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©Baker Tilly Virchow Krause, LLP
Baker Tilly Capital, LLCM&A Presentation
11/07/14
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Introduction
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Table of Contents
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I. Overview of Baker Tilly Capital............................................................... 4II. Current Market & Trends......................................................................... 8III. Valuation Considerations........................................................................ 17IV. Sale Process & Timeline......................................................................... 21
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Overview of Baker Tilly Capital
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Overview of Baker Tilly Capital
Subsidiary of Baker Tilly› Baker Tilly is the full service accounting
and advisory firm› Ranked as one of the twenty largest
certified public accounting firms in the U.S. according to Accounting Today’s “Top 100” list
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We speak your language and identify with your goals to consistently deliver solutions that are just right for you
Baker Tilly Capital› Boutique investment bank› Specializing in merger and acquisition,
transaction, and corporate finance services.› Completed hundreds of transactions
representing billions of dollars› Clients include public companies, privately
held companies, and private equity groups
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Independent member of Baker Tilly International› World’s 8th largest accounting and business services network.› Represented by 161 firms in 137 countries with more than 26,000 people in 738 offices.› Integrated teams with in-country operations for: Canada, China, Mexico, and UK.
Overview of Baker Tilly Capital
Blue shading represents the Baker Tilly International global network.
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Compliance Services
Tax Strategy Services
People Services
Consulting Services
Transaction Services
Employee Benefits Services
International Trade
Investment Advisor Services
˃ Audits, Reviews, Compilations˃ Specialized
Financial Reports˃ Budget Analysis
& Development˃ Proforma &
Projected Financial Statements˃ Accounting
System Review˃ Internal Audit
Review
˃ Tax Planning˃ Tax Return Preparation˃ Cost Segregation Studies˃ Estate Planning˃ Retirement / Pension Planning˃ Sales / Use Tax
Consulting˃ State Income and
Franchise Tax Planning˃ Property Tax
Consulting
˃ Temporary and Permanent Placement˃ Direct Hire
Placement˃ Succession
Planning
˃ Operations Management˃ Customer
Management˃ Financial
Management˃ Technology
Management˃ Strategic
Sourcing˃ International
Trade –Marketing, Sourcing, Global Strategies, and Compliance
˃ Mergers and Acquisitions˃ Investment
Banking Services˃ Due Diligence˃ Valuation
Services˃ Financial
Modeling˃ Business Review
Services˃ Dispute Services
˃ Health & Welfare Employee Benefits Consulting˃ Independent
Insurance Brokerage˃ Provider Due
Diligence˃ Regulatory
Compliance˃ Risk
Management & Insurance Program Review
˃ Market Expansion˃ Sourcing˃ Global Strategies˃ Compliance˃ Complex Tax
Consulting˃ Transaction
Support˃ In-country
Support˃ International Risk
Analysis
˃ Fiduciary Review˃ Fee-based
Independent Investment Consulting˃ Unlimited Open
Access to Investments˃ Leverage Plan to
Reduce Costs˃ Fiduciary
Protection for Plan Sponsor˃ Employee
Education
Baker Tilly Capital can provide a greater breadth of servicesthan any other regional investment banking firm
Baker Tilly Advantages
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Current Market & Trends
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U.S. Financial Markets
US GDPDate Growth Rate
30-Jun-2014 4.06%31-Dec-2013 4.57%31-Dec-2012 3.47%31-Dec-2011 3.64%31-Dec-2010 4.56%31-Dec-2009 0.11%31-Dec-2008 -0.92%31-Dec-2007 4.40%31-Dec-2006 5.12%31-Dec-2005 6.52%31-Dec-2004 6.31%
Source: U.S. Bureau of Economic Analysis
U.S. GDP Growth RateU.S. GDP & Stock Growth › U.S. GDP has improved
significantly since the recession,increasing from essentially zero in2008 & 2009 to 4.1% in June2014.
› It is anticipated the 3rd quarter2014 GDP growth rate will beapproximately 4.6%, more closelyaligning to CY 2013.
› Using the S&P 500 index as abenchmark, the U.S. stock marketis outperforming its pre-recessionnumbers.
› In Sept. 2014 the S&P 500 hitrecord highs with prices above$2,000, but since has retreated5.2%. The fed was going to raiseinterest rates, but that is currentlyon hold as prices have stabilized.
