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Anintroductiontopropermaintenanceofyourcompanyandyourestate.PRIVATEEQUITYINNOVATIONSHANDWINTER2013TheOwnersManual DUANEMORRISLLPPRIVATEEQUITYGROUPWithexperiencedprivateequitylawyersacrossourdomesticandglobalplatformcoupledwiththedeepcapabilitiesofmorethan700lawyersDuaneMorrisofferstheresourcestooptimizetransactionalvalueprovideguidanceonfundformationandexitstrategiesandsupportandexpandportfoliocompanyoperations.WithourstrategicfocusonthemiddlemarketbroadexperienceinmajorindustrysectorsandaninnovativeculturedeeplycommittedtoclientserviceDuaneMorrisisregularlycalledupontoworkwiththemostsophisticatedanddemandingplayersinthemiddlemarket.InThisIssuePartneringwithPrivateEquityFirmsBeyondBankBorrowingMezzanineFundsGrowthCaptialTheAuctionBlockFindingtheRightBuyerforYourCompany71115FirstStepsDontLetYourExitBeanAccident20Introduction4Glossary26 2Businessownersfaceamyriadofissueswhenbuildingtheirbusinesses.Theseissuesrangefromdevelopingaproductorservicetoattractingcustomersselectingsuppliersarrangingfinancingsretainingemployeesandfendingoffcompetitiontonamejustafew.Abusinessownerisbombardedonadailybasiswithchallengesliketheserequiringdecisionsthatwillfundamentallyaffectthebusiness.Sincethebusinessisgenerallytheownersprincipalassetthesedailyissuescanbeall-consuming.Theownersgoalistobuildacompanythatcaneitherbepassedontohisorherheirsorsoldtoliquefyassets.Asyouknowgrowingabusinessisdifficultandcannotbeachievedalone.Yesyoumaybetheleaderbutyouneedateamlawyersandaccountantsareintegralmembersofthatteamasareyourlenders.Stillinmanycasesthisteamcantakeyouonlysofarwiththeexecutionofyourstrategy.Theintroductionofadditionalcapitalwhetherintheformofdebtequityoracombinationofthetwocanprovidethefueltohelppropelyourbusinessforward.Importantlyprivateequityfirmsprovidemorethancapital.TheadditionalvaluethataprivateequityfirmcanbringincludesmanagementandHRexpertiselendingrelationshipsandbuyingco-opsaswellasboardinsightandfinancialdisciplinethatcanbetransformational.Ontheotherhandunlesswell-plannedtheintroductionofaprivateequityfirmcanalsobeintrusive.Thepreparationfortakingonthistypeofpartnerinyourbusinesscanbeoverwhelmingdistractingandoftenbewildering.Fortunatelywithanexperiencedteamandpreparationyoucanreducealthoughnoteliminatethefrustrationandanxietyandincreaseyourreturn.ToOurReaders 3Preparationforworkingwithaprivateequityfirmisnotlimitedtothebusiness.Althoughabusinessownermayhavealong-termbusinessstrategyandmaybeexecutingatacticalstrategythatincludesfundingofsomedescriptionfromaprivateequityfirminmanycasesheorshedoesnothaveapersonalfinancialplan.ThisisamissedopportunityTheplanningfortheprivateequityprocessshouldalwaysincludeawealthplanningcomponent.Infactitisessentialtotakeaholisticapproachtotheentirewealthcreationprocess.TheDuaneMorrisOwnersManualprovidesaroadmapforbusinessownersastheypreparetonavigatetheseaofchangethatwillaccompanytheprivateequityandwealthplanningprocess.Asthisareaishighlytechnicalandcanbequitecomplexwehaveprovidedaglossaryofsomeofthetermsusedthroughoutthispublication.WehopethatourOwnersManualwillprovidesomeinitialguidanceasyouplanthenextphaseofgrowthforyourcompany.SincerelyGeorgeJ.NemphosChairofCorporatePracticeGroupandCo-HeadofPrivateEquityRichardP.JaffeCo-HeadofPrivateEquityPieroCarboneCo-HeadofPrivateEquityUKEurope 4Ifyouaretheownerofacompanychancesareyoureceivearegularstreamofcoldcallsfromprivateequityfirmscompetitorsandstrategicinvestorswhowanttotalktoyouaboutyourbusiness.Someofthemresorttosaleslettersinsteadinvitingyoutocallthemsotheycantellyouhowtheycanmakeyourverygoodcompanyagreatcompany.Somewilltellyouthatyoucanliquefyaportionofyourownershipinthecompanyandcontinueinyouroperatingroleifyoudesireoftenwhileretainingsomeupsidethroughcontinuedownershipinthebusinessorthroughthereceiptofadditionalpurchasepricebasedonthebusinessachievingcertainfinancialgoalsoveraperiodoftimecommonlyreferredtoasanearn-out.WhatmakesyousointerestingtotheseinvestorsOverthelasttwodecadesbillionsofdollarshavebeenraisedbymiddle-marketprivateequityfundstoinvestinoracquirecompanieslikeyours.Theyarelookingformaturemid-sizedcompanieswithrevenuesof10milliononthesmallerendto500millionatthelargerend.Eachprivateequityfundwilltargetacertainsizecompanyandmanywillfurthernarrowtheirfocustocertainindustrysectorswherethepartnersintheprivateequityfirmhavedevelopedsomeexpertiseorinwhichoneoftheirportfoliocompaniesalreadyfocuses.Privateequityfirmsalreadycontrolnearlyhalfofthemiddlemarketasmeasuredbyvalueupfromaround10percentjust20yearsagoaccordingtooneestimate.1Chancesareyouhaveseensomeofyourbusinessassociatesorevencompetitorsinvolvedinsalestoorrecapitalizationbyprivateequityfirms.Ifyouarereadytosellyoumaybetemptedtoanswersomeofthosesolicitations.WhatifyouarenotreadytosellWhatifyouwouldliketotakesomemoneyoffthetableandcontinuetogrowyourbusinessOrwhatifyoujustwanttosurveythemarketandhavesomemeetingstotakethepulseoftheprivateequityfirmsOrwhatifyoulikesomanyownersofsmall-andmid-sizedcompaniesarefacedwithamorecompleximperativesuchasthepurchaseofasmallercompetitorthedesiretofollowyourlargestcustomerintoanewmarketortheneedforadditionalcapitalmerelytoenableyouIntroduction