1. PLANNING FOR SUCCESSFUL TRANSITIONS AND GROWTH MAY 22, 2013 Maximizing the Value of Your Business Presented by Frederick D. Lipman

2. 2 ALTERNATIVES TO SALE Leveraged recapitalization: Entity borrows money without personal guarantee of owners under loan terms which permit distribution of loan proceeds as a dividend Sale to a company ESOP Private placement of securities Public Offering – New Jobs Act Regulation A Offering will permit up to $50 million of capital to be raised. U.S. versus foreign IPOs.

3. UNDERSTAND BASICS OF VALUATION The following formulas are used to determine total enterprise value (TEV): Rule of Thumb Formulas EBITDA Method: Adjusted for expenses which will not continue after sale Discounted Cash Flow Method Comparable Company Method Comparable Transaction Method Asset Accumulation Method 3

4. MAJOR ADDITIONS AND SUBTRACTIONS FROM TEV Major Subtraction from TEV: Indebtedness. Addition: Excess Net Working Capital Subtraction: Inadequate Net Working Capital Indirect Addition: Assets not needed by buyer to conduct the business: e.g. cash value of personal life insurance, artwork, etc. Specific Factors (See next slide) 4

5. Factors Increasing Valuation 1. Strong customer relationships at all levels. 2. Proprietary products of services. 3. No single customer accounts for more than 5% of revenues or profits. 4.Strong management team (important mainly to financial buyers. 5. Excellent employee turnover and relations. 6. Consistent revenue and earnings trends. 7. Plant and equipment in good repair. 8. Intellectual property assets which are legally protected. Factors Decreasing Valuation 1. Weak customer relationships and frequent turnover. 2. Lack of proprietary products or services. 3. A single customer accounts for over 15% of revenues or profits. 4. A weak management team (so- called one-man-show syndrome). 5. Poor employee turnover and relations. 6. Inconsistent revenue and earnings trends. 7. Plant or equipment has been neglected and requires significant repairs. 8. Lack of legally protected intellectual property assets. 5

6. OTHER METHODS OF INCREASING VALUATION Bigger is better Increased book value Make assets assignable (problem with leases) Remove unproductive assets from business Minimize working capital needs Protect intellectual property Minimize taxes resulting from sale 6

7. 7 TEV / EBITDA Multiples by Deal Size Deal Size ($ in millions): Source: GF Data

8. ELIMINATE DEAL KILLERS AND OTHER SALE IMPEDIMENTS During the advance planning stage it is important to eliminate deal killers and other sale impediments. The following are a few examples of sale impediments: Environmental liabilities; Litigation liabilities; Tax liabilities resulting from misclassification of employees as independent contractors; 8

9. ELIMINATE DEAL KILLERS AND OTHER SALE IMPEDIMENTS (Cont.) Unfunded pension obligations and multiemployer pension plan liabilities; Product warranty obligations of unreasonable scope or length; Lack of audited or auditable financial statements; Non-transferrable assets; and Key employees who have no incentive to help in the sale process or who can leave and set up a competitive business. 9

10. TIMING THE SALE Sell during periods of high valuation because of macro and micro factors. Macro factors include the state of the economy and the stock markets. For example, 2009 was a terrible year to sell your business. Another important macro factor is the presence of financial buyers as well as strategic buyers. The presence of financial buyers as well as strategic buyers enables an auction. 10

11. TIMING THE SALE (Cont.) Financial buyers are most likely to be available when the banks and other financial institutions from which they borrow have the most generous lending terms and provide the largest amount of leverage to the financial buyers. Other macro factors include sales or public offerings of companies in your same trade or business which occurred at a high valuation. 11

12. 12 Middle-Market M&A Activity Source: FactSet

13. TIMING THE SALE (Cont.) Micro factors include how well your business is doing and your growth prospects. You should understand the method of valuing your business by obtaining a valuation report well before the expected sale date. A valuation report may indicate that one particular line of business has a much higher valuation than a second line of business and permits concentration on the higher valuation business. 13

