M&A International the world's leading M&A alliance Business Valuation, Acquisitions & Divestitures March 2014 Howard E. Johnson MBA, FCPA, FCA, FCMA, CBV, CPA, CFA, ASA, CF, C.DIR

M&A International the world's leading M&A alliance About Veracap M&A International Veracap M&A International Inc. is a leading investment bank advising on acquisitions, divestitures, financing and shareholder value initiatives. As a member of M&A International, Veracap forms part of the worlds leading affiliation of M&A advisors, with over 600 professionals in 41 countries. Veracap is a sister company of Campbell Valuation Partners, Canadas longest established independent business valuation firm. www. veracap.com 2

M&A International the world's leading M&A alliance Speaker Howard E. Johnson MBA, FCPA, FCA, FCMA, CBV, CPA, CFA, ASA, C.Dir Managing Director, Veracap M&A International Inc. (416) 597-4500; hjohnson@veracap.com Howard is a Managing Director of Veracap M&A International and its sister firm, Campbell Valuation Partners Limited. Howard has been involved in business valuation, acquisition, divestiture, and shareholder value advisory assignments for corporations throughout North America. He is the author of several books on the subjects of business valuation and corporate finance, and has acted as an expert witness on valuation matters before the courts. 3

M&A International the world's leading M&A alliance Disclaimer This material is for educational purposes only. It deals with technical matters which have broad application and may not be applicable to a particular set of circumstances and facts. As well, the course material and references contained therein reflect laws and practices which are subject to change. For these reasons, the course material should not be relied upon as a substitute for specialized advice in connection with any particular matter. Although the course material has been carefully prepared, the author does not accept any legal responsibility for its contents or for any consequences arising from its use. Howard E. Johnson, 2014 4

M&A International the world's leading M&A alliance Overview I. Concepts & Principles II. Valuation Methodologies III. Rates of Return and Valuation Multiples IV. Acquisitions V. Divestitures VI. Private Equity and MBOs VII. Wrap-up 5

M&A International the world's leading M&A alliance PART I CONCEPTS AND PRINCIPLES 6

M&A International the world's leading M&A alliance Principles Enterprise value vs. equity value En bloc value vs. minority interest Business valuation vs. stock prices Cash flow and rates of return / multiples Liquidity 7

M&A International the world's leading M&A alliance Fair Market Value vs. Price Fair Market Value Open & unrestricted market Buyer and seller have equal knowledge & negotiating strength Parties are prudent and under no compulsion to transact Cash transaction Price Market restrictions Buyer and seller have different knowledge and negotiating skills Parties imprudent or compelled to act Non-cash consideration Other factors 8

M&A International the world's leading M&A alliance Components of Value & Price Post- Acquisition Synergies Intangible Assets & Goodwill Tangible Net Worth Fairmarke range(stan Investmen 9

M&A International the world's leading M&A alliance Goodwill Value of Shares $5,000,000 Underlying net tangible assets $3,000,000 Goodwill $2,000,000 Commercial Goodwill Transferable Individual Goodwill Transferable w/non-compete Personal Goodwill Non- Transferable Fair Market Value & Price Value to Owner 10

M&A International the world's leading M&A alliance Part II VALUATION METHODOLOGIES 11

M&A International the world's leading M&A alliance 70% 32% 22% 2% 12% 0% 10% 20% 30% 40% 50% 60% 70% %ofRespondents Discounted Cash Flow Multiple of Earnings Multiple of EBIT-DA Multiple of EBIT Other/industry -specificMethodology (Note: many respondents indicated more than one method. Therefore, the percentages do not total 100% ) Valuation Methodologies

M&A International the world's leading M&A alliance Cash Flow Terms Used in M&A Income before taxes + Interest expense = earnings before interest and taxes (EBIT) +/- Normalization adjustments = Normalized EBIT + Depreciation and amortization = Norm. earnings before interest, taxes, depn, amort. (EBITDA) - Capital expenditures - Cash income taxes - Incremental working capital requirements = Normalized discretionary cash flow (or free cash flow) 13

M&A International the world's leading M&A alliance Normalization Adjustments Non-active family members Excess or deficient salaries to owners Personal expenses Rents above/below market Non-recurring items Unusual items Etc. Separate return on effort and return on capital 14

M&A International the world's leading M&A alliance Multiple of EBITDA Approach to Valuation Normalized EBITDA Multiplied by EBITDA multiple Equals enterprise value Deduct interest bearing debt Equals equity value 15