S&P 500Date Stock Prices % Change
10-Oct-2014 $1,906 3%31-Dec-2013 $1,848 30%31-Dec-2012 $1,426 13%30-Dec-2011 $1,258 0%31-Dec-2010 $1,258 13%31-Dec-2009 $1,115 23%31-Dec-2008 $903 -38%31-Dec-2007 $1,468 4%29-Dec-2006 $1,418 14%30-Dec-2005 $1,248 3%31-Dec-2004 $1,212
Source: Yahoo Finance S&P 500 Data
U.S. Historical Stock Prices
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Impending Retirement of the Baby-boom Generation› We live in an aging world with birth rates down and baby boomers retiring (10,000 per day according to
Pew Research Center).› We are now on the cusp of what is expected to be the greatest wave of business transition in U.S.
history.› A great deal of the assets held by baby boomers (which represent a huge pool of wealth) will be up for
sale as they begin to transition from the “working” years to the “Golden” years.
› Those near retirement will seek to take some (if not all) of their chips off the table and shift their“business” assets into more diversifiable “liquid” assets.
› Below are some compelling statistics surrounding baby boomers:› A survey by another international accounting firm, one third (33%) of global businesses are planning
a sale in the next 2 years, and over 50% selling within the next 10 years.› Ninety percent of all businesses with employees are family owned, and one-third of Fortune 500
firms are family controlled.› Children of baby boomers are less likely to take over the family business as only a third of family
businesses are successfully transferred to the next generation.› As we are currently experiencing a seller’s market in M&A, this trend could soon see a dramatic shift
as more companies are up for sale.
Baby-boomers – Effect on M&A
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Available Capital› American companies are sitting on trillions of
dollars worth of cash despite slightlydecreasing from 2013
› Investors have demanded a higher return ontheir investment and M&A remains a keyfocus to achieve such returns
› Deal flow has slowed in Q3 2014 asvaluations continue to increase in a sellersmarket
› Although private equity activity is down fromQ2 2014, PE firms continue to sit onsignificant amounts of dry powder which isrequired to be put to use in the near future
› If Q4 2014 activity is in-line with this yearsprevious quarters, 2014 could still set post-crisis highs for both deal flow and capitalinvested
M&A Available Capital
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M&A Market Deal Activity
▪ Although it was a slow start to 2014 for M&A, deal volume YTD 2014 is up compared to 2013. ▪ Average number of transactions <$100M from 2004–2012 was 3,192 which was down 33.9% in 2013 to 2,110 deals.▪ Assuming the current run rate of YTD 9/14 transactions <$100M for CY 2014 will be increase 10.2% compared to CY 2013.
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 9/13YTD
9/14YTD
# of Transactions - $500M - $1B 134 143 178 225 120 78 173 151 168 171 120 137# of Transactions - $100M - $499M 781 795 862 852 598 427 688 760 717 711 511 633# of Transactions - <$100M 3,040 2,911 2,826 2,557 2,880 2,809 4,533 3,648 3,524 2,110 1,636 1,744# of Transactions - Middle Market 3,955 3,849 3,866 3,634 3,598 3,314 5,394 4,559 4,409 2,992 2,267 2,514Deal Value $338 $350 $400 $421 $277 $194 $341 $346 $343 $329 $233 $281
3,955 3,849 3,866 3,634 3,598
3,314
5,394
4,559 4,409
2,992
2,267 2,514
$0
$100
$200
$300
$400
$500
$600
0
1,000
2,000
3,000
4,000
5,000
6,000
Dea
l Val
ue
# of
Dea
ls
# of Transactions - $500M - $1B# of Transactions - $100M - $499M# of Transactions - <$100MDeal Value
U.S. Middle-Market M&A Activity
Source: Dealogic and Robert W. Baird
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M&A Market Deal Valuation
▪ Deal multiples of EBITDA have remained stable for lower middle market companies and are starting to see a slight uptick in 2014▪ Multiples of companies less than $25 million transaction value typically realize a lower multiple range
