valuation transactions

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Valuation Consulting — Transactions

Adding Value, Not Appraising It

Eric Baltes

©2012 CliftonLarsonAllen LLP2

Presenter BioEric M. Baltes, ASA, is a manager in CliftonLarsonAllen’s Forensic & Valuation Services practice in Minneapolis and has been with the firm since 2004. He has performed valuations for tax purposes, financial reporting, and corporate and shareholder planning as well as a variety of valuation consulting engagements. His engagements have spanned a number of industries, including agribusiness, construction, manufacturing & distribution, financial services, and professional and business services.

Mr. Baltes is an Accredited Senior Appraiser in business valuation from the American Society of Appraisers. He also has an MBA degree and a BS degree in Finance and Entrepreneurial Studies, both from the University of Minnesota. Prior to joining CliftonLarsonAllen, he worked for U.S. Bancorp for 7 years.


You May Know Me Better As…

Phil DunphyModern FamilySpecial Thanks to my Wife

ScreechSaved by the Bell

Special Thanks to People that are not my Friends

Tim Pawlenty (T-Paw)Fmr Governor Minnesota

Special Thanks to the Woman behind me in line at Target

Sean ConneryJames BondWhen I look in the mirror


Agenda• What is valuation consulting for transactions?• What services are provided?

– Pricing analyses– Acquisition modeling– Cash flow modeling (ownership realignment, financing

growth, etc.)– Working capital analysis– Due diligence– Valuation multiples

• How do I get involved?• Questions


What is Valuation Consulting for Transactions?


Valuation Consulting

• Client is considering buying another company, selling their own, or some other corporate action

• Services provided at different stages in the process or as a bridge from one stage to the next

• Consider the human lifespan as an example


Inception or conception: an idea is formed

Infancy and childhood: a plan is formed by absorbing information from the environment

Adolescence: action—the plan is being executed

Adulthood: consummation (completion)

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A. Pricing analysis: go or no go decision on planning

B. Modeling: aid in moving from plan to action—negotiation and financing

C. Working capital analysis and due diligence: aid in moving from action to completion—resolution of purchase agreement, negotiations, et al


What Services are Provided?


Pricing Analysis

• Clients are feeling out a possible sale or purchase

• Typically a specific buyer or seller (i.e. investment value)

• Maximize potential price received (seller) or quantify maximum benefit (buyer)


Pricing Analysis

• NOT a valuation, NO compliance with USPAP• Three steps:

1. Analyze and normalize historical EBIT or EBITDA, including buyer/seller specific synergies

2. Perform a market transaction and/or guideline public company search and identify a range of reasonable multiples

3. Conclude on a “pricing” range by applying the range of multiples to the normalized EBIT or EBITDA


Step 1: Normalize EBIT and EBITDAThree Period

Year Ending December 31, 2003 2004 2005 2006 2007 2008 2009 Average

Actual ResultsOperating Profit 155,087 $ 139,056 $ 172,504 $ 134,227 $ 79,729 $ 112,541 $ 94,776 $ 95,682 $ Other Income/(Expense) 2,045 1,725 2,462 3,034 3,438 3,999 3,354 3,597 Interest Expense (17,120) (7,488) (3,120) (2,377) (1,608) (815) (96) (840) Profit before Taxes 140,012 $ 133,293 $ 171,846 $ 134,884 $ 81,559 $ 115,725 $ 98,034 $ 98,439 $

Normalization & Synergy AdjustmentsAdd back: Excess Payroll for Children 69,680 $ 69,680 $ 69,680 $ 69,680 $ 69,680 $ 69,680 $ 69,680 69,680 $ Add back: Auto Expenses for Non-Operational Uses 7,000 7,000 7,362 26,322 8,721 8,072 17,247 11,347 Add back: Cell Phone Expenses for Family 1,240 1,240 1,240 1,240 1,240 1,240 1,240 1,240 Add back: Tax Preparation Expenses 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Add back: Health Insurance Premiums 3,600 3,600 3,600 3,600 3,600 3,600 3,600 3,600 Add back: Inventory Adjustments - - - 10,000 10,000 10,000 - 6,667 Add back: Personal Food Expenses 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 Add back: Charitable Contributions 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 Add back: Advertising 55,791 61,473 62,670 60,088 71,303 63,463 75,074 69,947 Add back: Carry Out Labor 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 Add: Buyer Purchasing Power 183,133 190,062 192,203 198,490 186,868 187,135 180,368 184,791 Add: Administrative Savings n/a n/a n/a n/a n/a n/a n/a n/aAdd: Repairs & Maintenance 15,686 16,566 12,312 19,560 21,307 13,867 24,635 19,936 Add: Supplies & Labeling n/a n/a n/a n/a n/a n/a n/a n/aAdd: Freight Expense n/a n/a n/a n/a n/a n/a n/a n/aLess: Salaries & Bonus of Officer's / Management (15,000) (15,000) (15,000) (15,000) (15,000) (15,000) (15,000) (15,000) Less: Rent Expense (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) (100,000) Total Normalization & Synergy Adjustments 255,630 $ 269,122 $ 268,567 $ 308,480 $ 292,220 $ 276,557 $ 291,344 $ 286,707 $

