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Creative Deal Structures For Extraordinary Times

Without question, the most advantageous time for a business owner to consider an outright sale or recap of his/her equity is during expansionary economies where the company has shown steady growth, appears likely to continue on that upward trajectory, and capital markets are flush with cash.  Unfortunately, economic cycles don’t always align with a business owner’s plans for wealth diversification….

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Without question, the most advantageous time for a business owner to consider an outright sale or recap of his/her equity is during expansionary economies where the company has shown steady growth, appears likely to continue on that upward trajectory, and capital markets are flush with cash.  Unfortunately, economic cycles don’t always align with a business owner’s plans for wealth diversification. Most buyers base their valuations on trailing twelve month’s EBITDA, a measurement business owners rightfully feel is artificially depressed during a deep recession.  One option for entrepreneurs is to put off a transaction and wait for more advantageous conditions.  However, this is not the only option for business owners seeking a fair value for their company. 

At MCM Capital, we have completed transactions in virtually
all macro-economic conditions ranging from the dotcom bust and 9/11 attacks
through the middle of the Great Recession as well as more benign growth
environments.  Certainly, deep recessions
make it challenging for selling shareholders to garner sufficient value to make
a transaction attractive for both parties; however, creative transaction structures
can be instrumental in bridging valuation gaps during extraordinary times. 

This is by no means an exhaustive list but meant to highlight a few alternatives to getting a deal done in unfavorable economic conditions.  It is also particularly applicable, but not exclusive, to a partial sale utilizing a leveraged recapitalization (“recap”) structure.  The following tools may create a win-win for both the selling and buying shareholder:

Contingent Consideration (“Earnout”)

An earnout is a contractual provision providing the seller of a business additional compensation in the future if the business achieves certain pre-defined thresholds.

While earnouts are most commonly employed when there is a
gap between what the buyer is willing to pay and what the owner believes the
business is worth, they are also used to share in the potential risk of future
(albeit short-term) growth that can’t be easily accounted for by using a simple
EBITDA multiple. In essence, an earnout allows the buyer to mitigate risk while
positioning the seller to benefit from near term company growth after the sale
closes, and receive payment if/when the company achieves specific goals
commonly built around achieving certain levels of EBITDA.  Consequently, earnouts work best when the selling
shareholder is looking to maximize cash proceeds in the short term (12 to 24
months after close), the company continues to operate as a standalone entity
and the triggering event is easily measured and closely aligned
with the value of the business. 

We have occasionally used earnouts to bridge a value gap created by, for example, reliance on the continue support of an outsized (>15%) customer. For instance, we entered into an agreement to recap an aerospace company manufacturing 3D printed and molded parts, serving the defense and commercial aviation markets, for $30 million in total consideration, including 40% of retained equity.  During diligence, it became known a critical defense customer intended to develop a second source for an existing program generating approximately $2.5 million of EBITDA out of a company total of $4.5 million in EBITDA.  The seller expressed doubt the customer would be successful in this initiative, but it was an issue we could not ignore.  Fortunately, both parties were committed to finding a mutually acceptable resolution.  After exploring several alternatives, we eventually settled on a transaction structure which lowered the cash purchase price by $4 million at closing and replaced it with an earnout which triggered a like payment based on achieving a cumulative EBITDA measured at the end of two years.  This structure assisted us, as buyers, to ensure we were properly capitalizing the company in the event a significant profit stream was compromised without unduly penalizing the seller who thought the loss of any portion of this program was unlikely.  It is doubtful a deal could have been consummated without an earnout.

Equity Clawback

A clawback gives one party the right to repurchase a certain amount of equity at a stated value if certain conditions are met.

