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2015 M&A and Capital Markets
Update – A Sellers Market but for
How Long?
Today’s Presenters
Joseph Durnford
CEO
David Barnes
Managing Director
Jeffrey Sasakura
Senior Vice President
What to Expect From This Webinar
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3
4
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• Middle Market M&A Volume, Multiples and Industry
Trends – Why the Record Prices?
• Dealmakers Insight – Recent changes in how deals
are structured, financed and won
• Sell Side Perspective – Best Practices for maximizing
value and determining if now is the right time to sell
• Private Equity Update – The Private Equity formula for
creating value for buyers and sellers
Middle Market M&A Volume, Multiples
and Industry Trends
Jeffrey Sasakura
Senior Vice President
Sustained Rebound in M&A Activity
Recent Transaction Activity
• 
As we expected, continued pursuit of growth by strategic in economically unexciting times resulted in a rebound in M&A activity in 2014 and so far
in 2015 after volume dipped significantly in 2013
• 
Additionally, increased availability of leverage for private equity firms has helped them compete with strategic valuation and continue doing deals
at a steady pace, yet Private Equity were net sellers in 2014 and YTD 2015
• 
M&A markets are robust and seller-friendly for quality companies with strong valuations for sellers and healthy competition among buyers
Number of Announced Deals by Sector Annually
Commercial Services
2011
1230
91120 195
471
351
345 80
894
420
239
295 127 243
439
197
1185
Communications
150 120
Consumer Durables
Consumer Non-Durables
2012
1253
104121175
472
444
348 70
875
403
231
309 126 212
495
216
1253
166
Consumer Services
90
Distribution Services
Electronic Technology
Energy Minerals
2013
1125
99102169
474
307
305 62
866
363
211 266 72191
411
225
1085
Finance
161 108
Health Services
Health Technology
Industrial Services
1391
2014
81128188
691
397
333 77
1091
466
267
367 107 250
516
274
1326
154 115
Non-Energy Minerals
Process Industries
Producer Manufacturing
1374
2015 TTM
83128 196
703
408
327 77
1110
446
257
348 112 249
504
270
1403
139 110
Retail Trade
Technology Services
Transportation
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Utilities
Source: CapTarget
5
Multiple Trends by Sector
Revenue Multiples by Sector
7.0x
6.0x
5.0x
3.7x
4.0x
3.0x
3.0x
2.0x
2.0x
1.7x
1.7x
1.5x
1.2x
2.1x
1.4x
1.1x
1.0x
0.0x
Commercial
Services
Communications
Consumer
Durables
Consumer Non- Consumer Services
Durables
2010
2011
2012
2013
Distribution
Services
2014
Electronic
Technology
2015 TTM
Energy Minerals
Finance
Health Services
Average
Revenue Multiples by Sector (Cont.)
4.0x
3.5x
3.1x
3.1x
3.0x
2.5x
2.5x
2.0x
2.0x
1.5x
1.4x
1.5x
1.5x
0.7x
1.0x
0.7x
0.5x
0.0x
Health Technology
Industrial Services
Non-Energy Minerals
Process Industries
2010
2011
2012
Producer
Manufacturing
2013
2014
Retail Trade
2015 TTM
Technology Services
Transportation
Utilities
Average
Source: CapTarget
6
Multiple Trends by Sector
EBITDA Multiples by Sector
20.0x
18.0x
16.0x
14.0x
12.0x
10.0x
8.0x
6.0x
4.0x
2.0x
0.0x
9.5x
Commercial
Services
10.6x
8.1x
Communications
10.5x
8.1x
7.9x
Consumer
Durables
11.3x
10.2x
Consumer Non- Consumer Services
Durables
2010
2011
2012
2013
7.7x
Distribution
Services
2014
2015 TTM
Electronic
Technology
Energy Minerals
Finance
8.8x
Health Services
Average
EBITDA Multiples by Sector (Cont.)
