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Buy/Sell/Hold: Evaluating Strategic Alternatives

Mark Padjen Director Financial Advisory Services

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Potential Shareholder Value Drivers

Capabilities Required to Succeed

Benefits

Ideal Market Characteristics

Organic Growth Acquisitions Monetization Financial

Engineering

Relies on core competencies

Low risk strategy

Strategically aligned

Enhanced growth

Diversification of revenue / earnings

Synergy potential

Enhanced shareholder returns

Lower cost of capital

Provides liquidity while maintaining control

Immediate realization of cash

Diversification of wealth

Potential to retain upside through partial rollover

Growing end markets

High barriers to entry

Enhanced value proposition

Availability / actionability of targets

Debt availability

Reasonable valuation multiples

Active debt / equity markets

“Cheap” money

Stable end markets

Active M&A market

Attractive end markets

High valuation multiples

Capital to invest

Financial flexibility

Defendable market position

M&A execution capabilities

Ability to integrate

Debt firepower

History / ability operating with leverage

Stable cash flows

Selling shareholder engagement

Good margins / returns inherent in business

Strong growth prospects

Adequate cash flow to support leverage

Delivering value to shareholders can be achieved through multiple strategies

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Formation of the Decision Making Process

General market outlook (economic and capital markets)

Industry outlook and growth potential

Debt / risk appetite and availability

Market Conditions

M&A Opportunities

Availability of acquisition targets

Expertise in acquiring and integrating businesses

Industry consolidation trends / acquisition activity / competitive dynamics

Business Performance

Trajectory and sustainability of top-line growth, margins and cash flow

Debt capacity and M&A firepower

Market position relative to peers

Owner Priorities

Active vs passive involvement in the business

Retirement objectives and timing

Near-term liquidity needs

Family legacy and ongoing family involvement

The decision making process is typically informed by owner priorities, business performance and general market conditions

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Understanding the Value of Your Business and Returns

Returns

Evaluate historical and projected returns in the business

Compare returns vs. peers

Understand the Company’s weighted average cost of capital (“WACC”)

Ensure capital being deployed in assets / projects that exceed Company’s WACC

Ensure equity returns commensurate with owning smaller, illiquid, private company

Private equity investors demand high teens or better, why shouldn’t you?

Valuation

Determine the fair market value of a business utilizing various valuation techniques

Leveraged Buyout Analysis

Comparable Acquisitions

Comparable Trading Analysis

Discounted Cash Flows

Before evaluating the alternatives, you must first be grounded in the value of your business and the returns it is generating

Self reflection of historical / projected returns will help serve as a basis to compare alternatives

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Manufacturing company with strong reputation in highly fragmented market

Revenue growth forecasted at 2.5% annually

EBITDA margins increase 10 bps per annum

Cash builds with cash flow as debt is paid down – net cash position by 2019E

Cash tax rate of 40.0%

Capex equal to 3.0% of sales

Illustrative Scenario

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Forecast

Assumptions

Observations Historical equity growth of 7.3% is lower than forecasted growth of 8.9%

Forecasted equity growth of 8.9% falls short of Company’s cost of equity at 14.7%

Equity accretion to shareholders in the status quo scenario is suboptimal

Financial

Forecast

Note: Observations based on EBITDA valuation multiple of 8.0x

($ in 000's)

Historical Forecast '16 - '21FYE 12/31 2014A 2015A 2016A 2017E 2018E 2019E 2020E 2021E CAGR

Net Revenue $56,556 $58,252 $60,000 $61,500 $63,038 $64,613 $66,229 $67,884 2.5%% Growth n/a 3.0% 3.0% 2.5% 2.5% 2.5% 2.5% 2.5%

Adjusted EBITDA $9,501 $9,845 $10,200 $10,517 $10,842 $11,178 $11,524 $11,880 3.1%% Margin 16.8% 16.9% 17.0% 17.1% 17.2% 17.3% 17.4% 17.5%

Cash 0 0 0 3,568 7,297 11,202 15,299 19,600

Debt (14,000) (13,000) (10,200) (9,180) (8,160) (7,140) (6,120) (5,100)

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Stand Alone Value Creation

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Enterprise Value Equity Value

