BUILDING VALUE IN THE FIRM BUILDING VALUE IN THE FIRM 1 BUILDING - PowerPoint PPT Presentation

THINK TANK: Business Models Institutionalization of the Hedge Fu nd Industry Succession Planning and Exit Strategies: Implications and Challe nges November 2005 April 20, 2006 Franklin H. Kettle Cary J. Meer Colchester Partners LLC Kirkpatrick & Lockhart Nicholson 175 Federal Street Graham LLP Boston, MA 02110 1601 K Street, NW (617) 896-0200 Washington, DC 20006 (202) 778-9107

BUILDING VALUE IN THE FIRM BUILDING VALUE IN THE FIRM 1

BUILDING VALUE IN THE FIRM Second Generation and Succession Planning Must have 2nd/3rd Generation Must be in place and functioning well for a period of time 1st/2nd/3rd Generation should cover all required functions (i.e. investing, operations, distribution (sales and service), compliance, business management) Single Generation Firms have limited value to third parties 2 2

BUILDING VALUE IN THE FIRM Enfranchising the Second Generation Equity Participation Cash Compensation Opportunities Deferred Compensation Opportunities Firm/Product Strategy Leadership Opportunities Quid pro quo for combination of the above are Business Protection Covenants 3 3

BUILDING VALUE IN THE FIRM Develop a Business Plan Correlation to Success and Growth Promotes a focus on People, Product, Distribution and Business Issues Run the Firm as a Business 4 4

BUILDING VALUE IN THE FIRM Develop Additional Product Strategies One product strategy firms have less value to third parties unless a specialized niche Additional products can be offshoots of original or new through lift-outs of teams/people (examples) 5 5

BUILDING VALUE IN THE FIRM Develop Additional Distribution Channels Institutional, High Net Worth Various sub-markets within these channels Direct, Indirect through intermediaries (brokerage firms and consultants) Domestic, International 6 6

BUILDING VALUE IN THE FIRM Protect Intellectual Property Product Strategies Proprietary systems Clients and Prospects 7 7

BUILDING VALUE IN THE FIRM Structural Matters Separate Governance from Economics Separate Compensation from Ownership Distributions Establish an objective system for rewarding people Estate/tax planning 8 8

BUILDING VALUE IN THE FIRM Further Structural Matters Choice of the Firm Entity(s) matters now and later (C corps, S corps, LLCs and limited partnerships) Get good advice and address issues, if any, now before the business is very valuable Choice of Ownership Entity(s) 9 9

EXIT STRATEGIES EXIT STRATEGIES 10

EXIT STRATEGIES Initial Public Offering/Spin-Off Realistic or not? Volatility of Revenues and Earnings Size constraints Public Reporting Sarbanes-Oxley and other regulatory issues 11 11

EXIT STRATEGIES Sale to a Strategic Partner Issues to Consider What do they bring other than money? (Distribution, infrastructure) Synergies are almost always overstated 100% Sale vs. Majority Sale vs. Minority Sale Degrees of Autonomy vs. Integration Investments Operational Distribution Major business decisions Managing the Process Managing the client/investor perception 12 12

EXIT STRATEGIES Sale to a Strategic Partner Pricing and Structure Pricing Recurring Revenues and EBITA Performance Fee Revenues and EBITA Payment Structures Upfront Consideration Contingent, Earn-out Consideration Consideration for Performance Fee EBITA Liquidity Mechanisms for Minority Equity Retained Puts and Calls Timeframes Pricing Governance 13 13

EXIT STRATEGIES Sale to a Strategic Partner Social Issues and Personal Commitments Meeting of the Minds Expectations and Responsibilities Reporting Relationships Integration/Autonomy for all functions Employment Agreements Non-competes/Non-solicitations of clients and employees 14 14

EXIT STRATEGIES Internal Buyouts for Ownership Transitions Pricing Structures Timeframes Financing 15 15

EXIT STRATEGIES The Role of Private Equity for Ownership Transitions Pricing Structures Private Equity Exit Plan 16 16