BSU EXECUTIVE MBA PROGRAM
January 11, 2017
Establishing a Demand-Driven
Private Equity Market
My Background
First 36 years:
• Managing Partner of a regional CPA firm for 20
years with 90 people at its peak
• Firm had a generational ownership structure and
good buy/sell agreement
• Clients were all private companies in almost
every industry in Idaho
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My Background (cont.)
Now:
• Consult with Private business on the True
Corporate Model™ transition concept and on
private business finance issues.
• Manage my private business equity holdings.
PO BOX 1023, McCall, ID 83638
208-899-4666 or [email protected]
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Private, Closely Held
What is “X”? Why?
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Private, Closely Held
Tired
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Private, Closely Held
Tired
Risk adverse
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Private, Closely Held
Tired
Risk adverse
No cash distributions
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So, what’s changed?
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So, what’s changed?
• Opportunities to sell private businesses
• People are living longer
• Non-group health insurance costs growing
for seniors
• Less confidence in public market
investment returns
• If you are living longer, when do you give
Uncle Sam his 30% of your nest egg?
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So, why sell a business that:
a)gives you a 20% to 25% pretax return on FMV invested
capital;
b)pays for your health
insurance; and
c)is growing?
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If selling or liquidating isn’t the
solution, what is?
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Control Model
vs.
“True Corporate Model™”
Forms of Business Governance
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True Corporate Model™
A Process not an ESOP or
a Stock Option Plan
• Involves primarily key employees
• Not subject to IRS or Department of Labor
rules or regulations
• It emulates the entrepreneurial process
experienced by the founding owners
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Elements of a
True Corporate Model™
• Rights and duties separated and defined
for:
– Owners
– Policy makers
– Officers & managers
– Employees
• Fair return for time invested separated
from fair return on invested capital
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Elements of a
True Corporate Model™
• Profits distributed not retained
• Growth financed by selling new units of
ownership to key employees
• Valuation of units linked to earnings and
cash flow
• Regular meetings with stakeholders
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The TCM Process™
• Step 1 – Obtain founders’ consent &
commitment
• Step 2 – Separate fair return on equity
from fair compensation to owners
• Step 3 – Package the offer to Key
Employees
• Step 4 – Obtain Key Employee
acceptance & commitment
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The TCM Process™
• Step 5 – Obtain Bankers’ and Third Party
acceptance & commitment
• Step 6 – Write proper owner documents
with effective buy/sell provisions
• Step 7 – Close the sale to Key Employees
• Step 8 – Nurture and maintain the
demand-driven equity market
• Step 9 – Dealing with the unknowns
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EXAMPLES
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Ex. # 1 - Construction Company
in 1990
Unit Holders:
Father 1,000 units @ $1,500
$1,500K
Son
100 units @ $1,500
150K
Total capital (Book Value)
$1,650K
Annual Profit = $500,000; $455 per unit;
All profits were retained, except tax
distributions
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Ex. # 1 - Construction Company
in 2001
Unit Holders:
Father 1,000 units @ $2,500
$2,500K
Son
500 units @ $2,500
1,250K
Key EE 400 units @ $2,500
1,000K
Total capital (FMV)
$4,750K
Annual Profit = $1,250,000; $658 per unit;
90% of profits distributed; Father died 2002
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Ex. # 2 - Temp Agency
in 2000
Unit Holders:
#1 50,000 units @ $1.00
$ 50K
#2 50,000 units @ $1.00
50K
#3 50,000 units @ $1.00
50K
Total capital (Book & FMV) $150K
Annual Profit = $100,000; $0.67 per unit
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Ex. # 2 - Temp Agency
in 2013
Unit Holders:
#1 349,000 units @ $2.25 $ 785K
#2&3 321,000 units @ $2.25
722K
#4-11 202,000 units @ $2.25
455K
Total
872,000
(FMV)
$1,962K
2013 Profit = $950,000; $1.09 per unit
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