20.0x
18.0x
16.0x
14.0x
12.0x
10.0x
12.2x
11.6x
9.8x
11.4x
10.7x
9.5x
8.8x
10.3x
9.7x
7.9x
8.0x
6.0x
4.0x
2.0x
0.0x
Health Technology Industrial Services
Non-Energy
Minerals
Process Industries
2010
2011
Producer
Manufacturing
2012
2013
Retail Trade
2014
2015 TTM
Technology
Services
Transportation
Utilities
Overall Average
Average
Source: CapTarget
7
Multiples by Transaction Size
Multiples Vary by Size
• 
In some industries, multiples for larger companies tend to be higher
• 
Companies with less than $5 million in EBITDA have limited appeal to private equity groups and
thus should consider making acquisitions to expand EBITDA
• 
Services industries have the smallest price size spread historically
• 
Energy and industrial services have the largest size spread
• 
Buyers have been willing to pay higher multiples for companies with larger cash flow and stronger
brand/market presence
EBITDA Multiples for Total Enterprise Values (TEV) Above and Below $500 Million (2010-2015)
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
Avg EV/EBITDA Under 500m
Avg EV/EBITDA Over 500m
-
Source: CapTarget
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Strategic vs. Financial Buyers - Volume
Deal Volume by Buyer Type (US-Based Targets)
•  Strategic buyers always outpace private equity in terms of deal volume
•  Strategic buyers have continued to ramp up their deal activity since it dipped during the recession – deal volume is
at record highs
•  Private equity firms continue to do deals at a normal pace but their share of deals overall declined since 2013
•  The increasing competition for deals both within the private equity community and between private equity and
strategic buyers should prove to have a positive effect on valuations for sellers
7601
6458
6068
7629
6678
6012
Financial
Strategic
708
733
677
609
2010
2011
626
625
2012
2013
2014
Q1 2015 TTM
Source: CapTarget
9
Strategic & Financial Buyers Are Flush with
Cash
Strategic Buyers
S&P 1500 Constituents Total Cash & Equivalents ($ Millions)
• 
Strategic buyers continue to have
healthy balance sheets
• 
Cash balances spiked significantly
at the end of 2014
2,500,000
• 
Members of the S&P 1500 ended
the year with over $3 trillion in cash
on their balance sheets
1,500,000
• 
Strategic buyers will continue to be
active in the market in 2015 and
have the liquidity to get and close
deals quickly
3,500,000
3,000,000
2,000,000
1,000,000
500,000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2008
Private Equity Buyers
• 
The number of funds along with
assets under management
continue to grow
• 
Firms still have record levels of cash
AKA “dry powder” to invest –
increasing their equity available by
$100 billion over 2013,. Now
exceeding $1 Trillion of committed
equity for investment
• 
Leverage markets have continued
to open up and private equity
have been able to increase
valuations accordingly
2009
2010
2011
2012
2013
2014
Global Private Equity “Dry Powder” ($ Billions)
$1,208
$1,005
$1,071 $1,064
$992
$927
$943
$1,062
$801
$561
$298
2000 $377
2001 $407
2002 $403
$406
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: CapTarget
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Dealmakers insight – Changes in how deals are
structured, financed and won
Joseph Durnford
CEO
Actual vs. Trend Line M&A Volume
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Small Deal Market is Active
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Behind the Data – M&A Market Dynamics
Energy Deals had peak valuations in Q3 2014 with multiples declining
precipitously with decline in oil prices. Deal activity is increasing as strategic
buyers acquire quality assets at distressed prices.
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2
Low Interest Rates and Solid Earnings Growth have resulted in higher valuations
in many sectors as larger enterprises consolidate market positions to fuel top
line growth. This has also resulted in increased use of leverage as % of TEV.
3
The Conference Board and PwC Measure of CEO Confidence™, declined in
Q1 2015 from 68 in first half 2014 to 57. This corresponds with a slow down in
deal initiations in Q1 2015, although Q1 ’15 saw an increase in closed deals.
