How ToRealize Best Value

A controlled auction increases the seller’s leverage by engaging multiple buyers

Multiple buyers drive valuations higher. When sellers focus on only one buyer, they surrender any leverage they have, placing the ball squarely in the buyer’s court. The buyer can control the timing, often intentionally dragging out the process, and can even dictate terms, placing the seller at a disadvantage. (Some of the typical pitfalls we see are demands to leave working capital in the business, diminishing the seller’s return; escrowing funds, which can delay the payout; and requiring unreasonable representations and warranties, which increases the seller’s exposure.) Tech-enabled research can identify numerous potential buyers from around the world, often attracting multiple bids in a controlled auction that increases the seller’s leverage and results in the highest possible valuation.

261

Prospective
Buyers

104

Received
Offer Memo

28

Sent
Initial Offer

4

Wrote Letter
Of Intent

1

Final
Buyer

Types of Buyers

Types of Buyers

Berkery Noyes clients receive a 40% increased offer by approaching other potential buyers on behalf of them

Received 28 IOI’s
(Initial Offers of Interest)

Received 28 IOI’s (Initial Offers of Interest)

• closing buyer

You can see the initial bidder moved up significantly above their preemptive offer

IOI Buyer Information

Bidder Example Strategic Example PE
Valuation & Implied Multiples
  • Enterprise Value = $72 million to $86.4 million
  • LTM PF Adj. EBITDA (2015A PF Adj. EBITDA): 10.8x to 13.0x
  • Bidder states that its range is based on paying a multiple of 10x-12x an expected $6M of LTM adjusted EBITDA at closing. See Proposed Consideration and Working Capital Requirement sections for more detail
  • Enterprise Value = $54 million to $60 million
  • LTM PF Adj. EBITDA (2015A PF Adj. EBITDA): 8.1x to 9.0x
  • Bidder does not include a multiple range and only includes the TEV range of $54-60M. See Proposed Consideration and Working Capital Requirement sections for more detail
Proposed Consideration
  • Acquire 100% of the Company on a cash-free, debt-free basis, including capital leases (but not operating leases)
  • Acquire the Company on a cash-free, debt-free basis
Working Capital Requirement
  • Securing debt financing terms acceptable to Bidder approval of Bidder’s investment committee which would be obtained prior to the execution of a definitive agreement and all necessary regulatory consents and approvals where relevant
  • Board of Directors will need to approve this transaction
Financing
  • Proposal constitutes an all-cash offer and will finance this offer through the use of cash on hand and Bidder’s existing $200M undrawn revolver
  • Final Buyer will provide the equity required in the Transaction out of Final Buyer III (“FB III”)
Material Conditions
  • The Company would have achieved its FY ’17 results and be on track to achieve its FY ’18 Budget
  • Proposal is subject to customary conditions, including, but not limited to: (1) negotiation and execution of mutually acceptable definitive agreements and (ii) satisfactory completion of confirmatory due diligence of the Company
  • Management will be able to demonstrate their ability to achieve the 2017 revenue and pro forma EBITDA projections outlined in the CIM
  • This proposal is contingent upon closing the existing acquisition currently under LOI and factored into management’s projections
Plans for Management
  • Anticipates setting up Company as its own vertical, reporting to either the COO or the CEO.
  • Assessment of management’s commitment to quality, cultural fit with Bidder integrity and long term commitment to the business will be a major part of their diligence activity.
  • Finally, they plan to structure a management equity program so that Company mgmt. can participate meaningfully in the future value appreciation of Bidder.
  • Anticipate that the management team will remain in their current roles with the Company as they are critical to the continued growth and success of the business.
  • Bidder believes in providing substantial equity incentives, including direct equity investment opportunities, to management teams in order to share common objectives and participate in the value creation of the business.
  • Anticipate that the management team will roll a minimum of 15% (revised per new IOI received 12/1) of their equity into the Transaction.
  • In addition, Bidder believes in creating a Board of Managers with independent, value-added managers that bring industry or competency-specific expertise and experience to the Company
Time & Other
  • 14 days exclusivity period starting with the execution of a Letter of Intent.
  • Anticipates they are willing to adhere to the 30-day period post management meetings to complete due diligence and finalize a definitive agreement.
  • Offer expires December 11th at 5pm ET.

Received 4 LOI’s
(Letters of Interest)

The Letter of Intent is the prospective buyer’s “foot in the door” signaling a level of interest in pursuing the transaction. We caution sellers to treat LOI’s gingerly. Some buyers use the LOI to tantalize with a high value, expecting to negotiate down from this initial, non-binding offer, while seller’s often look at the LOI as the floor, anticipating the offer to rise during negotiation. What’s more, your company financials may be black-and-white to you, but they’re open to a buyer’s interpretation–it’s up to the seller, or the seller’s representative, to steer that interpretation in a favorable direction. LOI’s often contain non-cash provisions that can be tricky to value–covenants, earn-outs, management agreements, and any number of conditions which can take the shine off a seemingly attractive initial offer. Confidently navigating the ocean of distance between the LOI and the Sale Purchase Agreement (SPA) is where the M&A advisor can be the seller’s lifesaver.