OWNERSMANUAL5togrowyourbusinessWhatifyoudonothavetheknowledgecontactsmanagementcapacitybankcreditorotherresourcestomakeithappenWithouthelpyoumaynotbeabletotakeadvantageoftheseopportunities.Ifyouarenotgrowingyouruntheriskoflosingmarketshareforinstanceyourcompetitorsmayaccessprivateequitycapitalandseektoattackyourbusinessthusstandingstillismostoftennotanoption.PRIVATEEQUITYMAYOFFERASOLUTIONAfewdecadesagoyouronlychoicemayhavebeentosellthebusinessbeforeitwastoolateorcarryonandhopeforthebest.Ifyouwereluckyandyourneedswerenottoogreatyoumighthavebeenabletoconvinceabanktolendyoumoreortofindasilentpartnerwillingtomakeanequityinvestment.Withsomanymiddle-marketprivateequityfirmsofferingsomanydifferentkindsoffinancialproductsaswellasothersupportandvalueincludingoperatingpartnerswhohaveactuallyrunbusinessesandmanagedthroughsomeofthechallengesconfrontingyoubusinessownershaveawidearrayoffinancingalternativesandaccesstovariedoperatingroles.NoonehasalltheanswersonhowbesttotransitionthroughsuchinflectionpointsbutonethingisapparentAnsweringcoldcallsisnotthebestwaytofindtherightinvestorforyouandyourbusiness.Evenifyouarenotreadytosellitisagoodideatounderstandyouroptionsandbewelladvisedandpreparedaheadoftime.Thebestpreparationbeginsmorethanayearbeforeyouarereadytoputyourcompanyontheblockortakeinamajorinvestor.DonotletyourexitbeanaccidentInourOwnersManualwediscussarangeofoptionsavailablewithaprivateequityfirmtouchingonwhatwouldbegainedandwhatwouldbegivenupineachscenario.Weincludeasectiononhowyoucanprepareyourcompanyforaninvestmentbyaprivateequityfirmandhowtoshopforthebestadvisorsandinvestors.Ofparticularnotewealsoaddresswealthplanningopportunitiesfortheentrepreneurandhisorherfamily. 6Finallyanunderstandingofhowprivateequityfirmsoperateisvitalbeforeyouconsidertakingcapitalfromanyofthem.Youalwayswanttoknowfromwhomyouaretakingcapitalandthenatureoftheirendgame.Thebasicprivateequityfirmstructureisforthefirmtoformoneormorefundsaslimitedpartnerships.Theprivateequityfirmthensecuresthefundsthatenableittoinvestthroughcapitalcommitmentsfromsuchinstitutionsaspublicpensionfundscorporationsendowmentsandhighnetworthindividualsallofwhombecomelimitedpartnersinthefund.Afundgenerallyhasalifeof10to12yearswiththeabilitytoextendfortwoyearsinordertoconductanefficientliquidationofitsinvestments.Privateequityfundsgenerallyinvesttheircapitalincompaniessuchasyourswhichtheycalltheirportfoliocompaniesoveraperiodoffivetosixyearsandgenerallylooktosellorexitfourtosixyearsaftertheirinitialinvestment.Exitinganinvestmentpermitsthefundtodistributetheproceedsofasaletoitslimitedpartnerinvestors.Fundsvaryinhowtheymanagetheirinvestmentsinportfoliocompaniesfromtakingatotallypassiveroleinthemanagementoftheportfoliocompanytoplayinganactiveroleinday-to-dayoperations.YoushouldaskforreferencesfromCEOsofotherportfoliocompaniesinwhichaparticularprivateequityfirmhasinvestedaswellasaskthefundmanagerspenetratingquestions.Youwillbepartnersjustasinamarriage.Youwanttomakecertainthatyouknowyourpotentialmate.Considerablecapitalisoutthere.Youcanhaveyourchoiceofhowmuchoutsideinvestmenttotakeontofinanceyourgrowthhowmuchmoneytotakeoffthetableandwhatwillbeyourfutureoperatingmanagementroleinyourcompany.Therearemyriadplayersandopportunitiesfromwhichtochoose.Hereareafewpointstostartyourthinking. WhenshouldacompanytakecapitalfromaprivateequityfirmAsanowneryouhavetoaskyourselfWhatdoesitmeantopartnerwithaprivateequityfirmWhatdoIgainWhatdoIgiveupTherearetimeswhenanownerorabusinessreachesacrossroadsandmoneyalonewillnotguideyouintherightdirection.Supposethenextlogicalstepforyourbusinessmeansenteringanoverseasmarketthatwouldstretchmanagementtothebreakingpoint.Supposeanobsoleteplantorequipmentiscostingyoubusinessbutbuildinganewfacilityorpurchasingnewequipmentwouldentailmoreriskthanyouarewillingtoassumewhetherornotthefinancingisavailable.Nowsupposecarryingonbusinessasusualwithoutinvestinginnewmarketsnewequipmentandnewtechnologywouldmeanlosingmarketsharetolargercompetitorswhoareinabetterpositiontoinvest.Formanymid-sizedbusinessownersthesesortsofdilemmasaremorethanhypotheticals.Marketschangeandchangingwiththemmaybemorethanyouwanttoundertakealone.Thisiswhatprivateequityfirmslookforabusinessthatcouldbenefitnotonlyfromacapitalinfusionbutalsofromtheoperationalandmanagerialexpertisethattheyareabletoprovidetotheirportfoliocompanies.Someprivateequityfirmshaveoverseasofficesenablingthemtohelpoutsourcemanufacturingandprovidein-marketcontactsfortheirportfoliocompaniesorpossiblyfacilitatesalesintothosecountries.Partneringwithaprivateequityfirmmaymeangivingupacontrollinginterestpossiblyeconomicandvotinginyourcompany.Itmaymeangainingapartnerthatcannotonlyprovideprofessionaloversightbutalsosharetheexpensesandtherisksofgrowingyourbusinessariskthatmanybusinessownerstendtounderestimate.Ifyouarelikemanyentrepreneursyouhaveasignificantportionofyournetworthtiedupinyourbusiness.Aninvestmentbyaprivateequityfirmcouldprovideawaytoturnyourhardworkintoliquidassetsanddiversifyyourpersonalfinancialrisks.PartneringwithPrivateEquityFirms7 