4
Private Equity firms have been selling to strategics and to other private equity
firms to take advantage of high exit multiples.
5
Private Equity deals are shifting away from complex capital structures to better
alignment with sellers retained interest and to faciliate use of greater leverage.
6
Quality acquisitions remain difficult to find as sellers remain reluctant to sell,
due to lack of alternative investment yield. As equity markets improve sellers
are becoming more willing to sell.
7
Sellers are demanding and getting better deal terms with fewer earnouts, seller
notes and strict representations and warranties. Increasingly Reps & Warranties
Insurance is being used to reduce Seller Indemnity Escrow.
M&A Market Fundamentals are Sound
Sellers
Buyers
Drivers:
• 
Grow market share and
expand geographically
• 
Regulatory compliance
costs
• 
Numerous mega deals
completed in 2014, but
add ons more common
• 
Age demographics
trending toward selling
• 
Healthy earnings for past
few years increases value
expectations
• 
Internally generted
capital is available for
distributions
• 
Becoming more difficult
to find and retain next
generation management
• 
Greed and desire for
greater liquidity. Fear is
not a driver, but be ware
• 
• 
• 
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Drivers:
Significant cash is
available to both
strategic and financial
buyers
Private equity frims must
deploy capital and are
aggressive in searching
for deals, but still risk
averse
New capital structures
designed to position
acquisitions for growth
Sellers Market for
M&A
Sell Side Perspective
Best Practices
Finding Buyers
• 
The first step in finding buyers interested in
purchasing your business is to engage in a self
assessment and perform pre-sale due diligence.
• 
Most strategic buyers are well aware of the
companies operating within their competitive
niche and they often have some degree of
familiarity with rising stars or regional leaders
• 
Network with other CEO’s in your industry, via
trade associations, industry trade shows and
other events, may also want to attend
Association for Corporate Growth meetings to
network with financial buyers and deal pro’s
• 
Maintain relationship with investment bankers
and stay abreast of deal activity in your industry.
Take note when private equity firms purchase or
sell a company in your sector
• 
When decision is made to pursue an exit, always
use purposeful process and require transparency
and accountability from deal professionals
• 
Develop a target buyer list of logical players and
then add the non-congruent buyers who may
find greater value than an industry insider
• 
Make a commitment to sell, do not “test the
market” and be willing to “be in in play” as it may
add millions to selling price
Know Thy Self
Leverage
internal and
external
networks
Use proven
processes
Think inside and
outside of the
box
Be committed
and in play
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Negotiating the Deal
After identifying the target, the process of courtship truly begins
Court multiple buyers to
maximize seller leverage
Have your own house in
order and be prepared for
rigorous Quality of Earnings
Analysis Understanding the needs and
motivation of the buyer is
often the most critical aspect
of negotiating and structuring
a deal that works for both
parties
Art & Science of Closing
We recommend
companies negotiate
a LOI with most or all of
the key terms upfront then allow a brief
period of buyer
exclusivity (30-60 days)
for buyer to conduct
confirmatory due
diligence and
demonstrate financing
is in place
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The courtship process must
allow the buyer to conduct
THOROUGH due diligence
while protecting the seller
from a real competitive
threat
Hire creative and
experienced deal team to
assist in negotiating, price,
terms, reps, warranties,
indemnities, reps/warranties
insurance, deal timing, and
overcoming the death of the
re-trade
Negotiation Posture
Do not Negotiate
Sequentially
Often Seller’s have
more leverage
than they think but
not as much as
they want
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Negotiate to
achieve maximum
best overall
outcome taking
into account all
factors
Understand your
walkaways and
giveaways
Flexibility is key to
success and
creativity is key to
flexibility
Keep emotions in
check and stay
focused on end
goals especially
when your deal
goes in the ditch
Is Now A Good Time to Sell
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• Lower Middle Market
Purchase multiples are
relatively steady, but will likely
move downward if interest
rates rise
• Buyers are willing to pay up
for unique quality businesses
• Tax are currently stable, and
somewhat predictable.
