Once the decision has been made to tender equity after appropriate debt structures have been utilized; then mezzanine and recap equity alternatives should be considered.

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HRTech Fall 2017 Market Update
Founder and Shareholder Liquidity Alternatives
Having been a Founder, Shareholder, Investor, and Operator in a dozen HRO and HRTech organizations over the
past 20 years; at Ephor we make it a priority to evaluate and take an “inventory” of the current financing markets
that enable shareholders and equity participants to understand the current and near‐term liquidity options.
As we near year‐end 2017 and embark on our organizational and personal financial planning for 2018, there is no
better time to understand these market dynamics. This is particularly important in that it is well known that there
is only a short list of American publicly traded HR technology companies, hereinafter referred to as “HRTech”, that
ever achieve a successful IPO.
At Ephor we suggest that this limited “public” liquidity option will be reserved for only the top 1% of the business
models in the near‐term. Therefore, as fiduciaries we provide the following alternatives review and commentary,
to guide your year‐end financial planning.
Consistent with past historical market trends the liquidity
alternatives that will continue to be most prevalent will include non‐
bank financing: mezzanine financing alternatives, minority
ownership recapitalizations and majority ownership
recapitalizations, and obviously the outright sale of the company
equity. New entries into the market include family wealth offices,
and other alternative asset investment groups.
In that most of us are very familiar and currently utilize the
structured debt/bank financing liquidity option, in this article we focus on those alternatives that involve the
liquidity of equity: mezzanine, minority recapitalizations, and major recapitalizations. Our objective is to enable
you to effectively think through these alternatives as they relate to your specific shareholder situation.
The Ephor Philosophy on Shareholder Value and Equity:
We at Ephor have learned over our many years that as founders and shareholders to treat our equity as “the most
valuable asset” and never treat it as a “commodity”. Said differently, as long as we are convinced and committed
that our organizations business models can improve, grow and consistently continue to create shareholder value;
we should only “tender” our equity when either there is “an optimal timing or risk issue” or for whatever reason
we have no other choice. Ephor’s philosophy therefore suggests that debt financing should be the initial source of
wealth transfer options. However, once the decision has been made to tender equity after appropriate debt
structures have been utilized; then the below equity alternatives should be considered.
“Over the decade we’ve made mistakes
others should avoid, and we’ve
celebrated deals that have created ALL
constituents wealth.”

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Mezzanine Financing Shareholder Liquidity Option
Overview: The word “mezzanine” utilized in the financial engineering arena, describes a layer of financing that
“sits” between classical asset based or senior bank debt financing, and the equity component of the company’s
balance sheet. Often there is a debt component that is tied to an equity component that generally represents a
small minority equity interest.
Fit: This alternative best fits organizations that have single digit revenue growth rates with an established business
model which have illustrated profitability scalability as evidenced by double digit EBITDA levels (minimum ~$1M).
Terms: Debt component interest rates are generally in the low teen’s: equity component range from 5% to 25%.
Duration of the investment are generally 3 to 4 years.
Governance Requirements & Considerations: Generally, a formal governance process is required that includes a
Board of Directors with the financial sponsor having a seat and observer rights. However, it is also quite common
for an Executive Chairman (“Board of One model”) to be required in place of a formal board construct. In that it is
“minority interest” investment, generally minimal day to day effect is inserted on the business model and current
management team.
Shareholder Considerations: This alternative provides wealth transfer through the combination of debt and equity
therefore it is very “equity efficient”. Likewise, the instrument provides a meaningful wealth transfer amount that
can be ~3 to 3.5x times trailing 12‐month EBITDA performance, therefore it is very attractive to satisfy near‐term
liquidity objectives while maintaining significant equity for long‐term wealth creation.
Potential Sponsors: Mezzanine providers:
 There are a dozen quality “mezz shops” in North America that have successfully invested in the HRO sector.
 SBICs are another active participant in the sector; with at least 2 such providers in every region of America.
 Family Wealth Offices of recent have entered the market and are becoming more prevalent as sources of
more “patient capital”.
“The best capital financing partner is in the long‐term best interest of the
company and ensures the business model is scalable, the team is incented to
perform, and a market leadership position is created.”

