What Key Factors Should Risk Officers Consider When Using Generative AI
HatchConf Business Value and M&A Process
1. MERGERS & ACQUISITIONS
CORPORATE FINANCE
MARKET INTELLIGENCE
BUSINESS VALUATION
EXIT PLANNING
MERGERS AND ACQUISITIONS
CORPORATE FINANCE
MARKET INTELLIGENCE
Investment Bankers To The Middle Market
BUSINESS VALUATION
Investment Bankers to the Middle Market EXIT PLANNING
What’s your Business Worth?
HARRY WARD
HAMPTON ROADS OFFICE
757.613.0476
hward@mcleanllc.com
2. Introduction to The McLean Group
Middle-market investment bank with extensive reach and experience.
Private Company M&A, Capital Formation
Business Valuation
Market Intelligence
Exit Planning
Broker/dealer serving the middle-market ($5M to $500M in revenue)
McLean Securities, a wholly-owned affiliate, is a registered broker/dealer with
FINRA; Member, Securities Investor Protection Corporation (SIPC) 1
Headquartered in the Northern Virginia technology corridor near
Washington, D.C. with 30 North American offices.
International desk with network of 200 close affiliates in 35 countries.
1. All advisors are fully-licensed to facilitate securities transactions as mandated and actively enforced by government regulatory bodies with unique
technical depth – CPAs, CFAs, MBAs, certified negotiators, M&A and valuation experts.
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3. Objectives:
• Define the Middle Market
• Discuss Types of Buyers
• Show How Buyers Value a Company
• Contrast Seller’s Approach to Value
• Discuss the M&A Process
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4. Defining Our Middle Market:
Revenues from $5 million to $500 million
Less than $5 million: “Mom and Pop” - best served by business
brokers;
Greater than $500 million: best served by Wall Street and some
regional I-banks.
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5. Buyer Types Help Drive Business Value:
Buyer Type Generates value through…
Strategic – Industry Consolidators Operational means: economies of
scale, new markets, market
share, “synergies”
Financial – Private Equity Financial engineering and
operational efficiencies
Roll-up groups Financial engineering
Industry (non-strategic) Bottom-fishers (opportunistic)
Individual Buyers Last ditch effort, very rare in MM
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6. Another View of the Buyers
Source: Mergerstat Review
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8. Formal vs. “Street” Valuations
• Formal (Report) • M&A (The street)
Appraisals of Equity for Always Investment Value
legal purposes of whole enterprise
Several Measures: FMV, Real-world transaction
Investor Value, Fair Value comparables
Assumes Symmetric Asymmetric Knowledge is
knowledge reality
Cash/Non-contingent Mixed Consideration,
Consideration often Contingent
** Appraisals are of little value to a seller: each buyer
drives a different value **
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9. M&A Valuation Dynamics:
Buyers Sellers
Detalied Calculations Preliminary Calculations
1.DCF / Capitalized Cash Flows 1.Comparable Transactions
2.Comparable Transactions 2.DCF / Capitalized Cash Flows
• Unavoidable! • Understand Buyer’s view
Negotiated Agreement
Buyer’s investment value and synergies
balanced with market influences in auction
Key Issue: Who gets the value of buyer’s synergies?
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11. EBITDA: Pre-Tax Cash Flow
• What? Earnings before interest, taxes, depreciation and
amortization (EBITDA);
• Why? EBITDA is a close approximation to cash flow; removes
the effects of financing and cap investment decisions
• Who cares? Buyers care because cash-flow comparisons allow
them to evaluate alternative investment vehicles that provide
cash flows
– Bonds 5% (20 times multiple)
– Real Estate (commercial) 9% to 11% (11 to 9 times multiple)
– Large cap stocks 12% (8 times multiple)
– Small cap stocks 21% (4.8 times multiple)
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12. Normalize for “Real” EBITDA
Or Pre-tax Cash Flow
Reported net taxable income 500,000
Adjustments:
Add back owner salary > $200K $ 400,000
Add back interest long term debt 50,000
Add non-recurring expenses $ 250,000
Add back depreciation $. 50,000
Normalized net (EBITDA) $ 1,450,00
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13. Cash Flow to the Firm
• EBIT = Earnings before Interest and Taxes
Standard for seller
market multiples >
• EBITDA = add depreciation and amortization
(and normalize)
• EBITDA minus Capital Expenditures
– Buyer estimates CAPEX to sustain operations
Standard used by • EBITDA minus CAPEX & Changes in Working
most buyers for
DCF > Capital (aka Cash Flow to the Firm)
– Need more WC to execute plans? Must reduce cash
flow as a buyer
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14. Basic DCF
1. Buyer calculates Cost of Capital *
2. Forecast 3 – 5 years cash flows and terminal value
3. Discount each year and terminal value by cost of capital
EXAMPLE
Year 1 Year 2 Year 3 Terminal
Forecast cash flow 2,200 2,500 2,900 30,000
Present value at 12% 1,964 1,993 2,064 21,353
Sum all DCF’s for Total Enterprise Value: $27,374
* Various Flavors: WACC, Discount Rate, Cap Rate, IRR
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16. Multiple Realities in the Middle Market:
• Usual range 4.5x – 5.5x EBITDA
• Possible range 1x - 12x
• Higher ranges may be justifiable in hot industries
with high growth rates, and
• Lower ranges are more likely in professional
services, resellers, commodity and “buggy whip”
businesses).
