High Rock Partners, Inc.

𝐕𝐚𝐥𝐮𝐞 𝐋𝐞𝐯𝐞𝐫𝐬 - 𝐑𝐞𝐭𝐮𝐫𝐧 𝐨𝐧 𝐈𝐧𝐯𝐞𝐬𝐭𝐞𝐝 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 (𝐑𝐎𝐈𝐂) – (post 2 in the series) Continuing from post 1 in this Value Levers series, let’s focus on the first major lever… that is ROIC in the context of increasing the value of the business. One of the common ways to measure return on invested capital (ROIC) is to divide (i) net operating profit less adjusted taxes by (ii) total assets minus non-interest bearing liabilities (Copeland, 1996)2. 𝘙𝘖𝘐𝘊 = (𝘖𝘱𝘦𝘳𝘢𝘵𝘪𝘯𝘨 𝘱𝘳𝘰𝘧𝘪𝘵 - 𝘢𝘥𝘫𝘶𝘴𝘵𝘦𝘥 𝘵𝘢𝘹𝘦𝘴) / (𝘛𝘰𝘵𝘢𝘭 𝘢𝘴𝘴𝘦𝘵𝘴 - 𝘯𝘰𝘯-𝘪𝘯𝘵𝘦𝘳𝘦𝘴𝘵 𝘣𝘦𝘢𝘳𝘪𝘯𝘨 𝘥𝘦𝘣𝘵) To increase the ROIC, a company can either increase its operating profits and cash flow while maintaining the same level of invested capital, or it can reduce the amount of invested capital while maintaining the same operating profit and cash flow. Under ideal circumstances, management will do both simultaneously. Below we discuss five key levers that can work to manage, control and increase the ROIC. The primary outcome of moving these levers should be increased cash flow and improved capital efficiency; however, a possible, secondary effect of moving these levers is an increase in the rate of growth of that cash flow. Preparation for growth or for an M&A transaction includes developing and prioritizing appropriate initiatives to optimize the ROIC of the company given the risk profile and ambi­tions of the shareholders. As a company optimizes its ROIC, it is likely to also experience improved operating metrics, such as better-than-industry-average gross and EBITDA margins, and faster growth as compared to its peers, both of which contribute to greater value. Over the next five posts, I will write about these five sub-levers that impact ROIC – 1.      Strategic position 2.      Customer base 3.      Cost and Scalability 4.      Working capital 5.      Human capital #dealmakers #mergersandacquisitions #divestitures #professionalservices #middlemarket #ValueLevers

𝐕𝐚𝐥𝐮𝐞 𝐋𝐞𝐯𝐞𝐫𝐬 – 𝐈𝐧𝐭𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐨𝐧 (post 1 in the series) Buddy Howard and I wrote short book on the basics of improving enterprise value… it’s titled 𝘝𝘢𝘭𝘶𝘦 𝘓𝘦𝘷𝘦𝘳𝘴 (https://lnkd.in/g3nsgrdg). We are going to make a series of posts to share the key concepts over the weeks ahead; so let’s jump in: For private, middle–market companies—those companies with annual revenues from $5 million to $1 billion—value creation is principally based on long-term, expected future cash flow. Essential to increasing the value of a company is increasing the amount and certainty of its cash flow while reducing the risk of achieving that cash flow. Optimizing the business should result in both a shift in the market value of the company towards the upper end of valuation benchmarks and an increase in its alternatives (more buyers, cheaper capital, etc.) when engaging with the capital markets. Our discussion in this series of posts centers on those value levers most critical to the optimization of private, middle-market companies from the perspective of those in the capital markets, including institutional investors, lenders, and buyers. As a basic concept, calculating the value of a stream of cash flow can be illustrated in mathematic terms by this simplified formula: 𝘝𝘢𝘭𝘶𝘦 = 𝘦𝘹𝘱𝘦𝘤𝘵𝘦𝘥 𝘤𝘢𝘴𝘩 𝘧𝘭𝘰𝘸 / (𝘤𝘰𝘴𝘵 𝘰𝘧 𝘤𝘢𝘱𝘪𝘵𝘢𝘭 - 𝘨𝘳𝘰𝘸𝘵𝘩 𝘳𝘢𝘵𝘦 𝘰𝘧 𝘤𝘢𝘴𝘩 𝘧𝘭𝘰𝘸) (Note that there are variations of this formula that account for fast-growth businesses, and for those with negative short-term cash flow and positive long-term cash flow.) According to this equation, we can increase value by increasing the absolute value of the cash flow, reducing the cost of capital, or increasing the rate of growth of the cash flow (or any combination of the three). We will go into details in the coming posts. Value Levers is largely based on the academic work by the authors above and reprinted with permission: Kenneth H. Marks, John A. Howard (2015), Optimizing Private Middle-Market Companies for M&A and Growth, in Cary L. Cooper, Sydney Finkelstein (ed.) Advances in Mergers and Acquisitions (Advances in Mergers and Acquisitions, Volume 14) Emerald Group Publishing Limited, pp.67 – 82. #dealmakers #mergersandacquisitions #divestitures #professionalservices #middlemarket #ValueLevers

A DONE DEAL: As I’ve posted before, a key tenet for our team in serving our clients is to focus on achieving their objectives and being results driven. 

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A DONE DEAL: As I’ve posted before, a key tenet for our team in serving our clients is to focus on achieving their objectives and being results driven. Industrial & Construction Enterprises (ICE) ownership sought to optimize the sale of their business while taking care of their employees and customers… continuing their legacy and enabling the next wave of growth. Venturi Supply recognized the strategic value of ICE as they sought to expand in both geography and capabilities. To us, results matter! #dealmakers #mergersandacquisitions #divestitures #professionalservices #middlemarket

Our firm was pleased to represent PSS in this transaction as they become part of WGNSTAR.  Congratulations as they build an industry leading workforce for the semiconductor sector. https://lnkd.in/evnra7kD #dealmakers hashtag #mergersandacquisitions hashtag #divestitures hashtag #professionalservices hashtag #M&A hashtag #middlemarket

DEAL STRUCTURE - - In a lot of M&A cases, deal structure is nearly as important as the value of the company. Many times, structure impacts the after-tax cash to the seller and the risk allocated to the buyer. For those sellers that might transact with a private equity firm or one of their platform investments, a common structuring technique is called an “F Reorg” (or F Reorganization). Structuring a transaction involves balancing various considerations for both buyers and sellers. In the middle market, there is no one-size-fits-all structure, and multiple alternatives exist to achieve transactional goals. The F Reorg involves the target company becoming a QSub, which then converts into a single-member LLC. The entire process qualifies as a tax-free reorganization under Section 368(a)(1)(F) of the Internal Revenue Code. A couple of the benefits to the seller include - *Avoiding the rigidity of a 338(h)(10) election or 336(e) election, including the requirements on greater than or equal to 80% sale, taxing the entire gain and meeting the qualified stock purchase requirements, *Providing for the deferral of gain recognition with respect to rollover equity. And the buyer benefits from – *Achieving a step-up in the basis of the seller’s assets, *Retaining the seller’s Federal Employer Identification (FEIN) number, *Possibly removing the risk associated with the validity of the seller’s S-Corporation election. Before agreeing to an LOI, make sure you’ve thought about the deal structure and its impact. #dealmakers #mergersandacquisitions #divestitures #professionalservices #M&A #middlemarket #Freorg #Freorganization