1. HOW PRIVATE EQUITY CAN UNLOCK
YOUR CLIENT’S ASSETS
PRESENTED BY
Exit Planning Institute – North Texas Chapter
January 9th, 2015

2. TODAY’S PRESENTATION
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3. BACKGROUND AND CONTACT INFORMATION
 Career Background
– KLH Capital, Partner
– Recovery Holdings, CFO
– Founders IB, Associate
 Mobile, AL native
 BS, University of Alabama
 Covenant Life Church
 Married with three
daughters (4, 2 & 1)
James B. Darnell
813-222-0160
james@klhcapital.com
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4. THE GOAL FOR TODAY IS TO UNDERSTAND…
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1. Structure and setup of private equity firms
2. When is the right time for Private Equity
3. How to qualify a client like a private equity group
4. Life after the deal for your client

5. THE GOAL FOR TODAY IS TO UNDERSTAND…
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1. Structure and setup of private equity firms
2. When is the right time for Private Equity
3. How to qualify a client like a private equity group
4. Life after the deal for your client

6. WHAT IS “PRIVATE EQUITY?”
 Investors that make investments into private companies (not
publicly traded)
 Capital for private equity is raised from high net worth
and institutional investors
 Money can be used to accomplish a myriad of goals and
objectives in the context of a deal
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7. FUND STRUCTURE IS TYPICALLY CONSISTENT…
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Limited Partners (Investors)
(Pension funds, insurance companies, high net worth
individuals, family offices, endowments, etc.)
Private Equity Fund
(Limited Partnership)
Investment Investment Investment

8. …BUT EACH FIRM HAS TARGETED CRITERIA
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Startup Stable/Mature
Maturity of the Company
Hands on Hands off
Operational Involvement
$0 $1bln+
Size Investments
Industries of Interest
Old economy New economy

9. FOR EXAMPLE, AT KLH WE LIKE:
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Company
Maturity
Mature, growing businesses with a history of profitability that need
capital for growth, expansion, working capital, or buyouts
Company Size Revenue of $10.0 to $100.0 million with EBITDA of $2.0+ million
Management Desire to assume meaningful ownership stakes
Targeted Sectors
 Niche manufacturing
 Value added distribution
 Specialty services
Geography Nationwide

10. THE GOAL FOR TODAY IS TO UNDERSTAND…
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1. Structure and setup of private equity firms
2. When is the right time for Private Equity
3. How to qualify a client like a private equity group
4. Life after the deal for your client

11. UNDERSTANDING YOUR DEAL IS THE FIRST STEP
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Business owner wants to retire in 5 – 10 years, wants to
maximize the value of his business over that time frame
Retirement
Business owner needs to buyout minority partner and bring
in capital to help him grow
Shareholder
Buyout
Patriarch of the family company wants to retire, but doesn’t
trust 2nd generation to run the company with all his net
worth on the line
Family
Transfer
Inactive business owner wants to sell the company to his
management team
Management
Buyout

12. GOALS & OBJECTIVES DETERMINE STRATEGY
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 Who owns the company?
 Who runs the company?
 Who wants to sell and who wants to
stick around?
 Why is the company for sale?
 •Where is the company heading?
Goals &
Objectives
Key Questions To Answer

13. FUNDAMENTAL M&A TRANSACTION OPTIONS
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Least
Most
MostControl
Liquidity
Recapitalization
Sell large % of equity
Status Quo
No Exit Plan
Outright Sale
Sell 100% of equity
Private Equity
Options

14. RECAPITALIZATION AS A PHASED EXIT PLAN
 Sponsor acquires majority position in the company to provide
diversification of shareholder(s) wealth
 Owner retain ownership stake and continue growing the company with a
“2nd bite of the apple” in mind
 Existing management team/owner retains operational control day-to-day
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Recapitalization
Mgmt
Minority
Mgmt
Owns
Majority
Big Idea: Client sells a portion of their ownership now at FMV, brings on partner to help
grow the business and setup for 2nd “bite at the apple” in 4 – 7 years
Private
Equity
Group

15. CASE STUDY – MIDSTATE MACHINE & FAB.
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 Post-Investment Summary
 Management partnered with KLH Capital to
support their growth strategy and pursue select
acquisitions
 Post transaction, the Company brought on a new
CFO and controller to implement a new IT
infrastructure and to improve financial tracking
 We are evaluating a number of add-on
acquisitions to help bring on new service
offerings
 Mid-State expects to grow EBITDA by more
than 20% in FY 2015
Company Description
Transaction Summary
• The owner was seeking a liquidity event to plan
for retirement and desired to bring on a growth-
oriented financial partner
• The Company was able to give equity to an
industry veteran who became President
Provider of outsourced fabrication, maintenance, and field services to the
mining, chemical, power, and general manufacturing industries

