2. Business Valuation Issues 20 th Annual OEOC Conference - April 21, 2006 Rosanne J. Aumiller, CPA/ABV, ASA rja@barneswendling.com 216.566.9000 Step by Step Process for Selling Your Business to Your Employees

3. 2 Introduction BBarnes Wendling has served Northern Ohio’s closely-held businesses since 1946. OOur core clients are privately owned middle market companies. WWe consider confidentiality, independence, senior level involvement, integrity, & relationship building to be critical success factors.

4. 3 Where to Find Us Akron 1799 Akron-Peninsula Rd. #222 Akron, OH 44313 (330) 701-0128 Sheffield Village 5050 Waterford Drive Sheffield Village, OH 44035 (440) 934-3850 Norwalk 48 Executive Drive Norwalk, OH 44857 (419) 668-8296 www.barneswendling.com Sandusky 1616 Sycamore Line Sandusky, OH 44870 (419) 627-2770 Cleveland 1215 Superior Avenue, Suite 400 Cleveland, OH 44114 (216) 566-9000

5. 4 Business Valuation Litigation Support Forensic Accounting Corporate Finance  Estate and Gift Tax Planning  Buy Sell Agreements  Succession Planning  Family Limited Partnerships  ESOPS  Mergers and Acquisitions  Intangible Asset Valuation  Financial Modeling  Buyer/Seller Due Diligence  ESOP Feasibility Study  Appraisal Review  Appraisal Consulting  Raising Capital / Re- Capitalization  Acquisitions  Divestitures  Business & Strategic Planning/Budgeting/Forecasting  Capital Budgeting  Debt Restructuring  Obtaining Financing

6. 5 Some Questions Raised... What should an ESOP Trustee look for in an appraiser? What is a business valuation? What creates value in the ESOP sponsoring company?

7. 6 Organizations & Credentials American Society of Appraisers  ASA Accredited Senior Appraiser American Institute of CPAs  ABV Accredited in Business Valuations National Association of Certified Valuation Analysts  CVA Certified Valuation Analyst Institute of Business Appraisers  CBA Certified Business Appraiser

8. 7 Number of Professionals American Society of Appraisers - 2,313 Accredited Members American Institute of CPAs - 1,701 ABV Holders Nat’l Assoc. Cert. Val. Analysts – 4,800 CVA Designees Institute of Business Appraisers – 465 CBAs Source: Borrowman Baker It Boils Down to A Relatively Small Number

9. 8 What Is a Business Valuation? Product –comprehensive written report –gives the reader a logical, supportable value conclusion –company history, products/services, personnel, markets, economy, analysis, conclusion Service –key is client should understand content

10. 9 Valuations Have Multiple Uses XYZ Company may have different “values” depending on the “level of value” and the “standard of value”

11. 10 The Valuation Process Identify  Purpose – ESOP transaction or annual update  Level of Value - control or minority  Standard of Value - fair market value  Date of Valuation  Key Issues – adjust owners' comp; leverage

12. 11 Minority vs. Control Interest Impact on Value Control –Ohio 2/3 ownership or –Greater than 50% voting or –As defined in a shareholder agreement –Large enough block to control mgmt. decisions Minority –Discounted value –No individual ability to affect mgmt. decisions

13. 12 Levels of Value Synergistic (Strategic) Value Controlling Interest Value Control Premium Minority Discount Discount for Lack of Marketability Marketable Minority Interest Value - as if freely traded on an active public market { Non-marketable Minority Interest

14. 13 Standards of Value ALL ASSUME CASH EQUIVALVENT VALUE Fair Market Value - hypothetical willing buyer/seller, refer to Rev Ruling 59-60 Investment Value Strategic Value Fair Value

15. 14 IRS Revenue Ruling 59-60 Set the guidelines for valuing private interests Fair Market Value “The amount at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

16. 15 IRS Revenue Ruling 59-60 Eight factors to consider: kNature of the business & history kEconomic & industry outlook kBook value of stock & co. financial condition kEarning capacity kDividend paying capacity kIntangible value - goodwill or other kSales of stock and size of block kMarket price of similar public stocks

17. 16 DOL Requirements ESOP cannot over pay for stock – adequate consideration FMV as of transaction date Utilize qualified valuator as professional advisor to the trustee Valuator – independent of ESOP, Company & selling shareholder(s) Similar to IRS Revenue Ruling 59-60

18. 17 Two Key Drivers Future Cash Flow Available to Shareholders Volatility or Risk Associated with Future Cash Flow

19. 18 Factors that Drive Value Internal Factors: Quantitative Qualitative External Factors: Economic climate

20. 19 Factors that Drive Value Total Invested Capital After initial valuation stock price may decline if leveraged As debt is repaid, stock price increases

21. 20 How is a Business Valued? ApproachMethodValue is based upon…. INCOME MARKET ASSET Discounted Cash Flow or Capitalized Earnings Comparable Sale or Guideline Company Adjusted Net Assets Estimated future profitability (cash flow) Historical profitability/ (cash flow) Private company transactions involving similar businesses Public company stock prices Appraisal of hard assets

22. 21 Discounts and Premiums Minority discount Control premium Lack of marketability Key person discount Blockage discount

23. Marketability Discount Model: Liquidity Hierarchy

24. 23 What goes into our work? Industry Data Research Insight (Standard &Poor's Public Company Data) Partnership Profiles (Database of limited partnership transactions) Pratt's Stats Database (Private company transactions) FactSet Mergerstat Transaction Data Various trade and industry publications Unique Resources BW’s Proprietary Internal Database (Given the number of engagements we have completed, we have a huge body of valuation data) ScanUS (Mapping software used to graphically display relevant data can be a powerful analysis tool) WELL-RESEARCHED, DEFENDABLE RESULTS & OPINIONS External Resources Financial Consulting Group (Access to the knowledge of hundreds of valuation professionals) CPA Associates International Association of Certified Fraud Examiners THE KNOWLEDGE AND EXPERIENCE OF BW’s CONSULTING PROFESSIONALS

25. 24 What Information Do We Need? 1.Five years of financials and tax returns 2.Business plan or budget for next 1 to 5 years 3.Shareholder agreements 4.Fixed asset/depreciation schedules 5.Terms of debt 6.Terms of capital and operating leases 7.Identify competitors 8.Management structure Financial & Operational Data 9.Capital expenditures over the last 5 years and plans for the future 10.Distributions/dividends paid 11.Industry data the company may receive as part of a trade group 12.Sales by product line 13.Summary of employees by function, organizational chart, terms of labor contracts if applicable 14.Owners compensation for last 5 years 15.Complete document request will be provided

26. 25 Valuation Process Timeline Data Request – List to Client Identify Key Issues Analyze Financials/ Operational Data Site Visit and Interview Draft Report Final MSDP Present Final Report to Client Week 1Week 2Week 3Week 4 Research Comparable Transaction Data Apply Valuation Methods Client gathers data

27. 26 Conclusion Challenge - to balance objectivity with providing a reasonable value range to meet client’s needs Questions? Thank you