8PRIVATECAPITALTAkESMANYFORMSAswewillseeinthenextchapterprivateequityfirminvestmentscomeinmanydifferentflavors.Forinstancetherearenon-controlinvestmentsthataresometimesreferredtoasgrowthcapitalinvestments.Therearecontrolinvestmentsinwhichtheprivateequityfirmwillacquire100percentoftheequityandpermitorrequirethemanagementteamtorolloverorreinvestinthecompany.Underanyscenariokeepinmindthatfirstandforemostprivateequityfirmsareinvestinginmanagement.ThismeansyouDependingonthepurposeoftheproposedinvestmentandtheneedsofthecompanyyoumayalsobeabletonegotiatehowmuchequityandhowmuchcontrolyouareabletoretain.Justasthestructuringofaninvestmentbyaprivateequityfirmcomesinavarietyofflavorssodoprivateequityfirmsthemselves.Thekindofrelationshipyoudevelopwiththeprincipalsintheprivateequityfirmwilldeterminethenatureandextentoftheintrusioninyourbusiness.Selectingaprivateequityfirmiskeysinceyouwillbeacceptingmorethancapitalyouwillbereceivinganewpartnerwhowillworktoplayapositiveandconstructiveroleintheexecutionofyourbusinessstrategy.Becausethefundsarestewardsofotherpeoplesmoneytheprincipalsinaprivateequityfirmarehands-onwiththebusinessesinwhichtheyinvest.Itwillbeabravenewworldforyou.HoweverthecombinationofaInourexperienceworkingwithbusinessownersontheirexitsprivateequitycanpresentapuzzle.Aprivateequityfirmwillbeaskingtoughquestionsinareasyoumaynothaveaddressedbefore.Weretoldfrequentlythatswhenweaddthemaximumvaluenotjustnegotiatinganddraftingagreementsbutcounselingownersintherun-uptowhatwillbeinmostinstancesthesingle-mostmeaningfultransactionoftheirlives.THEDUANEMORRISVIEWStuartSorenson OWNERSMANUAL9newpartnerwithcapitalwhoplaysanactiveroleinyourcompanycanbeaverypositiverelationship.THEGROWTHEQUITYMODELInatypicalgrowthequityornon-controlinvestmenttheprivateequityfirmandmanagementwillseektoagreeonhowtodeterminevaluationwhichisalwaysaninterestingexercise.AlthoughseveraldifferentmethodsareusedtoarriveatavaluationincludingadiscountedcashflowanalysiscomparablesoramultipleofearningsbeforeinteresttaxesdepreciationandamortizationreferredtoasEBITDAprivateequityfirmsgenerallyuseadjustedornormalizedEBITDAtovalueabusiness.Thatisonlythebeginningoftheprocess.TheprivateequityfirmwillissueatermsheetorletterofintentcalledanLOIthatwillbenon-bindingandwillsetforththeprincipaltermsoftheinvestment.Theprivateequityfirmwillgenerallyacquireapreferredsecuritywhichwillprovideforadividendthatwillaccrueareturnofcapitalplusapreferencepaymentandparticipationonaproratabasiswithallequityholders.Theotherprincipaltermstypicallyincludeoneormoreboardseatsaswellascertainprotectiveorconsentrightswhichwillrequirethecompanytoobtaintheconsentorapprovaloftheprivateequityfirmtocertainmaterialtransactionsincludingasaleofthecompanyandotherfundamentaltransactions.Theseconsentprovisionscanbeintrusiveandforthatreasonareusuallyheavilynegotiated.Anotherstandardprovisioniscalledarightofredemptionwhichreferstotherightoftheprivateequityfundtorequirethecompanytorepurchasethefundsinterestafteraperiodoftimeusuallyfiveyearsaftertheinvestment.Eventhoughthisisnotadebtinstrumentthereisamaturitydate.Otherprovisionswillbenegotiatedtoo.Inadditionaninvestmentbyaprivateequityfirmmayormaynotincludeadebtcomponent.EventhoughLOIsarenon-bindingoncetheyhavebeensigneditisverychallengingtorenegotiateissuescoveredintheLOI.Thesellerorcompanywillloseasignificantamountofleverageatthispoint. 10Ifyouareactivelymanagingyourcompanybutarenotyetreadytomoveonorretireandyouwanttotakesomemoneyoffthetableprivateequityfirmsmayalsoprovidethatopportunityineitheranon-controlorcontrolscenario.Infactbecausemiddle-marketprivateequityfirmslookforaplatforminvestmentinanindustrythattheybelievehasthepotentialtogrowtheadditionofaprivateequityfirmasaninvestormayprovideyouwiththepotentialtomanageamuchbiggercompany.Thetypeofcompanytheyusuallyseekisreasonablywell-establishedandhasthecapacitytogrowexponentiallythroughacquisition.Thentheybuyothercompaniesinthesameindustrywithastrategyforexamplegrowinggeographicallyorincreasingmarketshare.ThemathissimpleAbiggercompanycangetbettertermsfromlendersandsuppliersandwhenitstimetosellahighervaluationinthemarket.Toachievethatgrowthprivateequityfirmsrelyonexecutivesandmanagerswhoknowthebusinessintimately.Theyarenotinterestedinrunningyourbusinessonaday-to-dayleveltheywanttoinvestinitandmoreimportantlyinyouandyourmanagementteamhelpmakeitbetterandselltheirstakeatapremiumwithinfourtosixyears.Thisstrategymakesyourpotentialsecondbiteattheapplemuchsweeter.Ifyouareactivelymanagingyourcompanybutarenotyetreadytomoveonorretireandyouwanttotakesomemoneyoffthetableprivateequitycanprovidethatopportunity. Imagineyoucantakeadvantageofatransformativeopportunityforyourcompany.Youneed10milliontorealizeyourvisionbutthebankisonlywillingtolendyou5million.Fortunatelyprivateequityfirmsarewillingtoprovidegrowthcapitalintheformofmezzaninedebtgrowthequityorahybridofboth.Eachentailssomecosttoownersabovewhatacommercialbankwouldchargeinexchangeforthegreaterrisktheseinvestorsarewillingtotake.COMMERCIALLENDERSIfyouhavetheassetstosecurealoandebtfinancingmaystillbethebestandleastexpensiveoptionevenifitdoesnotcomefromabank.Forinstancemanyprivateequityfundshaveaddedseniordebtoptionsthroughwhatiscalledunitranchelendingtotheirlineups.Thesefundsprimarilyprovideleverageforinvestmentsbyprivateequityfirms.Non-banklendersarealsowillingtoextendseniordebtbeyondacommercialbankscomfortzone.FinancecompaniessuchasCITandGECapitalspecializeinunderwritingdebtforcloselyheldcompaniesusuallyatthelargerendofthemiddlemarket.Ifyouarelookingtoleasenewequipmentorifthereisarealestatecomponenttoyourinvestmentandyouwillhavethecashflowtocoverahigherdebtloadyoumaybeabletofundyourgrowthwithnon-bankseniordebt.Thishastheadvantageofkeepingyourequityintactbutmayrequirepersonalguarantees.Thesenon-banklendersarealsolessunderstandingindownturnsorhiccupswhichlikelymeansmorerisktoyou.Whiletheydonotchargemuchifyoudonotperformtheyexpectyoutofixitsincetheyarenotmakingenoughofareturntofixitforyou.Howeverotheralternativesareavailable.BeyondBankBorrowingMezzanineFundsGrowthCapital11 