16. OUTRIGHT SALE TO FAMILY OR MANAGEMENT
 Sponsor backs current management team or other family members to buy-
out current majority shareholders
– Family members are often times members of the management team
 Provides ability for next generation to build wealth via “sweat equity”
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Exiting
Seller
Owns
Majority
Mgmt/
Family
Sale
Big Idea: Client sells the company to the Management team or someone else in their
family to facilitate a liquidity event at a fair market value
Private
Equity
Group

17. CASE STUDY MANAGEMENT BUYOUT
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 KLH Capital partnered with Management to
develop the business organically and through
acquisitions
 KLH Capital helped to secure a robust line of
credit to ensure adequate working capital
availability for implementing Management’s
growth initiatives
 Post transaction, the Company expanded its
warehouse and office space and brought on new
sales professionals including a Vice President of
Sales and Marketing
• The President of the business was seeking a
liquidity event in order to retire
• KLH Capital facilitated a transaction that
allowed Management to gain a large equity stake
in the Company
A national full-line distributor of petroleum handling equipment for
petroleum marketers, wholesalers, and technicians
 Post-Investment Summary
Company Description
Transaction Summary

18. THE GOAL FOR TODAY IS TO UNDERSTAND…
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1. Structure and setup of private equity firms
2. When is the right time for Private Equity
3. How to qualify a client like a private equity group
4. Life after the deal for your client

19. HOW TO QUALIFY A CLIENT LIKE A PEG
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Key
Value
Drivers
Customers
Industry &
End
Markets
Suppliers
Competitio
n
Mgt &
Financials

20. QUALIFY A CLIENT: CUSTOMERS
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 How does the company make money?
 Who are its customers?
 Is there customer concentration?
 What does the sales force look like?
 How difficult is it for customers to
leave?
Customers
Key Questions To Answer

21. QUALIFY A CLIENT: INDUSTRY & END MARKETS
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 How discretionary are the purchases
to the customer?
 How big is the market?
 Is it growing or shrinking?
 How cyclical is the business?
 How regulated is the industry?
Industry &
End
Markets
Key Questions To Answer

22. QUALIFY A CLIENT: SUPPLIERS
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 Who are its suppliers?
 Is there any supplier concentration?
 How easy would it be to switch
suppliers?
 Can the suppliers sell directly to the
end user?
Suppliers
Key Questions To Answer

23. QUALIFY A CLIENT: COMPETITION
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 How special are its products/services?
 Are there any reasonable alternatives?
 Why do customers buy from them?
 How easy is it for new competitors to
spring up?
Competition
Key Questions To Answer

24. QUALIFY A CLIENT: MGT & FINANCIALS
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 Who are the key people in the
organization?
– Responsibilities
– Backgrounds
– Goals & Objectives
 How big is the company and how
organized are the numbers?
 What type of accounting
software/MIS does it use?
Mgt &
Financials
Key Questions To Answer

25. THE GOAL FOR TODAY IS TO UNDERSTAND…
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1. Structure and setup of private equity firms
2. When is the right time for Private Equity
3. How to qualify a client like a private equity group
4. Life after the deal for your client

26. COMMON MISCONCEPTIONS OF LIFE AFTERWARDS
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27. BUT ACTUAL REALITY IS MUCH DIFFERENT
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Non-recourse
Capital
Relationships
Experienced
Advice
Improved
Reporting
Growth
Energy/
Excitement

28. TYPICAL CONTRACTS & KEY TERMS
• Price and Consideration: How much value is being delivered, the forms of consideration
(cash/stock/note/earnout), and the terms of each
• Reps/Warranties: Outlines indemnification from seller for various forms of liabilities
• Working Capital: Buyer will typically expect A/R, Inventory & A/P to be transferred
• Non Compete: Sellers will not be able to start another similar business within ~5 years
Purchase Agreement
• Post Closing Roles: Outlines the seller’s role and responsibilities be going forward
• Compensation/Benefits: Documents all compensation seller will receive going forward,
including salary, bonuses, and benefits
Employment Agreement
• Corporate Governance: Who controls the company and can compel it to do something
• Transfers/Repurchases: Governs when/where/how sales of ownership can occur
Shareholders Agreement
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29. Q&A
James B. Darnell
601 Bayshore Blvd.
Suite 850
Tampa, FL 33606
813-222-0160
james@klhcapital.com
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www.klhcapital.com