M&A International the world's leading M&A alliance Multiple of EBITDA Example Normalized EBITDA $ 5 million Multiplied by EBITDA multiple 5x Equals enterprise value $25 million Deduct interest bearing debt ($5 million) Equals equity value $20 million 16

M&A International the world's leading M&A alliance Issues with the Multiple of EBITDA Approach EBITDA vs. discretionary cash flow Capex considerations Tax considerations Working capital requirements Normalization adjustments Distorted EBITDA base Growth assumptions embedded in the selected multiple 17

M&A International the world's leading M&A alliance Capitalized Cash Flow Approach Prospective discretionary cash flow Divided by rate of return Equals enterprise value Add redundant assets Deduct interest bearing debt Equals equity value 18

M&A International the world's leading M&A alliance Prospective Discretionary Cash Flow Cash that can be withdrawn from the business each year in the future without impairing ongoing operations Normally determined as: Earnings before interest expense & taxes (EBIT) of most recent years normalized for non-recurring items and related party remuneration Less income taxes Add back depreciation Less sustaining capital investment 19

M&A International the world's leading M&A alliance Rate of Return Capitalization rate (inverse of multiple) After-tax rate of return applied to after-tax cash flows Function of risk factors and opportunities Risk - reward trade-off Range of 10% to 15% for mid-sized, stable business is not unusual Higher rates for small companies, start-ups & high risk businesses 20

M&A International the world's leading M&A alliance Redundant Assets Non-operating assets not required in the operations of the business Example: marketable securities, excess land Must be permanently redundant (i.e. not a seasonal surplus) Remove any related income in estimating maintainable cash flow Normally withdrawn (on a tax-deferred basis) rather than sold 21

M&A International the world's leading M&A alliance Interest Bearing Debt Financing vs. operations Includes short term & long term interest bearing debt (lines of credit, mortgages, capital leases, etc.) Includes interest bearing debt equivalents (advances from shareholders, bonuses payable to shareholders, etc.) Excludes trade debt (accounts payable) Usually net of cash 22

M&A International the world's leading M&A alliance Case Example Joe Smith is the sole owner of a small product manufacturing company His business has been relatively stable in recent years and is expected to remain so Joes remuneration consists entirely of a bonus declared at year-end 23

M&A International the world's leading M&A alliance Current Balance Sheet $000 Assets Liabilities Cash 200 Bank loan 1,000 Accounts Receivable 1,200 Accounts Payable 700 Inventory 800 Bonus Payable 500 Due from Shareholder 300 Total liabilities 2,200 Total current assets 2,500 Equity Share Capital 1 Fixed assets (net) 1,000 Retained earnings 1,299 Total Equity 1,300 Total Assets $3,500 Total Liabilities & Equity $3,500 DECEMBER 31, 2013 24

M&A International the world's leading M&A alliance Historical Income Statements 2011 2012 2013 Revenues 5,530$ 5,950$ 5,710$ Cost of Sales 2,720 3,010 2,860 Gross Profit 2,810 2,940 2,850 Operating Expenses 1,740 2,090 1,770 Depreciation 220 230 240 Interest Expense 100 170 140 Shareholder Bonus 550 250 500 2,610 2,740 2,650 Earnings before tax 200 200 200 Income Taxes 40 40 40 Net Income 160$ 160$ 160$ $000 25

M&A International the world's leading M&A alliance Other Facts Annual capital reinvestment required = $250,000 Market salary for active shareholder = $150,000 2012 expenses includes a one time charge of $300,000 Prospective income taxes @ 25% (acquirers rate) Assume a 15% rate of return (6.7X multiple) 26

M&A International the world's leading M&A alliance Normalized Discretionary Cash Flows 2011 2012 2013 Earnings before tax 200$ 200$ 200$ Add: Unusual expense item 300 Shareholder bonus 550 250 500 Interest Expense 100 170 140 Less: Normal remuneration (150) (150) (150) Normalized EBIT 700 770 690 Less: Income Taxes (175) (193) (173) Normalized income 525 578 518 Add: Depreciation 220 230 240 Deduct: Capital Investment (250) (250) (250) Normalized cash flow 495$ 558$ 508$ 27

M&A International the world's leading M&A alliance Estimate of Stand Alone Value Maintainable discretionary cash flows, say $520 Divide by Capitalization rate (6.7x multiple) 15% Equals Enterprise Value (rounded) $3,500 Add: Redundant assets (due from s/h) 300 Deduct: Debt (bank loan + bonus cash) (1,300) En Bloc equity value $2,500 Intrinsic Value of Shares 28

