BUSINESS VALUATION EXPLORED APRIL 23 2015 Business Valuation

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 Practical and entertaining education for business owners and executives, accredited investors, and their legal and financial advisors. For more information, visit www. financialpoise. com DISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS © 2015 2

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 ABOUT THIS EPISODE What something is worth is always a matter of opinion, ultimately tested by the price at which a willing seller and purchase will do a deal. While true, these words don’t help business owners or their advisors determine what price to sell for. This webinar will discuss the generally accepted methods of valuing a business and help business owners and their advisors to apply those methods to come up with a range of value for the business being sold. © 2015 3

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 ABOUT THIS SERIES Hundreds of thousands of businesses are bought and sold each year. Most sellers, while successful business owners, are not expert at the “art of the deal. ” That is, while they know their business inside and out and are sophisticated on matters related to it, most simply don’t have experience in selling a business. From how to market a business (do you hire a business broker or I Banker? ) to how to structure the ultimate deal (asset sale v. stock sale), and all the issues in between (how do you value your business? Explaining what an earn-out is and when to use one), this series will cover issues that ever business owners should understand before selling a business. As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes: think sitcom rather than soap opera. © 2015 4

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 SUMMARY OF EPISODES EPISODE #1 Business Valuation Explored - PREMIER DATE: April 23, 2015 EPISODE #2 How to get a business ready for sale - PREMIER DATE: May 21, 2015 EPISODE #3 The Buying/Marketing Stage - PREMIER DATE: June 18, 2015 EPISODE #4 How to find a buyer - PREMIER DATE: July 16, 2015 EPISODE #5 Purchase Offers - PREMIER DATE: August 20, 2015 EPISODE #6 Letter of Intent Stage - PREMIER DATE: September 17, 2015 EPISODE #7 Closing Stage - PREMIER DATE: October 15, 2015 EPISODE #8 All About ESOPS - PREMIER DATE: November 19, 2015 EPISODE #9 Post Sale Topics - PREMIER DATE: December 17, 2015 *ALL EPISODES ARE AVAILABLE ON DEMAND* © 2015 5

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 MEET THE FACULTY • Richard Claywell, CPA • Todd Mitchell, CBIZ Valuation Group, LLC • Gary Lotzer, Business Valuations & Advisory, LLC Moderator: Jonathan Brand, Lakelaw © 2015 6

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 PRINCIPAL DIMENSIONS I. Clarify Expectations II. Prepare Business

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 WHAT IS BEING SOLD? Assets v. stock Real Property and Business, or Business alone? Review of tax differences Transferability of assets (contracts, IP) © 2015 8

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 CRAFTING THE STORY Why would Buyer want this business? What would Buyer want to know? Real cash flow History of business; competitive advantages Tangible vs. intangible assets Contingent Assets and Liabilities Employee loyalty, Customer loyalty © 2015 9

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 WHO WOULD BUY? Identifying Target Market Strategic Buyers

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 SELLER’S MOTIVATION Why sell the business? Retirement (e. g. , no succession plan) Family members Key Employees Buyout of other shareholder, recap Market Conditions (Beneficial) Liquidity Shareholder Dividend Distressed © 2015 11

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 RETENTION OF PROFESSIONALS Business Broker or Investment Banker Law, Consulting, or Accounting Firm (or all) Active or Retired Senior Executives Understanding personality dynamics between successful businessperson and crew of shiny and brilliant professionals © 2015 12

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 NEW BALANCE SHEET Manage for profit and not minimal tax Timing issues of revenues and expenses Off-balance sheet assets such as real estate Contingent Liabilities E. g. , lawsuits, lease-purchase options Account for related party transactions Formalizing related party relationships Normalize the costs of related party expenses To audit or not to audit © 2015 13

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 SELLER LOOKING ITS BEST Organize Documents and Financials Tax Returns valid Review or audit of financial statements, Consistency- apples to apples Inventory Ownership compensation Related party payments Disclosure of contingent liabilities Settlement of Lawsuits / Satisfaction of Liens © 2015 14

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 SQUARING THE CORNERS Qualifications to do business Software Audit Updating licenses Clearing ownership title Avoiding zoning issues Formalization of oral agreements © 2015 15

