly for potential investmentBusiness owners are aging, baby boomersBuyers more sophisticated than sellersThe prices being paid for companies has increasedOverall, Activity Multiples !
Slide31Deal Multiples Among Industries
Slide32Family-owned businesses comprise 80-90% of all North American businesses.
1
Nearly 35% of the Fortune 500 are
family
firms.
2
Family
businesses account for 58% of the GDP, 60% of the US Workforce &
78% of all new job creation.
2
1. Nancy Bowman-
Upton,Small
Business Administration publication
Transferring Management in the Family-Owned Business,
2. “Taking the Pulse of Family Business” Stacy
Perman
, Bloomberg Business Week,. Quoting statistics from, U of So Maine, Institute for Family Owned Business.
3. Family Business Insitute.com
30% of all family owned businesses survive into the second generation.
3
12% into the third generation
3% into the fourth generation
Result - 97% of all family owned business don’t survive past the 3
rd
generation
Facts on Family Owned Businesses
Slide33First step in any planning exercise is to answer the question….
What is my business worth?
Slide34Calculation of Value
What it is…Range of ValueUtilize streamlined Market and/or Income approachesPerspective on Value driversLeverage for negotiations
A great place for the planning to begin What it isn’t…Formal documented appraisal accepted by the IRSUSPAP compliant nor appropriate for legal, tax or other formal filings.
Slide35What is happening in the market today?Currently in the financial buyers market
$1 trillion of money looking for a homeLimited platform companies availablePEG’s are moving downstream to acquire smaller companies, and actually calling into companies directly for potential investmentBusiness owners are aging, baby boomersThe prices being paid for companies has increasedOverall activity is UP!
Slide36Competitors in industry
Companies looking for expansion
PEG’sHedge FundsFamily officesManagement
Family membersEmployees
FinancialStrategic
InternalTypes of buyers
Slide37Buyers
Sellers
Buy companies everydayHave strategies for buying companiesNot emotionally engaged in the process
Sell their company once in a lifetimeNot prepared for what it takes to sell
Emotionally attached to their company
So, who has the upper hand in this situation?
Together, we can help!
Slide38Terms to know and understand EBITDA – Earnings before Interest, Taxes, Depreciation and AmortizationLevels of Financial StatementsInternal
CompiledReviewedAuditedMultiplesAdd backsTrailing twelve months resultsDiscounted cash flowAdd on or tuck in acquisition Platform companiesAsset versus stock sale
Slide39Final Price Realized vs. Asking PriceSource: IBBA, M&A Source, Pepperdine Private Capital Markets Project: Market Pulse 4Q2017
Slide40Time to CloseSource: IBBA, M&A Source, Pepperdine Private Capital Markets Project: Market Pulse 4Q2017
Slide41Portion of Sale Received as Cash at CloseSource: IBBA, M&A Source, Pepperdine Private Capital Markets Project: Market Pulse 4Q2017
Slide42Buyer Location (in miles – relative to seller)Source: IBBA, M&A Source, Pepperdine Private Capital Markets Project: Market Pulse 2Q2017
Slide43Top Industries Transacting in 2017Source: IBBA, M&A Source, Pepperdine Private Capital Markets Project: Market Pulse 4Q2017
<$500K - $2MM$2MM - $50MM
Slide44US PE Middle-Market EBITDA MultiplesSource:
PitchBook, 2017 Annual US PE Middle Market Report
Slide45US PE middle-market Add-on Activity
Source: PitchBook, 2017 Annual US PE Middle Market Report
Slide46US PE middle-market deals (#) by sector
Source: PitchBook, 2017 Annual US PE Middle Market Report
Slide47Reasons for Business Sales Not Transacting
Source: Pepperdine 2018 Private Capital Markets ReportValuation Gap in Pricing for Transactions That Didn’t Close
Slide48Thank You!
Questions?48
Slide49Marshall & Stevens is a valuation and financial consulting firm. While some of our professionals are lawyers, accountants and/or investment bankers, we are not a law firm, an accounting firm, a broker dealer or an investment advisor and are not licensed to provide legal, accounting, brokerage, or investment advisory services. These materials are not intended to constitute tax, legal or estate planning advice. The discussions included in this presentation are summary in nature and intended for illustration only, and are not intended to be exhaustive or definitive. No final determination on any legal or financial issue should be made on the basis of this presentation.
These materials are intended only for the use of the persons to whom they have been addressed, and are not to be copied or distributed to or used by any other person without our written consent. © Marshall & Stevens Incorporated 2017Marshall and Stevens is not affiliates of Ameritas or any of its affiliates. This information is provided by Ameritas®, which is a marketing name for subsidiaries of Ameritas Mutual Holding Company, including, but not limited to: Ameritas Life Insurance Corp., 5900 O Street, Lincoln, Nebraska 68510; Ameritas Life Insurance Corp. of New York, (licensed in New York) 1350 Broadway, Suite 2201, New York, New York 10018; and Ameritas Investment Corp, member FINRA/SIPC.Each company is solely responsible for its own financial condition and contractual obligations. For more information about Ameritas®, visit ameritas.com.
Ameritas® and the bison design are registered service marks of Ameritas Life Insurance Corp. Fulfilling life® is a registered service mark of affiliate Ameritas Holding Company.© 2017 Ameritas Mutual Holding Company49Disclaimer
Slide50Ameritas Advanced Markets800-319-6903 ext. 2
advancedmarkets@ameritas.com
Contact Information