M&A International the world's leading M&A alliance Discounted Cash Flow Approach Forecast discretionary cash flows normally 3 - 7 years projected cash flow Capital expenditure and working capital requirements considered Determine Terminal value value beyond forecast period maintainable discretionary cash flow at that time divided by capitalization Rate Discount annual forecast and terminal value Discount & cap rates reflect risks in forecast Equals enterprise value Deduct interest bearing debt & equivalents Equals equity value 29

M&A International the world's leading M&A alliance Discounted Cash Flow Example Current Year 1 Year 2 Year 3 Term. EBITDA 5,000 5,500 6,050 6,655 6,790 Depreciation (1,500) (1,500) (1,500) (1,530) EBIT 4,000 4,550 5,155 5,260 Income taxes at 25% (1,000) (1,138) (1,289) (1,315) After-tax income 3,000 3,413 3,866 3,945 Add back: dep'n 1,500 1,500 1,500 1,530 Deduct: capex (2,900) (1,000) (1,000) (1,600) Deduct: Working Capital (1,000) (1,000) (1,000) (240) Discretionary cash flow 600 2,913 3,366 3,635

M&A International the world's leading M&A alliance Discounted Cash Flow Example Year 1 Year 2 Year 3 Term. Discretionary cash flow 600 2,913 3,366 3,635 Capitalization rate (net of 2% growth) 13% Terminal Value 27,962 PV at 15% 560 2,362 2,373 19,716 (mid-year discounting)

M&A International the world's leading M&A alliance Discounted Cash Flow Example Contd PV of forecast discretionary cash flows $ 5,300 PV of terminal value $19,700 Enterprise value $25,000 Less - Interest bearing debt $(5,000) Equity Value $20,000 * Note figures rounded

M&A International the world's leading M&A alliance What about the Balance Sheet? Expectations of buyers as to deliverables Working capital Book value Normally cash-free, debt free, except as agreed Redundant assets Operating asset adjustments 33

M&A International the world's leading M&A alliance Part III RATES OF RETURN AND VALUATION MULTIPLES 34

M&A International the world's leading M&A alliance Rates of Return Discount Rate Converts a series of cash flows to present value Used in Discounted Cash Flow calculation Normally a weighted average cost of capital Capitalization Rate Converts a point estimate of cash flow into value Equals discount rate less long term growth rate Capitalized cash flow methodology and terminal value part of DCF Valuation Multiple Inverse of capitalization rate Often expressed on a pretax basis 35

M&A International the world's leading M&A alliance Weighted Average Cost of Capital Cost of Equity WACC Cost of Debt Optimal Capital Structure Cost % 100% Debt Debt + Equity 0 36

M&A International the world's leading M&A alliance Simplified WACC Formula WACC = Ku x {1 - [T x D/(D+E)]} Debt-free Return on Equity Tax Rate Debt to Debt Equity (capital structure) Operating Risk Financial Risk { { This is as technical as it gets!!!! 37

M&A International the world's leading M&A alliance Determining the Buyers Debt-Free Return on Equity (KU) Function of operating risk (business risk) reflects industry and company-specific risks & opportunities Normally relatively stable given investment horizon Often based on a build-up methodology LT Govt bond rate + equity risk premium +/- Adjustments Possibly a corporate hurdle rate 38

M&A International the world's leading M&A alliance Determination of Buyers Capital Structure Optimal vs. appropriate Long term target range Target vs. acquirer Determinants cost of debt industry practice stability of cash flows underlying assets covenants tax rate Subjective 39

M&A International the world's leading M&A alliance Buyers After-Tax Capitalization Rate Nominal WACC discount rate (including inflation) Deduct: inflation Deduct: perpetual real growth rate (reasonableness issue) Equals Capitalization Rate 40

M&A International the world's leading M&A alliance Discount & Capitalization Rate Example Facts: Cost of equity (pre-debt) 14% Inflation 2% Debt to total capital 33% Tax rate 25% Perpetual real growth 1% 41

M&A International the world's leading M&A alliance Discount & Capitalization Rate Example Contd Discount rate (nominal WACC) = 14% x [1 - (25% x 33%)] = 13% (rounded) Capitalization rate (real WACC) = 13% deduct: 2% inflation 1% growth = 10% Equivalent multiple of after-tax free cash flows (before interest expense): = 1 / 10% = 10X Equivalent multiple of EBIT = 10 x (1-25%) = 7.5X Multiple of EBITDA: 7.5 x (1-20%) = 6x (assuming depn is 20% of EBITDA) 42