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 DUE DILIGENCE (FROM BUYER’S PERSPECTIVE) Documents likely to be requested by a potential purchaser include: Profit-and-loss statements Detail of adjustments to EBITDA Balance sheets Tax returns List of hard assets (e. g. , furniture, fixtures, equipment) List of inventory, analyzed as to usability in the business Commercial property appraisal or lease agreement Material contracts Software and other IP Licenses Aged list of receivables Aged list of payables © 2015 16

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 NOW, ON TO VALUATION Common valuation techniques: Discounted Cash Flows: Determine the value of a company based on the discounted value of its unlevered projected future cash flows Public Company Multiples: Use available data from similar publicly traded companies to value a subject company based on specific metrics Private Transaction Multiples: Apply data from similar transactions to value a subject company based on specific metrics Asset Value / Liquidation: Net value of assets in a liquidation scenario LBO / IRR: Use reasonable leverage assumptions to determine returns based on different capital structures © 2015 17

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 DISCOUNTED CASH FLOWS Overview: Determine the value of a company based on its unlevered projected future cash flows, discounted at the appropriate cost of capital Requires assumptions for a specific forecast period and a terminal value at the end of the forecast period Key Terms: Free cash flow Discount rate (cost of capital) Terminal value Advantages: Quantitatively defensible Disadvantages: Highly sensitive to inputs Relies heavily on management forecast © 2015 18

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 COMPARABLE PUBLIC MULTIPLES Overview: Use available data from similar publicly- traded companies to value a subject company based on specific metrics Examines how the stock market is currently valuing companies within the industry Public multiples are then adjusted for liquidity, size, control, and company-specific factors Key Terms: EBITDA Liquidity Premium Size Premium Advantages: Current data is readily available Disadvantages: Size and liquidity premium is somewhat arbitrary Truly comparable companies can be scarce for some industries © 2015 19

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 COMPARABLE TRANSACTION MULTIPLES Overview: Use available data from similar transactions to value a subject company based on specific metrics Find a representative selection of comparable, completed transactions and understand the private market drivers that resulted in the reported pricing information Key Terms: EBITDA Advantages: Situational comparability (what buyers are actually paying in the market) Disadvantages: Financial data for private transactions is often not disclosed Deals occur at different points in time and have multiples that reflect then-current market conditions Individual data points may be skewed by factors specific to that deal © 2015 20

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 ASSET VALUATION Overview: Determine the value of a company’s assets in a liquidation scenario Include only assets and liabilities that would be assumed in a transaction Key Terms: Net asset value Liquidation Advantages: Provides a “floor” for other valuation methods Data is readily available via appraisals and company balance sheet Disadvantages: Does not accurately reflect the value of a profitable, growing business © 2015 21

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 LBO / IRR Overview: Make assumptions about capital structure to create a desired return Most private equity firms use this as their primary valuation methodology Key Terms: Senior debt Subordinated debt Exit value Internal Rate of Return (IRR) Advantages: Takes into account elements of the capital structure that affect returns Can be tailored to specific IRR thresholds Quantitatively defensible Disadvantages: Highly sensitive to inputs including debt availability and pricing © 2015 22

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 QUANTITATIVE FACTORS AFFECTING VALUATION Financial trends; entity sales in the industry Asset base Margins and growth Capital expenditure requirements (for necessary and expected production) Working capital needs (including employee expenditures) Size of the company © 2015 23

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 QUALITATIVE FACTORS AFFECTING VALUATION Management quality and stability Predictability of revenue streams (identify assumptions underlying projections for validity and bias) Customer concentration Intellectual property Threat of offshore competition Geographic location Seasonality and cyclicality Brand value Litigation history and environmental concerns © 2015 24