LOI Buyer Information

Element Example PE Example Strategic
Consideration, Valuation & Implied Multiples
  • Enterprise Value = $72 million
  • Acquire 100% of the Business
  • LTM 12/31/15 Unadjusted EBITDA Multiple = 16x
  • LTM 12/31/15 Pro Forma Adj. EBITDA Multiple = 10x
  • Proposal assumes a minimum adjusted EBITDA as of 12/31/15 of $8 million
  • Rep & Warranty Insurance: Seller and buyer split the costs equally
  • Will honor Key Employee’s existing employment agreement subject to receipt and reasonable satisfaction; no other new employment agreements will be required at or prior to closing
  • Post-closing equity incentive plan representing 8% of the fully diluted ownership of the Company will be in the form of profits interests and will vest based on time and performance (Bidder will work with Key Employee to determine the appropriate allocation of employee ownership in the plan)
  • Treatment of Debt: Assumes $18M @ 12/31/2017 which includes: negative cash balances ($750K), management fees ($100K), designated receivables ($15K), inventory payable ($255K), CEO loan ($50K), bank errors ($46K), severance obligations ($365K), above market rent ($400K between the Closing Date and the applicable Lease expiration date) and contingent payments owed under the New Company acquisition agreement and related agreements ($600K)
  • Enterprise Value = $52 million
  • Acquire 100% of the Business
  • LTM 12/31/15 Unadjusted EBITDA Multiple = 12.2x
  • LTM 12/31/15 Pro Forma Adj. EBITDA Multiple = 7.1x
  • Rep & Warranty Insurance: Buyer Pays
  • $650,000 of restricted cash related to the Company’s workers’ compensation insurance policy shall remain on the balance sheet at closing and will be released to seller if and when released by insurer
  • Mgmt. Rollover: Existing management owners will roll 20% – 30% of their sale proceeds (structured as same preferred security as Bidder with 7% dividend)
  • Management equity incentive program would consist of profits interests in Newco that would provide its holders with a potential total residual ownership interest in Newco of up to 15% (one-third would vest over 6 years, the remaining two-thirds would vest at a liquidity event)
  • Treatment of Debt: Consistent with accounting’s QoE ($28.4M @ 12/31/17) plus above market rent ($400K), surplus amounts owed on remainder of Newark , NJ facility lease, pre-closing severance/employee agreement costs ($365K and $205K, respectively), and any deferred contingent consideration related to past acquisitions ($600K related to New Company acquisition)
Timing
  • Close in 19 days
  • Exclusivity Period = 19 days
  • Completed all diligence except regulatory review (expected to take 6-7 days)
  • Sign a Definitive Agreement in 35 days with a final closing occurring once final regulatory approval is received
  • Exclusivity Period: 35 days + 15-day extension if substantial progress has been madePlan to perform a third-party QoE analysis
  • Remaining diligence includes: (i) understanding the diligence completed by the Company in support of its acquisitions of NewCo’s; (ii) completion of a third-party industry study to better understand the underlying market growth outlook for the segment and validating Company’s reputation in the market; (iii) legal due diligence; (iv) insurance and benefits review; (v) Management assessments and background checks, (vi) accounting and tax diligence, including a third-party quality of earnings analysis
Financing
  • No financing contingency
  • Prepared to close with all equity and will work with management post-closing to capitalize the business in a structure beneficial to the business
  • Term sheets from 3 lenders (SG Capital Management, Newport Bank and Q Bank) for debt up to $42M ($30M term and $12M working capital and acquisition revolver)
  • Financing Contingency
  • Combination of equity capital (Secondary Fund III) and third-party debt (3.5x – 4.0x total leverage)
  • Term sheets from 2 lenders (Senoka Capital Management and Mpath Capital Partners)
Working Capital
  • Net working capital target of $12.5M (no detail)
  • Bidder’s Investment Committee has approved the transaction as proposed and no additional approvals will be required
  • Prior to closing, Company’s senior management team will be required to give a presentation to the partners and senior staff of Bidder in its Texas office
  • Adequate working capital at the date of the closing to run the business in the ordinary course
  • Bidder’s Investment Committee has approved the transaction
  • Prior to closing, Management to visit Chicago, IL to provide a presentation to Bidder investment committee
Time & Other
  • LOI expires on 5:00pm ET on January 1, 2017
  • Board Seat: Steve Markum
  • Legal advisor: Jack Smith
  • Financial advisor: Ernst & Young
  • Anticipate a total of 60 days following the execution of a Letter of Intent to complete the diligence required, arrange the debt financing, negotiate and execute legal documents and close the Transaction
  • Offer expires December 20th at 5pm ET
Key Legal Terms
  • See Key Lawfirm’s analysis
  • See Key Lawfirm’s analysis