M&A International the world's leading M&A alliance Buyers Corporate Hurdle Rate Another name for discount or capitalization rates Set at board level Must understand what it represents (WACC or ROE, discount or capitalization rate, etc.) Fact specific adjustments Implicit assumptions re: inflation, financial leverage, industry risk, etc. 43

M&A International the world's leading M&A alliance Target Nominal WACC Rates of Return Used by Corporate Acquirers Less than 10% 10% - 11% 12% - 13% 14% -15% 16% -17% 18% - 19% 20% & Over 9% 25% 20 % 30% 3% 5% 8% 0% 5% 10% 15% 20% 25% 30% %ofRespondents 44

M&A International the world's leading M&A alliance Valuation Multiples Mirror Side of the Capitalization Rate Often converted to a pretax basis, and expressed as a multiple of EBIT or EBITDA 5x EBITDA a popular starting point for mid-sized mature businesses Adjustments for risk, growth, perceived importance of acquisition target, etc. 45

M&A International the world's leading M&A alliance Determinants of Valuation Multiples Company size Revenue stability and concentration Proprietary products and services Management and employees Growth potential Capital expenditure requirements Buyer synergy expectations Terms of the transaction Comparable transactions 46

M&A International the world's leading M&A alliance Rates of Return & Multiples Return Multiple EBITDA $5,000 20% 5.0X Depreciation 1,300 EBIT $3,700 15% 6.7X Income taxes 1,200 After-tax cash flow $2,500 10% 10.0X All results lead to $25 million (enterprise value) 47

M&A International the world's leading M&A alliance PART IV ACQUISITIONS 48

M&A International the world's leading M&A alliance Objectives Driving Deals for Buyers Access to new markets ...76% Growth in market share ...74% Access to new products ...54% Access to talent 47% Enhanced reputation 46% Reduction in operating expenses 46% Access to distribution channels 38% Access to new technologies 26% Reduction in # of competitors 26% Access to new brands ...25% ( source: PWC) 49

M&A International the world's leading M&A alliance M&A Valuation Dynamics Buyers Detailed Calculations 1. DCF / Cap. Cash flows 2. Comparable transactions Sellers Preliminary Calculations 1. Comparable Transactions 2. DCF / Cap cash flows Dynamic Investment value Market influences Negotiations 50

M&A International the world's leading M&A alliance Overview of the Acquisition Process 1. Pre-acquisition Planning 2. Search for targets 3. Target company analysis 4. Internal valuation & pricing 5. Negotiations and the LOI 6. Detailed due diligence 7. Purchase agreement & closing 8. Integration 51

M&A International the world's leading M&A alliance Pre-acquisition Planning Fit with strategic plan Build vs. buy Policies and procedures in place Resources Search criteria Active vs. passive search 52

M&A International the world's leading M&A alliance Confidentiality Agreements / NDAs Usually will be asked to sign prior to receiving confidential info and sometimes prior to knowing the identity of the seller Be careful re: provisions governing restrictions on contacting customers, suppliers etc. (especially for competitors) Best to ask that your own 2-way NDA be signed Establish internal protocol for NDA approvals 53

M&A International the world's leading M&A alliance The 3 Classic Deal Contexts 1. The single buyer 2. The controlled auction 3. The effective auction 54

M&A International the world's leading M&A alliance Preliminary Due Diligence Assessment of confidential information memorandum Publicly available data Meetings with owners and management Review data room Assessment of other potential bidders 55

M&A International the world's leading M&A alliance Preliminary Due Diligence Strategic Fit assessment Likelihood of integration Revenue base and growth prospects Sales and marketing Management and employees Operations Financial performance Synergies 56

M&A International the world's leading M&A alliance Integration and Transition Risks Loss of customers Non-transferability of key contracts Loss of key employees Change in culture Additional costs / lost revenue during integration Damage to brand names and other intangibles acquired 57 Transition Risks

M&A International the world's leading M&A alliance Synergistic Objectives (& Results) Driving M&A Deals Access to new markets 76%... (74%) Growth in market share 74%... (60%) Access to new products 54%... (72%) Access to talent 47%... (51%) Enhanced reputation 46%... (48%) Reduction in operating expenses 46%... (39%) Access to distribution channels 38%... (60%) Access to new technologies 26%... (63%) Reduction in # of competitors 26%... (80%) Access to new brands 25%... (92%) Source: PWC 58