$62 $71

$95

$14 $10

$76 $82

$95

2014A 2016A 2021EEquity Net Debt

3.6% IRR

3.1% IRR

$62 $71

$95

$14

$62 $71

$110

2014A 2016A 2021EEquity Net Cash

7.3% IRR

8.9% IRR

Leverage enhances return profile to shareholders

($ in millions)

2016A $10.2MM EBITDA

8.0x Multiple

2021E $11.9MM EBITDA

8.0x Multiple

2014A $9.5MM EBITDA 8.0x Multiple

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Weighted Average Cost of Capital (“WACC”) Analysis

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WACC

Pro Forma Cost of Debt Cost of Equity (CAPM)

WACC analysis is highly dependent upon capital structure assumptions and size of company

WeightedAverage

Weighted Avg. Cost of Debt 4.0%

Tax Rate 40.0%

Weighted Avg. after tax Cost of Debt 2.4%

Weighted Cost % of Cap Average

Debt 2.4% 12.5% 0.3%

Equity 14.7% 87.5% 12.9%

Totals 100.0%

WACC 13.2%

Based on Duff & Phelps 2016 Valuation Handbook – CRSP

Deciles Size Premium

Source: Risk Free Rate based on current synthetic 20-year treasury yield; Market Risk Premium per Damodaran’s Implied ERP based on Average Cash Flow yield last 10 years; Size Premium per Duff & Phelps 2016 Valuation Handbook based on CRSP Deciles Size Premium

Metric

Risk Free Rate (Rf) 2.7%

Company Beta (Rb) 0.80

Market Risk Premium (MRP) 5.8%

Size Premium (SP) 7.3%

Cost of Equity (Rf+(Rb*MRP)+SP) 14.7%

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Assumptions

Sources & Uses and

Capitalization

Pro Forma

Financial

Forecast

Incorporating M&A Into the Mix

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Assumes purchase of $4 million EBITDA target at 8.0x multiple

Consolidated leverage of 3.0x

Financed entirely with senior term debt

Target financial forecast aligns with Acquirer (similar margins and growth profile)

Assumes synergies valued at 5.0% of Target’s COGS

($ in 000's)

Sources % of Cap2016A EBITDA

Multiple UsesSenior Revolver -$ 0.0% 0.0x Purchase Target Company 32,000$ Senior Term Loan 42,700 48.7% 3.0x Refinance Existing Senior Debt 10,200

Total Senior (and Total) Debt 42,700$ 48.7% 3.0x Rollover Equity 45,000Book Value of Equity 45,000 51.3% Fees & Expenses 500 Total Sources (Capitalization) 87,700$ 100.0% Total Uses 87,700$

($ in 000's)

Forecast '16 - '21FYE 12/31 2016A 2017E 2018E 2019E 2020E 2021E CAGR

Net Revenue $83,529 $85,618 $87,758 $89,952 $92,201 $94,506 2.5%% Growth n/a 2.5% 2.5% 2.5% 2.5% 2.5%

Adjusted EBITDA $14,200 $15,520 $15,994 $16,483 $16,986 $17,504 4.3%% Margin 17.0% 18.1% 18.2% 18.3% 18.4% 18.5%

Cash 0 911 2,014 3,281 4,740 8,113

Debt (42,700) (37,519) (32,146) (26,609) (20,880) (16,610)

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$71

$132 $10

$8

$82

$140

2016A 2021EEquity Net Debt

11.4% IRR

$71

$132

$71

$132

2016A 2021E

13.0% IRR

Value Creation with M&A

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Enterprise Value Equity Value

Debt financed M&A drives an elevated return profile

($ in millions)

2016A $10.2MM EBITDA

8.0x Multiple

2021E $17.5MM EBITDA

8.0x Multiple

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Organic vs M&A Growth Summary

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Organic Growth

M&A Growth

Familiarity / expertise, ease of sticking to knitting

Premium placed on strong organic growth in valuation context

No transactional risk to implement

× Highly dependent on underlying growth of market

× Longer lead time to make fundamental shifts in the business

× Unlikely “game changing” strategy / outcome

Ability to transform / diversify business rather quickly

Opportunity to achieve revenue / operational synergies

May significantly enhance equity upside

× Transaction / integration risks

× Significant management time and effort

× Highly dependent on market, valuation and actionable targets

$71

$110 $132

2016AStandalone

2021EStandalone

2021EWith M&A

8.9% IRR

13.0% IRR

Equity Value ($ in millions)

