It's Lonely at The Top:Exit Strategy Alternatives For Sole Owners and Partners

It’s Lonely at the Top
Exit Strategy Alternatives for Sole

Owners and Partners
Presented by: Steve Gido, CFA and Michael O’Brien, ASA
ZweigWhite Financial Advisory

Services
managing the business of design &
construction
Boston Washington, DC Chicago
321 Commonwealth Road 1001 19th Street, North IBM Plaza
Suite 101 Suite 1200 330 N. Wabash, Suite 3201
Wayland, MA 01778 Arlington, VA 20009 Chicago, IL 60611
1-508-651-1559 1-202-965-3390 1-312-628-5870
ZweigWhite Financial Advisory
Services
ZweigWhite’s Financial Advisory Services Group provides a diverse range of
corporate finance, valuation, ownership transition planning, incentive
compensation, and merger & acquisition services for engineering,
architecture, and environmental consulting firms, from niche organizations to
ENR 500 and publicly-traded firms.
Valuation & Ownership Planning Services

- Business valuations and appraisals – for internal transfer purposes, M&A transactions,
ESOPs, stock incentive programs, formula design, buy/sell agreements, litigation support,
estate planning, etc.
- Comprehensive internal ownership and exit strategy planning, alternatives and analysis
- Fairness and solvency opinions
- ESOP consulting and assessment
- Incentive compensation implementation, assessment, and benchmarking
Merger & Acquisition Advisory Services

- Firm acquisition searches, outsourced corporate development, and buyside representation
- Firm merger/sale services and sellside representation
- Asset divestitures and spin-offs
- Negotiation, deal structure, and due diligence assistance
- Strategic integration planning, support, and consulting
- Market and industry research
Visit us at www.zweigwhite.com
Learning Objectives
 The ownership transition challenges and landscape facing
AEC and environmental consulting owners and partners
today that are seeking to retire
 Discussion of various internal transition alternatives (direct
buy-sell, ESOPs, recapitalizations) and the pros/cons of each
 The importance of a thorough firm valuation to manage
expectations and minimize surprises
 Should you sell your firm to a larger A/E firm? Getting your
firm “transaction ready” and comparing the external sale
vs. the internal transition route
 How owners and partners can get going now. What are the
steps to move towards a positive succession plan?
Internal Ownership Transition
Shifting Demographics
Percent of Total Population
30.0%
28.0%
Percent
26.0% 55 & Up
24.0% 35 to 54
22.0%
20.0%
08
16
04
06
10
12
14
18
20
20
20
20
20
20
20
20
20
20
Year
Options for getting shares into hands of your
employees
 Direct Stock Purchase
 Employee Stock Purchase Plan (ESPP)
 Employee Stock Ownership Plan (ESOP)
 Leveraged Recapitalization
 Stock Bonus Programs
 Synthetic Equity Plan (Conversion)
 Stock Options
 Merger and Acquisition
Direct Stock Purchase Plan
Planned direct sales to key individuals
 Non-dilutive
Sales of shares from treasury

 Dilute ownership (not value)
 Takes longer to reduce major shareholders’ interest
 Be mindful of IRC Section 302
Formalized sales of shares over time

Communicates long-term opportunity for
expanded ownership
Employee Stock Purchase Plan
 423 Plans
 Direct purchase of shares
 Discounted up to 15%
 Discriminatory
 Dilutive
Employee Stock Ownership Plan (ESOP)
Qualified retirement savings plan under IRC 401a
Beneficial owners of the sponsoring stock
 Similar to mutual funds
 Not shareholders of the company!
Offers tax advantages to sellers, employees, and
company
 1042 Rollover
 Tax deductible Principal
 Deferred tax to beneficiaries
Non-discriminatory
Great tool for managing stock redemptions
 ESOP is governed by trustees

 Department of Labor governs the administration
of ESOPs
 Implementation and administration of ESOP will
require services of an experienced benefits
consultant
 Stock must be valued annually for ESOP
purposes by a qualified independent appraiser
 More firms opting for S-ESOP
Pre-tax earnin
Leveraged Recapitalization
Stock redemption
Special dividends
Bank note versus shareholder note
 Mitigate bankruptcy risk
 Easier to fund
 Not much less risk than being a shareholder
 Excess cash?
Sole owner versus large shareholder
IRC Section 302
Stock Bonus Programs
 Tax deductible expense with no cash outlay
 Sales of shares from treasury
 Dilute ownership (not value)
 Did they “Buy” it?

