4th Floor Equity Group, Ltd.

What makes for a good investment and how do you decide to proceed?
How do you determine the value of companies?
How do you structure deals?
How does a recapitalization differ from a sale transaction?
Do you have a fund/are you a private equity firm?
What factors besides price are important for a seller to consider?
Do you need controlling ownership in a transaction?
What is a business owner's typical role after a transaction?
Do you get involved with managing a business?
How are employees treated after a transaction?
What happens if things don't turn out as planned?
How do you add value to companies?
How are you different from other holding companies?

What makes for a good investment and how do you decide to proceed?
In addition to a close fit with our investment criteria, we believe it's important to be in philosophical alignment with our fellow owners and company managers. We seek out situations where all parties have similar transaction expectations and are committed to seeing it through. We are prepared to quickly respond and work toward a transaction with situations that fit this profile.

How do you determine the value of companies?
Many factors go into determining an appropriate purchase price for a company. Akin to p/e multiples on public companies, the enterprise value of private companies is most often quoted on a multiple of trailing 12 month EBITDA (earnings before interest, taxes, depreciation and amortization). While each situation must be evaluated for its individual merits, multiples for companies with $1 - $5 million EBITDA tend to range from <4 to >6 times EBITDA. Among the more important factors impacting multiples are industry position and competitive dynamics, growth trends and prospects, management depth and caliber, customer diversity, capital expenditure and working capital requirements and, of course, the level of earnings.

How do you structure deals?
Each deal is carefully tailored to the circumstances of the transaction and needs of the business. Most deals will include a combination of lower cost bank debt along with equity and subordinated debt, seller debt or earn-outs. While there is obviously an incentive to use lower cost sources of capital first, we take a conservative approach towards capital structure to ensure adequate funding for growth initiatives and to cushion against unforeseen shortfalls.

How does a recapitalization differ from a sale transaction?
A recap may be thought of as a partial sale. It is the simultaneous restructuring of a company's capital structure and equity ownership, often facilitated by a private equity firm. Recaps can take a variety of forms, but are a great means for owner-managers to generate significant cash liquidity, ongoing ownership and retained operational control of their business. It is not unusual for an owner to realize 60% - 75% of the value of their business in cash along with 1-20% or more retained equity ownership in a recap transaction. Moreover, owners can realize even greater cash liquidity on the subsequent sale of their retained ownership.

Do you have a fund/are you a private equity firm?
No. 4th Floor Investments is categorized as a fund-less sponsor, however on certain transactions we do partner up with capital and/or mezzanine/equity groups. Our group has the deep experience, network and resources to instill confidence in sellers to ensure the certainty of closing.

What factors besides price are important for a seller to consider?
Though price is certainly important, we believe it's critical for a seller to choose a buyer they trust. The decision can impact how, when, and on what terms the transaction closes as well as what happens with employees and the business post closing.

While so-called strategic buyers may pay premium prices, an acquired business can find itself in uncertain territory if the new parent experiences either strategic or leadership changes that radically impact the business. At 4th Floor Investments, we're interested in buying businesses intact. Since we along with management are the owners and decision makers, you know right up front our interests and intentions.

Do you need controlling ownership in a transaction?
No, but post-close business plans are to be clear and our vote has to matter and have weight. The economics and dynamics of each deal will generally drive the ownership levels of each party to the transaction.

What is a business owner's typical role after a transaction?
Some business owners look to retire after selling their firms. Others just want some cash liquidity to diversify their net worth and enable them to feel more financially comfortable in growing their companies but have no intention of slowing down. Since we recognize the value of good management, we are pleased to consider all proposals from owners and managers for post-closing roles.

Do you get involved with managing a business?
This is dependent on the situation, but generally not. As investors, our business is one of investing in companies and helping to facilitate their growth and development. We look to partner with incumbent management teams or recruit from the outside in the absence of continuing leadership. In either case, it is the management team that will run the day-to-day operations of the firm. We play a supporting role, and will even lead efforts if the situation merits.

How are employees treated after a transaction?
We have found that the best performing businesses are ones with strong corporate cultures. A strong culture starts from the top and relies in large part on fostering an environment of respect and opportunity throughout the organization. We are big believers in operating autonomy (as long as strategic goals are being met) and the alignment of financial interests. Our transactions will typically include equity ownership opportunities and formal, but easy to measure, compensation plans for key managers.

What happens if things don’t turn out as planned?
We recognize that businesses typically go through a host of unforeseeable ups and downs as they evolve. When problems develop we roll up our sleeves, but look first to our key managers for solutions. We like to think that our sustainability approach helps to foster an environment of problem solving. In cases that may benefit from our capabilities, we believe that our business acumen, experience and professional network can address challenges, large or small.

How do you add value to companies?
Our role is one of marrying good businesses with the resources to achieve their potential. While many companies are already well-run, we often find that our bias for growth enables us to support management in seizing opportunities. In some cases, this is as straightforward as backing a management team to buy a business from an owner that may have become risk averse over the years. The operating disciplines such as budgets and the establishment of equity incentive plans coupled with the professional network we can bring to bear help a company tap into its opportunities and address challenges. In other cases, we take a more active role, helping to source and consummate the acquisition of competitors. We are firm believers that ours is an apprentice business which takes many years to develop the right professional networks, working with a broad spectrum of businesses to achieve a formula for success.

How are you different from other holding companies?
There's no question the M&A industry has a number of high caliber firms. Since the stakes are so large and the relationships so lengthy and involved, it's critical for sellers and managers to select the right fit. When it comes to lower market M&A deals in the USA, we believe few firms can match our combination of passion, diversity, experience, capabilities and track record.