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 2 TODAY’S AGENDA I. Private Equity Overview II. Types of Transactions and Value Drivers III. How to Work with Private Equity 3 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 4 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 5 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 6 TARGETED RATES OF RETURN Most Venture Capital 35%+ Return Equity Funds 25 – 35% Debt Funds 15 – 25% Bank Debt 5 – 10% Least Risk 7 Most COMMON PERCEPTION OF LIFE AFTER THE DEAL 8 SPECTRUM OF PRIVATE EQUITY STYLES Personality Strict Flexible Operations Hands on Hands off Investment Horizon Short-term Long-term Motivations Current income Equity appreciation 9 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 11 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 12 Most OUTRIGHT SALE Most Outright Sale Sell 100% of company Transaction Examples Liquidity • Corporate divestitures Least • Owner retirements • MBIs Control 13 Most MAJORITY RECAPITALIZATION Most Majority Recap Liquidity Sell > 50% of company Transaction Examples • Recapitalizations • Family successions • MBOs Least Control 14 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 15 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 16 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 17 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 18 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 19 TODAY’S AGENDA I. Private Equity Overview II. Types of Transactions and Value Drivers III. How to Work with Private Equity 20 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 21    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 22 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” 23 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 24 CONTACT INFORMATION James B. Darnell Partner 601 Bayshore Blvd Suite 850 Tampa, FL 33606 813.222.0160 [email protected] Highly Confidential www.klhcapital.com 25