4/6/2011 The Market Is Heating Up Are You Prepared? The Aerospace - - PDF document

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4/6/2011 The Market Is Heating Up Are You Prepared? The Aerospace & Defense Forum March 18, 2011 January 2011 SLIDE 1 SLIDE 1 1 Aerospace A & D Current Market Assessment Its a good time to be in the A&D market

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SLIDE 1

4/6/2011 1

SLIDE 1

Aerospace

January 2011

SLIDE 1

1

The Market Is Heating Up … Are You Prepared?

The Aerospace & Defense Forum March 18, 2011

A&D … Current Market Assessment

It’s a good time to be in the A&D market

  • Market is heating up.
  • Transactions will occur at unexpected times.
  • You will receive inquiries.
  • You may get an unsolicited offer.
  • Are you ready?

Aerospace & Defense Aerospace & Defense

Are you ready? Are you prepared?

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SLIDE 2

4/6/2011 2

Moss Adams Capital LLC

Investment Banking for Private Companies

Strategic Advisory

Sale of Companies Minority Recapitalization Buy-side Advisory Evaluate Strategic Alternatives Transaction Readiness

  • Affiliate of Moss Adams LLP
  • Registered Broker/Dealer
  • Member FINRA & SIPC
  • 3 Offices in SoCal
  • Specialist in A&D suppliers,

parts manufacturers, and

Aerospace & Defense

Capital Formation

Growth Equity Debt

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parts manufacturers, and engineering design firms.

Common Situation: We have an Offer … then …

  • Delay due to accounting and tax matters.
  • Delay due to inability to produce requested information and

documents.

  • Buyer discovers surprises … rather than Seller discussing on pro-

active basis.

  • Appearance of undisclosed commitments, contracts, obligations.
  • Management team reliant upon key person(s) with no back-up.
  • Inability to support “add-backs” for non-recurring / one-time

Aerospace & Defense

Inability to support add-backs for non-recurring / one-time expenses by the Seller.

  • Family business comingled with operating business.
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SLIDE 3

4/6/2011 3

Preparedness will bring out Full Value

What drives value … What can be done to improve it?

  • The greater lead-time … the more you can do.
  • Transferrable operations, revenues and earnings.
  • Put the Financials in a condition to sell.
  • Beyond the financial statements … Operate company in “transferrable” form.
  • Plan the Tax Implications … Form of entity, wealth transfer, estate planning

Aerospace & Defense

  • Steps to take now.

Being “Prepared and Ready” doesn’t mean the Company is for sale.

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Understand the Source of Initial Valuation

Initial Valuation Proxy is a multiple of EBITDA EBITDA comes in many forms EBITDA comes in many forms As reported = per the prepared financial statements As presented = used as basis for valuation proxy As transferrable = condition of the business that will be transferred As strategic = if combined with another similar business EBITDA is measured over different periods Historical EBITDA Forward EBITDA

Aerospace & Defense

Trailing Twelve Months EBITDA (“TTM”) Free-Cash Flow is relevant Action: Start tracking your TTM number and add-backs

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SLIDE 4

4/6/2011 4 Normalizing the Income Statement

  • Normalize owner/manager compensation
  • Clearly track discretionary and extraordinary items
  • Track fixed equipment purchases whether capitalized or expensed
  • Adjust for abnormal economics
  • Conform to accepted accounting practices
  • Produce monthly statements and summary reports

Aerospace & Defense

Produce monthly statements and summary reports

Action: Put the income statement in “normalized” condition

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The Balance Sheet at Deal Time

Buyer will value deal on a “debt-free” basis. Normalize working capital Normalize working capital.

  • Most private companies have excess/surplus working capital.
  • What is “adequate” working capital for the business?
  • Hard to justify big changes at time of sale.

CAPEX related debt.

  • Big equipment purchases often accompanied by debt or cap leases.
  • If recent purchase, the full earnings effect hasn’t been realized.
  • No credit in earnings, but still penalized for debt.

Aerospace & Defense

Maintain the Fixed Asset schedule and depreciation schedule Action: Today’s balance sheet should approximate the one transferred.

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SLIDE 5

4/6/2011 5

Proxy for Value: Comparables and Multiples

Buyer’s attempt to make comparisons between the relative valuations of comparable companies in the “marketplace” and the subject company.

  • Enterprise Value -to- EBITDA
  • Enterprise Value -to- FCF
  • Enterprise Value -to- Revenue
  • Price-to-Earnings (public companies)

Public Comparables

  • Compare valuations of public companies
  • Similar companies, industries, or characteristics

Private M&A Comparables:

T ti i tit i

Aerospace & Defense

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  • Transactions in competitor companies
  • Transactions in similar companies
  • Transactions in similar industries

Action: Know the Comparables/Multiples for your Company

Make “Rules of Thumb” work in your favor

Rules of thumb will be frequently referred to … however …

  • They are not given any weight unless they are supported by other valuation

methods;

  • They are applied only to transferrable revenue and earnings;
  • They will be relevant only if supporting evidence is available to inspire

confidence among buyers and sellers;

  • They often get discounted in the due diligence process.

Aerospace & Defense

Action: Know how “Rules of Thumb” apply to your situation.

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SLIDE 6

4/6/2011 6

Beyond the Financials: Build up your Strategic Value

Tell the story: Formal strategic plan to define future business Customer/Program Factors Product or Capability Factors Strategic Factors Intellectual Property Factors Leadership & Reputation within Industry

Aerospace & Defense

Leadership & Reputation within Industry Action: Create a Business Plan that presents the future opportunities

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Significant value at stake E l l i f t t t h l t i t d l id ti

Tax Planning -- Keeping the Value

Early analysis of tax structure helps you retain post-deal consideration Form of Entity Allocation of Purchase Price Current “Window” to Transfer Wealth Requires a tax specialist

Aerospace & Defense

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Requires a tax specialist Action: Find a transaction tax specialist

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SLIDE 7

4/6/2011 7 Tax Planning: A Window of Opportunity

Three Year Window for Major Tax Planning Three Year Window for Major Tax Planning 2010 Window of Opportunity (now extended) 2010 Window of Opportunity (now extended) 2011 & 2012 “Silver Platter” For Income, Gift & Estate Planning 2011 & 2012 “Silver Platter” For Income, Gift & Estate Planning 2013 & Beyond Current federal and state deficits will lead 2013 & Beyond Current federal and state deficits will lead

Aerospace & Defense

extended) extended) Planning Planning to….??? to….???

Steps to Take Now

  • Put Yourself through “mock” due diligence
  • Get Independently prepared financial statements; preferably audited.
  • Get corporate records complete, organized, and corrected.
  • Quality check all material contracts, licenses, agreements.
  • Create an organization chart with clear roles and responsibilities.

Aerospace & Defense

  • Analyze and assess tax implications of a sale.
  • Consider your form of entity (“C” Corp, “S” Corp, “LLC”)

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SLIDE 8

4/6/2011 8 In Closing

  • The opportunity will likely come at an unexpected time.
  • “Market multiples” will be tossed around.
  • Rules of thumb will be frequently referred to … however … the value will

be determined by many other variables.

  • Assess your readiness and preparedness … regardless of intent to sell.

Aerospace & Defense

  • Be prepared. Be ready.

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