Business Valuation vs Real Estate Valuation When do

Business Valuation vs. Real Estate Valuation When do you have one or the other? ICAP Summer Seminar Lisle, IL May 8, 2017 Title Text Dan Daitchman, ASA ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Itinerary • Firm bio and personal bio • How do you value a business? • When do you have a business valuation vs. a real estate valuation? • Case studies Title Text 1 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

B. Riley Financial Overview Investment Banking Leading provider of asset solutions and valuation services Sell-Side/ Buy-Sidedisposition M&A Title Text §Public Inventory, Offerings fixed asset and intellectual property appraisals § Corporate valuation services Private Placements § Asset disposition services Full-service investment bank focused on small- to mid-cap companies with high impact management teams § Capital Raising § Mergers & Acquisitions § Financial Restructuring Minority and Majority Recaps The June 2014 merger of Great American Group and B. Riley & Co. created a differentiated financial services platform dedicated to helping clients manage all aspects of their balance sheets. Fairness Opinions 2 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

B. Riley & Co. Overview B. Riley is a leading full-service investment bank focused on bringing superior corporate advisory services to middle market public and private companies. Investment Banking Equity Research § M&A, capital formation and financial advisory for public and private clientele § Analysts publish research on 200+ publicly traded securities Sales & Trading § Market makers in 150+ securities § Strong domestic and cross-border M&A experience § Historical focus primarily on misunderstood and/or under-followed middle market companies § Unique understanding and familiarity with middle-market public companies and investors § Frequent awards for excellence among individual research analysts Title Text § Aggregate transaction value in excess of $7. 3 billion since 2007 § Active trading relationships with substantially all major institutional money managers § Large number of stock purchase programs § Repurchased nearly $1 billion of stock for corporate clients since 2010 Asset Management § In 2014 launched affiliated investment advisor § Leverages firm’s outstanding research track record § Seasoned portfolio managers with track record of success § Significant pipeline of investment products Corporate Valuation Services 3 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Great American Group Overview Great American Group (GA) is a leading provider of appraisal and valuation services, asset disposition and auction solutions and commercial lending solutions for an extensive array of companies. Appraisal Services Corporate Valuation Services § Inventory and Machinery & Equipment valuations for asset based lending purposes § Experts in the valuation of business interests, tangible assets, intellectual property and other intangible assets, and equity instruments § Inventory appraisal presence across retail, manufacturing, pharmaceutical and many more industries Title Text § The leading lending valuation provider for the energy industry § Reviewed over $130 billion in assets over last two years Asset Disposition Services § Provide transactional and on going valuations for corporate financial reporting and tax planning needs § Has become the sole financial reporting provider for multiple sponsors GA Capital § More than 40 years of experience helping our clients dispose and realize immediate returns from underperforming assets § Loans range in size from $10 million to $150 million and are provided on a senior secured basis § We understand that or any large-scale disposition timely results are a priority § Products include secured last-out first lien or second lien debt directly below senior facilities with strong rights and controls, as well as first lien senior secured revolvers selling at deep discounts § Great American has a team of approximately 175 retail field consultants available to support any size project 4 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Personal Bio Dan is a Manager with Great American Group’s Corporate Valuation Services practice. Professional and Industry Experience • Over 10 years of financial advisory and consulting experience helping clients resolve complex financial issues. Dan Daitchman, ASA Manager Corporate Valuation Services Great American Group Chicago Office • Dan specializes in transaction and financial advisory services related to enterprises, derivatives, and intangible assets. These services are used for transaction financing, financial statement reporting, capital raising, litigation, bankruptcy, solvency opinions, and merger and acquisition advisory. Direct (312) 777 -7954 Mobile (312) 880 -8250 Email ddaitchman@greatamerican. com • Dan has served clients in a wide range of industries including: energy, financial services, automotive, commodities, wholesale and retail distribution, media and entertainment, healthcare, consumer products, professional services, and private equity. Main (818) 884 -3737 Fax (818) 746 -9904 Web greatamerican. com • Prior to joining Great American Group, Dan was a project leader at Hilco Global. Prior to joining the Hilco Organization, Dan was an analyst in the Alternative Investment Products group at US Bancorp. Title Text Education, Licenses & Certifications • MBA, Finance De. Paul University • BS, Finance and Real Estate Marquette University • Accredited Senior Appraiser of the American Society of Appraisers, certified in business valuation Representative Clients • • • Blue Bunny Lakeview Farms J-W Power Company Alexander Wang Hamilton Beach Oscar de la Renta • • • Big Red Stolichnaya Levi Strauss & Co Pompeian Don Sebastiani ION Geophysical Corporation 5 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

