1. BUSINESS VALUATIONS FOR EARLY STAGE COMPANIES Avenue M Advisors℠, Inc.

2. AVENUE M ADVISORS A boutique, national business valuation and consulting services company Business valuation services include: – Investment Valuations – Tax Related Valuations – Litigation Valuations Compliance with USPAP and NACVA as well as meets requirements of IRS, SEC, ERISA, DOL

3. AVENUE M ADVISORS Consulting Services include: – Pro Forma Projections with Defensible Assumptions – Due Diligence and Quality of Earnings – Preparation of a Company for Sale (People, Processes and Systems) – Operations and Process Improvement – Interim CFO Services

4. WHY DO I NEED A BUSINESS VALUATION? Sale of your business − Asset Valuation Seeking Financing (from Bank or Investors) − Equity Valuation Company issues stock options, restricted stock or completes a round of Preferred Financing (Series A or B) − Business Valuation is required to comply with IRC §409A Company has intellectual property (patents, trademarks, copyrights, proprietary software, etc.) IP Valuation

5. A BUSINESS VALUATION IS: Valuation – an opinion of value of the tangible and intangible assets of a business. It is performed as of a specific time period by an experienced and accredited valuator. What are the components of a business valuation?

6. BUSINESS VALUATION COMPONENTS Identify the Purpose and Use of the Valuation Define the Appropriate Standard of Value Describe the Definition of Valuation Problem Classify the Approaches to Value State the Effective Date Identify the Intended Users Confirm the Conclusions of Value

7. PURPOSE AND USE OF THE VALUATION Define the purpose and use for the valuation. –Is it for Investment purposes? –Are you seeking Financing? –Are you issuing Employee Stock Incentives? –Is it for a Buyout of a Shareholder interest? What is the use of the valuation? –Identifies whether a high or low value is being sought.

8. STANDARDS OF VALUE Fair Market Value – The most probable price that a business would bring in a competitive and open market under all conditions requisite to a fair sale where the buyer and seller act prudently and knowl­edgeably and assumes the price is not affected by undue stimulus. May include discounts for lack of control and/or marketability. Fair Value – is essentially the pro rata Fair Market Value of the entire company without discounts for lack of control and/or lack of marketability applied. Investment Value – the value to a particular investor based upon their stipulated investment requirements.

9. DEFINITION OF VALUATION ISSUE Identify what is being valued. – Assets, Equity, IP, etc. Identify the approaches to value that will be used to value the Company. – Market Comparisons, Income Approach, Discounted Cash Flow Analysis, Replacement Cost Approach Identify Company issues that may affect the value. (i.e., litigation, contingent liabilities, subsequent sales, etc.) Identify whether discounts/premiums will be analyzed for the subject being valued.

10. APPROACHES TO VALUE AN ESTABLISHED COMPANY Market Approach – Private Company Databases – Public Company Databases Income Approach – Strengths and Weaknesses of Company – Discounted Cash Flow Analysis – Ibbotson’s Build-Up Approach – Excess Earnings Analysis

11. APPROACHES TO VALUE AN EARLY STAGE COMPANY Discounted Cash Flow Analysis Replacement Cost Approach Reasons: No other way to measure the Company. – Measure it by its capital investment or – Measure it by what it is expected to produce

12. MULTIPLES IN 2013 Multiples vary by type of business and the industry as well as the condition of the business. The valuation multiples on the next page was prepared by an investment bank. The multiples are on the high side. We’re seeing multiples between 3-5X EBITDA for most companies. For technology and healthcare, we’re seeing anywhere from 8-11X EBITDA multiples.

14. VALUE OF A BUSINESS VALUATION FOR ENTREPRENEURS Independent analysis of the value of your business – Provides credibility and support for negotiations with potential buyers – Provides compelling reasons to support stated purchase price for the business Barometer of how well the business is doing – Shows the strengths and weaknesses of the business so you can focus the company on improving weak areas

15. VALUATION EXAMPLES

16. SAMPLE OF BANK FINANCING VALUATION Company provides a line of patented microdermabrasion products. The Company experienced a decline in market value due to a steady decline in revenues for the past few years. Company entered into an agreement with potential buyer with a purchase price of $1.5M for the business. Buyer was seeking bank financing for the transaction. Bank required a business valuation to support the loan amount the bank would provide to the buyer for the business.

17. SAMPLE OF BANK FINANCING VALUATION The assets in the business were approximately $700,000. The intangible asset value (IP and Goodwill) in the company was approximately $2,700,000. – The discrete IP consisted of several patents the Company owned. – The non-discrete (goodwill) consisted of the product lines and the diversity of the customer base.

18. SAMPLE OF BANK FINANCING VALUATION The fair equity value of the Company was valued at $3.4M USD for the tangible and intangible assets. The business received a multiplier of 4X EBITDA. The feasibility test showed a 20.74% ROI which is reasonable given the decline in revenues and market value.

19. SAMPLE OF BANK FINANCING VALUATION The valuation provided immense value for the buyer – who received a great deal on the business and a high ROI. The seller lost out of at least $2M in his negotiations with the buyer because he did not understand the value of the intangible assets in his business.

20. SAMPLE OF WEBSITE/DOMAIN Online advertising portal desired to have a valuation for a potential sale. Website – www.irs.com.www.irs.com Company received millions of hits and converted them to sales. The Company was valued at $16M.

21. SAMPLE OF IRC §409A – STOCK OPTIONS A mobile games company providing virtual money inside of mobile games needed a valuation for stock options it was issuing. Company is a startup company and pre-revenue. Company had preferred shareholders, common shareholders, note holders and stock option holders. – The more equity classes, the more complex the valuation. Company valued using Replacement Approach.

22. SAMPLE OF IRC §409A – STOCK OPTIONS Convertible notes had to be converted to determine # of shares attributed to each note holder. Company valued at $600K and if stock options issued with a strike price of $0.05 per share, then the shares will comply with IRC 409A provisions.

23. SAMPLE OF IP VALUATION FOR SPIN OFF OF IP Company developed a data scraping technology that could be used by numerous clients to gather different kinds of data about customers. Company has other technologies that it will be selling to customers. Company decided to spin off the proprietary technology into a new company and license the technology for internal and external use. Company is start up business and in the pre-revenue stage.

24. SAMPLE OF IP VALUATION FOR SPIN OFF OF IP Company provided projections of the potential license revenue for the IP over 3-5 years. Capitalized start up costs were also provided. The single IP asset was valued using: − Discounted Cash Flow Analysis − Replacement Cost Approach The total value of the single IP asset was found to be $400,000 USD. The fair equity value of the shareholder interests in the Company that owned the single IP asset was determined to be $395,000 USD or $0.04 per share value.

25. CONSIDERATIONS FOR EARLY STAGE COMPANIES □ Develop relationships with Business Advisors (Attorney, CPA) □ Work with advisors to determine the right Equity Structure for your business □ Develop 3 Year Pro Forma Projections (keep them updated) - Providing defense for the underlying assumptions is very important □ Budget for a Business Valuation (along with legal, accounting, etc.) □ Valuation firm should have the credentials and experience with the type of valuation being performed

26. CHECK QUALIFICATIONS OF VALUATION FIRMS Does the firm have the credentials to perform the type of business valuation being performed? − Does the firm have IRS acceptable accreditations? − Examples: NACVA, ASA, IBA, AICPA How many business valuations has the firm performed? What other services does the firm provide besides basic valuation services? Are there any conflicts of interest? Obtain customer references from the firm and check them out.

27. QUESTIONS Melisa G. Silverman T: 818.758.8457 E: melisa@avemadvisors.commelisa@avemadvisors.com