As an investment banker for some 26 years who has sold dozens of middle market privately held companies to private equity groups throughout the U.S. and Canada, Bob Scarlata will describe for us how private equity groups make their money and how private business owners can benefit and profit from their professional management strategies.

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3. • How Did Mitt Romney Accumulate One Quarter of a
Billion Dollars in Net Worth as the Founder, Owner,
Manager & Investor in a Private Equity Group?
• What Lessons Can Private Business Owners Take Away
From The Strategies That Created Such Wealth?

4. Fees
Leverage
Growth
Carried Interest
Best Practices
Investor
Certain Tax Preferences

5. Who Invests in Private
Equity Groups
• Pension Funds
• Endowment Funds
• High Net Worth Individuals
• Insurance Companies and Banks
• All in search of higher investment returns….

6. Private Equity Group
Overview
• 2,670 PEGs with HQ in the U.S.
• 500 Currently Raising Funds in the U.S.
• 15,680 PEG Backed Companies in the U.S.
• 8.1MM Employees
• Investable Funds Globally - $372Billion
• Avg Equity Investment +/- 40%

7. Private Equity Group
Overview
• $122Billion New Capital Raised in ‘2011 in the U.S.
• $144Billion invested so far in ‘012 in 1,700 US
Companies
• Over $1Trillion distributed to PEG investors over
3 decades
• www.PEGCC.org (Private Equity Growth
Capital Council)

8. Back to Mitt Romney
& How He Made One Quarter of a Billion Dollars
Fees
Typically 1% of the total funds under management per year
Other potential fees include acquisition & divestiture fees
Board Fees: Per year, per company for managing the
enterprise over & above fund management fees
Carried Interest
Once the investors get back 100% of their invested capital the PEG
retains (typically) 20% of the gain thereafter. This is where the
“juice” is.

9. Back to Mitt Romney
& How He Made One Quarter of a Billion Dollars
Investment Income
Often the best PEG’s co-invest with their investors and so
they enjoy the same returns on their invested dollars as
their investors
Taxes
Fee income is taxed as ordinary income.
Carried interest is taxed at long term capital gains rates
(15% currently vs 35% for ordinary income….compound
those savings over time)

10. How Do PEG’s Increase the
Value of Their Investments
• Leverage: Equity investments avg 40% and the balance
is borrowed at much lower rates [note: each investment
must stand on its own]
• Acquisitions: Once a PEG has a “platform” additional
acquisitions are made that allow for synergies
• Organic Growth: Employ best practices to increase
revenue & earnings
• Increase in Multiple Of Their Holdings: Improvements to
decrease risks and improve long term performance
• Application of Best Practices:

11. From Day One Private Equity Groups Are
Sellers And They Manage There Manage
Their Businesses Accordingly

12. PEG Purchase Criteria
Internal Rate Of Return
Widget Mfg Co
Internal Rate of Return Analysis
EBITDA $964,000
Deal Factor 4
Deal Value $3,856,000
Debt Factor 50.00%
Annual Capex -$100,000
EBITDA Growth 5%/year
Discount Rate 5.00%
IRR 27.78%
Debt/Equity 50.00%
Total Debt $1,928,000
Total Equity $1,928,000
Loan Amort Rate 5.00%
Loan Amort Years 7