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Minority Ownership Recapitalization
Overview: A minority “recap” of the company is defined as 49% or less of the company’s equity and voting rights
are tendered for wealth transfer. This is a very common and often executed upon alternative for organizations
that have illustrated repeatable revenue growth while presenting consistent and increasing recurring EBITDA
performance. Generally, the wealth transfer aspect of a minority recap is combined with an infusion of growth
capital and part of an acquisition financing event. However, it is also common as an exclusive wealth transfer
transaction. The most relevant benefits of this alternative include: maintaining governance control and granting
equity shareholders “a second bite at the apple”.
Fit: This alternative generally best aligns to organizations that have greater than single digit revenue growth rates,
combined with an established business model which has illustrated profitability scalability as evidenced by
consistent and recurring EBITDA levels of performance. (Minimum ~$1M).
Terms: Generally, 20% to 49% of the company ownership shares and voting rights are tendered or sold. In general,
the shareholder agreement includes customary minority shareholder rights, which are negotiated as part of the
transaction structure. Most commonly the participant financial sponsors provide a 3 to 5 year duration as their
investment timeframe.
Governance Requirements & Considerations: A formal governance process is generally required through a formal
Board of Directors, with the minority financial sponsor having 1 to 2 seats of a 5 person board or a minority
number of seats, which may also include one observer seat as well. Note however Ephor has seen participated in
Board of One concepts that have proven to be quite successful in this alternative.
Shareholder Considerations: This alternative generally provides a substantive wealth transfer portion that can
provide an enterprise value of 5 to 7 times trailing twelve‐month EBITDA in the HRO sector, combined with
maintaining control and the attractive “second bite at the apple” to capitalize on the future. This alternative is
most attractive to existing shareholders that have investment or wealth transfer objectives that are required in
both the very near‐term and term and long‐term.
Potential Sponsors: The financial sponsors here are Private Equity shops that specialize in “minority recaps” of
technology enabled companies and other “buyout oriented” Private Equity groups that have experienced success
in the sector. Family Wealth Offices have over the past few years entered the market and illustrate more of a
“patient capital’ demeanor.
“The selling and the timing of your equity participation is potentially the most
important and relevant personal financial decisions of your life.”

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Majority Ownership Recapitalization
Overview: The “majority recap” alternative is defined as when the shareholders tender greater than 51% of the
entities shareholder interest and voting rights. However, most common is that greater than approximately 70% is
tendered, because at that level of ownership transfer is generally more attractive to the institutional financial
sponsors. This alternative is very common where the company business model is proven, scalable and has
provided historically sustainable revenue and EBITDA growth rates, where the company internal capital creation is
simply not sufficient to maximize the market opportunity. Again, as is the case in the minority recap arena this
wealth transfer alternative is often combined with an infusion of growth capital and part of an acquisition
financing event.
Fit: This alternative best fits organizations that generally have an institutional worthy double‐pdigit revenue
growth rates and EBITDA in the greater than $1.2m range that is sustainable and recurring. Barriers to a majority
recap can include significant customer concentration issues, lack of a scalable management team or a “bankable”
experienced proven “sector executive” involved in the business, or a past governance process that would not
enable to pass the due diligence requirements of the financial sponsors.
Terms: Normal equity tendered amounts are generally 70% to 90+% of the company ownership shares and voting
rights are sold. The resulting shareholder agreement includes most customary majority shareholder rights, and
majority control voting considerations, which are negotiated as part of the transaction structure. Investment
timeframes for the participant financial sponsors are generally 4 to 6 year hold periods.
Governance Requirements & Considerations: A formal Board of Directors will be required that generally includes 5
members (though not uncommon for 7 seat boards) where the majority of the seats, 3 in a 5 member board are
appointed by the “controlling” shareholder group, with the founding shareholders generally having 1 seat. The
remaining seat(s) most generally goes to a knowledgeable “outsider”.
Shareholder Considerations: This alternative provides substantive wealth transfer that can provide an enterprise
value of 5 to 7x times trailing twelve‐month EBITDA in the HRO sector, however loss of control and no significant
second bite are the trade‐offs in this wealth transfer alternative. This alternative is most attractive to existing
shareholders that are aging, or need to diversify their personal investments, or feel that current management
simply does not have the skill or knowledge to take the business model to the next level.
Potential Sponsors: Financial sponsors in the “buyout or “majority recap” arena have traditionally been Private
Equity providers, and of recent have included large family offices. In that the competition for buyouts has
escalated in the past 10 years or so, most of Private Equity is now more specialized in certain sectors.
“For shareholders to create wealth at exit, they must seek out the select few
equity providers that have successful experiences in the HRO / HRTech sector,
which are therefore: Useful Capital.”

