1. Oklahoma Society of CPAs Tulsa Chapter May 2014 David L. Perkins, Jr. Acquisition Advisors Lower Middle Market M&A for the CPA, CFO, Controller

2. Publicly Announced Transactions Acquisition Advisors

3. Private Equity Transactions Acquisition Advisors

4. P/E Multiples Paid Acquisition Advisors

12. Not Just Anybody Acquisition Advisors The average annual growth rate of PE-purchased companies is 15% The average EBITDA margin is 20%

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14. 49% of annual revenue. 2.4 times seller’s discretionary cash flow (SDCF). 70% include seller financing. Transaction Patters by Toby Tatum Acquisition Advisors For what do small businesses sell?

15. Most frequent % of price financed by seller is 50%. When sellers finance, 70% of the notes are amortized over five years or less. Payback period for buyer’s down payment has a mean of 1.1 years. Transaction Patters by Toby Tatum (cont’d) Acquisition Advisors

16. PV = E 1 / (k-g) Where: PV = Present Value E 1 = Expected Income in Year One k = Discount Rate g = Annual Growth Rate of Expected Income And:k = Rf + R k - g = Capitalization Rate Acquisition Advisors

17. Example 1: Buyer of ABC Company projects $100,000 of pre-tax income in year 1, assigns a 25% required rate of return based on the overall risk profile of ABC, and anticipates zero growth. As such, Buyer values ABC as: PV = $100,000 / (.25 -.00) = $100,000 /.25 = $400,000 Acquisition Advisors PV = E 1 / (k-g)

18. Example 2: Buyer of XYZ Company projects $100,000 of pre-tax income in year 1, assigns a 25% required rate of return based on the overall risk profile of XYZ and anticipates 15% annual growth PV = $100,000 / (.25 -.15) = $100,000 /.10 = $1,000,000 Acquisition Advisors PV = E 1 / (k-g)

19. Build value through your income statement, not your balance sheet. Wisdom Acquisition Advisors

20. Required Rate of Return 1 - RETURNS ARE RETURNS TO TOTAL CAPITALIZATION (DEBT AND EQUITY). 2 - MICRO-CAP. STOCKS IS DEFINED AS THE PORTFOLIO OF STOCKS COMPRISED OF THE 9TH AND 10TH DECILES OF THE NEW YORK STOCK EXCHANGE. ACCORDING TO THE CENTER FOR RESEARCH IN SECURITY PRICES, UNIVERSITY OF CHICAGO, THE AVERAGE CAPITALIZATION OF MICRO-CAP COMPANIES FROM 1926 TO 2000 WAS $68 MILLION. SOURCE: IBBOTSONS Acquisition Advisors Average Annual Return Inflation3.0% U.S. Treasury Bills (30 days)3.7% U.S. Treasury Bonds (5 years)5.3% U.S. Treasury Bonds (20 years)5.6% L.T. Corporate Bonds (20 years)6.3% Large Cap. Stocks9.3% Micro-Cap. Stocks15.5%

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22. Goodwill Such value, when it exists, is separate and distinct from the tangible assets of the business enterprise. Acquisition Advisors The intangible asset that may arise or exist in a business as a result of name, reputation, competency, location, product, service, customer lists, etc. A term accountants use for purchase price paid for a business in excess of the book value of the business’ assets.

23. “Blue Sky” The slang term for goodwill. Acquisition Advisors

24. Paid off by seller with after-tax proceeds. How Does i-Bearing Debt Impact Value? Acquisition Advisors

25. How important is the seller? Transferability of the Business Acquisition Advisors

26. BUYER TYPES Individual Industry Private Equity Groups (PEG’s) Acquisition Advisors

27. Mr. Cooper earns $300K per year after paying $100K salary to the owner. Business sells for $1.2 million. The owner, Larry, leaves the business, loses his salary, and puts his $750K in a mix of stocks, bonds and cash and earns an average annual return of 7%. Larry now earns $52,500. Acquisition Advisors Cooper Service Company

28. If your business is profitable, you’ll be financially better off keeping your business Owners of high value businesses sell when they value their freedom more than the money Acquisition Advisors

29. If your business is perpetually under- performing, you may be better off selling (for whatever you can get) Acquisition Advisors

30. Value is not absolute (it’s elastic) Acquisition Advisors

31. Stupid buyers (with money) are hard to find. It’s hard to judge a buyer by his babble. Wisdom Acquisition Advisors

32. The Absolute Key to Maximizing Sale Value, Minimizing Time, Maintaining Confidentiality Multiple high quality buyers “worked” simultaneously, with urgency Auction characteristics (going, going, gone!) Acquisition Advisors

33. How Do You Know if an Offer is “Good”? Acquisition Advisors

36. How Sale Price is Maximized Sale Price = Enterprise Value + Packaging + Process + Dealmaker Skill Acquisition Advisors

38. A value killer for many business sellers Confidentiality Acquisition Advisors

39. An appraisal before you sell? Acquisition Advisors

40. Questions? David L Perkins, Jr. Acquisition Advisors, LLC www.AcquisitionAdvisors.com 918-748-7995

41. Additional Topics 100% cash at closing? When is the right time to sell a business? Quality financial statements Presenting financials in most favorable light C-Corps How to move from CFO to owner? MBO? Acquisition Advisors