How do you value a business? • Just like in real estate, the approaches are Cost, Income, and Market • Cost approach is used the least, as it typically only applies in distressed and startup situations • Real estate is the only other discipline where the income approach is a reliable indicator of value. Rarely, if ever, used in Machinery & Technical Specialties, Personal Property, Gems & Jewelry, etc. Title Text 6 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Income Approach Title Text • Simply put, it’s the present value of the sum of all future cash flows of the business. Most commonly called the Discounted Cash Flow (DCF) method. • Three key inputs: Cash flows, rate of return, and time • Whereas real estate often involves the capitalization of a single cash flow into perpetuity, the cash flows of a business can often be more volatile. 7 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Income Approach Capitalization of Income Title Text • In a real estate context, the formula is a little simpler because the cash flows are more stable. • This approach is used in nearly every DCF analysis, at the point where the cash flows have stabilized (typically 5 -10 years into the future). • Can be used based on “latest 12 months” (LTM) financial data if the recent historical and future cash flows are relatively stable and predictable (ex. utilities, consumer staples). 8 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Market Approach • Two primary methods: • Guideline Public Company Method (GPC) • Guideline Merged or Acquired Company Method (GMA) Title Text 9 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Market Approach Guideline Public Company Method • Analyzes the trading multiples of publicly traded comparable firms in order to help select a multiple for the subject firm. • Two common metrics are Revenue and Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA). The multiples analyzed would be Enterprise Value/Revenue and Enterprise Value/EBITDA. • EBITDA is used most often because it is most representative of a company’s cash flow. It excludes biases related to capital structure, taxes, depreciation policies, and organic/inorganic growth. Similar to Net Operating Income in a real estate context. Title Text • Example: The appraiser analyzes the EBITDA multiples of the comparable public firms, and determines that the median of 8 x EBITDA is most appropriate. EBITDA for the subject company for the LTM period is $10 million. Enterprise Value = $10, 000 x 8 = $80, 000 10 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Market Approach Guideline Merged or Acquired Company Method • The GMA method is very similar to the GPC method • Analyzes the multiples of recently acquired comparable firms in order to help select a multiple for the subject firm. • Same as the GPC method, Enterprise Value/EBITDA is one of the most common metrics used for the same aforementioned reasons. Title Text • Example: The appraiser analyzes the EBITDA multiples of the recently acquired firms, and determines that the median of 7 x EBITDA is most appropriate. EBITDA for the subject company for the LTM period is $10 million. Enterprise Value = $10, 000 x 7 = $70, 000 11 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Market Approach • Where is the overlap between the Market Approach and Real Estate? • Using a multiple is the same as dividing by a cap rate! A multiple is simply the inverse of a cap rate. • Remember, EBITDA is a strong proxy for cash flow: $10, 000 x 8 = $80, 000 Title Text 1/8 = 12. 5% $10, 000 / 12. 5% = $80, 000 12 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Market Approach • One main difference between business valuation and real estate valuation is the validity of the market approach. • In real estate, comparable properties and transactions are more common place than in business valuation, and thus the market approach is a stronger indication of value. • In business valuation, finding comparable public companies and/or recently acquired companies that are similar to a subject company can be difficult due to differences in business mix, size, geography, customer base, etc. Title Text 13 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Cost Approach • Also known as the Asset Accumulation Method • Involves determining the replacement cost of each of the assets of the business, and adding up each of the asset values. • Rarely used, since it ignores the value of goodwill (residual value between the enterprise value and the sum of the asset values). • Typically only used for distressed companies. Has applications with startup companies as well (which we’ll discuss later). Title Text 14 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Business Valuation or Real Estate Valuation? • It’s all about what drives the cash flows. • What drives the cash flows? The assets! • Assets can be divided into two major groups: tangible and intangible • Tangible assets: Working capital, machinery & equipment, real estate • Intangible assets: Brand name, technology, customers, permits/licenses, people Title Text 15 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Business Valuation or Real Estate Valuation? Which Assets Drive the Cash Flows for Which Type of Firms? • Working Capital – Distributor/wholesaler, retailer • Machinery & Equipment – Steel mill, paper mill, railroad, equipment rental • Brands – Consumer packaged goods, fast food chain, apparel • Patents/Technology – Pharmaceutical, biotechnology, software, medical device Title Text • Customers – Equipment rental, distributor/wholesaler • People – Consulting (Appraisal firms!), professional services 16 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