Normalized Pre-tax Profit 395,642 $ 402,415 $ 440,413 $ 443,364 $ 373,779 $ 392,282 $ 389,378 $ 385,146 $ Add back: Interest Expense 17,120 7,488 3,120 2,377 1,608 815 96 840

Earnings before Interest & Taxes (EBIT) 412,762 $ 409,903 $ 443,533 $ 445,741 $ 375,387 $ 393,097 $ 389,474 $ 385,986 $

Add back: Depreciation & Amortization 50,675 89,535 60,473 33,548 38,326 89,659 56,151 61,379 Earnings before Interest, Taxes, Depreciation & Amortization (EBITDA) 463,437 $ 499,438 $ 504,006 $ 479,289 $ 413,713 $ 482,756 $ 445,625 $ 447,365 $

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Step 2: Perform Search for Market DataTransaction / Sales EBITDA EBIT Transaction

Date Target Name Target Description Multiple Multiple Multiple Value ($)

9/28/2009 T&T Supermarket, Inc. Asian supermarket chain in Canada 0.40 225,000,000 6/1/2008 Don Pedro Market Groceries and hardware 0.19 13.11 800,000 5/7/2008 Not provided Grocery and deli 0.99 8.62 760,000 3/7/2008 Not provided Grocery store 0.77 3.85 1,156,000

12/13/2007 Cost-U-Less, Inc. Owns and operates retail warehouse stores that provide food and non-food items

0.22 7.03 11.10 49,840,000

10/24/2006 Glen's Market Full-service grocery store 0.10 1.64 90,000 7/17/2006 Mohawk General Store Grocery store 0.40 2.60 225,000 6/23/2006 Northside Supermarket Supermarket 0.34 5.12 5.17 500,000 5/18/2006 Vacherie Food, Inc. (dba

Boudin's Supermarket)Grocery supermarket 0.14 4.98 7.94 315,000

3/20/2006 Martin's Food Basket Grocery store 0.11 4.21 12.06 375,000 2/27/2006 Fresh Brands, Inc. Operates as a supermarket retailer and grocery

wholesaler0.18 5.60 12.76 122,510,000

7/26/2005 Nadeau's Market Grocery store and gas station 0.43 7.12 8.85 1,490,000 5/20/2005 Glenway Superstore Grocery store 0.40 3.98 662,500

Range 0.10 - 0.99 4.21 - 7.12 1.64 - 13.1125th Percentile 0.18 5.02 3.9530th Percentile 0.19 5.05 4.3440th Percentile 0.20 5.12 6.28Median (50th Percentile) 0.34 5.36 8.28Average 0.36 5.68 7.6475th Percentile 0.40 6.67 11.34

Sources: Capital IQ and Pratt's Stats


Step 3: Conclude on “Pricing” Range2008 2009 3 Yr Avg

Pre-tax Profit, Rounded 116,000 $ 98,000 $ 98,000 $

Normalization & Synergistic AdjustmentsAdd back: Non-Operational Wages 69,680 $ 69,680 $ 69,680 $ Add back: Owner Perqs 24,412 33,587 27,687 Add back: Inventory Adjustments 10,000 - 6,667 Add back: Other Discretionary Expenses 23,000 23,000 23,000 Add / Add back: Buyer Specific 264,465 280,077 274,674 Less: Higher Store Manager / Management Salaries and Bonuses (15,000) (15,000) (15,000) Less: Rent (100,000) (100,000) (100,000) Total Normalization & Synergistic Adjustments 276,557 $ 291,344 $ 286,707 $