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 MORE ABOUT THE FACULTY Jonathan Brand Jonathan T. Brand is a managing attorney at Lakelaw (www. lakelaw. com). Jonathan provides expert advice and counsel in the areas of bankruptcy, chapter 11 reorganizations, commercial litigation, and related transactional matters, and regularly represents debtors, trustees, and creditors in a variety of complex insolvency matters in State and Federal courts. He also assists clients with out-of-court workouts, assignments for the benefit of creditors, and structured liquidations. Jonathan is board-certified in Business Bankruptcy by the American Board of Certification, rated AV® Preeminent™ by Martindale-Hubbell’s peer review process and earned a 10. 0/10. 0 rating on Avvo. com. Illinois Super Lawyers recognized Jonathan as a Rising Star in the area of Bankruptcy & Creditor/Debtor Rights in 2012, 2013 and 2014. Jonathan volunteers his time with American Bankruptcy Institute’s Credit Abuse Resistance Education (C. A. R. E. ) Program and has provided pro bono representation through the Volunteer Attorney Panel for the Bankruptcy Court for the Northern District of Illinois. Jonathan currently serves as the Co-Chair of the Liaison Committee for United States Bankruptcy Court for the Northern District of Illinois. Prior to joining Lakelaw, Jonathan served as a law clerk to the United States Bankruptcy Court for the Northern District of Illinois and the Honorable John S. Dalis, United States Bankruptcy Judge for the Southern District of Georgia. Jonathan is a member of American Bankruptcy Institute, the Turnaround Management Association, the Chicago Bar Association, and the Florida Bar. He received his Bachelor of Arts in History and Juris Doctor from the University of Florida. © 2015 25

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 MORE ABOUT THE FACULTY Gary Lotzer Mr. Lotzer has over thirty years of diverse, business experience across a broad spectrum of industries. He has served in C-level roles of lower mid-market companies located in the US, Mexico, Europe and Asia. His specialized combination of corporate finance, marketing and operations skills have been successfully applied in venture-backed startup, turnaround and high growth business stages. Particular professional expertise includes strategic planning, business plan development, financial modeling, business valuations and due diligence. Mr Lotzer has founded and co-founded multiple successful companies, and has personally negotiated and structured numerous debt and equity capital transactions. He has also participated in OTCBB and AMEX public capital listings. Prior to joining Hunter Wise he was engaged in M&A as an independent intermediary. He is currently a Managing Director of Hunter Wise Financial Group LLC, a middle-market investment bank, headquartered in Irvine, CA. His office is in Tucson, AZ. Mr. Lotzer holds Series 82 and 63 securities licenses. He began his career in Chicago in public accounting, but migrated to Milwaukee where he eventually (1986) merged Lotzer & Co CPA’s into Seidman & Seidman/BDO, an international CPA/Consulting firm. He is a Certified Public Accountant (WI License No. 5757), and long-term member of the American Institute of Certified Public Accountants and holds the Accredited Business Valuation (ABV) credential issues by the AICPA exclusively to licensed CPA’s that complete their rigorous accreditation requirements. He is also a member of the AICPA Forensic and Valuation Services section, Arizona Society of CPA’s and the Arizona Business Broker’s Association. He is a graduate of the University of Wisconsin – Madison School of Business, and has attended the Thunderbird American Graduate School of International Management Executive Program in Phoenix. © 2015 26

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 MORE ABOUT THE FACULTY Todd Mitchell Mr. Mitchell is a director in the Northeast Region of CBIZ Valuation Group. His responsibilities include the management and execution of engagements, business development and the review and preparation of valuation assignments. Mr. Mitchell has prepared valuation analyses of business enterprises, intangible assets and securities for purposes such as purchase price allocations, impairment testing, mergers and acquisitions, ESOPs, gift and estate planning, and for implementation of stock option plans. Mr. Mitchell has considerable experience in such industries as publishing, automotive parts, biotechnology, financial services and industrial equipment. Prior to joining CBIZ Valuation Group, Mr. Mitchell was a valuation analyst at Management Planning, Inc. , where he was responsible for the completion of various business valuation engagements. Mr. Mitchell earned his Bachelor of Science degree in business administration with a concentration in finance from The College of New Jersey. He is a CFA charterholder, as awarded by the CFA Institute, and an associate member of the American Society of Appraisers (ASA). © 2015 27