But What About Real Estate? • Apartment building • Golf course • Farm • Real Estate Investment Trusts (REITs) Title Text • Are the cash flows of these businesses driven by anything other than real estate? In most cases, no. 17 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

REITs as an Example • Net book and gross book value of real estate as a % of the value of the business (enterprise value) shows that real estate drives the cash flows of the business, and thus is a strong indicator of the value of the business. Title Text 18 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Case Study 1 Wind Farm Development • Subject company was located in Wyoming, owned by several real estate investment firms. Purpose of the appraisal was for tax. The company converted from a C corporation to an S corporation, and needed to determine the Fair Market Value (FMV) of the equity as of the election date (early 2014). The FMV is then used to help compute capital gains/losses when the company is sold. • The assets of the company as of the valuation date were almost exclusively real estate: 78, 000 acres of ranch land with modular buildings scattered throughout. Title Text • The client was an equity investor in the development, and the investment thesis was to sell the land to a developer that would convert the land into a wind farm. Conservation credits were also part of the business plan, but were a much smaller piece. • Wind energy (and ultimately, electricity) generated would ideally be sold to a utility company in Southern California. • Real estate appraisals as of the valuation date were provided to GA. 19 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Case Study 1 • To be able to properly market the land as an attractive investment to a developer, several assets were required: permits, transmission lines, and a power purchase agreement. • At the time, the subject company possessed none of these assets, which creates a significant amount of financial and execution risk for any hypothetical buyer. • GA used the income approach and the cost approach to value the business. The market approach was not applicable, since comparable public companies and recent comparable transactions did not exist. Title Text • Remember, the cost approach is also known as the asset accumulation method. The real estate appraisals were critical in valuing the business using the cost approach. • Given the level of risk inherent in the future cash flows, GA concluded that the value of the business using the income approach was lower than the value using the cost approach (i. e. value of the real estate +/- any other assets, liabilities. ) • Since the cost approach can be seen as a floor value, that was the value GA ultimately used. ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES 20

Case Study 1 • So what did we learn? • The assets of the business are what drive the value of the business. Real estate was clearly the primary asset. So while GA performed a business valuation, the result was much closer to a real estate valuation. Title Text 21 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Case Study 2 Real Estate Private Equity Firm • Subject company was the investment manager of a real estate private equity firm. Purpose of the valuation was to value the equity stake of one of the firm’s investors, so the firm could buy him out. • Several funds were raised. Each fund acquired distressed apartment buildings in New York City, rehabbed them, and sold them. • Income related to the investment manager included management fees, as well as performance fees related to the profits of rehabbing the buildings. Title Text • Since the subject company was just the investment manager, there were little to no assets (mainly office equipment). All assets were held in each fund and owned by the limited partners. 22 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Case Study 2 • Similar to the first case study, GA relied on the income approach. No publicly traded companies similar to the subject company (i. e. little to no assets), and no recent acquisitions of a similar type company. • Income related to rehabbing the buildings was recognized via rent-roll, i. e. determining the value of the building using rents of comparable buildings in the area. Title Text • GA relied on the rent rolls for the valuation of the buildings. Would we have liked appraisals for each of the buildings? Absolutely. In this case, it wasn’t in the budget. If the report was to be reviewed by an external authority (ex. IRS), GA likely would have pushed harder to have appraisals done by real estate professionals. • This was different from the first case study, but again, a business valuation with a lot of overlap with a real estate valuation. 23 ADVISORY · VALUATION · RETAIL SOLUTIONS · AUCTION SERVICES

Questions? FOR MORE INFORMATION, CALL DAN AT (312) 777 -7954 OR EMAIL HIM AT DDAITCHMAN@GREATAMERICAN. COM