Normalized Pre-tax Profit 392,557 $ 389,344 $ 384,707 $ Add back: Interest Expense 815 96 840

Earnings before Interest and Taxes (EBIT) 393,372 $ 389,440 $ 385,547 $

Add back: Depreciation & Amortization 89,659 56,151 61,379 Earnings before Interest, Taxes, Depreciation & Amortization (EBITDA) 483,031 $ 445,591 $ 446,925 $

Low Multiple of Normalized EBIT 4.00 1,573,000 $ 1,558,000 $ 1,542,000 $ to to to to to

High Multiple of Normalized EBIT 6.00 2,360,000 $ 2,337,000 $ 2,313,000 $

Low Value High ValuePricing Analysis (Weighting of Indicated Multiples), Rounded 1,500,000 $ 2,400,000 $ Plus: Market Value of Real Estate as of 2009 (Estimated) 1,000,000 1,000,000 Pricing Analysis Conclusion (Weighting of Indicated Multiples), Rounded 2,500,000 $ TO 3,400,000 $

Implied 2009 Sales Multiple 0.52 0.71

For detailed normalization and buyer specific adjustments, see Exhibit C, Schedule 1.A


Success Stories

• Small town grocery store considering selling to a larger, local grocery chain– EBIT as stated of $98 thousand, Normalized

EBIT of $389 thousand– Pricing Analysis range of $2.5 million to $3.4

million– Acquisition Purchase Price of “Not Disclosed”


Success Stories• Medical products distributor selling to a larger, national distributor

– EBITDA as stated of $3.3 million, Normalized EBITDA of $9.1 million– Pricing Analysis range of $31.3 million to $49.9 million– Acquisition Purchase Price of $40 million

• Credit card collection agency selling to a larger company in the same industry– EBITDA as stated of $9.2 million, Normalized EBITDA of $15.3 million– Pricing Analysis range of $65 million to $117 million (before losing

customer)– Acquisition Purchase Price of $72.5 million (after losing its largest

customer)


Modeling• Client has a plan or is forming a plan• Typically a specific buyer or seller (i.e. investment value)• NOT a valuation, used to analyze specific actions (i.e.

acquire Company A, redeem stockholder B’s shares, spin-off Division C)

• Usually developed in conjunction with the client or through iterative client interactions

• Two types:1. Acquisition modeling2. Cash flow modeling


Acquisition Modeling — Example • Client was dental lab company that developed a

disruptive technology• Acquired a handful of smaller labs to prove out the

financial and quality advantages• Wanted to acquire the largest dental lab company in

the country (publicly traded and over 13x larger)• Worked with CEO to develop a bottoms-up model to

quantify cost and benefits of potential acquisition• Following slides illustrate bottoms-up assumptions

and corresponding projections and financing needs


Acquisition Modeling — AssumptionsPro Forma and Financing Inputs / Assumptions:Blue Text Are Inputs

Acquirer Revenue Growth Rate 12,505,020$ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Target Revenue Growth Rate 164,692,000 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Gross Margin Realized 1.00 33.2% 34.7% 36.3% 37.9% 37.9% 37.9% 37.9%Annual Lab Closures - 5 10 15 - - - Annual Lab Closures Realized 1.00 - 5 10 15 - - - Lab Operating Expense (update if depreciation chgs) 17.7% 17.7% 17.7% 17.7% 17.7% 17.7% 17.7%

Depreciation and Amortization % 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2%Depreciation and Amortization $ 5,670,305$ 5,670,305$ 5,670,305$ 5,670,305$ 5,670,305$ 5,670,305$ 5,670,305$ Purchase Premium Amortization $ (Included in Tax Row) 3,769,800$ 3,769,800$ 3,769,800$ 3,769,800$ 3,769,800$ 3,769,800$

Mid-Year OERP Realized (Lab Mgmt, Occup., Etc.) 1.00 -$ 957,512$ 1,915,023$ 2,872,535$ -$ -$ -$ Full-Year OERP Realized (Lab Mgmt, Occup., Etc.) 957,512$ 3,830,047$ 8,617,605$ 11,490,140$ 11,490,140$ 11,490,140$ Cumulative OERP - 957,512 4,787,558 13,405,163 24,895,302 36,385,442 47,875,581

Corporate Expenses $ 10,663,131$ 9,663,131$ 9,163,131$ 8,663,131$ 8,663,131$ 8,663,131$ 8,663,131$ Corporate Expenses % Total Pro Forma 6.0% 5.5% 5.2% 4.9% 4.9% 4.9% 4.9%