• Federal capital gain rates on
sale of a business at 23.8% vs.
maximum federal ordinary
rates at 38%
• Middle market companies
are enjoying record profits
and have strong balance
sheets
• Easier to sell a thriving
business during optimistic
time
High
Valuations
Predictable
Tax Outcomes
Business Cycle
Timing
• Companies with less than
$2M EBITDA being squeezed
out of traditional senior
lending market
• Larger enterprises have big
advantage in accessing
capital
• Due to aging of baby
boomers and smaller size of
Gen X there are fewer inside
managers or kids available to
facilitate internal succession
plans
• Baby boomers are being
pressed by age, health and
lifestyle preferences
• Dealogic reported that Q1
2015 global M&A volume was
the strongest Q1 since 2007
• Global interest rates pose
threat to valuations and deal
activity, when rates rise
buyers will become more
cautious and scarce
Available Low
Cost Debt
Succession
Planning
Supply &
Demand
Is Now A Good Time to Sell?
Sellability Overview
§  In this sellers market, is your business ready to
sell?
50
40
60
30
§  To answer that question, JD Ford & Company is
offering a Sellability analysis for participants of
this Webinar.
70
§  CEO’s will learn how your business rates in the
following key areas:
§  Financial Performance
20
80
§  Growth Potential
§  Switzerland Structure
§  Cash Cycle
10
90
§  Recurring Revenue
§  Monopoly Control
0
100
§  Customer Satisfaction
§  Key Person Dependence
§  The questionnaire should take less than 30
minutes to complete, it is available at
http://www.jdford.com/sellability_score.html
21
Private Equity Update:
The Private Equity formula for creating value for
buyers and sellers
David Barnes
Managing Director
Not All Debt Created Equal
The availability and type of debt available is dependent on a couple of factors
that make it more or less “attractive” (in terms of cost, risk and flexibility):
1. 
Market conditions
2. 
Type of borrower: institutionally backed vs. individual borrower
Institutional
• More flexible covenants (less risk)
• Equity cure rights (less risk)
• Long-term relationship thinking (less risk)
• Lower interest rates (cost)
• Lower amortization (flexibility)
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Individual
• Often requires personal guarantees (more risk)
• Most of the cash flow based market is not available
(cost, availability)
• Lender not general thinking long term about
relationship (more risk)
Private Equity & The Rational For Leverage
Overview
• 
Case Study Assumptions
Private Equity relies on debt in buyouts and transactions to help
provide liquidity to shareholders upon buyout or recapitalization as
well as to enhance returns for all shareholders upon harvesting of the
investment
• 
Most private equity deals involve senior debt equivalent to 2.0x to
3.0x EBITDA of the selling company
• 
Most deals are leveraged less aggressively today than they have
been in the past due to tighter banking covenants and more
conservative investing approaches overall
• 
While business owners may be debt averse inherently, many private
equity groups have learned to take a disciplined approach to utilizing
leverage in a positive manner to achieve results that surpass those
that would be obtained via the use of equity alone
Shareholder
Shareholder A
Shareholder B
Shareholder C
Shareholder D
Buyer
New Debt
Total
Proceeds to Selling Shareholders:
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% Before
25%
25%
20%
30%
0%
$ Before
$ 25,000,000
$ 25,000,000
$ 20,000,000
$ 30,000,000
0
100%
$ 100,000,000
$ 75,000,000
• 
Assume a hypothetical recapitalization of a company with $15.4
million in EBITDA and an enterprise value of $100 million (6.5x multiple)
• 
The proposed transaction is to recapitalize the company with a 75%
purchase of equity from the existing shareholders allowing them to
retain 25% ownership in the new entity
• 
The private equity firm utilizes sr. debt in the transaction of 2.0x EBITDA
or $30.8 million
• 
The private equity firm provides equity of $44.2 million
• 
Capitalization and proceeds to shareholders is shown in the table
below:
$ Proceeds
$ (18,750,000)
$ (18,750,000)
$ (15,000,000)
$ (22,500,000)
$ 25,000,000
$ 28,571,429
$ After
$ 6,250,000
$ 6,250,000
$ 5,000,000
$ 7,500,000
$ 25,000,000
% After
12.5%
12.5%
10.0%
15.0%
50.0%
$ 50,000,000
100.0%
Case Study (Cont.)