13. PEG Purchase Criteria
Internal Rate Of Return
Widget Mfg Co Widget Mfg Co
Internal Rate of Return Analysis Internal Rate of Return Analysis
EBITDA $964,000 EBITDA $964,000
Deal Factor 4 Deal Factor 5
Deal Value $3,856,000 Deal Value $4,820,000
Debt Factor 50.00% Debt Factor 50.00%
Annual Capex -$100,000 Annual Capex -$100,000
EBITDA Growth 5%/year EBITDA Growth 5%/year
Discount Rate 5.00% Discount Rate 5.00%
IRR 27.78% IRR 22.57%
Debt/Equity 50.00% Debt/Equity 50.00%
Total Debt $1,928,000 Total Debt $2,410,000
Total Equity $1,928,000 Total Equity $2,410,000
Loan Amort Rate 5.00% Loan Amort Rate 5.00%
Loan Amort Years 7 Loan Amort Years 7
Annual 35% Tax Annual Annual 35% Tax Annual
Year Investment Debt Annual on Net Inc After Tax Year Investment Debt Annual on Net Inc After Tax
and/or Residual Payments EBITDA after IDA Capex Cash Flow and/or Residual Payments EBITDA after IDA Capex Cash Flow
0 -$1,928,000 $0 $0 $0 $0 -$1,928,000 0 -$2,410,000 $0 $0 $0 $0 -$2,410,000
1 $0 -$333,197 $964,000 -$249,900 -$100,000 $280,903 1 $0 -$416,496 $964,000 -$249,900 -$100,000 $197,604
2 $0 -$333,197 $1,012,200 -$266,770 -$100,000 $312,233 2 $0 -$416,496 $1,012,200 -$266,770 -$100,000 $228,934
3 $0 -$333,197 $1,062,810 -$284,484 -$100,000 $345,130 3 $0 -$416,496 $1,062,810 -$284,484 -$100,000 $261,831
4 $0 -$333,197 $1,115,951 -$303,083 -$100,000 $379,671 4 $0 -$416,496 $1,115,951 -$303,083 -$100,000 $296,372
5 $0 -$333,197 $1,171,748 -$322,612 -$100,000 $415,939 5 $0 -$416,496 $1,171,748 -$322,612 -$100,000 $332,640
6 $0 -$333,197 $1,230,335 -$343,117 -$100,000 $454,021 6 $0 -$416,496 $1,230,335 -$343,117 -$100,000 $370,722
7 $4,970,697 -$333,197 $1,291,852 -$364,648 -$100,000 $5,464,704 7 $6,213,372 -$416,496 $1,291,852 -$364,648 -$100,000 $6,624,080
Totals $3,042,697 -$2,332,379 $7,848,896 $5,724,601 Totals $3,803,372 -$2,915,472 $7,848,896 $5,902,182
IDA = Interest, Depreciation, and Amortization = $250,000/year

14. Strategies for Maximizing Value:
Typical PEGs vs. Typical Business Owners

15. Strategies for Maximizing Value:
Typical PEGs vs. Typical Business Owners
Strategies for Maximizing
Value:
Typical PEGs vs. Typical
Business Owners

16. Strategies for Maximizing Value:
Typical PEGs vs. Typical Business Owners

17. How Do PEG’s Increase the
Value of Their Investments
• Leverage: Equity investments avg 40% and the balance
is borrowed at much lower rates [note: each investment
must stand on its own]
• Acquisitions: Once a PEG has a “platform” additional
acquisitions are made that allow for synergies
• Organic Growth: Employ best practices to increase
revenue & earnings
• Increase in Multiple Of Their Holdings: Improvements to
decrease risks and improve long term performance
• Application of Best Practices:

18. To Summarize
1) Private business owners can and should copy the “best
practices” of Private Equity Groups
2) Business Owners can, and many do, make more after-tax
profit in the aggregate than during their entire period of
ownership (the “juice” is in cashing out)
3) The #1 Best Practice which drives all others is “Be
Prepared To Sell At All Times”
4) A Private Business is an illiquid asset. Typically, it takes a
great deal of time, effort, money and talent to build
wealth. This wealth can evaporate rapidly.
5) Owners need not “sell out” to diversify their net worth.
They can take on a partner, a Private Equity Group.

19. Next Steps
1) Personal Assessment
2) Corporate Assessment
a. Valuation including the value of
deficiencies and of opportunities
b. Industry Data Comparison
c. Analysis of potential exit strategies
3) Implement the highest dollar value tasks
4) Implement the tasks designed to minimize family risk
(“Defend Your Wealth”)
5) Executing This Plan Will Result in Substantially Greater
Profit Now With Less Risk

20. Thank You For Attending
This Presentation
For a Free Copy of the Book Please Email
BScarlata@StrategicTransitionPartners.com