In contrast to earnouts, a clawback works best when the
Selling shareholder has a longer-term focus and prefers to make business decisions
centered around shareholder appreciation as opposed maximizing cash proceeds in
the near term.  A clawback works in a
similar way to an earnout but allows the Buyer to “clawback” equity retained by
the Seller at close under certain scenarios.  As a consequence, a Seller will not be unduly
penalized by the softness currently confronting the company and the Buyer has
recourse should the softness not be transitory. For example, several years ago
we were pursuing an attractive recap opportunity with the founder of a medical
components company generating superior margins, growing nicely and possessing
several competitive advantages.  It was
led by “Bill”, its 63 year-old CEO/founder and sole shareholder who wanted to
continue to lead the company, retain 25% equity ownership and pocket a targeted
amount of cash at close.  Based on the
company’s recent 2-year history Bill’s valuation expectations were reasonable.  Unfortunately, the company was now operating
in recessionary conditions which negatively impacted the company’s earnings by
25% and temporarily stilted its growth.  Understandably,
the owner was loath to compromise on any aspect of his aforementioned economic
goals but also didn’t want to wait potentially 2-3 years to revisit a
transaction.  We were able construct a compromise
which met his cash and retained ownership goals by incorporating a clawback to
bridge the value gap.  More specifically,
at the close of the transaction the seller received his targeted cash amount
and 25% retained equity interest subject to a clawback giving MCM the right to
purchase up to 10% of his retained equity if certain thresholds were not
met.  In our case, we established a
threshold based on a minimum total shareholder value measured at the 5-year
anniversary of the transaction, or earlier if a controlling interest in the
company was sold.  Importantly, the
structure we employed allowed Bill capital gains treatment on the portion of
his equity subject to the clawback.  I am
happy to report within 18 months the company was growing again and thus the
founder ultimately retained his desired 25%. For more information on our
investment in Bill’s medical components company, click
here
.

Performance Based Stock Awards

Performance shares are equity awards, typically given to senior managers provided certain specified performance criteria are met, such as EBITDA targets or appreciation in a company’s enterprise value.

When properly constructed, performance-based stock awards
closely align management interests with that of the Company’s
shareholders.  They also can be used in
bridging value gaps whereby selling shareholders are expecting a substantial
increase in value due to, for instance, the end of recessionary conditions,
anticipating outsized growth from the launch of new customer programs,
etc.   We commonly use a flavor of this
type of program to reward selling shareholders and management for exceeding
mutually defined expectations.  MCM
recently used this program to get a deal over the finish line.  The company is a provider of technically
exacting metal working services catering to aerospace and medical
customers.  The CEO and sole shareholder
was anticipating 20%+ EBITDA growth within 18 months of closing and didn’t want
to be short changed by prematurely selling a controlling interest.  Consequently, we were approximately $5
million apart; however, we were able to get a deal done by agreeing to award a
meaningful additional amount of Performance Based Stock provided certain
[EBITDA] requirements were met, further aligning our collective interests.  We included the broader executive team,
comprised of a younger, talented group who would not otherwise be in a position
to acquire equity , in the Performance Based Stock Award pool, creating further
alignment throughout the organization.

Summation

An ill-timed economic downturn can throw a wrench in a
business owner’s plans to diversify his/her wealth by suppressing earnings, and
consequently, eroding the value buyers assign to their Company. Fortunately, a
multitude of options exist to bridge valuation gaps when they arise, each with
its own nuances which can be tailored to an individual’s goals and comfort
levels. Please feel free to contact us if you would like a more in-depth
discussion on utilizing these creative M&A deal structures.


Source: https://www.mcmcapital.com/2020/04/creative-deal-structures-for-extraordinary-times/

Private Equity

Ordermark Funded $120M to Expand its Virtual Business

Virtual

Ordermark is based in Los Angeles, CA, one of the leading online ordering management solutions for restaurants and virtual restaurant concepts.

Ordermark was funded $120 million series C round funding. The funding was led by prominent technology investor SoftBank Vision Fund and joined by returning investor Act One Ventures. The grant will use to help more restaurants transition to online ordering during the pandemic and beyond.