M&A International the world's leading M&A alliance Synergies A premium over stand-alone value due to: increase in free cash flows due to higher revenues or reduced costs reduced risk in achieving free cash flows additional growth opportunities and strategic value Should be separately assessed Unique to every acquirer Buyer is in a better position to quantify Apply probability factor to reflect risk Synergies not paid for act as buffer Can be a key negotiating point 59

M&A International the world's leading M&A alliance Up to 25% of synergies 16% Synergies not considered 18% More than 75% of synergies 30% 51% to 75% of synergies 7% 26% to 50% of synergies 29% Proportion of Synergies Incorporated by Acquirers in Valuing Acquisition Targets 60

M&A International the world's leading M&A alliance M&A Negotiation Importance of negotiating strategy often underestimated Posture, style, and other tactics Price and terms are important The need and desire to transact 61

M&A International the world's leading M&A alliance M&A Negotiation Team Internal Division Executives (finance, marketing, operations, etc.) Corporate development officer In-house General Counsel External - Transaction / Valuation Advisors - Legal / Tax / Accounting - Non-M&A Technical Advisors 62

M&A International the world's leading M&A alliance Who Should be Involved in Negotiations Agree up front Fewer is better (directly) External advisors act as buffer subsequent relationship emotional deal killers shadow negotiator Authority/competence to recommend deal 63

M&A International the world's leading M&A alliance Financing Alternatives Vendor financing (e.g. promissory note) Senior debt Normally secured against A/R, inventory, real property Rate is prime + Usually up to about 2x to 3x EBITDA Subordinated debt Usually a coupon of 10% to 15%, plus upside kicker Considerable interest in acquisition financing Usually 1x to 2x EBITDA Equity New vs. existing 64

M&A International the world's leading M&A alliance Debt Financing Considerations Restrictive covenants Security offered Long term capital structure Future financing requirements Degree of flexibility Matching principle Principal repayment options Renewal options

M&A International the world's leading M&A alliance Final Due Diligence Legal and audit due diligence Verification of facts and assumptions Details not previously reviewed Employee details Contracts and agreements Detailed operational issues Customer / supplier details Financial details Insurance and related claims Legal issues, minute books, etc. 66

M&A International the world's leading M&A alliance Hidden Liabilities Overvalued assets Slow-moving inventories Receivables Fixed assets (repairs, maintenance) Undervalued Liabilities Pensions and post-employment obligations Warranties Contracts and commitments Revenue / expense recognition 67

M&A International the world's leading M&A alliance Due Diligence Renegotiation Buyers side significant issues discovered or interim business issues Lower price vs. change terms When to walk away Sellers side unsolicited alternative offer Interim business performance Holding out for more 68

M&A International the world's leading M&A alliance Purchase Agreement Definitive binding agreement Contains all aspects of the deal Drafted by the buyers legal counsel Normally prepared concurrent with due diligence Representations and warranties Arbitration clauses 69

M&A International the world's leading M&A alliance Representations & Warranties Best of knowledge vs. Absolute knowledge Time period Minimums / maximums (baskets and caps) Seller covenants 70

M&A International the world's leading M&A alliance Management Contracts Individual shareholders Eases transition issues for buyers Usually 6 months to 3 years Level of involvement to be determined May effectively represent a portion of price Transition issue for seller? 71

M&A International the world's leading M&A alliance Non-competition Agreements Individual shareholders Individual goodwill Specifies scope of work, territory and time period 2 to 5 years is not uncommon Purchase price allocation Tax rules 72

M&A International the world's leading M&A alliance Closing Usually at a lawyers office Concurrent with or shortly after execution of purchase agreement Exchange of cash, shares, notes, etc. Last-minute negotiations Post-closing audit 73

M&A International the world's leading M&A alliance Keys to Successful Integration Communication Plan with milestones Execution / managing the process Champion with authority and business savvy Plan in advance during assessment stage Identify and deal with issues early Getting employee buy-in 74

M&A International the world's leading M&A alliance Classic Buyer Mistakes Overpaying for expected synergies / unrealized synergies Compulsion to act / falling in love with the deal Inadequate due diligence Technical errors in financial analysis & calculations Poor integration Bitter post-acquisition sentiment Management philosophy / cultural differences Failure to identify hidden costs Failure to anticipate or avoid key personnel turnover 75