12MEzzANINEDEBTMezzaninedebtasthenameimpliessitsinthemiddleofthecapitalstructurebetweenseniordebtandequity.Mezzaninelendersareprivateequityfundsthatraisemoneyfrominstitutionalinvestorsandothersandtheyusuallylookforopportunitieswithinasetspecialtyeitheragroupofindustriesageographicregionoracertainsizecompany.Mezzaninelenderslendtheirfundsmoneyintheformofsubordinateddebt.Theyalsooftenmakeequityinvestmentsincompaniesalongwithotherprivateequityfirms.Inunsponsoreddealsthosewithoutaprivateequityfirminvestingmezzaninelendersseektoinvestinprofitablecompaniesthatcanprovideapayoutwithinafewyearscompaniesonthevergeofagrowthopportunityabouttogopublicorplanningtocashoutanownerinpart.Insponsoreddealstheyworkwithcommercialbanksandprivateequityfirmstoprovidealayeroffundingonaspecificprojectordeal.Atypicalmezzanineloanwillbestructuredwithafive-yeartermduringwhichthecompanywillpayinterestonlyuntilmaturitywhentheprincipalwillbedue.Theinterestratewilltypicallyrangefrom11percentto14percent2ofwhich10percentto12percentwillbeinterestpayableincashonamonthlybasisandthebalancewillbeinterestpayable-in-kindorPIKinterest.Mezzaninelendersmayalsochargeup-frontfeesofupto2percentoftheprincipalamountoftheloan.Aspartoftheagreementmezzaninelendersgenerallysecureobservationrightsontheboardanddependingonavarietyoffactorstheymayrequireaseatonyourboard.Inadditionmezzaninedealsusuallyinvolveanequitykickerintheformofawarrant.WhereabankearnsmoneyoninterestandservicessuchasdepositsandcashflowmanagementmezzaninelenderswhositbelowtheseniordebtlendersandarethusinariskierpositionwanttoMezzaninedebtmaybetherightoptionifthecashinfusionmeansacceleratingrevenuegrowthwellbeyondwhatyoucouldachieveorganicallyandif...youwanttosellitorlistitwithinafewyears. OWNERSMANUAL1313participateintheupsidethatequityinvestorswillenjoyatleastinthemediumterm.Inanidealtransactionthemezzaninefundhopestomakeaprofitthroughacombinationofcurrentinteresttheexerciseofwarrantsthesaleoftheunderlyingequityuponasaleofthebusinessorbyrequiringthecompanytorepurchasethewarrantsafteraperiodoftime.Mostmezzaninelendersarenotinterestedinbecominglong-termshareholdersinyourcompanybecausetheyneedtomakedistributionstotheirownlimitedpartners.Mezzaninelendersdonotlendtokeepthelightson.Thereforethisisagoodoptionifyouneedtofundagrowthprojectwithafairlycertainpayoutwithinafairlypredictabletimeframeoreventotakesomemoneyoffthetable.Ifontheotherhandyouarelookingfortotalliquidationofyourownershipinthecompanyorifyourcompanyrequiresrescuecapitalmezzaninedebtisgenerallynotamongthebetteroptions.Forabusinessthatiscomfortablewiththeprovisionsofatraditionalbankloanthetermsofamezzaninedebttransactionmayinitiallylookaggressive.IsitworthitMezzaninedebtmaybetherightoptionifthecashinfusionmeansacceleratingrevenuegrowthwellbeyondwhatyoucouldachieveorganicallyorifyoubelievetheinvestmentwouldhelpyouenhancethevaluationofyourcompanybecauseyouwanttosellitorgopublicwithinafewyears.ThequestionyouneedtoaskisWillyourbusinessgenerateareturnonthecapitalinexcessofthecostofthecapitalWhenwehelpputtogetherdebtfinancingfortransactionsinvolvingprivateequityitwouldbeillogicaltoassumethatabusinessownerorevenanactiveprivateequitygroupthatdoesntconsistentlyparticipateinleverageddealswouldhaveasolidhandleonstate-of-the-marketconditionsorsophisticatedsometimes-novelfinancingtypesandterms.Wemakeitourbusinesstostaycurrentandconversantandinsodoingconveycompetitiveadvantagestoourclientsoneithersideofatransaction.THEDUANEMORRISVIEWDavidBernsohn 14GROWTHCAPITALTakingonanequitypartnermaybeamoreattractivesolutionthantakingondebtforacompanyseekinggrowthcapitalbutitisamoreexpensivealternative.Someprivateequityfirmshavefundscalledgrowthcapitalfundswithwhichtheywillmakeminorityornon-controlinvestmentsinacompany.Howeverthetermsmaylookverysimilartowhataprivateequityfirmwoulddemandifitweremakingacontrolinvestment.Forinstanceinexchangeforacapitalinfusionyoumayhavetogiveupsomeownershipofyourcompanyandsomeboardcontrol.Keepinmindthatwhileaninvestmentbyagrowthcapitalfundisnotdebtandthereforedoesnothavetoberepaidprivateequityfirmsgenerallyseektoexitaninvestmentinfourtosixyears.Toachievethisobjectiveprivateequityfundsgenerallymakeaninvestmentintheformofpreferredequityandnegotiatearightofredemptionwhichenablesthemtocausethecompanytoreplacetheminfiveyearsorinsomecasespermitthemtocausethecompanytobesold. Anentrepreneurcanspendalifetimebuildingabusinessandafamilybusinesscanrepresentseverallifetimesofhardwork.ButwhatcanyoudoifthereisnoonetotakethereinsSecuringafinancialfutureforonesfamilyisapowerfulmotivationtosellabusinessevenfortheentrepreneurwhowouldprefertodiewithhisorherbootson.Moreovermostsmallandmid-sizedcompaniesareworthfarmorewithaneffectiveentrepreneuratthehelmthantheywouldbeaspartofanestate.Hencesuccessionplanningissuesareadrivingforceintheprivateequitydealcommunity.Inthisregardtimeisanegativefactorforthebusinessowner.Itisfarbettertocontemplateyouroptionsearlyandfromapositionofstrengthsothatwhenyouarereadytomakeadecisionyouknowwhatthenextstepslooklike.Topotentiallymaximizethevalueofyourbusinessandfacilitatetheinvestmentorsaleprocessitisessentialtoassembleanexperiencedandseasonedteamofadvisorswhocanprepareyoufortheprocess.Yourteamcandescribeindetailtheprocessoftakingonaprivateequityfirmasaninvestorandcanthereforeassistinsettingreasonableexpectationsforthetransaction.Thisplanningexercisecanpreventdisappointmentandreduceorlargelyeliminatesomeofthecommonfrustrationswiththeprocess.Anexperiencedteamofadviserswilltakeaholisticapproachtotheplanningprocessandexamineyourgoalsforboththecompanyandyourfamily.Theteamshouldbecomposedofaninvestmentbankeralawyeranaccountantandawealthplanner.Theimportanceofhavingateamthatworkstogethersupportsthebusinessownerandservesasaresourcecannotbeoveremphasized.TheprocessofpreparingacompanyforasaleengaginganinvestmentbankerpreparingtheconfidentialinformationmemorandumfordistributiontoprivateequityfirmsandothersconductingmanagementmeetingsnegotiatingtheLOIundergoingduediligencenegotiatingadefinitiveagreementwithallofitsancillarydocumentsandclosingthetransactiongenerallytakesuptoninemonths.Aseasonedteamofadvisorscanaddsignificantvaluetothatprocess.TheAuctionBlockFindingtheRightBuyerforYourCompany15 16PREPARINGFORANExITISATEAMSPORTTheselectionoftheteamisgenerallyaprocessinitselfandiftheownerslawyersandaccountantsareexperiencedtheycanbeinvaluableintheprocess.Forinstancethelawyerwillinitiallybethequarterbackintheselectionprocesssometimescalledabake-offfortheinvestmentbanker.Oncethebankerhasbeenselectedthebankerandtheotherteammemberswilldevoteasignificantamountoftimetodesigninganoptimalsaleprocess.TheywillreviewandevaluatequestionslikeShouldthesaleprocessforyourcompanybeabroadcompetitive-biddingprocessafullauctionwhichisdesignedtodrawthegreatestnumberofprospectivebuyersOrwouldatargetedauctioninwhichbiddersarelimitedtoanarrowrangeoflikelyprospectshand-selectedbyyouandyourinvestmentbankerbeabetteroptionEachapproachhasitsownprosandcons.Inanyscenariothedrainonmanagementresourceswillbesignificantanditisanotherareainwhichtheownerwillhavetopreparethecompanyforthesaleprocess.Theplanningphaseiskeybecausemanybusinessownersgoingthroughthisprocessdiscovertheyhaveprioritiesaboveandbeyondfindingthehighestbidder.WhatwillhappentokeyemployeesWhatifyouarereluctanttoshowyourbookstoalifelongcompetitorwhoexpressesinterestinbuyingyourcompanyWhatifyoustillwantaplaceinthebusinessyouhavebuiltevenifyouwillnotcontrolitTheprocesswhetherafullortargetedauctionwillbedesignedtogeneratethebesttypesofoffersforyourbusinessfromseveralappropriateinvestors.ThebenefitYouwillhavesomechoicewithregardtothefutureofyourcompanyandyoucanbeassuredthatyouaremaximizingvalueandgettingthemostfavorableterms. OWNERSMANUAL17Asanalternativetoprivateequityfirmssometimesreferredtoasfinancialbuyersthesaleprocessmayincludepotentialacquirerscalledstrategicbuyers.Strategicbuyershavecapitalresourcessuchaslinesofcreditthatwillenablethemtocompeteeffectivelywithfinancialbuyers.Infactifastrategicbuyerneedsyourcompanyasopposedtowantingitastrategicbuyermaypaymoreforacompanythanafinancialbuyerjusttogetit.Howeverifastrategicbuyermerelywantsyourcompanytheymaywantitatapriceorontermsnotacceptabletoyou.Oneoftheprincipaldifferencesbetweenasaletoafinancialbuyerandasaletoastrategicbuyeristhatstrategicacquisitionsusuallyinvolvetheacquisitionofalltheequityinacompany.Inthatinstanceyourcompanywillbeacquiredbythepurchaserthroughasaleofallofthecompanysstockasaleofallorsubstantiallyallofthecompanysassetsoramergerwiththeacquiringcompany.Ineachoftheseinstancesyouwouldnothaveanyfurtherownershipinyourcompany.Closingadealwithastrategicbuyercanalsoinvolveacertainlevelofinternalbureaucracyespeciallyinalargecorporationwhereapprovalsmustbesoughtfromtheirboardandvariousdepartmentsthatmightbeaffectedbythemergeroracquisitionofyourcompany.Howeverfinancingisusuallynotanissueinastrategicacquisition.Whileweseefinancialbuyersinthemarketallthetimeweseejustasfrequentlytheothermajorforcestrategicbuyers.SincewehandleMAforabroadspectrumofmid-rangeandlargecorporationswecanprovideownerswithspecificunderstandingoftheirprioritiesandtheprocessesassociatedwitheachtypeofbuyer.Businessownersoftentellusthatthisperspectiveisamongthemostvaluablecapabilitieswecanbringtothetable.THEDUANEMORRISVIEWTomRedekopp 18Sellingtoafinancialbuyeroftenprovidesthebusinessownerwithmoreflexibilitythanwouldasaletoastrategicbuyer.Ingeneralunlessthesaleisanaddontoaprivateequityfirmsplatformportfoliocompanytheownerwillusuallybeabletosellthecompanyandrolloveraportionofhisorherequitysothattheownerwillhaveasecondbiteattheappleinfourtosixyearsoratsuchothertimewhentheprivateequityfirmwantstoexittheinvestment.Thisprovidestheownerwithanopportunitytotakesomemoneyoffthetableatthetimeoftheinitialsaletotheprivateequityfirmcontinuetogrowthecompanyandthenrealizeanotherpaydaywhenthecompanyissoldafewyearsdowntheroad.Sellingtoafinancialbuyeralsooffersthemostflexibilityondealstructureandthebestavenuetoafutureroleforyourmanagementteam.ANOTHERExITALTERNATIVETHEESOPAsyouevaluateyourexitoptionssomeconditionscouldleadyoutoconsidertheEmployeeStockOwnershipPlanESOPalternative.Inoneinstanceyouandyouradvisorsmaydetermineinthecourseofthesalesprocessthatmarketcircumstancesandthecompetitiveenvironmentdonotfavorwhatyouconsideranadequatevaluationandthattheprimaryvalueofthecompanyasanongoingconcernistotheworkforceemployedbythecompany.Thisisacomplextransactionthatinvolvessignificantfinancingbutcanalsoprovideimportanttaxandotherbenefits.FortheownerdeeplyinvestedinthewelfareofhisorheremployeesanESOPtransactioncanbeanattractiveoptionworthyofexploration.Itsrarethattheprocessofsellingaprivatelyownedcompanyisjustamatteroffactsandfiguresalthoughobviouslyitisessentialtohaveasolidgraspofthefundamentals.Morefrequentlyitsaprettyemotionalprocess...largelybecausetheownerisabouttopartwiththeworkofanentirelifetimeorinsomecasesmanygenerations.Weunderstandthatforsomeownersthecontinuedsuccessofthebusinessandwelfareoftheemployeessomeofwhomarenotonlycriticaltothebusinessbutarealsoascloseasfamilycanbeasintegralasthefinancialconsiderationsofasale.Westrivetounderstandwhatisofutmostimportancetoasellingownerandweputtheownerspeaceofmindatthetopofourprioritieslist.THEDUANEMORRISVIEWHeatherCarmody 19WhetheryoudecidetoexitentirelywithasaletoastrategicbuyersellamajorityofyourinterestinthecompanytoaprivateequityfirmorexitthroughanESOPtransactionup-frontplanningisvitalfordeterminingthestructureandtypeofdealthatwillaccomplishyourgoalswithregardtobothyourbusinessandyourfamily.Mostifnotallbusinessownersaresoconsumedwithstartingmanagingandgrowingtheirbusinessesthattheyignoretheconsiderationofestateplanningtechniqueswhichcansubstantiallyreducethetaxconsequencesimposeduponthedeathofitsfounderandprincipalshareholder.Personalestateplanningisoftenoverlookedbysellingownersbutitisasessentialaspreparingyourcompanyforthesaleprocess.Althoughestateplanningandtheassociatedtaxconsiderationsfrequentlyaddanotherlayerofcomplexitywhenconsideringthesaleofaninterestinabusinessthebenefitscanfaroutweighthetime-consumingnatureofthisactivity.Considerationofestate-andtax-planningtechniquescanforceabusinessownertoseekthemostcomfortableorleastuncomfortablebalanceofpotentialtaxsavingslossofcontrolandwillingnesstoallowpotentiallysignificantpartsofthesaleproceedstopasstoorforthebenefitoffamilymembers.Itmaybeappropriateforyoutoconsiderafamilylimitedpartnershipatrustorsomeotherwealthtransfervehiclethatmayamongotherbenefitstransferinterestsinyourcompanyatadiscounttoyourfamilymemberswhileyoucontinuetomaintaincontroloftheentity.Preparingandplanningfortheintroductionofnewinvestorsintoyourbusinessortheultimatesaleofyourbusinessalthoughdauntingalsopresentsanopportunitytoaddressfamilyissuesandstrategiestomaximizethenetafter-taxproceedsofincomethatyoureceivefromthesaleofallorpartofyourcompany.Estate-tax-andwealth-planningtechniquesaremosteffectivewhenconsideredandimplementedasfaraspossibleinadvanceofatransactioninvolvingthesaleordispositionofabusinessinwholeorinsignificantpartandwellbeforethevaluationprocessbeginswiththeinvestmentbankerandtheprivateequityfirms.Awealthplannerplaysanintegralroleinthisprocessandshouldbeamemberofyourteamofadvisors.WealthandEstatePlanningAnIntegralPieceofthePuzzle 20THEHUNTHOWPRIVATEEQUITYFIRMSFINDYOUWhetherornotyouareinterestedanumberofprivateequityfirmswouldlikelywanttogettoknowyoubetter.Someprivateequityfirmsemploybusinessdevelopmentprofessionalswhosesoleroleistofindpotentialcompaniesthatfitaparticularinvestmentstrategysoyouwillprobablyhearfromthemoncoldcallsorseethemattradeshowsorotherindustryevents.Mostaremoretargetedthanthathowever.Theymayalreadyhaveinvestmentsandexpertiseinyourindustry.Theymayownoneortwoofyourcompetitors.Theymaymaintainrelationswithinvestmentbankerswhowouldalsoliketoworkwithyou.Evenifyouarenotconsideringasalenowyoucanheartheirpitchandlearnsomethingabouttheothercompaniesintheirportfolios.Mostinvestmentbankersandprivateequityprincipalsarehappytospeakwithbusinessownerseveniftheyarenotforsale.Ifprivateequityisagrowingpresenceinyourindustryalittleknowledgecangoalongway.WhatifyouwanttohuntfortherightpartnereithertoselltoorinvestinyourcompanyAsdiscussedabovetheteamyouassemblewillleadthehunt.AnexperiencedinvestmentbankerwillknowyourindustryandthefinancialandstrategicbuyersthatFirstStepsDontLetYourExitBeanAccidentThesaleofanybusinessisfraughtwithtaximplications.Abusinessthatisprivatelyorcloselyheldfamily-controlledorownedbyasmallgroupofpartnersisintenselypersonalformanyreasonsnottheleastofwhichisthepotentiallycompleximpactoneachownerspersonalwealthandestateplanningstrategies.Oftenthosestrategieswillpresentconcernsnotpreviouslyknownorconsideredwhencombinedwiththepossibilityofasaleofthebusiness.Weworkhand-in-glovewithourtransactionalandfinancinglawyerstodeveloptermsandstructuresdesignedtoyieldoptimaladvantageforindividualownersbynavigatingthesubstantialchallengesthatcomeintoplayinanticipationoftheclosingofasaletransaction.MichaelGrohmanTHEDUANEMORRISVIEW OWNERSMANUAL21wouldbeinterestedinspeakingwithyou.Takingthisproactiveapproachgivesyougreaterandearliervisibilityintopossibleoptionsalongwithbettercontrolovertheprocess.Thetimewhenyouhavethemostleverageiswhenyouarepickingyourpartner...anditisalwaysbettertobethehunterratherthanthehunted.PREPAREYOURSELFBeforeyouapproachanypotentialinvestoritisagoodideatoassesswhatyouexpectfromadealandwhetherornotyourpotentialpartnersharesyourgoals.Thisisanotherareainwhichconsultingwithyouradvisorscansmoothpotentiallyroughwaters.Manyastuteownersalsosavethemselvesconsiderablegriefbyhiringanaccountingfirmearlyintheprocesstodoareadinessassessmentwhichshouldincludeaquality-of-earningsreview.Meetingwithyourteamprovidesanopportunitytocovereverythingfromwhetherornotco-ownershaverealisticexpectationsforwhatadealwillaccomplishstraightthroughtowhatabuyerorinvestorislikelytouncoverwhileconductingduediligence.Sortingoutanypotentialissuesaheadoftimecanexpeditetheprocesslateronaswellashelppreventnastysurprisesafteraletterofintenthasbeenexecuted.AswediscussedaboveonenumberthatmattersgreatlytoprivateequityfirmsisEBITDAwhichisearningsbeforeinteresttaxdepreciationandamortization.ManyentrepreneursmaynotfocusontheircompanysEBITDAbutforaprivateequityfirmEBITDAistheprincipalmethodfordeterminingvaluationandwhetheryourcompanyisagoodfitfortheirportfolio.Forinstanceaprivateequityfundwithanaverageinvestmentsizeof100millionisunlikelytobeinterestedinacompanywithanEBITDAof2millionunlessitisforanadd-oninvestmenttobulkuponeoftheirprimaryplatformportfoliocompanies.EBITDAisalsooneofthenumbersusedtoassessriskdeterminehowmuchleveragecanbeappliedtoadealandestablishavaluationforyourcompany. 