The company’s software consolidates incoming orders from multiple platforms and sends them to a single printer. Ordermark also operates a company

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The post Ordermark Funded $120M to Expand its Virtual Business appeared first on Funded.com.

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Ordermark is based in Los Angeles, CA, one of the leading online ordering management solutions for restaurants and virtual restaurant concepts.

Ordermark was funded $120 million series C round funding. The funding was led by prominent technology investor SoftBank Vision Fund and joined by returning investor Act One Ventures. The grant will use to help more restaurants transition to online ordering during the pandemic and beyond.

The company’s software consolidates incoming orders from multiple platforms and sends them to a single printer. Ordermark also operates a company called Nextbite, a portfolio of 15 readymade virtual brands such as CraveBurger, Firebelly Wings, and HotBox by Wiz, a collaboration with rapper Wiz Khalifa. Restaurants can offer these delivery-only brands out of existing kitchens, opening up additional revenue streams.

Jeff Housenbold, the Managing Partner at SoftBank Investment Advisers, said. They believe Ordermark is a leading technology platform and innovative virtual restaurant concepts transform the restaurant industry. And they are excited to support their mission to help independent restaurants optimize online ordering and generate incremental revenue from under-utilized kitchens.

The rise of ghost kitchens and virtual restaurants, often referred to as the 3rd wave of food delivery, have paved the way for a broader addressable market for online food delivery.

The statement of Alex Canter, the chief executive officer behind Ordermark 2020, has been a tough year for restaurants. That’s why they are focus on providing products and services to help keep their doors open. This funding allows them to offer more restaurants with innovative ways to reach more consumers.

By: K. Tagura

Author statement:

Funded.com is the leading platform for accredited investors network worldwide. We monitor and provide updates on important funding events. Angel Investors and Venture Funding can be a key growth for a startup or existing business. Whether it is a first, second or third round financing having a strategic alliance with an Angel Investor or Venture Capital financing can propel a business to the next level and give the competitive edge.

Source: https://www.funded.com/blog/2020/10/ordermark-funded-120m-to-expand-its-virtual-business/

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Private Equity

Alternative Investments/ESG: Amundi Launches Sustainable ETF With Exposure To Japanese Stocks

The Amundi Index MSCI Japan SRI UCITS ETF offers exposure to large and mid-cap companies with outstanding Environmental, Social, and Governance (ESG) ratings in the Japanese market. The new ETF is an extension of Amundi’s range of sustainable ETFs.

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Alternative Investments/ESG: Amundi Launches Sustainable ETF With Exposure To Japanese Stocks

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Amundi’s new ESG ETF invests in large and mid-cap Japanese stocks.

The Amundi Index MSCI Japan SRI UCITS ETF offers exposure to large and mid-cap companies with outstanding Environmental, Social, and Governance (ESG) ratings in the Japanese market.

The new ETF is an extension of Amundi’s range of sustainable ETFs. (ETF Stream)

Amundi Index MSCI Japan SRI UCITS ETF

The ETF tracks the performance of the MSCI Japan SRI Filtered ex Fossil Fuels Index, which in turn is an equity index based on the MSCI Japan Index (the parent index). The index is representative of the large and midcap stocks of the Japanese market.

It excludes issuers involved in Nuclear, Tobacco, Thermal Coal, Alcohol, Gambling, Controversial Weapons, Conventional Weapons, Civilian Firearms, Oil & Gas, Fossil Fuels, Genetically Modified Organisms (GMO), and Adult Entertainment.

Its total expense ratio is 0.18%. No performance fees apply.

It is an accumulation fund and will be managed by Amundi Luxembourg SA, an entity that is part of the Amundi group.

The ETF is market-cap weighted and includes a 5% capping on issuer weights. It comprises 68 stocks, compared to 320 names in its parent index.

The fund’s largest holding is Nintendo with 5.6% weighting ahead of Daikin Industries with 5% and Sony with 4.7%.

It is listed on the Deutsche Boerse and Euronext Paris.

