Optimizing the Value of Your Company

January-11-12

Optimizing the Value of Your Company

Shaw Business

BITNET Presentation – January 10. 2012

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• Extensive Fibre footprint across Canada with deep-fibre penetration and coax distribution in Western Canada

• Deep roots in the business segment from Shaw “Big Pipe” and Shaw for Business

• Have a suite of Business products that address the needs of Small, Medium, Large and Carrier customers, including: • Voice trunks/SIP trunks • Hosted telephony • Internet • Ethernet LAN connectivity • WiFi


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AGENDA

• How to maximize the value of your company in a sales process: • Typical Sales Process • Pre-Sale Decision • Valuation • Preparation • Process to maximize value • Keys to successfully selling a company


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The Process and Timeline

• This process and timeline would be typical of a business that is: • $50M to $500M in value • Non-public • Moderate complexity • Buyer and seller are motivated • No regulatory requirements

Pre Sales Decision Preparation Non-Binding

Bids Bake-off Pre-closing Post Closing

2 Months 1 Month 2 Months 2 Months

Pre-Sales • Always be prepared:

• Keep a record of transactions in your industry • Have a business plan that looks forward three years or

more • Contracts and Legal Documents

• Have list of all contracts and their location • Better yet - keep them in a single location or in a Database • Avoid “consent for change of control clauses”

• Avoid a complicated ownership structure and any restrictions on the sale

• Make the decision to sell at the right time


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Pre-Sales • When is the right time to sell?:

• Depends heavily on the market, the company, the owners,…

• To maximize value it would be perfect if: • There are multiple motivated buyers • You are the only seller • Company has a strong opportunity to grow • No recent, material changes (lawsuits, company structure, ownership,……)

• No gun to your head

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Decision to Sell

• Hire Professional help • Bankers/brokers • Lawyers • Accountants

• Negotiate a fee prior to start (avoid hourly charges)

• Make a list of the potential buyers and why they would want to buy your company.

• Establishing value expectations and validate it. • Discounted Cashflow • Enterprise Value as a multiple of Earnings

(EV/EBITDA) • Previous transactions (price per sub, price per $ revenue,…)

• SET A FLOOR VALUE AND STICK TO IT

Valuation is key


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• Sample Company – Kazoo Enterprises

• Financials – 2 previous years, 3 year plan and two additional years “extrapolated”. • Private company • Revenue growth 10% and Expense Growth of 8% • $5M a year in capital upgrades to support growth

Kazoo Enterprises2010 2011 2012 2013 2014 2015 2016

Revenues $40.0 $44.0 $48.4 $53.2 $58.6 $64.4 $70.9Expenses $28.0 $30.2 $32.7 $35.3 $38.1 $41.9 $46.1EBITDA $12.0 $13.8 $15.7 $18.0 $20.5 $22.5 $24.8Capital $5.0 $5.0 $5.0 $5.0 $5.0 $5.0 $5.0Taxes (@20%) $2.4 $2.8 $3.1 $3.6 $4.1 $4.5 $5.0Free Cashflow $4.6 $6.0 $7.6 $9.4 $11.4 $13.0 $14.8in $M

Valuation – Discounted Cash Flow

• What is the Dollar Value of the free cashflow generated by the company? • Future “cash” is discounted by a “discount rate” • Terminal Value – value of the company if it were to be sold in the

terminal year

• In this example, we assume: • Growth beyond 2016 = 2% and a Discount rate of 12%

• Terminal Value of $151M and Free Cashflow Value of the Company = $122M


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Free Cashflow $4.6 $6.0 $7.6 $9.4 $11.4 $13.0 $14.8

2010 2011 2012 2013 2014 2015 2016 2017 $ Terminal Value

Valuation – Discounted Cash Flow • Watch-out for:

• Small changes in inputs can have huge swings in the result. • Terminal growth of 4%, raises value by $25M

• Doesn’t work well in early stage companies or companies in high growth and/or high risk environments.

