H S W

HOW TO SUCCESSFULLY WORK WITH
PRIVATE EQUITY
PRESENTED BY
Exit Planning Exchange
TODAY’S AGENDA
I.
Private Equity Overview
II.
Types of Transactions and Value Drivers
III. How to Work with Private Equity
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TODAY’S AGENDA
I.
Private Equity Overview
II.
Types of Transactions and Value Drivers
III. How to Work with Private Equity
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WHAT IS PRIVATE EQUITY?
 Investors and funds that make investments into private
companies (not publicly traded)
 Capital for private equity is raised from high net worth
and institutional investors
 Money can be used to accomplish a myriad of goals and
objectives in the context of a deal
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TYPICAL PRIVATE EQUITY GROUP STRUCTURE
Private
Equity Firm
(General Partner)
Limited Partners (Investors)
(Pension funds, insurance companies, high net worth
individuals, family offices, endowments, etc.)
Fund / investment management
Ownership of the fund
Private Equity Fund
(Limited Partnership)
The fund’s ownership of the portfolio investments
Investment
Investment
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Investment
FUNDS ORGANIZED BY INVESTMENT STRATEGY
LBO/Buyout
Growth Capital
• Majority ownership
• Equity investments
• Mature companies
• Minority ownership (<50%)
• Equity investments
• Mature companies
Mezzanine Debt
Venture Capital
• High yield (12%+ rates)
• Subordinated loans
• No personal guarantees
• Equity investments
• Early stage companies with
new technology or products
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TARGETED RATES OF RETURN
Most
Venture
Capital
35%+
Return
Equity Funds
25 – 35%
Debt Funds
15 – 25%
Bank Debt
5 – 10%
Least
Risk
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Most
COMMON PERCEPTION OF LIFE AFTER THE DEAL
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SPECTRUM OF PRIVATE EQUITY STYLES
Personality
Strict
Flexible
Operations
Hands on
Hands off
Investment Horizon
Short-term
Long-term
Motivations
Current income
Equity appreciation
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TODAY’S AGENDA
I.
Private Equity Overview
II. Types of Transactions and Value Drivers
III. How to Work with Private Equity
10
WHEN IS PRIVATE EQUITY RIGHT FOR ME?
Liquidity
Ongoing
Ownership
Operational
Control
Private Equity Solution
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FUNDAMENTAL M&A TRANSACTION OPTIONS
Most
Outright Sale
Sell 100% of company
Majority Recap
Liquidity
Sell > 50% of company
KLH Focus
Minority Recap
Sell < 50% of company
Debt Recap
Subordinated debt
Least
Control
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Most
OUTRIGHT SALE
Most
Outright Sale
Sell 100% of company
Transaction Examples
Liquidity
• Corporate divestitures
Least
• Owner retirements
• MBIs
Control
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Most
MAJORITY RECAPITALIZATION
Most
Majority Recap
Liquidity
Sell > 50% of company
Transaction Examples
• Recapitalizations
• Family successions
• MBOs
Least
Control
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Most
MAJORITY RECAPITALIZATION
Shareholder Goals & Objectives
Liquidity:
 Provides significant liquidity event to shareholders as
part of “1st bite of the apple” at fair market value
Operational
Control:
 Equity partner is majority shareholder with Board control
 Management often stays in place
Pro-Forma
Ownership:
 Ownership retained for “2nd bite of the apple”
 Option incentives would likely replace stock program for
key employees
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RECAPITALIZATION
 Sponsor acquires majority position in the company to provide
diversification of shareholder(s) wealth
– Current manager(s) retain ownership stake and continue
growing the company with a “2nd bite of the apple” in mind
– Opportune time to give ownership stakes to key employees
Mgmt
Owns
Majority
Mgmt
Minority
Recapitalization
KLH
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FAMILY SUCCESSION
 Sponsor acquires older generation’s shares to allow younger
generation management to continue operating the business
– Provide liquidity event for exiting generation
– Removes conflicts of interest between generations
Younger
Generation
Younger
Generation
Older
Generation
Succession
KLH
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MANAGEMENT BUY-OUT
 Sponsor backs current management team to buy-out current
majority shareholders
– Provide liquidity event for previous managers / owners
– Creates upside incentives for “new” management team
Exiting
Seller
Owns
Majority
Mgmt
MBO
KLH
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VALUE DRIVERS
2.0x
3.0x
4.0x
5.0x
•
Little to no
accounting
systems
•
Limited
information
systems
•
Adequate
information
systems
•
Sophisticated
information
systems
•
Un-auditable
books and
records
•
Unaudited
financials with
ability to audit
•
Reviewed or
audited
financials
•
Audited
financials
•
One man
operation/no
management
team depth
•
One or two
person senior
management
team
•
Some
management
team depth
•
Well rounded
management
team
•
No professional
accounting staff
•
Bookkeeper on
staff
•
Controller on
staff
•
CFO on staff
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TODAY’S AGENDA
I.
Private Equity Overview
II.
Types of Transactions and Value Drivers
III. How to Work with Private Equity
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UNDERSTANDING INVESTMENT CRITERIA
Stage of
Development
Company Size
Management
Transaction
Types
Avoided
Industries
Geography
Mature, growing businesses with a history of profitability that
need capital for growth, expansion, working capital, or buyouts
EBITDA of $2.0 to $8.0 million
Strong track record and desire for meaningful ownership stakes

Growth capital

Working capital

Family successions

IT software or hardware

Capital intensive

Early stage ventures

Biotech
Nationwide
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


Recapitalizations
Corporate divestitures
Other ownership
transitions




Restaurants
Real estate
Retail
New construction
DEAL EVALUATION PROCESS
Initial call or email
with basic deal
information
Site visit
Follow up call to
discuss level of
interest and
additional
questions
Management call
Letter of Intent
Full diligence
process and
Closing
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THE IDEAL TEASER
 Brief, articulate description of what the business does and the
general business model
 Rough location of the business
 Historical financial information (2008A-2013E)
 Seller’s objectives and overview of management team
 Key preliminary information
– Ex: “The business has ~$7 million of existing debt on the
Balance Sheet”
– Ex: “Strong #2 man to take over and would like equity”
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HOW WE CAN WORK TOGETHER
 We want to see all sell-side or buy-side opportunities you
encounter, especially if they are in Florida or the Southeast
 We honor buy-side fee arrangements
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CONTACT INFORMATION
James B. Darnell
Partner
601 Bayshore Blvd
Suite 850
Tampa, FL 33606
813.222.0160
james@klhcapital.com
Highly Confidential
www.klhcapital.com
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