ESG ETFs continue record run

European ESG ETFs continued their strong trend and set a record for assets gathered in a month (€3.9 billion), according to the latest Money Monitor report from Lyxor ETF for September.

Related Story:  Amundi Expands ESG Range With Two New ETFs

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Source: https://dailyalts.com/alternative-investments-esg-amundi-launches-sustainable-etf-with-exposure-to-japanese-stocks/

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Private Equity

Artificial Intelligence: Intel First To Deploy AI “On Edge” In Space

Intel (NASDAQ: INTC) has the distinction of launching the first onboard AI processing chip into space. Earlier this month, the European Space Agency and Intel announced the successful deployment in space of PhiSat-1, the first-ever satellite with onboard AI-processing capabilities. Launched from a rocket dispenser on September 2, the PhiSat-1 is positioned about 530 km above our heads, moving at a speed of 27,500 km per hour in a sun-synchronous orbit.

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Artificial Intelligence: Intel First To Deploy AI “On Edge” In Space

https://dailyalts.com/wp-content/uploads/2020/10/Intel-AI-Satellite-4-scaled.jpg

A satellite the size of a cereal box, carrying a camera and an AI chip, is now in orbit.

Intel (NASDAQ: INTC) has the distinction of launching the first onboard AI processing chip into space. Earlier this month, the European Space Agency and Intel announced the successful deployment in space of PhiSat-1, the first-ever satellite with onboard AI-processing capabilities. (Business Insider)

Launched from a rocket dispenser on September 2, the PhiSat-1 is positioned about 530 km above our heads. It is moving at a speed of 27,500 km per hour in a sun-synchronous orbit.

PhiSat-1

The satellite’s objective is to monitor polar ice and soil moisture, as well as to test inter-satellite communication systems.

The satellite carries a hyperspectral-thermal camera and an Intel Movidius™ Myriad™ 2 Vision Processing Unit (VPU). The latter is responsible for the AI heavy lifting operations onboard the spacecraft.

Myriad’s immediate function is to curate the huge mass of data captured by the camera.

AI at the ultimate edge – space

The big problem facing the scientists was the sheer volume of data generated by the hi-fidelity camera onboard the PhiSat-1. The camera unfortunately does not know how to differentiate between a cloudy and clear environment.

It, therefore, takes a large number of photographs that are useless because, at any given time, clouds envelop two-thirds of the earth’s surface.

The junk photos consume precious internet bandwidth to send down to earth. After all that, scientists would likely delete the unclear photos.

The scientists decided to use onboard AI (also known as “on edge” processing) to curate the photos. Myriad-2 would examine the images, trash the useless ones, and send only the good ones to earth.

By discarding the cloudy images at the source, they saved nearly 30% of bandwidth.

“Artificial intelligence at the edge came to rescue us, the cavalry in the Western movie,” says Gianluca Furano, data systems and onboard computing lead at the European Space Agency.

“Space is the ultimate edge,” says Aubrey Dunne, chief technology officer of Ubotica, the Irish startup that built and tested PhiSat-1’s AI technology. “The Myriad was absolutely designed from the ground up to have an impressive compute capability but in a very low power envelope, and that really suits space applications.”

Ubotica worked with cosine, the maker of the camera, in addition to the University of Pisa and Sinergise.

After three weeks of testing, the team could establish that Intel’s Myriad AI onboard the PhiSat-1 was working fine.

ESA then announced “the first-ever hardware-accelerated AI inference of Earth observation images on an in-orbit satellite.”

Satellite-as-a-service!

Scientists can now visualize multiple applications of AI on satellites.

For example, the satellite, during one orbit, could switch from spotting wildfires on land to rogue ships or environmental accidents at sea such as oil spills.

It could measure crops and soil moisture over farms and forests, and assess the ill effect of climate change on melting ice caps.

Related Story:   Satellites and AI Could Together Predict Wildfires Accurately

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Source: https://dailyalts.com/intel-first-to-deploy-ai-on-edge-in-space/

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