Tag Archives: EBITDA

What are the Key Points to Make in an Investor Presentation? Three Views

Situation: A CEO wants to raise money to expand the company. Target investors will be private equity investors with a minimum investment threshold of $10 million. What are the key points to make in an investor presentation?

Advice from the CEOs:

  • To demonstrate the company valuation, and the potential increase in value to investors, calculate the EBITDA trend for the last 3-4 years and project it out for the next 5 years.
    • The valuation is the whole company – not just the investment piece.
    • Show the increase in exit valuation with and without the target investment. Show impact.
    • Show revenue and EBITDA on the company’s current trend and what this will become with the investment.
  • An alternate view: Don’t focus on valuation. The company is profitable and growing. Pitch the plan and the financials associated with the plan. Let the potential investor come back with an investment proposal and terms. KISS – Keep It Simple Silly – take all the risk out.
  • There are periodic Shake the Money Tree events in Silicon Valley, sponsored by SVASE – Silicon Valley Association of Startup Entrepreneurs. Start attending these.
    • Ask for advice – not money. There is an adage in Silicon Valley is that if you ask for money you get advice; whereas if you ask for advice you get money.
    • There’s a subtle difference between the two asks. The point is that potential investors don’t just want to invest money. They want to be involved in the decisions as to how the company spends that money. By asking for advice, a potential investee demonstrates that they respect the opinions and input of potential investors and will listen to them.

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How Do You Fund Business Growth? Four Observations

Situation: A company is looking at options to fund growth. These include selling a stake in the company, bank financing, organic growth. or partnering with another company. There are trade-offs to each option. How do you fund business growth?

Advice from the CEOs:

  • There is a question that should be answered before talking about funding: what is the vision for the business?
    • Think about building the business that the founders want to run. What size company feels comfortable from an operational perspective? What does it look like?
    • Does the company have the right people and infrastructure to support planned growth? Are current direct reports capable of taking on additional projects and monitoring both current facilities and additional sites?
    • As the company grows, can the bottom line be increased as fast as the top line?
  • Commit the 5-year plan to paper. Before deciding how the company will grow, determine the vision, the growth rate to support that vision, the organization required, and the strategic plan to get there.
  • The funding decision is an investment decision. What’s the return for a multi-million-dollar investment?  What incremental revenue and earnings will it produce?
    • Estimate how much revenue the investment will generate in 5 years. At the current gross margin, what is the incremental gross margin per year.
    • Given this estimate, what is the projected EBITDA? Does the annual EBITDA represent a reasonable rate of return on the investment?
    • The investment ROI must be known – both from the company’s perspective and for any lender or partner who invests in the planned expansion.
  • How high do the company’s relationships extend in key client companies? Do client upper management realize how critical the company is to them?
    • If the answer is not high enough, develop these relationships. This could open new funding opportunities.
    • For example, if the CEO knows the right people at a key customer, let them know that the company may want to build a facility near them. The customer may be interested in partnering with the company to finance the facility.
    • A multi-million-dollar joint venture plant investment is a modest investment to a large customer if it gains them a strategic advantage.

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How Do You Respond to a Purchase Offer? Five Thoughts

Situation: A company has been approached by a larger company that is interested in purchasing it. The purchaser wants to fill a niche that they don’t currently serve, but which is important to their growth. The CEO is concerned about what will happen to employees following sale of the company. How do you respond to a purchase offer?

Advice from the CEOs:

  • Questions for Preliminary Stage Research:
    • What valuation is the tipping point for an attractive offer by the buyer?
    • Determine the nature of the purchaser’s interest in the company and how it fits into their broader strategic picture. If their plan will dramatically change the market the company’s current market value may go down later relative to doing a deal with them today.
    • If the acquirer has a history of buying other companies, look at who they’ve recently bought, what they paid, and what kind of impact they had on the staff and culture of the companies purchased.
    • Check out the purchaser’s P/E ratio. If it is in the range the company’s desired multiple on EBITDA, a good deal is possible.
  • Temper the company’s response and approach to get the most from this experience.
    • Currently, assumptions about the acquirer make the offer appear unappealing. Ask questions to validate or challenge these assumptions.
    • Be open-minded so that the purchaser reveals more about themselves and the market than they would if they sensed a lack of interest in an acquisition.
  • How does the company protect itself during the inquiry and due diligence process?
    • Keep staff numbers and individuals, and customer lists close to the chest.
    • Have an LOI and ask for a breakaway clause before sharing significant information. 
      • Breakaway clause: if the two companies get into discussions and the potential acquirer decides to abandon the discussions, it will cost them $1M.
      • The potential acquirer may not agree to this, but it demonstrates that the company is serious both about the discussions and about preserving the confidentiality of its business information.
  • More Advanced Stage Questions and Research:
    • This looks like a strategic interest. If so:
      • Get assistance from an investment banker.
      • Look at what other alternatives may be available to the acquirer to assess the company’s potential value.
      • Any offer other than a high-multiple strategic valuation and offer should not be of interest to the company.
    • What restrictions will the acquirer put on the company? 
      • For example, if there is an earn-out value, will they give the company the freedom to operate to maximize this value?
    • Be careful with employee communications and how employees are informed of an outside interest. This can be difficult during due diligence.
    • If the founder remains with the company post-sale this could help lock in the value of the exit and assure the employees’ future.
  • Make the most of this opportunity.
    • Are there ways that the company can become better and smarter working with the acquirer?
    • Is there a relationship short of acquisition than would benefit the company like a collaboration or partnership?
    • Can a relationship short of sale enhance the company’s market presence and help the company to achieve national status more quickly?

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