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It’s Lonely at the Top:Exit Strategy Alternatives for Sole Owners and Partners

It’s Lonely at the Top:Exit Strategy Alternatives for Sole Owners and Partners

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Published by Zweig White
Exit Strategy Alternatives for Sole Owners and Partners:

ZweigWhite’s Financial Advisory Services Group provides a diverse range of corporate finance, valuation, ownership transition planning, incentive compensation, and merger & acquisition services for engineering, architecture, and environmental consulting firms, from niche organizations to ENR 500 and publicly-traded firms.

For more information,visit us at www.zweigwhite.com

Exit Strategy Alternatives for Sole Owners and Partners:

ZweigWhite’s Financial Advisory Services Group provides a diverse range of corporate finance, valuation, ownership transition planning, incentive compensation, and merger & acquisition services for engineering, architecture, and environmental consulting firms, from niche organizations to ENR 500 and publicly-traded firms.

For more information,visit us at www.zweigwhite.com

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Published by: Zweig White on Apr 06, 2010
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05/12/2014

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It’s Lonely at the Top Exit Strategy Alternatives for Sole Owners and Partners

Presented by: Steve Gido, CFA and Michael O’Brien, ASA

ZweigWhite Financial Advisory Services
managing the business of design & construction
Boston 321 Commonwealth Road Suite 101 Wayland, MA 01778 1-508-651-1559 Washington, DC 1001 19th Street, North Suite 1200 Arlington, VA 20009 1-202-965-3390 Chicago IBM Plaza 330 N. Wabash, Suite 3201 Chicago, IL 60611 1-312-628-5870

ZweigWhite Financial Advisory Services
ZweigWhite’s Financial Advisory Services Group provides a diverse range of corporate finance, valuation, ownership transition planning, incentive compensation, and merger & acquisition services for engineering, architecture, and environmental consulting firms, from niche organizations to ENR 500 and publicly-traded firms.  Valuation & Ownership Planning Services
-     Business valuations and appraisals – for internal transfer purposes, M&A transactions, ESOPs, stock incentive programs, formula design, buy/sell agreements, litigation support, estate planning, etc. -       Comprehensive internal ownership and exit strategy planning, alternatives and analysis -       Fairness and solvency opinions -       ESOP consulting and assessment -       Incentive compensation implementation, assessment, and benchmarking

Merger & Acquisition Advisory Services
-       Firm acquisition searches, outsourced corporate development, and buyside representation -       Firm merger/sale services and sellside representation -       Asset divestitures and spin-offs -       Negotiation, deal structure, and due diligence assistance -       Strategic integration planning, support, and consulting -       Market and industry research

Visit us at www.zweigwhite.com

Learning Objectives
 The ownership transition challenges and landscape facing AEC and environmental consulting owners and partners today that are seeking to retire Discussion of various internal transition alternatives (direct buy-sell, ESOPs, recapitalizations) and the pros/cons of each The importance of a thorough firm valuation to manage expectations and minimize surprises Should you sell your firm to a larger A/E firm? Getting your firm “transaction ready” and comparing the external sale vs. the internal transition route How owners and partners can get going now. What are the steps to move towards a positive succession plan?

  

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Internal Ownership Transition
Shifting Demographics
Percent of Total Population
30.0%

Percent

28.0% 26.0% 24.0% 22.0% 20.0%
20 08 20 04 20 06 20 10 20 12 20 14 20 16 20 18 20 20

55 & Up 35 to 54

Year

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Internal Ownership Transition
Options for getting shares into hands of your employees         Direct Stock Purchase Employee Stock Purchase Plan (ESPP) Employee Stock Ownership Plan (ESOP) Leveraged Recapitalization Stock Bonus Programs Synthetic Equity Plan (Conversion) Stock Options Merger and Acquisition Visit us at www.zweigwhite.com

Internal Ownership Transition
Direct Stock Purchase Plan Planned direct sales to key individuals
 Non-dilutive

Sales of shares from treasury
   Dilute ownership (not value) Takes longer to reduce major shareholders’ interest Be mindful of IRC Section 302

Formalized sales of shares over time Communicates long-term opportunity for expanded ownership

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Internal Ownership Transition
Employee Stock Purchase Plan      423 Plans Direct purchase of shares Discounted up to 15% Discriminatory Dilutive

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Internal Ownership Transition
Employee Stock Ownership Plan (ESOP) Qualified retirement savings plan under IRC 401a Beneficial owners of the sponsoring stock
  Similar to mutual funds Not shareholders of the company!