14. CREATING A MARKETING BROCHURE No entrepreneur would attempt to sell a specific product or service without good marketing material. Likewise, no business should be offered to potential buyers without a well prepared marketing brochure. The effective marketing of your business requires you to understand the thinking of potential buyers and characteristics they would find appealing. You must learn to think like a buyer. 14

15. CREATING A MARKETING BROCHURE (Cont.) The marketing brochure must discuss your industry and your place in that industry. Is your market growing, flat, or declining? The marketing brochure should discuss what advantages you have over competitors in your industry and what protection you have from existing or new competitors. The marketing brochure should discuss the specific factors which increase valuation of your business. 15

16. CREATING A MARKETING BROCHURE (Cont.) The marketing brochure should discuss your strengths and also your weaknesses and emphasize how you are remedying your weaknesses Financial statements and possibly projections should be included in the marketing brochure with appropriate adjustment for expenses which will not be incurred by the buyer after the closing. Discuss what assets are not included in the sale. 16

17. CREATING A MARKETING BROCHURE (Cont.) A useful step is to prepare a marketing brochure several years before your sale target date so that you have time to correct the weaknesses before your sale target date. Potential buyers must sign a confidentiality agreement before receiving the brochure. An investment banker can be helpful in preparing a marketing brochure. 17

18. CONSIDER USING A QUALIFIED INVESTMENT BANKER An investment banker experienced in your industry has a greater knowledge of potential buyers for your business than you do. Choose an investment banker with access to foreign as well as U.S. buyers. Even if you know one obvious buyer for your business, an investment banker may be able to find one or more other prospects, thereby enabling an auction to occur. 18

19. CONSIDER USING A QUALIFIED INVESTMENT BANKER (Cont.) The investment banker can help screen your potential buyers and prevent you from wasting your time on financially unqualified buyers. An experienced investment banker can assist in negotiating the sale, smoothing rough spots, and protecting you from unrealistic demands. You could negotiate a lower investment banking fee for potential buyers which you identify. 19

20. CONSIDER USING A QUALIFIED INVESTMENT BANKER (Cont.) Any contract with an investment bank should be reviewed by an attorney specializing in sale transactions. A particular problem is the so-called tail provision which, if not properly negotiated, may result in having to pay two investment bankers a fee on the same sale if the first investment banker is terminated and the second investment banker is owed a fee for selling to someone approached by the first investment banker. 20

21. CONDUCT AN AUCTION An auction generally produces the highest price for a business. Usually, you need two or more bidders to conduct an auction. However, an auction can be conducted with only one bidder if the auction is a closed auction, that is, no one knows who else is bidding. To induce potential buyers to bid at an auction of your business, you must assure them that you do intend to sell and that the auction will be conducted fairly. 21

22. CONDUCT AN AUCTION (Cont.) The auction must be conducted by a person in whom bidders have confidence and pursuant to written rules and procedures that are uniformly applied to all bidders. Bidders are generally turned off by open auctions – in other words, auction s where their bids are disclosed to all other bidders – and by auctions in which there are innumerable rounds of bidding. 22

23. FAMILY BUSINESS SALE ISSUES Prevent sellers remorse by fully understanding motivation. Motivation for sale should be discussed with other family members involved in the business. Anticipate and correct potential threats to the family business. For example, children involved in the business leave and solicit customers. Owners children in the business must sign agreements not to solicit customers after leaving the business. 23

24. FAMILY BUSINESS SALE ISSUES (Cont.) Other threats include the following: –Divorces in anticipation of sale proceeds –Suits against trustee owners for selling too low Each potential threat must be carefully analyzed and ameliorated to the extent possible (e.g. prenuptial agreements). Selling to other family members who require payment terms. The owner should insist upon the same protection as a bank. Selling to company ESOP MBOs and LBOs 24