Alternative 1: No Debt, Same Proceeds
Effects of the Use of Leverage
• 
If the private equity firm didn’t use leverage the results of the
transaction would be entirely different
• 
The results of two alternative transaction structures are shown in the
tables:
• 
• 
Alternative 1: No debt, same proceeds to selling
shareholders
Shareholder
Shareholder A
Shareholder B
Shareholder C
Shareholder D
Buyer
New Debt
Total
% Before
25%
25%
20%
30%
0%
$ Before
$ 25,000,000
$ 25,000,000
$ 20,000,000
$ 30,000,000
0
100%
$ 100,000,000
Proceeds to Selling Shareholders:
$ Proceeds
$ (18,750,000)
$ (18,750,000)
$ (15,000,000)
$ (22,500,000)
$ 53,571,429
0
$ After
$ 6,250,000
$ 6,250,000
$ 5,000,000
$ 7,500,000
$ 53,571,429
% After
8.0%
8.0%
6.4%
9.5%
68.2%
$ 78,571,429
100.0%
$ 75,000,000
Alternative 2: No debt, same pro forma ownership
Reduced Ownership %
Proposed Transaction
Shareholder
Shareholder A
Shareholder B
Shareholder C
Shareholder D
Buyer
New Debt
Total
% Before
25%
25%
20%
30%
0%
$ Before
$ 25,000,000
$ 25,000,000
$ 20,000,000
$ 30,000,000
0
100%
$ 100,000,000
Proceeds to Selling Shareholders:
$ Proceeds
$ (18,750,000)
$ (18,750,000)
$ (15,000,000)
$ (22,500,000)
$ 25,000,000
$ 28,571,429
$ After
$ 6,250,000
$ 6,250,000
$ 5,000,000
$ 7,500,000
$ 25,000,000
% After
12.5%
12.5%
10.0%
15.0%
50.0%
$ 50,000,000
100.0%
$ 75,000,000
Alternative 2: No Debt, Same Pro Forma Ownership
Shareholder
Shareholder A
Shareholder B
Shareholder C
Shareholder D
Buyer
New Debt
Total
Reduced Proceeds
25
% Before
25%
25%
20%
30%
0%
$ Before
$ 25,000,000
$ 25,000,000
$ 20,000,000
$ 30,000,000
0
100%
$ 100,000,000
Proceeds to Selling Shareholders:
$ 50,000,000
$ Proceeds
$ (12,500,000)
$ (12,500,000)
$ (10,000,000)
$ (15,000,000)
$ 50,000,000
0
$ After
$ 12,500,000
$ 12,500,000
$ 10,000,000
$ 15,000,000
$ 50,000,000
% After
12.5%
12.5%
10.0%
15.0%
50.0%
$ 100,000,000
100.0%
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JD Ford & Company
Main:
9 Sedgwick Drive
The Consulate Building, Suite 200
Englewood, CO 80113
Telephone: 888-999-9495 | 303-333-3673 (FORD) x 7749
Southern California:
1334 Parkview Avenue, Suite 100
Manhattan Beach, CA 90266
310.546.8178
E-Mail: [email protected]
Web: www.jdford.com
© 2014 JD Ford & Company LLC
Sources:
GF Data Resources
JD Ford & Company Proprietary Data
Prequin
Standard & Poor’s Capital IQ
Captarget