Offers tax advantages to sellers, employees, and company
   1042 Rollover Tax deductible Principal Deferred tax to beneficiaries

Non-discriminatory Great tool for managing stock redemptions Visit us at www.zweigwhite.com

Internal Ownership Transition
Employee Stock Ownership Plan (ESOP)  ESOP is governed by trustees  Department of Labor governs the administration of ESOPs  Implementation and administration of ESOP will require services of an experienced benefits consultant  Stock must be valued annually for ESOP purposes by a qualified independent appraiser  More firms opting for S-ESOP Visit us at www.zweigwhite.com

Internal Ownership Transition
Employee Stock Ownership Plan (ESOP)

Pre-tax earnin
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Internal Ownership Transition
Leveraged Recapitalization Stock redemption Special dividends Bank note versus shareholder note
    Mitigate bankruptcy risk Easier to fund Not much less risk than being a shareholder Excess cash?

Sole owner versus large shareholder IRC Section 302

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Internal Ownership Transition
Stock Bonus Programs  Tax deductible expense with no cash outlay  Sales of shares from treasury
 Dilute ownership (not value)

 Did they “Buy” it?  Psychology of buying shares versus “Given” shares  Ownership starter?

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Internal Ownership Transition
Synthetic Equity Programs  Phantom Stock
 Receive “Units” representing value equal to appreciated increase in equity

 Stock Appreciation Rights
 Right to monetary equivalent

 Great tool for providing upside without giving up ownership  Less favorable tax consequence  Discriminatory  IRC Section 409a Visit us at www.zweigwhite.com

Internal Ownership Transition
Stock Options       Contract for a right to purchase shares Five to seven years of vesting Great recruiting/retention tool Ownership is not transferred (until exercised) Long-term objective Be aware of taxes

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Internal Ownership Transition
Fair Market Value  Balances the supply/demand between sellers and buyers  Creates transparency on how value is determined (independence)  Create shareholder value accountability for management  Mitigates against value manipulation

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M&A Environment
Current M&A Climate
 Despite global recession and uneven design climate, cautious but resilient M&A and industry consolidation activity is continuing in 2009  Some buyers are pulling back the reigns on M&A and expansion goals; others see “value play” opportunities given more realistic valuations  More sellers emerging with challenging design and economic climate and reality of favorable capital gains tax treatment expiring in 2010  Prior “Seller’s Market” of higher valuations shifting to “Buyer’s Market” given economic landscape and supply/demand imbalance – buyers are being choosier in terms of criteria, valuations, and strategic intent  Internal ownership transition plans becoming more difficult to accomplish  Long-term, U.S. market will continue to be attractive to Canadian, Australian, and European buyers, spurring more cross-border deals  Have witnessed sizable deals that are changing competitive landscape, but seeing more “niche” tuck-in deals given current conditions

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M&A Environment
Desired Criteria by Buyers
 Geographic regions: Southeast and Southwest U.S.; metropolitan U.S. cities  Services: civil, environmental, geotechnical, structural  Markets: federal, healthcare, mining, energy/oil & gas, power/utilities, state/municipal, water resources, water/wastewater, natural resources, infrastructure, green building (MEP), and transportation  Size: 15-150 employees, $2-$20M net revenue  Developed client base  Technical staff with broad project management and marketing expertise

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M&A Environment
Sale Rationale
 Facilitate ownership transition / maximize shareholder return  Expand firm’s resources (managerial, marketing, financial, personnel)  Increase opportunities for staff  Provide impetus for growth  Manage growth  Provide new services to existing client base  Provide existing services to new client base  “Fire sale” or distressed situation for survivability  43% of ZweigWhite’s 2009 Merger & Acquisition Survey of A/E/P and Environmental Firms respondents indicated considering a firm sale, an all-time high

