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AMC Owners as Buyers and Sellers – Two Perspectives 2013 AMC Institute Loews Don Cesar Beach Resort Thursday, February 14, 2013 St. Petersburg Beach, Florida. Overview of Today’s Topics. Gregory Cowhey Pots of Gold – Help for Sellers Basic Overview of Valuation Concepts & Principles
AMC Owners as Buyers and Sellers – Two Perspectives2013 AMC Institute Loews Don Cesar Beach ResortThursday, February 14, 2013St. Petersburg Beach, Florida
Specific Buyer Strategic
Value to A Specific Investor Based on Individual Investment
Specific Use – Legal Concept
Dissenters’ Shareholders suits
Perceived Characteristics of the InvestmentBusiness Valuation Issues and Considerations
Customer related intangible assets
Contract related intangible assets
Human capital related intangible assets
Location related intangible assets
Goodwill related intangible assets
Patents and other intellectual property
Below Market LeasesBusiness Valuation Issues and Considerations
The first type are adjustments that eliminate one-time gains or losses, other unusual items, non-recurring business elements, expenses of non-operating assets and the like.
Type 2 - Discretionary (Control) Expense Adjustments
The second type of normalization adjustment involves adjustments that normalize officer/owner compensation and other discretionary expenses that may be eliminated by an owner motivated to maximize profits and provide the greatest return to its stockholders.Adjusting Reported Income Statements
The use of minority cash flows in the income approach produces a minority interest value.
Minority cash flows are those cash flows without any adjustments for prerogatives of control by the controlling shareholder (e.g. excess compensation and perquisites)Type 2 Control Adjustments
Often referred to as “normalized compensation” or “reasonable compensation allowance”
Pertains to replacement compensation to replace (or retain) the owner/operator for the services performed.
Separate and distinct from the owner’s return on investment in the form of dividends/distributions
Trading current income (ordinary tax) for capital gains income (Cap gains tax)Replacement Compensation
The Bigger The Risk – The Bigger The Required Return
Rate Reflective of the Risk of The Investment
Rate Must Match Economic Income Stream
Build Up Method - Example
Risk Free Rate 4.92%
Equity Risk Premium 6.14
Small Stock Premium 6.41
Industry Risk Premium 1.43
Other Risk Considerations 2.00
Discount Rate 20.90%
Capitalization Rate = Discount Rate Less Long Term Growth RateMeasuring Risk in Business Valuations
Synergistic (Strategic) Value
Value of Control Shares *
Value of minority shares if freely traded on an active public market (“Publicly traded equivalent value or Stock Market Value
Discount for Lack of
Value of non-marketable minority (lack of control) shares
A hypothetical willing buyer would discount the price which would be paid for a stock in a corporation with trapped in gains (TIG). Similarly, a hypothetical seller will accept a lower price for a stock that is subject to trapped in gains.
ABC Corporation holds $5 million worth of assets and has no trapped in capital gains. XYZ Corporation holds $5 million of identical classes of assets, but has trapped in capital gains of $3 million due to depreciation recapture and market appreciation of its assets. All other things being equal, a hypothetical buyer would pay less for an interest in XYZ Corporation than in ABC Corporation due to the trapped in capital gains.Trapped In Gains (TIG) in Business Valuations
Smaller Funds Dig into Big Fund MarketPercentage of Capital Raised by Size – US Funds
Private sponsored deals reported by 174 PE firms and 1,431 deals since 2003Q1
Reporting data for 1,147 transactions that exhibited pricing multiples of 3-10x EBITDA [80% of total universe]
Size of transaction
Smaller deals $10-$25 M value trade at 5.0-5.4x EBITDA
Larger deals $100-$250M value trade at 7.0-8.5x EBITDA
Leverage model turned upside down
Pre-2006: typical model was 20% “real money” by PE firm with 80% bank debt
Post-2007: “new model” has averaged 50/50, with Seller taking back debt
Flight to quality
Inferior performers command lower pricing multiplesRecent Performance for $10-$250 MM Deal Range
2010-H1 – 60 deals at pricing multiples in the 5.5x EBITDA range
2010-H2 – 102 deals at pricing multiples in the 6.1x EBITDA range
2012-Q1 – 29 deals, still in the 6.1x EBITDA range
Election results – Democrats could not pass tax legislation
P/E Firms have “Dry Powder”
Need to invest or return
GP paid on %AUM and carried interest
Lack of success from 2007-2009 creates cautionary approach
Above average performance needed to attract attention
Deal multiples – 6.1x EBITDA
Senior Debt – 2.2x EBITDA
Total Debt – 3.0x EBITDA --- Sellers need to keep “skin in the game”
P/E Firm Equity – 3.1x EBITDARecent Performance for $10-$250 MM Deal Range
Percentage of capital invested by industry
Seller will give a great song and dance.
Independent appraisal is good, but need to determine what you think it’s worth.
Remember, most appraisals are MAI (made as instructed).
If deal sounds too good to be true---watch out.
Everyone uses data rooms these days --- they don’t tell the whole story
What is presented can be very filtered.
There’s nothing like hearing someone explain something.Overview
Can end up with less business than projected.
Value of business can go down.Liability
Not always objective, can be very subjective.
Review client contracts:
Assignability of contracts
Out clauses of contracts
Have most clients been around awhile or do they turn
What is likelihood clients will stay.
What synergies can be realized.Due Diligence
Sellers get easy capital gain treatment for taxes
Buyer gets very limited ability to deduct anything for taxes
Since no deductions to help fund deal, want lower asking price
Assume any and all Corporate liabilities, including staff issues
Book of business – contracts
Contingency paymentsDeal Structure
Determine what you are really buying
Do you really want all the clients?
Are you just getting the inside track when the RFP goes out?
This could be an easy way to increase client base.
Factor in tax consequences, but don’t let them drive the deal.
Not every deal is priced right or a good fit
Don’t fall in love
Be willing to work
Managing Director – Forensic & Financial Services
CBIZ MHM, LLC
401 Plymouth Road, Suite 200
Plymouth Meeting, PA 19462
Scott M. Hermansen, CPA
Chief Financial Officer
Applied Measurement Professionals, Inc.