M&A International the world's leading M&A alliance Acquisition Opportunities in the Current Environment Active search for proprietary deals Turnaround situations equity investment Debt acquisitions Small cap public companies Private equity portfolio orphans 76

M&A International the world's leading M&A alliance PART V DIVESTITURES 77

M&A International the world's leading M&A alliance Transition Trade-offs Family Mgmt. 3rd Party Usual time requirements 2-4 months 3-6 months 6-12 mo.s Complexity Low-med Med-high High Valuation & Pricing Low-med Medium Med.-High Cost Lowest Moderate Highest Risk (deal failure, info. leak, etc.) Lowest Moderate Highest Deal structuring flexibility Good Fair good Fair - good Tax efficiency opportunities Very good Good Fair - good

M&A International the world's leading M&A alliance VALUE RECEIVED BY THE BUSINESS OWNER ECONOMIC TERMS OF THE DEAL INTANGIBLE ASPECTS OF THE DEAL STATED PURCHASE PRICE Elements of Value to the Business Owner 79

M&A International the world's leading M&A alliance The Private Company Sale Process 1. Deciding When to Sell 2. Preparing for the Sale 3. Estimating Value & Price 4. Search for Buyers 5. Preliminary Due Diligence 6. Deal Structuring 7. Negotiations 8. Closing 80

M&A International the world's leading M&A alliance Timing of the Sale Process Time Reqd Planning Phase Deciding when to sell It depends Preparation 1-3 years (ideally) Valuation 1-2 months Execution Phase Search for buyers 1-2 months Preliminary due diligence 2-4 months Deal structuring & negotiations 1-2 months Closing 2-4 months 81

M&A International the world's leading M&A alliance Building Deal Momentum Deciding When To Sell Preparing For the Sale The Search For Buyers Estimating Value and Price Preliminary Due Diligence PLANNINGPHASEEXECUTIONPHASE Negotiations Deal Structuring Closing VALUEENHANCEMENT 82

M&A International the world's leading M&A alliance Deciding When to Sell The owners personal situation Economic and industry conditions Company performance and prospects Key = Time the sale to coincide with favourable personal and business conditions 83

M&A International the world's leading M&A alliance Circumstances Leading to Sale Compulsion to sell An undesirable situation The growing company dilemma Voluntary retirement / change of interests Management contract considerations Unsolicited offer Seller must stay in control of the process 84

M&A International the world's leading M&A alliance Considerations Prior to Sale Personal impact on owner and family Family members active in the company Who to sell to Family, management or third party Plans following the sale Management contract / non-compete considerations Personal financial situation Acceptable forms of consideration 85

M&A International the world's leading M&A alliance Company Performance and Prospects Recent historical operating results Easier to sell a growth story Revenue and cash flow growth Budgets and projections Tangible support where possible (e.g. contracts) Beware of unfounded optimism Influence on valuation multiples 86

M&A International the world's leading M&A alliance Timing of the Sale Profit Level Time Historical Forecast 87

M&A International the world's leading M&A alliance Preparing for the Sale Operational and financial structuring Income tax and estate planning Transaction advisors Key = Structure the affairs of the company to increase its attractiveness to buyers 88

M&A International the world's leading M&A alliance Operational Matters Customer and market analysis Revenue stability and concentration Competitive analysis Management and employees Ability to transition the business Key employee issues General operational matters Facilities, equipment, inventories, etc. Company website Caution re: new commitments Administrative matters Minute books, banking agreements, contracts, etc. 89

M&A International the world's leading M&A alliance Financial Matters Financial statement review / audit The income statement Revenue recognition Expense management Profit trends The balance sheet Working capital management Capital expenditure management Redundant assets 90

M&A International the world's leading M&A alliance Tax and Estate Planning Holding companies Crystallizing the capital gains exemption Family trusts, discretionary trusts, etc. Redundant / non-operating assets Real property issue Capital dividend account Refundable dividend tax on hand account 91

M&A International the world's leading M&A alliance Search for Buyers Identifying prospective buyers Qualifying prospective buyers Initial buyer contact Key = Establish a sufficient number of qualified buyers to establish the platform for the effective auction 92

M&A International the world's leading M&A alliance Types of Prospective Buyers Strategic Non-strategic Small corporate / individuals Financial Management and employees 93

