Deal structure

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<ul><li> 1. Deal Structuring for Success PRESENTED BY: Presented by Mathew Klossner Mystic Capital Advisors Group, LLC w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m </li> <li> 2. Topics to be Covered Basic Deal Structure terms How does Valuation affect Deal Structure and vice versa Trends in Deal Structure Types of Deals Deal Structure Mechanics Things to Consider when Structuring a Deal PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m </li> <li> 3. What is the one question asked more than any other about insurance industry M&amp;A? PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m </li> <li> 4. Answer: So what are transaction multiples these days? PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m </li> <li> 5. Deal Structure Multiples, Multiples, Multiples is the M&amp;A version of Marcia, Marcia, Marcia PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m </li> <li> 6. Deal Structure and Valuation are closely intertwined How much is the deal worth? PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m When is the consideration paid? What is guaranteed vs. what is variable? What metrics will be used to measure performance? What must be achieved in order for a seller to receive the variable component (earnout)? </li> <li> 7. PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m Valuation 101 Valuation is a function of cash flow and risk How long will it take to recoup my investment? At what risk? Most deals are priced off EBITDA Seller EBITDA x EBITDA Multiple = Base Value of Deal Occasional exceptions Multiple of Revenue Usually a Sanity check Assumes you can run business postclose at a competitive margin Multiple of Premium (or % of Premium) Can come into play with a carrier buying a MGA or Program Administrator with the intention of writing the business </li> <li> 8. General Valuation Trends PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m Sellers market, multiples are up Intense deal competition, often even for smaller deals Cash at close % and guarantees on deals are up Still uncertainty in Employee Benefits marketplace, especially for small accounts with ACA exposure Economic recovery seems to be fizzling Rush for PE Backed deals to gain mass and ultimately capitalize on investment </li> <li> 9. Transaction Structure Components Guaranteed Purchase Price This is as it says, GUARANTEED, not dependent on performance Typically is the amount paid at closing, but some deals have PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m future payments that are guaranteed No ability to claw back Base Purchase Price What the seller would conservatively anticipate to receive after the earn out period We typically assume 0% growth Potential Purchase Price Upside Amount the seller could potentially realize based on future performance May require significant growth The Everything fell into place perfectly price </li> <li> 10. PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m What is an Earnout? The earnout is the nonguaranteed, variable portion of the deal If a deal has a variable component or earnout component, then consideration paid at closing is only a portion of the Base Purchase Price Consideration paid at closing can vary significantly, often 50%90% of Base Purchase Price, and is often dependent on the riskiness of the deal Length of earnout varies, but 1 to 3 years is typical Simple Example Revenue of Seller $ 1,000,000 EBITDA $ 300,000 EBITDA Margin 30% Multiple of EBITDA for Deal 6.0x Base Deal Value $ 1,800,000 % of Deal Paid at Close 70% Payment at Close $ 1,260,000 Multiple of Guaranteed Payment 4.2x Amount of Base Earnout $ 540,000 Potential Deal Vaue $ 2,340,000 Potential Deal Vaue Multiple 7.8x (Assuming maximum earnout with a 30% upside cap) </li> <li> 11. Factors Affecting Valuation and Deal Structure Size of deal PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m Asset vs. Stock CCorp SCorp, LLC, Personal Goodwill Transaction Over 80% of deals are asset deals, however, stock vs. asset is less of an issue with larger transactions Risk Profile of Deal Account concentration, carrier concentration, other % of Deal at Risk The more at risk to the seller, the higher the multiple needed to entice seller More guaranteed, the lower the multiple </li> <li> 12. Factors Affecting Valuation and Deal Structure Contd PRESENTED BY: Age and Ability of Owners and/or Management Team Younger owners and management teams (ages in 40s and 50s) will receive a premium Ability of sellers team to organically grow business going forward and execute an acquisition strategy Deals where owners/management will not be continuing with acquirer are usually discounted Hand over the keys is risky for buyer w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m </li> <li> 13. Factors Affecting Valuation and Deal Structure Contd PRESENTED BY: Type of Consideration Cash or Liquid Stock Illiquid Stock or Restricted Stock Seller rolls equity into the deal Potential for second bite of the apple Seller note Common in smaller deals and perpetuation scenarios Other forms of consideration Higher commission rates Bonus pools Deferred comp plans w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m </li> <li> 14. Factors Affecting Valuation and Deal Structure Contd PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m Control Premium Minority investment is often discounted Length of earnout Most buyers are willing to increase multiples if they have longer payout horizon </li> <li> 15. PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m Types of Deals Platform or Hub Acquisition Carrier Acquisition of MGA/Program Administrator (PA) FoldIn Acquisition Producer Hire/Small Book of Business Acquisition </li> <li> 16. PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m Types of Deals Platform or Hub Acquisition Usually a larger, highperforming agency that serves as a base for an acquirer looking to get into a market, region, or niche class of business Due to brokerage industry demographics, there is a limited number of possible targets in this space. Size varies for what could be considered a platform acquisition For Public and National PE backed acquirers this could be as small as $3 5 million in revenue depending on the market, but typically is $5m to $15m in revenue For Private Equity groups looking for an initial entre into this market could be a minimum of $10 million in revenue, up to mega deals Hellman &amp; Freidman acquires Hub from Apex/Morgan Stanley Onex Partners acquires USI from Goldman Sachs PE acquirers often require the sellers/management to roll part of the proceeds into the acquiring entitys new deal </li> <li> 17. Types of Deals Contd Carrier Acquisition of MGA or Program Administrator (PA) Carriers and other risk bearing entities have viewed buying nonrisk bearing entities as a cheap way to grow premium and add underwriting talent as they will buy the MGA or PA and roll the business on to their paper Focus is on underwriting results and underwriting talent Niche businesses with monoline classes or niche programs are attractive Buying MGA/PA allows carrier to eliminate a layer of commission expense Often priced off profitability of the book and multiple of premium rather than EBITDA allowing a converted EBITDA multiple to be higher than if sold to a strictly financial acquirer If the Carrier is not planning on rolling book, then in effect they are a financial buyer Earnout is typically tied to underwriting results Can occasionally be used as a defensive measure to keep from losing book to another carrier Examples include: PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m IronshoreNSU HIIG Casualty Surety Markel Thomco </li> <li> 18. Types of Deals Contd FoldIn Acquisition Typically a smaller deal that can be consolidated into a platform or hub office of an acquirer Acquirer is able to realize economies of scale in operations (rent, accounting, insurance, etc) Foldins are typically firms that range in size from $1m to $5m of revenue Competition from National, Regional, and Local Firms Producer Hire/Small Book of Business Acquisition Buyer is often smaller privately held regional agency, although recent deal demand has seen PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m National brokers dip down Typically these deals are $1m in revenue or less </li> <li> 19. Types of Deals So what are the Multiples? Disclaimer: There is no typical deal and there are numerous risk factors that vary greatly for all PRESENTED BY: EBITDA Multiple Range w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m deals Type of Deal Base Deal Guaranteed Potential Deal Platform Agency Mega Deals 9.0x12.0x 8.0x11.0x 10.0x13.0x Platform Agency Regional or Niche Deal 7.5x9.5x 5.5x7.5x 10.0x12.0x Carrier Acquisition of Distribution 7.5x9.5x 5.5x7.5x 10.0x12.0x FoldIn Acquisition 6.0x8.0x 4.0x6.5x 6.5x9.0x Group Benefits Large Account 7.0x9.0x 5.0x7.0x 8.0x10.0x Group Benefits Small Account 4.0x6.0x 2.0x4.0x 5.0x7.0x Producer Hire/ Book of Business 5.0x7.0x 4.0x6.5x 6.0x8.0x </li> <li> 20. Other Mechanics of an Earnout Timing of Payments Periodic payments made over the course of the deal (often Frontend loaded vs Back end loaded Earnout calculation driven off average basis vs. calculated on last period Example: Earnout is based on the three year average EBITDA PRESENTED BY: with a trueup with the final payment vs. one payment at the end of the earnout period w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m achieved Minimum growth hurdle before seller is qualified to receive earnout vs. 0% growth qualifies seller for earnout Straight line or Tiered earnout vs. All or none </li> <li> 21. Other Mechanics of an Earnout Contd Ability for Seller to recoup missed payments with extraordinary PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m results in future periods How are foldin acquisitions handled postclosing? Caps and Floors Deal is capped on upside as a percentage of the base deal valuation. Often mirrors the floor, which is typically the consideration paid at closing For example, if consideration at close is 80% of the base deal value, then an acquirer may put in a cap limiting the potential deal value to 120% of base value. A cap protects the buyer, similar to the floor providing protection for the seller </li> <li> 22. What makes an Earnout Succeed? Aligning goals of seller and buyer Make sure the seller understands what will need to be done to PRESENTED BY: w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m make earnout Clearly defined metrics to achieve Making sure that the seller is able to control the metric that the earnout is based on (EBITDA, revenue) Foldin acquisition would combine operations with a platform agency acquirer and it may become difficult to assess what the EBITDA truly is. Revenue based earnout may make more sense A platform acquisition that was standalone would be more likely to favor a EBITDA deal as they will have the ability to control expenses Impeding the sellers ability to achieve the earnout is a fast track to a lawsuit </li> <li>...</li></ul>