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17. Value Driver Considerations
Growth
Size
Proprietary Assets/Differentiation
Customer/Supplier concentration
Ratio Comparisons
Cyclicality (e.g. construction)
Professional goodwill/key management dependence
In gov’t contracting: transferability of contracts
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18. Summing Up: Calculating Preliminary Value
(in the Marketplace)
Normalized net income (EBITDA) $ 6,000,000
Preliminary multiple 6X
Value of earnings $36,000,000
Excess balance sheet value $ 2,000,000
Value of enterprise
$38,000,000
Minus Liabilities assumed by buyer, e.g. $ 8,000,000
Value of Equity $30,000,000
In the auction – who knows?
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19. Owners – Keep an Eye on Your Exit
Always pursue growth (top and bottom line)
Hire, train, incentivize solid people
Keep balance sheet and business entities clean
(consider housing non-core assets in separate entities)
Diversify customer and supplier bases
Shift from tax optimization to value optimization
View your company through eyes of potential suitors
(e.g. build a complementary niche market)
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21. The M&A Process, Step by Step:
1. Identify and locate prospective buyers;
2. Prepare confidential information memorandum and acquisition
profile;
3. Distribute acquisition profiles to prospective buyers;
4. Secure non-disclosure agreements from interested prospects;
5. Distribute the confidential information memorandum;
6. Negotiate Indications of Interest (IOIs), hold meetings
7. Secure letters of intent;
8. Conduct due diligence (by buyer);
9. Negotiate and prepare the definitive agreement;
10. Closing (sounds easy, but “every deal dies a thousand deaths!”)
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22. Timing the Sale: A Big Mistake!
Maximum
Value
$ Sales
Time
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24. Don’t Hide Problems/Issues:
Letters of Intent Are Not Invitations to Further Negotiation
The Seller’s Advantage Curve
Seller
Buyer
Management Multiple LOI Negotiations Exclusivity to Buyer Closin
Presentation Offers g
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25. Buyer research & effective Auctions:
Don’t Assume
The “Likely” Identity of the Buyer
30 Transactions: were “Most Likely” Buyers the final acquirer?
Source: Goldsmith Agio Helms
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26. M&A Consideration:
Types and Ranges
• Principal elements:
– Cash (usually 40% to 80%);
– Seller take-back notes (20% to 40%);
– Stock (if any, then 20% to 80%), and
– Contingent vs. non-contingent consideration
• If any, then 20% to 25% contingent, and
• Comfort vs. incentive earn-outs.
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27. The Top 14 Seller Mistakes:
1. Selling it without 8. Being represented by an
representation unlicensed broker
2. Selling to a single offeror 9. Communicating your asking
3. The poorly constructed price inappropriately
earn-out 10. Eliminating offshore buyers
4. Disclosing an insufficient 11. Assuming the type of buyer
amount of information in 12. Waiting until management is
Offering Memo ready to retire
5. LOI not thorough 13. Waiting for next year’s growth
6. Focusing on history and 14. Ignoring or over-emphasizing
numbers instead of future timing
opportunity
7. Mismanaging team, end
runs
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28. National Office Locations
Headquartered in McLean, VA, The McLean Group has built a national presence in middle market investment banking
with offices in 30 cities nationwide. Each of The McLean Group’s investment bankers brings a unique breadth of
experience and expertise to the firm.
National Offices
McLean, VA – Headquarters Halifax, Nova Scotia
Anchorage, AK Lafayette, LA
Asheville, NC Miami, FL
Atlanta, GA Milwaukee, WI
Austin, TX Norfolk, VA
Baltimore, MD Phoenix, AZ
Boston, MA Reno, NV
Bozeman, MT Sacramento, CA
Buffalo, NY San Diego, CA
Chicago, IL San Francisco, CA
Cleveland, OH Silicon Valley, CA
Columbus, OH St. Louis, MO
Erie, PA Tallahassee, FL
Green Bay, WI Tampa, FL
Hartford, CT Tulsa, OK
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29. The McLean Group Hampton Roads, VA
The McLean Group, LLC
Harry Ward, Director
7900 Westpark Drive, Suite A320
3181 Shore Drive
McLean, VA 22102
Virginia Beach, VA 23451
703.827.0200
757.613.0476
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