Cap Ex - based on Client's Analysis 5,000,000$ -$ -$ -$ -$ -$ -$ Integration Expenses (pro rata based on lab closures) 1,575,000 3,150,000 4,725,000 - - -

Target Current Market Cap 107,190,000$ Target Interest-bearing Debt 36,801,000 Target Interest Expense 1,522,778 Purchase Premium Paid over Current Market Cap 30.0%Equity Working Capital Financing 2,000,000$ Senior Debt Turns Available for EBITDA 3.5 Sub. Debt Turns Available for EBITDA 1.5 Senior Debt Interest Rate - PRIME 8.25%Sub. Debt Interest Rate - PRIME + 2% 10.25%Senior Debt Repayment Term 5 Sub. Debt Repayment Term - Balloon 7 Lab Acquisition Strategy Yes


Acquisition Modeling — Projections100% Case with Acquisitions Year 0 (Baseline) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Acquirer Revenues (1st Quarter Annualized) 12,505,020$ 12,505,020$ 12,505,020$ 12,505,020$ 12,505,020$ 12,505,020$ 12,505,020$ Target Revenues (1st Quarter Annualized Adjusted) 164,692,000 164,692,000 164,692,000 164,692,000 164,692,000 164,692,000 164,692,000 Combined Revenues 177,197,020$ 177,197,020$ 177,197,020$ 177,197,020$ 177,197,020$ 177,197,020$ 177,197,020$

Gross Profit 58,763,630$ 61,421,586$ 64,326,837$ 67,232,089$ 67,232,089$ 67,232,089$ 67,232,089$ Gross Margin 33.2% 34.7% 36.3% 37.9% 37.9% 37.9% 37.9%

Lab Operating Expenses 31,293,379$ 31,293,379$ 31,293,379$ 31,293,379$ 31,293,379$ 31,293,379$ 31,293,379$ Operating Expense Reduction Program (OERP) - (957,512) (3,830,047) (8,617,605) (11,490,140) (11,490,140) (11,490,140)

Lab Operating Income 27,470,251$ 31,085,718$ 36,863,504$ 44,556,314$ 47,428,849$ 47,428,849$ 47,428,849$ Lab Operating Margin 15.5% 17.5% 20.8% 25.1% 26.8% 26.8% 26.8%

Lab-level EBITDA 33,140,556$ 36,756,022$ 42,533,809$ 50,226,619$ 53,099,154$ 53,099,154$ 53,099,154$ Lab-level EBITDA Margin 18.7% 20.7% 24.0% 28.3% 30.0% 30.0% 30.0%

Less: Corporate Expenses (10,663,131)$ (9,663,131)$ (9,163,131)$ (8,663,131)$ (8,663,131)$ (8,663,131)$ (8,663,131)$ Less: Integration Expenses (1,575,000)$ (3,150,000)$ (4,725,000)$ -$ -$ -$

EBITDA 22,477,425$ 25,517,892$ 30,220,679$ 36,838,489$ 44,436,023$ 44,436,023$ 44,436,023$

Acquired Lab EBITDA -$ -$ -$ 1,750,880$ 7,003,521$ 17,508,802$ 36,184,858$

Total EBITDA 22,477,425$ 25,517,892$ 30,220,679$ 38,589,369$ 51,439,544$ 61,944,826$ 80,620,882$

Plus: Debt Financing 75,586,125$ -$ -$ -$ -$ -$ -$ Plus: Acquisition Debt Financing - - - 9,345,000 18,690,000 37,380,000 62,300,000 Plus: Equity Financing 72,956,080 - - - - - - Less: Capital Expenditures (5,000,000) - - - - - - Less: Acquisition Capital Expenditures - - (1,125,000) (2,250,000) (4,500,000) (7,500,000) Less: Purchase Debt Service - (25,031,422) (23,733,351) (22,435,280) (21,137,209) (19,839,137) (3,455,904) Less: Acquisition Debt Service - - - (1,300,707) (5,511,214) (13,199,813) (26,354,458) Less: Equity Distributions - - - - - - - Less: Transaction Fees & Expenses (2,195,205) - - - - - - Less: Purchase Price (139,347,000) Less: Lab Acquisitions - - - (12,225,000) (24,450,000) (48,900,000) (81,500,000) Less: Taxes @ 40% (2,712,225) (5,112,568) (8,832,790) (13,929,286) (17,817,988) (24,273,366)