LTM SepTransaction Size 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014EV/EBITDA<$100M 7.6x 9.2x 8.1x 8.5x 7.8x 7.0x 7.0x 8.3x 7.1x 6.8x 7.8x$100M - $499M 9.0x 9.9x 9.2x 11.2x 11.1x 8.1x 10.1x 9.3x 9.1x 9.5x 9.9x$500M - $1B 10.3x 10.1x 12.0x 10.8x 10.6x 7.8x 9.0x 9.9x 8.7x 8.4x 8.6xMiddle Market 8.6x 9.7x 9.2x 9.9x 9.5x 7.6x 8.6x 9.2x 8.1x 8.4x 8.8x
EV/EBIT<$100M 9.6x 10.8x 10.0x 10.8x 10.1x 7.8x 10.3x 11.3x 10.3x 12.5x 11.3x$100M - $499M 11.7x 13.5x 13.3x 14.5x 13.7x 11.0x 12.2x 12.8x 13.0x 13.7x 13.8x$500M - $1B 14.0x 13.8x 17.0x 16.1x 13.7x 13.6x 13.4x 12.9x 13.8x 13.6x 11.7xMiddle Market 11.2x 12.4x 12.5x 12.8x 11.6x 9.7x 11.3x 12.1x 11.9x 12.5x 12.5x
EV/Revenue<$100M 0.95x 0.95x 0.96x 0.92x 0.91x 0.80x 0.94x 1.00x 0.81x 0.83x 0.82x$100M - $499M 1.34x 1.31x 1.24x 1.27x 1.30x 1.22x 1.24x 1.39x 1.36x 1.43x 1.43x$500M - $1B 1.33x 1.55x 1.69x 1.51x 1.42x 1.46x 1.56x 1.04x 1.23x 1.36x 1.64xMiddle Market 1.11x 1.10x 1.08x 1.01x 1.00x 0.90x 1.07x 1.14x 1.00x 1.01x 1.09x
Source: Capital IQ and Robert W. Baird & Co.
U.S. Middle Market Enterprise Value to Median EBITDA, EBIT, and Revenue Multiples
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M&A Market Deal Financing
▪ Middle market debt markets have stabilized, with capital markets and banks showing an appetite for risk with quality deal attributes
3.0x2.4x 2.4x 2.6x 2.7x
0.9x1.0x 1.0x 0.8x 1.1x
0.0x
1.0x
2.0x
3.0x
4.0x
5.0x
2010 2011 2012 2013 2014 YTD
Sr Debt/EBITDA Sub Debt/ EBITDA
Middle Market - Debt Multiples
50.7% 48.0% 46.8% 49.3% 42.7%
13.9% 15.0% 16.1% 12.3% 16.9%
35.5% 37.0% 37.0% 38.4% 40.3%
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
2010 2011 2012 2013 2014 YTD
Equity Sub Debt Senior Debt
Equity and Debt Contributions
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M&A Current Status› Deal activity rebounded strongly in Q2 2014 and the uptick is expected to continue
throughout the second half of 2014
› High level of capital in the market place ready to be put to use for both strategic andfinancial buyers› Aggressive financing markets with interest rates at historical lows› Strong macro-economic conditions has helped renew market confidence
› Low supply and strong demand for quality companies have continued to push multiplesupward› High competition for sell-side engagements due to limited supply› Potential success in receiving mandate can be challenging without prior
relationship
M&A Current Trends
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M&A Future Trends
M&A Future Outlook› Previously challenging environment starting to pick up again based on recent data.› Strategic and financial buyers have large cash reserves and excess capital.› Credit on favorable terms is readily available.› Demographics point toward greater sell-side transactions, transfers of wealth from the
baby boomer group as they move into retirement age.› Opportunities in emerging markets.› CEO confidence seems to be on the rise.› Increasing valuations.› China should continue to be a buyer of resources and intellectual property.› Weaker yen means Japan could be a strong acquirer on international growth.› Increased deal activity expected in the following sectors:
› Industrial/Manufacturing› Food & Beverage› Health Care› Energy
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Valuation Considerations
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Determining Value
What is a company’s value?› Traditional seller value expectations
› Country club value (two companies are never identical)› A number ($5 million for each of four children or what the seller needs to retire)
› Logical (see valuation chart on next page)› Discounted cash flow model based on projections› Multiple of EBITDA, revenues, cash flow› Asset value
› Most logical› What a buyer will pay for a business, combined with a strategic process to drive
value by maximizing negotiating leverage and competition among buyers
The market will determine value – just like in real estate. A business can be cleaned up by understanding attributes that drive interest and value.
