ASA Wisconsin Chapter November Meeting Presentation- (11-07-14)

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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

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Questions