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In summary, we, at Ephor, having been a participant in the HRTech sector now for more than 20 years have utilized
and been a participant in all of the aforementioned alternatives (and a few others as well) at various stages of our
activities. We have experienced all the goods and challenges of each of these financing option.
Our guidance is; each of you should carefully evaluate your specific situation against these alternatives and when
both the market and the company’s “timing is right”, seek outside assistance in the application of these
alternatives. The selling and the timing of your equity participation is potentially the most important and
relevant personal financial decisions of your life.
WHAT WE DO
Ephor Group is an operating and a co-investment partner for entrepreneurs
and financial sponsors to realize their shareholder objectives.
PORTFOLIO COMPANY FOCUS AREAS
 Differentiated business models with meaningful growth potential
 BPO & Technology Enabled Business Services
BPO Technology Services
 Healthcare
 MSO
 HRO
 FAO
 Centers
 Backoffice
 Sales
 Payroll
 Benefits
 Insurance
 HRTech
 Cloud
 Implementation
 Managed Services
THE EPHOR PROVEN APPROACH
We start every partnership with a pragmatic analysis of your situation from
a holistic, multi-functional, shareholder and operator perspectives,
compared to the market opportunity to create wealth.
CONTACT EPHOR
Charles Bedard, Director
214-702-6427
Bedard@EphorGroup.com
@EphorG

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Garry E. Meier
About Our Founding Partner
Mr. Garry E. Meier is highly recognized as a thought-leader within
the business services, financial services and technology sectors. He
is a noted operator, speaker, investor, board member, and
chairman.
Mr. Meier has served on the advisory board of the U.S. Senate
Small Business Committee, where he focuses on issues facing
small businesses in the “New Economy”, and has recently been a
senior advisor to the U.S. Commerce Department on small
business affairs. Most recently Mr. Meier as served as the Trump
Administration Team Leader for the Outsourcing Sector.
Garry currently focuses the majority of his time on providing strategic guidance to
Institutional Investors, “Sector Impact” Transformational Business Models, and Board of
Directors of “High Potential” organizations.
Garry's Career
A 43+ year career which has been exclusively focused on creating, developing, investing and
operating “Transformational Business Models” in the Business Services, Technology Services
and Financial Services sectors.
Mr. Meier illustrates particular expertise in the areas of Corporate Governance, Strategic
Management, Capital/Fund Raising, Financial Engineering,, Corporate Development, and
Shareholder Wealth Creation and Exit Strategies.
This knowledge and expertise has been instrumental in the creation of several such notable
and branded high growth organizations such as EdwardJones, First Financial Management
(FFMC), Technology Services Solutions, (TSS), and Medaphis (MEDA), among others.
Over the past 2 decades, Garry has served as the Chairman, or Executive Chairman of 9
different both public and private organizations in the services sector. He is most proud that
his involvement in these successful organizations has resulted in approximately 5,500 new
jobs.
"More important than ever before, and today and into the
future, the creation and development of CEO Entrepreneurs
are the key to job creation, and wealth creation."