M&A International the world's leading M&A alliance Where to Find Buyers Previous solicitations Competitors Industry transactions Public company disclosures Industry associations Customers / suppliers (value chain analysis) Financial buyers websites Importance of thinking outside of the box 94

M&A International the world's leading M&A alliance Qualifying Prospective Buyers Research and analysis Public company disclosures Websites Prior transactions Financial buyers 95

M&A International the world's leading M&A alliance Initial Buyer Contact Approaching the right person(s) Method of solicitation The acquisition profile The disclosure / obfuscation trade-off The non-disclosure agreement Beware of its limits 96

M&A International the world's leading M&A alliance Preliminary Due Diligence The Confidential Information Memorandum Initial buyer meetings Other information and procedures Key = Control the flow of information to increase the perceived value of the company among buyers 97

M&A International the world's leading M&A alliance Confidential Information Memorandum Purpose Sales document Establishes the ground rules (e.g. type of auction) Nature and amount of disclosure Sufficient to allow a buyer to understand the company and decide whether they are interested in proceeding further Extent of disclosure of weaknesses and threats 98

M&A International the world's leading M&A alliance Initial Buyer Meetings Meeting protocol Who attends Where held What is discussed Setting the agenda Preparing for meetings Conveying information to the buyer Obtaining information from the buyer 99

M&A International the world's leading M&A alliance Other Information and Procedures Additional documentation Plant tours Discussions with key employees / customers / suppliers Product demonstrations Issue how much information to disclose prior to the LOI 100

M&A International the world's leading M&A alliance Transaction Structuring Assets vs. shares Forms and terms of payment The Management Contract Key = Evaluate each proposal based on its risk-reward parameters and income tax efficiency 101

M&A International the world's leading M&A alliance Assets vs. Shares Buyers normally want to buy assets Income tax advantages Reduced liability Sellers normally prefer to sell shares Tax free share exchange Capital gains exemption - individuals Therefore, proceeds for assets normally higher, but consider tax consequences to seller Seller of assets either can wind up company following sale or retain it as a holding company 102

M&A International the world's leading M&A alliance Asset Purchases vs. Share Purchases Always or usually shares 49% Always or usually assets 34% Mix of assets & shares 17% 103

M&A International the world's leading M&A alliance Forms of Consideration Cash at closing Holdback Seller take-back / Promissory Notes Share exchange Earn-out 104

M&A International the world's leading M&A alliance Holdbacks Protects buyer against undisclosed liabilities 5% to 15% of purchase price not uncommon 6 to 18 months not uncommon Specify Interest bearing or not Buyers payment covenant and sellers recourse for non-payment Conditions for non-payment 105

M&A International the world's leading M&A alliance Seller Take-Back Usually a promissory note Generally 1 to 5 years Sometimes redeemable preference shares Specify Stated interest rate (or dividend rate) Buyers payment covenant and sellers recourse for non-payment Conditions for non-payment 106

M&A International the world's leading M&A alliance Share Exchange Normally tax-free if made between Canadian companies and seller does not receive other consideration Foreign tax free structures possible, but more complex Liquidity issue Private companies Public companies restrictions & floats Forward sale Often highly risky (e.g. Dot.coms) 107

M&A International the world's leading M&A alliance Earn-out Transfers risk from buyer to seller Five principal items negotiated Duration Control (Who has?) Unit of measurement (top, bottom or middle lines?) Cumulative ? (A second chance?) Collar and cuff? (Cliff payments and maximums) Tax issues 108

M&A International the world's leading M&A alliance Forms of Consideration Cash Only 60% Share Exchange 26% Vendor Take Back 2% Earnouts 2% Combination of Above 10% 109

M&A International the world's leading M&A alliance Negotiations Preparing for negotiations Negotiating strategies and tactics The Letter of Intent Key = Secure a comprehensive letter of intent that offers the best value to the business owner 110

M&A International the world's leading M&A alliance Preparing for Negotiations Who should be directly involved Understanding of sellers needs and interests Location where negotiations are held Parameters re: price range and deal structure Research on buyer 111

M&A International the world's leading M&A alliance Negotiating Principles Information is key Credibility Information provided Changes in stated positions Alternatives Number and quality of buyers Price and terms are important When / how paid Conditions for payment Tax issues 112

M&A International the world's leading M&A alliance The Letter of Intent Non-binding except for certain provisions Confidentiality Exclusivity A key document in negotiations The apex of negotiations Dangers of ambiguity LOI vs. Expression of Interest 113