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What is the Company Worth?
Bridging Valuation› Examine key metrics of valuation for
specific industry
› In depth analysis of quality of customer relationships and suppliers
› Key end markets served
› Strength of backlog and contracts
› Growth opportunities
› Geography
› Recurring service & revenue
› Analyze non-operating and non-recurring expenses for potential add-backs to EBITDA
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Attributes that Drive Interest and Value
General Business AttributesMarket Position Industry leader in an identified niche Small player in highly competitive marketProduct Differentiation Proprietary and/or branded products, registered IP Commodity products and/or contract manufacturingIndustries Served Attractive, growing, diverse industries Mature, cyclical, concentrated industriesGrowth Opportunities Strong organic growth prospects and excess capacity Weak organic growth prospects and nearing full capacityInfrastructure / Capex Up-to-date, well maintained equipment and technology Deferred maintenance with significant capex required
Financial AttributesTTM Revenue Over $20 million in annual revenues or large for market Under $20 million in annual revenue or small for marketTTM Adjusted EBITDA Over $3 million in EBITDA or high for market Under $3 million in EBITDA or low for marketHistorical Rev. & EBITDA Trends Consistent growth and profitability Declining or volatile earnings, losses or recent turnaroundAsset Base Adequate asset base to support leverage Inadequate asset base to support leverageCapital Expenditures Low annual capital investment requirements Highly capital intensive
Customer AttributesCustomer Concentration Diverse customer base (no customer > 15% of sales) High customer concentration (customers > 30%)Recurring Revenue High amount of recurring rev., multi-year customer contracts High customer turnover with low recurring revenueLength of Relationship Average top customer relationship > 5 years Average top customer relationship < 5 years
Management & WorkforceManagement Team Talented young team with desire to continue post sale Key management retiring / leaving after saleAverage Employee Tenure High tenure / low turnover Low tenure / high turnoverUnion Non-union workforce Unionized workforce
Company Characteristics Increases Value Decreases Value
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Sale Process & Timeline
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Starting the M&A Process
Advantages
• Owner succession planning
• No heirs or family transition
• Entrepreneur need of capital or shift in focus
• Industry consolidation
• Increased geographic reach with larger partner
• Market value
• Transition to employees
Disadvantages
• Growth through:
• Acquisitions
• Geographic expansion
• Products/Services
• Diversification
• Technological advancement
• Industry consolidation
Seller Motivations Buyer Motivations
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Sale Phases and Timeline
Phase 2
Marketing Program
Implementation
Phase 4
ContractNegotiations
Phase 3
Respond to Buyers
Due Diligence
Phase 1
Education & Document Prep
› Gather information about your company
› Review market and industry data
› Discuss best options for strategy
› Create Confidential Information Memorandum (CIM)
› Develop database of potential buyers
› Proactively approach buyers
› Send out teasers and Non-Disclosure Agreements (NDAs)
› Manage distribution of CIMs
› Qualify interest levels
› Respond to buyer due diligence requests
› Convey company’s strengths and opportunities
› Lead pre-negotiations
› Facilitate non-binding Letter of Intent (LOI)
› Conduct early negotiations
› Maximize value of transaction
› Understand and communicate economic and tax considerations
› Negotiate LOI to address buyer terms and conditions
› Close successful acquisition
4 Weeks 6 Weeks 5 Weeks 5 Weeks
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Sale Process and Timeline
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Strategic Planning 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Client / management discussions
Gather business & financial information
Marketing strategy development
Compile buyers list
MaterialsAuthoring Confidential Information Memorandum (CIM)
Authoring teaser
Create Non-Disclosure Agreement (NDA)
Prepare data room materials
Select phase II buyers
MarketingContact buyers
Issue teasers
Issue Confidential Information Memorandums (CIMs)
Buyer follow-ups
Negotiation and Due DiligenceDetailed analysis of buyer
Further negotiate terms and structure
Select preferred buyer
Finalize TransactionDraft and execute definitive agreement
Conduct due diligence
Close transaction
# of Weeks
25
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Questions