Buying a Business

1875 Century Park East, Seventeenth Floor, Los Angeles, CA 90067

Phone: 310.556.9900 Fax: 310.556.9901 www.sgcapital.com

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Why Buy a Business?

Strategic Reasons
Increased market share through elimination of competitor

Expansion into new geographic markets

Strengthened distribution capabilities

Strengthened product offerings through addition of complementary products (opportunity to bundle)

Creation of end-to-end product solution

Access to new technologies

Enhancement of product through convergence of technologies

Accelerated entrance time into new market

Ability to leverage capabilities/resources to enter faster growing market

Increased customer and supplier diversity (eliminate reliance on major customer or supplier)

Increased manufacturing capacity

Additional management, technical and sales talent

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Why Buy a Business? (continued)

Financial Reasons
Increased cash position

Strengthened credit profile

Diversified revenue stream

Revenue enhancement through cross-selling of products/services

Cost reduction through increased buying leverage with suppliers

Elimination of redundant sales, general, administrative and marketing costs

Combined R&D efforts increase efficiency and cut costs

Reduced overhead costs

Elimination of redundant assets

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The SG Capital Buying Process

Step1: Exploring Alternatives

Step 2: Approaching Potential Targets

Step 3: Valuation and Pricing

Step 4: Conducting Due Diligence

Step 5: Negotiation and Structuring

Step 6: Financing the Transaction

Step 7: Integrating the Transaction

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Step 1: Exploring Alternatives

Developing Buyer Objectives

Acquisition of stock vs. acquisition of assets vs. minority investment
Price vs. certainty
Confidentiality vs. timing

Assessing the Marketplace

Availability of suitable businesses / investment opportunities
Pricing expectations
Assessing potential competitors

Identification of Opportunities
Market intelligence on private company prospects
Access to SG Capital clients who may be selling or divesting

Can your company use M&A effectively?

Management bandwidth to integrate deals
Credit capacity to do deals

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Step 2: Approaching Potential Targets

Approach Strategies
Execute one-off approach vs. engaging in an auction process
Manage multiple one-off approaches while ensuring highest possible level of confidentiality

Selling Process Dynamics

Qualify potential seller to ensure real interest in selling
Determine competitive dynamics of selling process
Engage in advisor-to-advisor discussions to facilitate process

Timing Issues
Due diligence (when and how much)
Exclusivity (is it appropriate and, if so, when)
Term sheet (when and how extensive)

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Step 3: Valuation and Pricing

Principal Methodologies:
Comparable Company Market Valuation
Provides company’s implied value in the public equity markets through analysis of comparable companies’
trading and operation statistics
Applies multiples derived from similar comparable publicly-traded businesses to company’s operating
statistics
Private companies may need to factor in a lack of liquidity discount
Does not include a control premium
Reliability depends on the level of comparability to other publicly-traded companies

Precedent Transactions Analysis

Provides private market valuation in change of control scenario
Applies multiples derived from similar precedent M&A transactions to company’s operating statistics
Includes control premium
Reliability depends on number of precedent transactions and their degree of comparability, as well as the
relative supply and demand for the business at the time of the transaction
Market cycles and volatility may also affect valuation

Discounted Cash Flow Analysis (DCF)

Theoretical valuation
Projects the company’s future unlevered cash flows for a period of time (typically five years or more) and
calculates the present value of those cash flows and of the terminal value using an appropriate cost of
capital and terminal value methodology
Heavily dependent on cash flow and growth characteristics of the company and the terminal value
assumptions
Capital structure is reflected in valuation analysis through discount rate
May include a control premium based on the terminal value multiple

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Step 3: Valuation and Pricing (continued)

Other Methodologies:
Leveraged Buyout Analysis
Determines the range of prices that a financial buyer would be able to pay for the business assuming a
range of target rates of return
Heavily dependent on the cash flow of the business as well as entry and exit value assumptions

Other Approaches/Factors
Determine any specific sources or detractors of value in a particular transaction or industry
Net operation loss carryforwards
Synergies between merger partners
Off-balance sheet (or contingent) assets or liabilities
Break-up value
Replacement cost analysis
Asset value of reserves

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Step 4: Conducting Due Diligence

Business Due Diligence

Overview of the company and industry
Description of products/services/technology
Overview of sales, marketing, strategic relationships and customers
Overview of personnel and facilities

Financial Due Diligence

Historical financial statements and tax returns (3-5 years)
Projected financial statements (2-3 years)
Balance sheet review of assets and liabilities
Contingent liability review
Capital structure breakdown

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Step 5: Negotiation and Structuring

Pricing
Value of offer
Form of offer (cash, stock, debt assumption, debt instruments)

Deal Structure
Asset vs. stock purchase
Tax structuring
Earn-outs / contingent payments / management contracts
Deal protections

Purchase Agreement
Representations and warranties
Indemnifications
Post-closing Adjustments
Covenants
Conditions to close

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Step 6: Financing the Transaction

Capital Structure Review

Analysis of current company capital structure to determine if additional debt capacity exists

Identifying Potential Funding Sources

Seller financing
Third-party debt financing
Asset-based financing
Minority equity investments

Preparing the Credit Story

Positioning the company
Developing credible financial projections
Performing credit ratio analysis (leverage and coverage ratios)

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Step 7: Integrating the Transaction

Identify Joint Integration Team

Define roles and responsibilities
Dedicate the resources to team to allow them to drive integration

Execute Communications Plan

Explain transaction rationale to the combined company’s constituents

Develop Detailed Day 1 Activities Plan

Communications to employees, customers, investors, creditors, partners and others

Establish Formal Integration Program Management Office

Develop 3-Month Plan of Integration
Running parallel operations
Consolidating operations
Integrating the business
Transforming to a new organization

Identify Sensitive Restrictions and Allowances

Legal
Operational

Charter and Conduct Formal Culture Assessment

Develop Contingency Plans

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