• Buyers tend to discount the cashflows in the outer years (impacts both cashflows and terminal value)

• Taxation rates may vary between the selling company and buying company – which one should be used.


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Valuation – EBITDA multiples • EBITDA = Earnings before Interest, Taxes, Depreciation and

Amortization.

• Enterprise Value = cash value of a company • (Share Price x Number of Shares) + Debt - Cash

• Find as many Public companies in the same market and get an average of the EV/EBITDA.

• An estimate of the of value is $13.8M x 7.3 = $101M


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EV/EBITDAPublic Company A 7.2Public Company B 6.6Public Company C 8.1Average 7.3

Sample precedent transactions


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Valuation- EBITDA multiples • Watch for:

• Which EBITDA should be used: • Trailing 12 months • last quarter times 4 • Forward 12 months (in our example. $15.7M X 7.3 = $114.6M)

• Private companies tend to be more aggressive at expensing costs versus capitalizing costs – which hurts your EBITDA

• Public companies tend to have a more diverse product suite – therefore the comparisons may be apples to oranges

• Public markets have “expectations” built into the value of an organization – so there will be variations in data points that are hard to reconcile.


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Other issues with Valuations • Synergies:

• How to you account for savings that occur post transaction • Reduction in Management • Volume discounting on materials • …..

• Earn-outs • Avoid them like the plague

• Payment options (get professional advice) • Cash (tax implications) • Stock (can allow you to defer capital gains tax) • Mixture


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Preparation for the Sale • Confidential Information Memorandum (CIM)

• Document that details the business, past results, future plans, synergies with the buyer,…

• 50 to 100+ pages • Information must be factual and truthful

• Teaser Document • 2 page summary of the business

• Data Room • Contains all of the documents required to evaluate the operation of a company (financials, plans, contracts, suppliers and customer lists,….)

• Typically done electronically (documents all .pdf) and access to controlled and reported on.


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Non-binding Bids • Teaser document and Non-Disclosure/Non-Solicit

agreement sent to all potential bidders.

• CIM sent to all parties who sign the documents and a “Non-binding” offer is requested.

• Typically top 3 or 4 “non-binding” offers proceed to the next step.

• Things to watch: • Employees will start to hear the rumours – so have a

communications plan • Non-solicit must have a “no collusion” clause • Non-binding bids should contain information with regards to how the buying company intends to “fund the deal”


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The Bake-off • The final 3 or 4 buyers attend a management

meeting: • Questions on the CIM are answered and more

information provided. • Access to the Data Room is provided and due

diligence questions answered

• Two weeks later, Binding offers are requested • An auction like process is typically followed – those

who bid too low are given a chance to improve their offer.

• It is not just the money – the Definitive Agreement is a key part of the decision.

• PICK YOUR WINNER


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Definitive Agreement • Why it is important to be part of the final decision

• Number of Items can effectively lower the value paid, such as: • Representations and Warranties

– Timing and logistics of breaches – Capped versus uncapped

• Hold-backs and Escrow amounts – Size and timing

• Should contain a “break clause” • Hard to re-engage other parties once the decision is made

• Contains the items that need to be satisfied prior to closing and the timing. The faster you close the better: • Reduces employee uncertainty • A quick closing keeps your ability to revert to the runner up open. • You are effectively in a situation where you have two owners


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The Key’s to maximum value • Be committed to the sale – set a price and drive to completion.

• Bring in professional help – the money paid will most certainly be less than the value added.

• Run a competitive process – horses run faster when there are other horses in the race.

• Knowledge is a key driver • The better you can articulate the value drivers, the better price you will

get

• Be honest – as you will be expected to represent and warrant your statements

• Keep calm • emotions can be destructive in a sales process


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January-11-12 PRESENTATION NAME

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THANK YOU

John Piercy Group Vice-President, Shaw Business

[email protected]