 Psychology of buying shares versus “Given”
shares
 Ownership starter?
Synthetic Equity Programs
 Phantom Stock
 Receive “Units” representing value equal to appreciated
increase in equity
 Stock Appreciation Rights
 Right to monetary equivalent
 Great tool for providing upside without giving up
ownership
 Less favorable tax consequence
 Discriminatory
 IRC Section 409a
Stock Options
 Contract for a right to purchase shares
 Five to seven years of vesting
 Great recruiting/retention tool
 Ownership is not transferred (until exercised)
 Long-term objective
 Be aware of taxes
Internal Ownership
Transition
Fair Market Value
 Balances the supply/demand between sellers
and buyers
 Creates transparency on how value is
determined (independence)
 Create shareholder value accountability for
management
 Mitigates against value manipulation
M&A Environment
Current M&A Climate
 Despite global recession and uneven design climate, cautious but resilient M&A and
industry consolidation activity is continuing in 2009
 Some buyers are pulling back the reigns on M&A and expansion goals; others see
“value play” opportunities given more realistic valuations
 More sellers emerging with challenging design and economic climate and reality of
favorable capital gains tax treatment expiring in 2010
 Prior “Seller’s Market” of higher valuations shifting to “Buyer’s Market” given
economic landscape and supply/demand imbalance – buyers are being choosier in
terms of criteria, valuations, and strategic intent
 Internal ownership transition plans becoming more difficult to accomplish
 Long-term, U.S. market will continue to be attractive to Canadian, Australian, and
European buyers, spurring more cross-border deals
 Have witnessed sizable deals that are changing competitive landscape, but seeing
more “niche” tuck-in deals given current conditions
M&A Environment
Desired Criteria by Buyers
 Geographic regions: Southeast and Southwest U.S.; metropolitan U.S. cities

 Services: civil, environmental, geotechnical, structural
 Markets: federal, healthcare, mining, energy/oil & gas, power/utilities,
state/municipal, water resources, water/wastewater, natural resources,
infrastructure, green building (MEP), and transportation
 Size: 15-150 employees, $2-$20M net revenue
 Developed client base
 Technical staff with broad project management and marketing expertise
M&A Environment
Sale Rationale
 Facilitate ownership transition / maximize shareholder return

 Expand firm’s resources (managerial, marketing, financial,
personnel)
 Increase opportunities for staff
 Provide impetus for growth
 Manage growth
 Provide new services to existing client base
 Provide existing services to new client base
 “Fire sale” or distressed situation for survivability
 43% of ZweigWhite’s 2009 Merger & Acquisition Survey of A/E/P
and Environmental Firms respondents indicated considering a
firm sale, an all-time high
Sell Down or Sell Out?
Key Differences between an Internal Transition and
External Sale:
What does a typical AEC deal
look like?
 Most are asset purchases rather than stock purchases
 Transactions are often mix of cash, buyer’s stock, &

installment notes
 Example - $2.2M Valuation
 $750k cash at closing
 $250k stock at closing
 $1.2M in three annual installments of $400k each
(w/interest)
 Earnouts, or pay for performance clauses, remain popular

to close manageable valuation gaps, but can be a barrier to
integration
 Employment agreements and compatible salary/incentive

compensation structures are key
Are You “Transaction Ready”?
Personal
 Can you make the switch from owner/entrepreneur to employee?
 Realize possible loss of control, flexibility, lifestyle, benefits, title, role, etc.
 Age, family, health concerns, 2nd tier capability/leadership all factors
 Many owners share they work harder during and after the sale than before it!
Organizational
 How is your financial history and trends? Growing? Profitable? How’s backlog?
 Do you have organized financial, legal, personnel, and operational records?
 Are there any pending liability issues (personnel issues, pending lawsuits, software
licensing deficiencies, etc.)
 How would you break the news to employees and clients? Reactions?
Be able to articulate your firm’s capabilities and strategic rationale to a buyer!
Getting Going – Typical Firm
Sale Process
Unsolicited Inquiry
 Local/Regional Competitor or Unknown “Knock on the Door”
 One on one discussion – is buyer right cultural match? Are you
getting best price/terms? Is synergy potential there?
Active Representative Process

