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FVCAA Presentation by Robert Naploi, CA, CPA - First West Trust
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Financing for Succession and Buyouts
Presented to FVCAARobert Napoli, CPA-CA
Vice President
Overview• Characteristics of successful buyouts• Types of financing available• Case study
• Subordinate debt division of First West Credit Union (Envision Financial, Valley First)
• Trusted financial partners• $120MM capacity• Lent $50MM to 35 companies in 3
years• Focus on buyouts, acquisitions and
growth• Size: $0.5MM to $10MM, all
industries
First West Capital
Successful buyouts• Good succession plan• Strategic fit for natural, motivated
buyers• Buyer is well capitalised• Strong rapport between seller and
buyer
Buyout Process
1. Identification of the buyer Internal management team grooming External search or approach
2. Planning3. Letter of intent: valuation and terms4. Due Diligence5. Securing financing: debts and equity6. Closing
The financing landscape
Secured & proven cash flow
Demonstrates cash flow Involved capital
Retu
rn
6%
25%
15%
High
Med.
Low
Ris
kSub-debt & mezzanine
Senior debt
Equity
Senior debt finance• Lowest cost but most secured / restrictive. • Favored deals:
Strategic or management buyers that are well capitalised
Strong cash flow businesses
• LOC and or term loan facilities secured by assets
• Occasionally provide cash flow term loan• Covenants will include margining and
minimum DSCR, TNW, working capital.
Subordinate Debt finance• Provides additional leverage over senior
debt• Subordinate in priority to senior debt, but
senior in relation to shareholder loans and equity
• Structures vary: Repayment flexibility Cost in higher interest rate, add on equity
features
• Classified as equity from senior lender perspective with proper subordination and postponement agreement : Subordination, postponement and standstill
provisions
Buyer’s Equity• Skin in the game and patient capital
required by lenders • Between10% to 50% of the purchase
price: Buyer’s relative net worth Buyer’s value as the operator Buyer’s risk tolerance
• Management teams may seek private equity in larger MBO deals
• Personal guarantees
Vendor financing• Requested by buyers to smooth
transition risk• For seller: unsecured, subordinated,
low return (0-12%), no control, illiquid
• From the vendor’s perspective should be minimised
Terms
Finance source
Pricing Features
Senior debt Prime + 1.5% to 3% Senior security, amortizing, restrictive covenants
Subordinate debt
13% to 16% 2nd position security, flexible repayment, covenants
Mezzanine finance
Like sub-debt plus an equity feature 16%-22%
Same as sub-debt with more flexibility
Vendor finance 0% to 12% Deeply subordinated, postponed repayment to lenders default
Equity Dilutive, 25%+ Unsecured, ownership
Case Study: Tetrad Computer Applications Situation• Leading provider of geographic information management (GIS) software• Retiring owners in their 70s• Management team of four with 60 years collective experienceChallenges• Vendors remorse• Smaller deal• Limited resources from management teamSolution• Strong advisors to steer process• Management team were logical, motivated buyers• Senior and subordinate finance to close purchase price• Earn–out to bridge valuation gap
Sources of finance
Facilities
BMO Senior Term Term loan
First West Capital Subordinated loan
Equity 22.5%
Vendor earn out Royalty on sales>$XTerms
BMO Senior Term
DSCR>1.25, TNW>600k
First West Capital
Subordinated , Stepped covenants
Management Ltd personal guarantees
Vendor earn out
Performance based and unsecured
Robert Napoli, CPA-CA
t: 604-501-4294 | w: www.firstwestcapital.ca| e: [email protected] |Langley Office: 6470 201 Street Langley, BC V2Y 2X4Vancouver Office: #408, 688 W. Hastings Street Vancouver, BC, V6B 1P1