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Monetizing the Business – Market Considerations

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Global M&A Deal Volume 2008 - 2016 (US$ BN)(1)

U.S. M&A Transactions Multiples – EV/EBITDA(2)

M&A market remains at elevated levels and valuations are at record highs

$1,783$1,296

$1,760$2,021 $1,868 $1,884

$2,992

$3,655

$2,959 $2,546

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Num

ber o

f Dea

ls

North American Acquirers Europe Acquirers RoW Acquirers Number of Deals

8.4x

9.7x11.5x

9.7x11.0x

9.4x9.9x

10.9x

13.7x

2009 2010 2011 2012 2013 2014 2015 2016 2017YTD

Source: FactSet Note: 2017 is based on a run-rate basis, annualized from YTD activity as of June 30, 2017. 1. Includes all announced transactions 2. Includes all completed transactions with a U.S. acquirer and target disclosed values between US$200MM - US$5,000MM.

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$71 $68 $65 $62 $59 $55

$10 $21 $32 $43 $54 $71 $79 $86 $93 $101 $110

2016A 2017E 2018E 2019E 2020E 2021E

$71 $79 $86 $93 $101 $110

2016A 2017E 2018E 2019E 2020E 2021E

Sell Today vs Status Quo

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Future Equity Value

Present Value of Future Equity Value @ 14.7% Cost of Equity

In a low / no growth scenario, the greatest value might be achieved by selling the Company today

($ in millions)

($ in millions)

While Equity Value grows from

$71 million to $110 million...

…Present Value decreases from $71 million to

$55 million

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Potential Monetization Alternatives

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Sale to Third-Party Dividend Recap

Full valuation for selling shareholders

100% liquidity for shareholders at close

Strategic buyers may pay up for synergies

Maximize value through price discovery process

Pros

× Multiples may not meet expectations

× Execution risk

× Process creates significant management distraction

× Shareholders cede upside

Cons

Full ESOP

Maintain full ownership

Easy to execute

Provides partial return of capital to shareholders

× Provides only partial shareholder liquidity

× Significantly lower free cash flow than partial ESOP

× Lower leverage likely available vs. Full ESOP

Full valuation for selling shareholders

Significant liquidity event for shareholders

Highly tax efficient (Sub S Corp ESOP)

Optimal employee benefit / upside / potential for retention

× Multiple “steps” needed to achieve full liquidity

× Leveraged balance sheet × Trustee must agree to

valuation × Future repurchase obligations × Highly regulated structure

A monetization alternative can be structured to meet owners’ objectives

ESOP Basics

What is an ESOP?

Retirement plan for employees

Stock based compensation plan

It’s the law – governed by the Employee Retirement Income Security Act of 1974 (ERISA)

Provides tax benefits to encourage individual retirement savings

Virtual “stock market” for existing shareholders to sell shares

Highly customized structure (i.e., partial or full ESOP possible)

Similar to a leveraged share repurchase

Why Choose an ESOP?

Recruit and retain talent

Motivate employees with supplemental compensation

Monetize wealth for selling shareholders

Diversify holdings

Ability to maintain control of the business

Create tax shield for the Company

Create flexibility for shareholders to sell shares over time

Defer capital gains taxes indefinitely (30% Minimum ESOP & C-Corp required)

Preserve legacy

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Company Benefits Employee Benefits

Corporate tax shield created by ESOP contributions

Employee recruiting & engagement tool

Succession framework

Reduced uncertainty of potential M&A sale

Mitigation of estate tax exposure

Established fair market value for shareholder redemptions

Retirement savings vehicle

Ownership in company - wealth building opportunity

No cash out-of-pocket

Tax deferred savings

Potential for accelerated returns from equity growth + debt pay-down

Potential supplemental dividends

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ESOP Basics (Continued)

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Comments

Management Retains Control

Trustee represents employee equity interests (NOT on Board of Directors) and votes unallocated employee shares, generally holding voting control until full exit is achieved (depending on structure of inside loan)

BOD constituted by existing shareholders, ratified by Trustee based on BOD recommendations Day-to-Day management remains in place Trustee oversees valuation/repurchase exercise and negotiates on behalf of employees Employees have no say in day-to-day operations