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Sell Down or Sell Out?
Key Differences between an Internal Transition and External Sale:

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What does a typical AEC deal look like?
  Most are asset purchases rather than stock purchases Transactions are often mix of cash, buyer’s stock, & installment notes
    Example - $2.2M Valuation $750k cash at closing $250k stock at closing $1.2M in three annual installments of $400k each (w/interest)

Earnouts, or pay for performance clauses, remain popular to close manageable valuation gaps, but can be a barrier to integration Employment agreements and compatible salary/incentive compensation structures are key

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Are You “Transaction Ready”?
Personal  Can you make the switch from owner/entrepreneur to employee?  Realize possible loss of control, flexibility, lifestyle, benefits, title, role, etc.  Age, family, health concerns, 2nd tier capability/leadership all factors  Many owners share they work harder during and after the sale than before it! Organizational  How is your financial history and trends? Growing? Profitable? How’s backlog?  Do you have organized financial, legal, personnel, and operational records?  Are there any pending liability issues (personnel issues, pending lawsuits, software licensing deficiencies, etc.)  How would you break the news to employees and clients? Reactions? Be able to articulate your firm’s capabilities and strategic rationale to a buyer!

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Getting Going – Typical Firm Sale Process
Unsolicited Inquiry  Local/Regional Competitor or Unknown “Knock on the Door”  One on one discussion – is buyer right cultural match? Are you getting best price/terms? Is synergy potential there? Active Representative Process        Identify buyer universe Contact CEOs/Presidents at selected firms Distribute confidentiality agreements and sale memorandum Arrange introductory meetings for management teams Assist with valuation range, deal structure, and employment issues Work with legal and accounting teams Negotiation until deal closure

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Getting Going – Typical Firm Sale Process
Illustrative Sale Process

Approach Diverse BuyeratUniverse Visit us www.zweigwhite.com

Getting Going - Firm Sale Process
Shareholder Objectives
  Maximize valuation Evaluate relative merits of different forms of consideration
― ― ― ― Preference for cash and /or equity from strong, growing AEC firms Consideration of earnouts to bridge valuation gaps Salary, bonus, and perquisites to management and staff Evaluation of tax strategies to maximize transaction proceeds

  

Make progress on a timely basis to maximize senior management’s options Preserve confidentiality to minimize disruptions Orderly transition and integration of employee and client base

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Getting Going - Firm Sale Process
Key Transaction Considerations
   Timing issues Transaction structure Appropriate buyer universe ― Strategic / cultural fit and similar vision and design philosophy Valuation ― Opportunity to access new client/market base ― Geographic and service diversity ― Cost savings and synergy potential ― Ongoing senior management participation Disclosure and confidentiality

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Closing Thoughts
     Understand your motivation to sell and ask peers that have gone through it Understand the buyer’s motivation to acquire you Be aware that AEC transactions are “holistic” and integration of two disparate firms can be powerful, yet disruptive Realize things will be different – most employees and clients don’t like unexpected change! Know that you don’t have to sell (or buy) but realize your competition isn't standing still

Visit us at www.zweigwhite.com

Dedicated Exit Strategy Seminars & Events
 Merger & Acquisition Essentials for A/E/P and Environmental Consulting Firms
 October 28, Las Vegas, NV

Valuation & Ownership Transition for A/E/P and Environmental Consulting Firms
  October 28, Las Vegas, NV December 2, West Palm Beach, FL

2009 AEC Mergers & Acquisitions Summit – December 3-4 – Ritz Carlton, West Palm Beach, FL www.zweigwhite.com/events

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Questions

?
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Contact Information

Steve Gido, CFA Michael O’Brien, ASA (202) 965-4809 (202) 965-4807 sgido@zweigwhite.com mobrien@zweigwhite.com

Visit us at www.zweigwhite.com

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