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 MORE ABOUT THE FACULTY Richard Claywell Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in Business Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified Valuation Specialist, Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst in Financial Forensics, Certified in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has been valuing closely held companies since 1985. Richard’s practice is restricted to business valuation, economic damages, profit enhancement and exit planning. Richard received his Bachelor of Science in Accounting in 1979 from the University of Houston – Clear Lake. He then received certification as a Public Accountant in 1983. Over the years, Richard has earned additional accreditations that relate to business valuations, economic damages and fraud. Richard has been an instructor for the National Association of Certified Valuation Analysts for many years, has been an instructor for the Internal Revenue Service and the International Association of Consultants Valuators and Analysts (IACVA). Richard is currently the Director of Education for the IACVA and is responsible for the business valuations materials being taught in 55 countries. Richard has taught business valuation or economic damage courses in China, Korea, Taiwan. Richard has performed over 1, 000 business valuations since 1985. Richard has testified in Texas County Court, Texas State Court, Bankruptcy Court and Texas State Courts. Richard has given testimony in economic damages (lost profits), shareholder disputes, personal injury, wrongful termination and divorce. Richard has given he following presentations: Practitioners Publishing Company (PPC) Contributing Editor – Guide to Practical Estate Planning, 2008, 2012 Forensic Accounting Conference - The Risk Assessment and Prevention of Fraud in Business at the National Taipei University on April 27, 2012. The presentation was titled “The Meaning and Importance of Risk Assessment and Prevention of Fraud in Businesses”. 2012 Central University of Finance and Economics in Beijing China, presented a class titled “Relationships Between Risk and Value in Valuation” to graduate students. On April 29, 2012, Richard accepted an appointment to adjunct Professor of Valuation at the Central University of Finance and Economics and Research Fellow of the Appraisal Institute, Asset Appraisal Institute of the Central University of Finance and Economics in Beijing China. Co-Presenter of weeklong business valuation course for the Chinese Appraisal Society, November 2008, Beijing, China. A partial list of some of the topics instructed include: (1) remaining useful life analysis, (2) survivor curves, (3) valuing customer relationships, (4) valuing brands, (5) allocation of goodwill, valuing software, (6) quantifying synergies. 2009 Taipei International Conference: Valuation and Forensic Accounting. Presenter, Fraud Prevention and Detection. (November 2009). Chinese Appraisal Society in Seattle Washington, Presenter, Using Income Approaches and Using Guideline Companies, August 2, 2010. Shanghai University of Finance and Economics, Co-Presenter, The Relationships Between Risk and Value: The M & A Transaction, Value and The Valuation Report: What Do You See? , Value, Fraud, Risk: From Valuation to Fraud, September 19 – 21, 2010. Asian-Pacific Conference on Valuation and IFRS in Seoul South Korea, Presenter: Fraud, Risks and Valuations, December 3, 2010 . Chinese Appraisal Society in Beijing China, Presenter, Fundamentals of Business Valuations and Co-Presenter, Valuing Intangible Assets, December 12 -13, 2010. The Meaning and Importance of Risk Assessment and Prevention of Fraud in a Business, IACVA presentation, June 2013, Washington DC. The Meaning and Importance of Risk Assessment and Prevention of Fraud in a Business, Chicago International Business Valuation Symposium, IACVA presentation, October 11, 2013 © 2015 28

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BUSINESS VALUATION EXPLORED: APRIL 23, 2015 About Daily. DAC, LLC provides continuing education to business owners and executives, accredited investors, and their respective legal and financial advisors. Its websites, webinars, and books provide Plain English, sometimes entertaining, explanations about legal, financial, and other subjects of interest to these audiences. Click here for more information. © 2015 30

Business Transition and Exit Planning. com (“B-TEP”), owned by Daily. DAC, LLC, is an online plain-english educational resource for business owners and their trusted advisors contemplating, or getting ready, to sell their businesses. Visit us online at http: //www. businesstransitionandexitplanning. com/ © 2015 31

BUSINESS VALUATION EXPLORED: APRIL 23, 2015 The Chamber. Wise™ Education Consortium is a resource for Chambers of Commerce to provide its members with valuable member benefits by offering relevant business education webinars; and generate revenue for the Chamber as well. Visit www. chamberwise. org © 2015 32

IMPORTANT NOTE: THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY. YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS. © 2015 33