Employee Benefit

Governed by Employee Retirement Income Security Act of 1974 (ERISA), Department of Labor (DOL), & Internal Revenue Service (IRS) Encourages retirement savings Tax benefits borne out of retirement savings trade off Fundamentally similar to a stock bonus plan

Leveraged Share Repurchase

ESOP transaction is a leveraged share repurchase with significant tax benefits o 1042 Rollover election allows for no capital gains tax on sale proceeds o No corporate income tax under the 100% S-corp ESOP structure

ESOP buys shares from selling shareholders with leverage; then repurchases from employees later (typically T + 7 years or more) o Day 1 – employees own 0 shares (allocated, then vested, then repurchased at retirement / death / disability / termination)

Money flow: Bank Company ESOP Cash to selling shareholders

Highly Customized

Human Capital Considerations

Partial / full ESOP options Benefit levels determined by management Allocation of shares to employees / vesting rules / cash repurchases

Good retention strategy No cash contributions from employees, ESOP is funded with debt Enhanced compensation for employees when ESOP is used in conjunction with existing plans Wealth building opportunity for management and employees

7 yr loan 20+ yr loan Repurchase Shares

An ESOP is a well established, highly customized corporate finance tool

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ESOP: Steps to Formation

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Preliminary Valuation

Preliminary Structure

Debt Capacity

Select ESOP advisory firm

Preliminary Independent Appraisal

Feasibility Study (“Decision Package”)

Plan Design + Benefit Level

Procure Debt Financing

Employee Communication

Transaction Valuation + Binding Bid

Close ESOP Transaction

Administration

Annual Valuation

Repurchase Liability Planning/Funding

Phase I Preliminary Analysis Phase II Phase III

Forming an ESOP takes time and it pays to be thoughtful

Today ~30 days ~60 days Ongoing

BMO has unique capabilities to help

with ESOP formation and ongoing ESOP

needs

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ESOP Execution: Roles & Responsibilities

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Board of Directors BMO Harris Bank

Trustee

•Serves as fiduciary on behalf of employees

•Buyer of shares in ESOP transaction

•Hires valuation firm and reviews work product

•Negotiates purchase price on behalf of employees

•Ratifies candidates nominated to Board of Directors

•Does NOT serve on Board of Directors

•Considers M&A transactions

•Votes unallocated shares in all important corporate matters

•Hires attorney to represent employees

•Fiduciary duty to select, monitor or remove ESOP Trustee and the ESOP Administrator

•Existing fiduciary responsibility to shareholders unchanged

•Engage ESOP advisory firm

•Determine appropriate capital structure

•Mandate financing sources

•Hire Record Keeper for the Plan

•Develop executive compensation program

•Develop communications team & strategy

•Educate management on ESOP structure and benefits to constituents

•Educate company on ESOP structure

•Provide capital structure alternatives

•Advise on market terms for various financial instruments – Senior Debt – Mezzanine Debt – Seller Note – Equipment

Financing •Perform financial modeling of alternative scenarios

•Provide preliminary view on valuation and structure

•Structure transaction •Negotiate with ESOP Trustee on key terms – Valuation – Seller note terms – Warrant value &

structure •Assist company with developing plan details & documents

•Provide Trustees to BOD for consideration

•Execute transaction / close deal

•Advises company on all ESOP related issues

– Employee rights

– Transaction structure

– Allocation limits

– Tax issues

– Fiduciary responsibilities

•Drafts plan documents

•Draft employee communications

ESOP Counsel BMO Harris Bank ESOP Advisory Firm

Multiple parties work together for seamless execution

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Illustrative Transaction Diagram: Leveraged ESOP

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Sellers

ESOP TRUST*

(Employee Benefit Plan)

Cash

Debt (Outside Loan)

Promissory Note

(Inside Loan)

1

3

* Note: The ESOP Trustee is represented by independent legal and financial advisors

1. Company borrows money from BMO Harris – the “outside loan”

2. Company buys shares from selling shareholders, then sells to ESOP Trust

3. Company sells shares to ESOP in exchange for a note – the “inside loan”

Stock (or Cash)