 Identify buyer universe
 Contact CEOs/Presidents at selected firms
 Distribute confidentiality agreements and sale memorandum
 Arrange introductory meetings for management teams
 Assist with valuation range, deal structure, and employment issues
 Work with legal and accounting teams
 Negotiation until deal closure
Getting Going – Typical Firm
Sale Process
Illustrative Sale Process
Approach Diverse
Buyer Universe
Getting Going - Firm Sale
Process
Shareholder Objectives
 Maximize valuation
 Evaluate relative merits of different forms of consideration
― Preference for cash and /or equity from strong, growing AEC firms
― Consideration of earnouts to bridge valuation gaps
― Salary, bonus, and perquisites to management and staff
― Evaluation of tax strategies to maximize transaction proceeds
 Make progress on a timely basis to maximize senior management’s

options
 Preserve confidentiality to minimize disruptions
 Orderly transition and integration of employee and client base
Getting Going - Firm Sale
Process
Key Transaction Considerations
 Timing issues
 Transaction structure
 Appropriate buyer universe

― Strategic / cultural fit and similar vision and design
philosophy
 Valuation
― Opportunity to access new client/market base
― Geographic and service diversity
― Cost savings and synergy potential
― Ongoing senior management participation
 Disclosure and confidentiality

Closing Thoughts
 Understand your motivation to sell and ask peers that have
gone through it
 Understand the buyer’s motivation to acquire you
 Be aware that AEC transactions are “holistic” and integration
of two disparate firms can be powerful, yet disruptive
 Realize things will be different – most employees and clients
don’t like unexpected change!
 Know that you don’t have to sell (or buy) but realize your
competition isn't standing still
Dedicated Exit Strategy
Seminars & Events
 Merger & Acquisition Essentials for A/E/P and Environmental
Consulting Firms
 October 28, Las Vegas, NV
 Valuation & Ownership Transition for A/E/P and
Environmental Consulting Firms
 October 28, Las Vegas, NV
 December 2, West Palm Beach, FL
 2009 AEC Mergers & Acquisitions Summit – December 3-4 –

Ritz Carlton, West Palm Beach, FL
 www.zweigwhite.com/events
Questions
?
Contact Information
Steve Gido, CFA Michael O’Brien, ASA

(202) 965-4809 (202) 965-4807
sgido@zweigwhite.com mobrien@zweigwhite.com

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It’s Lonely at the Top

Exit Strategy Alternatives for Sole

ZweigWhite Financial Advisory

Valuation & Ownership Planning Services

Merger & Acquisition Advisory Services

Percent of Total Population

Sales of shares from treasury

Formalized sales of shares over time

 ESOP is governed by trustees

 Did they “Buy” it?

 Geographic regions: Southeast and Southwest U.S.; metropolitan U.S. cities

 Facilitate ownership transition / maximize shareholder return

 Transactions are often mix of cash, buyer’s stock, &

 Earnouts, or pay for performance clauses, remain popular

 Employment agreements and compatible salary/incentive

Be able to articulate your firm’s capabilities and strategic rationale to a buyer!

Active Representative Process

 Evaluate relative merits of different forms of consideration

 Make progress on a timely basis to maximize senior management’s

 Preserve confidentiality to minimize disruptions

 Orderly transition and integration of employee and client base

 Appropriate buyer universe

 Disclosure and confidentiality

 2009 AEC Mergers & Acquisitions Summit – December 3-4 –

Steve Gido, CFA Michael O’Brien, ASA

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