M&A International the world's leading M&A alliance Usual Contents of an LOI Offer price or range Specify shares or net assets Forms and terms of payment Salient terms of a management contract & non- compete Conditions of offer Exclusivity time period Balance sheet requirements Income statement / cash flow requirements Unusual representations and warranties 114

M&A International the world's leading M&A alliance The Buyer/Seller Advantage Curve Management Presentation Multiple Offers LOI Negotiations Exclusivity to Buyer Closing Seller Buyer 115

M&A International the world's leading M&A alliance Closing Detailed due diligence The purchase agreement Final closing Key = Maintain negotiating position to crystallize the value enhancement created throughout the sale process 116

M&A International the world's leading M&A alliance Why Deals Fail to Close Buyer and seller have different expectations Secure a comprehensive, unambiguous LOI / term sheet New issues uncovered in detailed due diligence Ensure full disclosure of major issues prior to the LOI / term sheet Material adverse change in the companys operations Adopt a business as usual attitude during closing External circumstances Negotiate a relatively short exclusivity period 117

M&A International the world's leading M&A alliance Divestiture Opportunities in the Current Environment Public companies with cash on hand Private equity overhang about $500 billion Bolt-on opportunities for small and mid-size companies Management buyouts 2-Stage deals, earnouts, etc. 118

M&A International the world's leading M&A alliance PART VI PRIVATE EQUITY AND MANAGEMENT BUYOUTS 119

M&A International the world's leading M&A alliance The Traditional Private Equity Mentality Leverage x Growth x Multiple Expansion = Huge ROI Today EBITDA $5 M Multiple 5 x Enterprise Value $25 M Debt $15 M Equity $10 M ROI = 500% Sale $10 M 6 x $60 M $ 0 M $60 M 120

M&A International the world's leading M&A alliance The MBO Opportunity Availability of capital from financial investors coupled with a lack of quality opportunities for investment Financial investors becoming more aggressive Quicker and more confidential than a 3rd party sale Deal structuring opportunities Tax efficient transaction and availability of cash Possible lucrative upside for owner and management Personal sentiment of the owner Management has earned the opportunity 121

M&A International the world's leading M&A alliance The MBO Process 1. Discussions between owners and management 2. Initial valuation 3. Business plan / information memorandum 4. Soliciting and meeting with financial investors 5. Negotiating the terms of the deal 6. The term sheet 7. Due diligence and finalizing the valuation 8. Closing 122

M&A International the world's leading M&A alliance MBO Example Company generates $5 million EBITDA and has no debt Multiple of 5x considered appropriate Management can raise $1 million Debt of $10 million can be raised, at an average cost of 10% Expected exit multiple of 6x EBITDA 123

M&A International the world's leading M&A alliance Financial Investor Economics Current Year 1 Year 2 Year 3 Exit EBITDA 5,000 5,500 6,050 6,655 6,655 Cash flow after tax, before debt 950 1,369 1,852 Debt repayment (950) (1,369) (1,852) Residual 0 0 0 Effective transaction multiple 5x 6x Transaction value 25,000 39,930 Financed by: Debt 10,000 9,050 7,681 5,829 5,829 Equity 15,000 34,101 Total 25,000 39,930 124

M&A International the world's leading M&A alliance Financial Investor Economics (contd) Current Exit Ownership Management team 6.7% 16.7% Financial investor 93.3% 83.3% Total 100.0% 100.0% Equity Investment Management team 1,000 5,684 Financial investor 14,000 28,418 Total 15,000 34,101 Return on Equity Management team 78% Financial investor 27% Blended 31% 125

M&A International the world's leading M&A alliance What are Private Equity Investors Looking for? Strong business fundamentals Differentiation Strong management team Alignment of interests Exit strategy alternatives 126

M&A International the world's leading M&A alliance Classic Mistakes MBOs Not recognizing managements conflict of interest Insufficient financial buy-in by management Not managing debt constraints and covenants Choosing the wrong financial partner(s) Being too stringent on terms 127

M&A International the world's leading M&A alliance Part IX WRAP UP 128

M&A International the world's leading M&A alliance Review I. Concepts & Principles II. Valuation Methodologies III. Rates of Return and Valuation Multiples IV. Acquisitions V. Divestitures VI. Private Equity and MBOs VII. Wrap-up

M&A International the world's leading M&A alliance Final Words Understand the components of value Internal consistency Importance of price and terms Negotiations are key Manage the acquisition & divestiture process 130

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