2

Company

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$117 $88

$78 $59

100%ESOP

Sale of Company

$71 $47

$24

100%ESOP

Sale of Company

Illustrative Monetization Alternatives

After-Tax Cash Proceeds After-Tax Estate Value in 20 Years

(1) Assumes 8.0x multiple and does not account for control discount; (2) 33.7% Minnesota capital gains tax assumed; (3) Reinvestment yield of 5.8% (compounding 20 years on cash proceeds) based on Market Risk Premium. Assumes 3.0x EBITDA paid in cash at close ($30.6 million) with the remaining $40.8 million being paid out evenly over 8 years

($ in millions) ($ in millions)

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100% ESOP Delivers +$29

million

($ in millions) 100% ESOP Sale of Company

Gross Proceeds (1) $71 $71

Less: Capital Gains Tax @ 33.7% (2) $0 ($24)

Net Proceeds $71 $47

Plus: Gains on Reinvestment @ 5.8% (3) $123 $100

Total Cash Delivered to Estate $194 $147

Less: Estate Taxes @ 40% ($78) ($59)

Net Proceeds to Heirs $117 $88

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Illustrative 30% Leveraged Share Repurchase

A leveraged share repurchase could drive a higher future share price for active shareholders

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Note: Assumes minority interest is bought out at a 25% discount to 8.0x Fair Market Value due to lack of control; Transaction 100% senior debt financed

($ in millions)Today Standalone

2021ELSR

2021E

EBITDA $10.2 $11.9 $11.9

Enterprise Value Multiple 8.0x 8.0x 8.0x

Enterprise Value $81.6 $95.0 $95.0

+/- Net (Debt) / Cash (10.2) 14.5 (3.7)

Equity Value $71.4 $109.5 $91.3

"Active" Ownership Stake 70% 70% 100%

"Active" Shareholders' Value $50.0 $76.7 $91.3

"Active" Shareholders' Value Accretion 53.4% 82.7%

"Active" Shareholders' IRR 8.9% 12.8%

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In Summary

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Make the decision that is right for you!

Understanding the intentions of key owners / decision makers is critical

Appreciate “what you have” before deciding “what you want”

Vet all possible alternatives and weigh their pros and cons

Multiple alternatives exist to generate and extract value from a business

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Q and A

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Mark Padjen

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Mark Padjen currently serves as a Director in Commercial Middle Market Financial Advisory Services for BMO Harris Bank. Mark specializes in providing corporate finance advisory services on topics such as mergers & acquisitions, acquisition financing, recapitalizations, ESOPs, ownership transitions, shareholder monetization, valuation, pension risk transfer and tax mitigation. Over his 14 year finance career, Mark has a wealth of experience working with management teams, boards of directors, family owned businesses and financial sponsors to execute strategic and capital structure alternatives. Prior to joining BMO in 2016, Mark enjoyed a successful 12 year career in investment banking, most recently as a Director at Credit Suisse. While at Credit Suisse, Mark led and executed 60+ bookrun or lead advisory transactions across the diversified industrial, transportation, aerospace and business services sectors. Mark subsequently spent time in an interim CFO capacity and advisor to private, family owned businesses. Mark holds a BS in Finance with High Distinction from the University of Illinois at Urbana-Champaign. Mark lives with his wife and two children in Munster, Indiana.

Mark Padjen Director, Financial Advisory Services BMO Harris Bank Commercial Banking mark.padjen@bmo.com 312-765-1040

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Disclaimer

These materials are confidential and proprietary to, and may not be reproduced, disseminated or referred to, in whole or in part without the prior consent of BMO Harris Bank (“BMO”). These materials have been prepared exclusively for the BMO client or potential client to which such materials are delivered and may not be used for any purpose other than as authorized in writing by BMO. BMO assumes no responsibility for verification of the information in these materials, and no representation or warranty is made as to the accuracy or completeness of such information. BMO assumes no obligation to correct or update these materials. These materials do not contain all information that may be required to evaluate, and do not constitute a recommendation with respect to, any transaction or matter. Any recipient of these materials should conduct its own independent analysis of the matters referred to herein.

BMO does not provide tax or legal advice. Any discussion of tax matters in these materials (i) is not intended to be used, and cannot be used or relied upon, for the purposes of avoiding any tax penalties and (ii) may have been written in connection with the “promotion or marketing” of the transaction or matter described herein. Accordingly, the recipient should seek advice based on its particular circumstances from an independent tax advisor.

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