22WhendeterminingEBITDAinthesalecontextthisnumberwillbenormalizedoradjustedtoaddorsubtractthoseincomeorexpenseitemsthatarenotordinarycourseitems.Forinstanceitemssuchasone-timelitigationexpensesandownersperkswillbeaddedbacktoincreaseEBITDA.Thisadjustednumberwillbethesubjectofthequality-of-earningsreviewthatthebuyersaccountingandfinancialconsultantswillperformaspartoftheirduediligence.Anyprivateequityfirminterestedinmakinganinvestmentinyourcompanywillalsoundertakeanextensivemarketstudyofyourcompanyandtheindustryorindustriesinwhichyouoperateanditslawyerswillperformanintensivelegalreview.Buyersingeneralwillscrutinizeyourincomestatementandbalancesheetassessingthequalityofyourearningsandfocusingonworkingcapitalissuesinparticular.Theywillanalyzemanyissuesthroughoutthisprocess.Withregardtointellectualpropertytheywillanalyzewhetheryouowntheintellectualpropertyusedbyyourcompanywhatintellectualpropertyisleasedandtheimportanceofthatintellectualpropertytoyouroveralloperations.Theywillassessyourmanagementteamtheteamyouhaveversustheteamyoushouldhave.AdvancewarningManyprivateequityfirmshavenotedthatthemanagermostoftenmissinginactionistheCFO.Evenifyouloveyourpart-timebookkeeperoryouthinkitisnotworththeexpenseyourcompanywilllookmoreattractivetoaninvestoriffinancialcontrolsaresetupbyaprofessional.ThelessonAgoodfinancialexecutiveshouldpayforhimselforherself.Alsoauditedfinancialstatementsinsteadofcompilationsorreviewedfinancialstatementsmakeasignificantdifferenceinaprivateequityfirmsanalysisofyourfinancialposition.Otherhousekeepingissuessuchastakingthetimetoputyourcontractsleasesandotheragreementsinproperorderwillenableyoutoprojectapositiveimagetoprospectiveinvestors. OWNERSMANUAL23STRATEGIESToattractarangeofbuyersyoushouldconsiderwhatreallymatterstoyourpotentialbidders.Whetheryouarethinkingaboutpositioningyourbusinesstobemoreattractivetoastrategicbuyerorafinancialbuyeryoumaywanttostartthinkingaboutwhatyourcompanycandothatnooneelsecanwhetheritsaproductaprocessorpersonnel.ForastrategicbuyeronequestiontoaskyourselfisWhatisitthatwouldmakeacompanythatalreadydoesexactlywhatyouredoingwanttopayapremiumtobuyyourcompanyWhateverthatisforyourbusinessfocusonthatcontinuetogrowthatcompetencyandstaylaser-focusedonthoseareaswhereyoucandeliverbetterthananyoneelse.Buyersarealsoattunedtotherisksassociatedwithyourbusiness.Identifywhatkeepsyouupatnight.Whatevertherisksareinyourbusinessthinkabouthowyoucanmitigatethem.Amongotherissuessupplierinterruptionskeypersonnelissuesunexpectedcustomerdefectionsandcompetitivetechnologyinnovationscanallplayhavocwithanestablishedbusiness.Remembernobattleplaneversurvivedcontactwiththeenemy.Thinkabouthowyourbusinesscouldsurviveandflourishshouldoneofthoseriskscometopass.Thisisanotherareainwhichyourteammaybeabletohelpyouevaluateyourbusinessinadvanceofasaleorinvestment.Whenprivateequityfirmslookatyourcompanytheywillfindthosesamerisksandworryaboutthemevenmorethanyou.Theyarenotasuptospeedwithyourbusinessasyouaresotheywillneverbeascomfortableasyouarewiththoserisks.Therisksthatexistwithyourcompanywillcomeintoplaywhenapotentialinvestorisascribingavaluetoyourcompany. 24CHOOSINGYOURTEAMITSTARTSWITHTHERIGHTLAWYERBeforeyouapproachtheprocessyoushouldhaveanexperiencedlawyerwhowillrepresentyourinterestsinallaspectsoftheprocessfromplanningtostructuringandfromnegotiatingtoclosing.Howeveryourbestbetwillbealawyerandlawfirmthathasbeentothisrodeobeforeifyourlegalcounselisyourfamilyattorneyyoumaynotbegettingthebestadviceforthiskindofatransaction.Ifyouhavegoodcounseltheywilldomorethandraftlegaldocumentsforyoutheycanprovideintroductionstoinvestmentbankersandbusinessbrokers.Alsotheyknowwhatisstandardfortheprocessandmarketfortransactionsandcanthusallayfearsoftheunknownwhichmayunnecessarilyunderminetheachievementofyourgoals.Thereforestartearlytakeyourtimegetrecommendationsandinterviewprospectivelegalteams.Doallthethingsyouwoulddoifyouwerepickinganewsupplierorhiringamanager.Agoodlawfirmcanalsohelpwithwealthplanning.Thelawfirmwillbeabletoadviseyouonwhetheryoucanminimizecapitalgainsandgiftandinheritancetaxespossiblybychangingtheequitystructureofyourcompanybeforeyousell.Giveyourselfasmuchtimeaspossibletoconsiderandexecuteyourwealthplanningstrategies.Rememberaplanningprocessthatstartsatleastoneyearinadvanceandperhapslongerisrecommendedinmostinstances.Ifyouhavegoodcounseltheywilldomorethandraftlegaldocumentsforyoutheycanprovideintroductionstoinvestmentbankersandbusinessbrokers. OWNERSMANUAL25CHEMISTRYCHECkIfyoudecidetouseaninvestmentbanktoshopyourbusinessyoushouldgothroughaninterviewprocessthatisequallyrigorous.Choosinganinvestmentbankerbasedonwhichonehintsatthehighestvaluationcouldproveamistakeafterallthebankerdoesnotsetthepricethemarketdoes.Itisvitalthatthechemistryfeelsrightandthatyouareconfidentinhisorherabilitiesandthatheorshecanandwilldevotetheirtimetoyourcompany.Sinceitcantakeoneyearfromstarttofinishonaveragetocloseasaleyouaregoingtogettoknowyourinvestmentbankerreallywell...somakesureitissomeonewithwhomyouwanttospendtime.Ifyouaregoingtopartnerwithaprivateequityfirmespeciallyifyouwillhaveacontinuingequityandmanagementstakeinyourcompanyyouwillwanttoknowevenmoreaboutthatfirm.Askforthenamesofthelastfiveentrepreneurswithwhomaprivateequityfirmhasworkedandgetintouchwiththem.WhatwastheirexperienceinworkingwiththisfirmWhathappenedwhenthingsweretoughWhatwouldtheyhavedonedifferentlyAsktospeakwithownersandmanagementofbadorfaileddeals.Thesestepstoeducateyourselfandprepareyourcompanyforamajorinvestmentorasalewilltaketimeawayfromtheday-to-dayoperationofyourcompany.IsitworththeeffortManyserialentrepreneurshavelearnedthroughtrial-and-errorexperiencethatitmakesgoodsensetorunabusinessasifitisalwaysforsaleevenifitisnot.Ifyouarealwayspreparedforasaleyoucantakeadvantageofanyopportunitiesthatmaypresentthemselvesandshouldntfindyourselfwithoutoptions.ThisamongmanyothergoodreasonsiswhyakeypieceoflearninghereisPreparenowanddontletyourexitbeanaccident. 26BAKE-OFFAcompetitionsometimescalledabeautycontestamonginestmentbankstobeselectedastheadisortoacompanyforanofferingfinancingsaleorsimilartransaction.CLOSINGClosingisthedateonwhichatransactionwhetherdebtorequityiscompleted.CONFIDENTIALINFORMATIONMEMORANDUMCIMAconfidentialinformationmemorandumorCIMisadetaileddisclosuredocumentdelieredtopotentialinestorsinapriateequitytransactionthatproidesinformationonthecompany.Itissimilartoapriateplacementmemorandumusedinasecuritiesoffering.CONTROLINvESTMENTThepurchaseoracquisitionofamajorityinterestinabusinessforthepurposeofgainingeconomicandotingcontrolofacompany.DUEDILIGENCETheactofperforminganinestigationlegalandbusinessofabusinessentitypersonorpartyinpreparationforanacquisitionorloantransactionortoerifytheaccuracyandcompletenessofanofferingdocument.EARN-OUTAnearn-outiscontingentadditionalpurchasepricepaidtoasellingownertheamountofwhichisbasedonthebusinessachieingcertainfinancialgoalsoeraperiodoftimefollowingclosing.EBITDAEarningsbeforethedeductionofinteresttaxesdepreciationandamortization.EBITDAisanon-GAAPcalculationbasedondatafromacompanysincomestatementusedtomeasureacompanysaailablecashflow.Itisusefulformeasuringacompanysoperatingcashflowandforcomparingtheprofitabilityofariouscompanieswithdifferentcapitalstructuresandindifferenttaxbrackets.EMPLOYEESTOCKOWNERSHIPPLANESOPAdefinedcontributionplanthatisdesignedtoinestprimarilyinemployerstock.AnESOPisgenerallyusedasafinancingehicletopurchasethefoundersstock.FINANCIALBUYERApriateequityfirmthatutilizesthecapitalinitsariouspriateequityfundstopurchaseanequityinterestinacompanyortheentirebusinessasdistinguishedfromastrategicbuyer.Glossary 27LETTEROFINTENTLOIAnon-bindingdocumentthatsetsoutcertaintermsofatransactionagreedtoinprinciplebetweenpartiesthatisnegotiatedandsignedatthebeginningofatransaction.AlthoughnotlegallybindinganLOImaycontaincertainnon-economictermsthatarelegallybinding.MEzzANINEDEBTAdebtobligationthatranksinprioritybehindseniordebtbutaheadofeuityoftenunsecuredhigh-yieldsubordinateddebtandcommonlyconertibleintoeuityoftheborrower.NON-CONTROLINvESTMENTThepurchaseoracuisitionofaninterestinabusinesswithoutgainingeconomicandotingcontrolofthecompanyalthoughtheinestorgenerallyhastheabilitytoexercisecontroloercertainmajorcorporatedecisions.PORTFOLIOCOMPANYAportfoliocompanyisacompanyinwhichapriateeuityfirmhasinested.PREFERREDSECURITYAclassofeuitysecurityinanentitythattypicallyentitlestheholderstocertainpreferencesandrightsoerthecommonholderssuchastherighttoreceiediidendsandtherighttoreceieprioritydistributionsupontheentitysdissolutionorliuidation.PRIvATEEqUITYFIRMApriateeuityfirmisaninestmentmanagerthatmakesinestmentsinpriatelyownedoperatingcompanies.Theseinestmentsaretypicallymadethroughafundwhichismostoftenalimitedpartnershipthathasbeenestablishedbythepriateeuityfirm.Eachfundraisesmoneythroughcapitalcommitmentsfromariousinestorssuchaspublicpensionfundscorporationsendowmentsandhighnetworthindiidualsallofwhombecomelimitedpartnersinthefund.Thepriateeuityfirmwillmanageoneormorefundseachofwhichwillhaeparticularcriteriafortheportfoliocompaniesincludedinthatfund.PROCESSTheactiitiesinwhichacompanyengagesinconnectionwithacapitaltransactionsuchasasaleprocess.qUALITYOFEARNINGSAnassessmentofthetrueearningsofanentitybyexaminingrecurringandnon-recurringitemsnon-businessrelatedexpensesandsimilaritems.STRATEGICBUYERAnoperatingcompanymakinganacuisitionforstrategicratherthaninestmentreasons.Generallyastrategicbuyeroperatesinthesameindustryasthecompanyitislookingtobuy. 28Thispublicationisforgeneralinformationanddoesnotincludefulllegalanalysisofthematterspresented.Itshouldnotbeconstruedorrelieduponaslegaladiceorlegalopiniononanyspecificfactsorcircumstances.Thedescriptionoftheresultsofanyspecificcaseortransactioncontainedhereindoesnotmeanorsuggestthatsimilarresultscanorcouldbeobtainedinanyothermatter.Eachlegalmattershouldbeconsideredtobeuniueandsubjecttoaryingresults.Theinitationtocontactattorneysinourfirmisnotasolicitationtoproideprofessionalsericesandshouldnotbeconstruedasastatementastoanyaailabilitytoperformlegalsericesinanyjurisdictioninwhichsuchattorneyisnotpermittedtopractice.InnoationsHandisasericemarkofDuaneMorrisLLP.DuaneMorrisLLP2013.NOTES1RichardTrottierMiddleMarketStrategiesHowPriateCompaniesUsetheMarketstoCreatevaluepage88JohnWileySonsInc.2009.2SkitchInestmentBankingquarterlyMiddleMarketReportSpring2012page4. 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