Change in Cash 2,000,000$ (2,225,755)$ 1,374,759$ 2,015,592$ 2,851,836$ (4,932,112)$ (162,846)$ Ending Cash 2,648,000 422,245 1,797,004 3,812,596 6,664,432 1,732,320 1,569,474


Acquisition Modeling — FinancingCapital Required and Multiples:Current Market Cap 107,190,000$ Premium 30%Purchase Price 139,347,000$ Plus: Initial Cap Ex 5,000,000 Plus: Working Capital 2,000,000 Total Capital Required before Transaction Fees 146,347,000$ EBITDA Multiple (Current Mkt Cap + Current Debt) 6.73 Plus: Transaction Fees and Expenses 2,195,205 EBITDA Multiple (Capital Required + Current Debt) 8.55 Total Capital Required after Transaction Fees 148,542,205$ Forward EBITDA Multiple (Capital Required + Current Debt) 7.18

Financing Calculations:Debt Turns Available on EBITDA 5.0 Senior Debt % 70%Debt Capacity 112,387,125$ Sub. Debt % 30%Current Debt 36,801,000 Debt / Market Equity 1.54 Debt Available for Deal 75,586,125$ Equity Required 72,956,080

Senior Debt Interest 1,522,778 5,841,321 4,543,250 3,245,178 1,947,107 649,036 - Sub. Debt Interest 3,455,904 3,455,904 3,455,904 3,455,904 3,455,904 3,455,904 Senior Debt Principal Repayment (Mid Year) 15,734,198 15,734,198 15,734,198 15,734,198 15,734,198 - Sub. Debt Principal Repayment (End of Year) - - - - - - Purchase Debt Service 25,031,422 23,733,351 22,435,280 21,137,209 19,839,137 3,455,904 Acquisition Debt Service - - 1,300,707 5,511,214 13,199,813 26,354,458 Total Debt Service 25,031,422 23,733,351 23,735,987 26,648,422 33,038,950 29,810,362

Senior Debt Remaining 78,670,988$ 62,936,790$ 47,202,593$ 31,468,395$ 15,734,198$ -$ -$ Sub. Debt Remaining 33,716,138 33,716,138 33,716,138 33,716,138 33,716,138 33,716,138 33,716,138 Cumulative Purchase Debt Remaining 112,387,125 96,652,928 80,918,730 65,184,533 49,450,335 33,716,138 33,716,138 Cumulative Acquisition Debt Remaining - - - 8,410,500 24,297,000 56,070,000 108,402,000 Total Cumulative Debt Remaining 112,387,125$ 96,652,928$ 80,918,730$ 73,595,033$ 73,747,335$ 89,786,138$ 142,118,138$

Deal Equity Financing 68,760,875$ -$ -$ -$ -$ -$ -$ Equity Working Capital Financing 2,000,000 - - - - - - Transaction Fees & Expenses (Max 2m OR 150bps) 2,195,205 - - - - - - Total Equity Financing 72,956,080$ -$ -$ -$ -$ -$ -$


Cash Flow Modeling — Example #1 • Client was specialty construction contractor• Complex ownership: cousins and key management• Two cousins wanted to transition out • One key manager wanted to take over Milwaukee• Other key managers wanted to take over West

Branches• Also wanted to shift risk due to asbestos and other

potential liabilities• Holdco would be created to realign ownership and

hold non-operating assets


Cash Flow Modeling — Ownership RealignmentOwnership Realignment (Based on Estimated Values)

ShareholderCurrent OWS % Ownership Holdco

Milwaukee Ops

West Branches Ops

Holdco 0.00000% in 75.9% in 21.4%Shareholder A 42.38024% in 66.7%Shareholder B 21.19012% in 55.4%Shareholder C 21.19012% in 33.3%Shareholder D 6.35704% in 16.6%Shareholder E 2.52546% in 6.6%Shareholder F 6.35704% in 24.1%Total 100.00000% 100.0% 100.0% 100.0%

"Buyers'" Ownership % 24.1% 78.6%

Based in part on Flow of Funds Analysis as shown on Exhibit A, Schedule 3.A

A

A + B + C = D + E = F

ShareholderValue of

MilwaukeeValue of West

BranchesNon-Operating

Assets SubtotalValue of Holdco

Total Value of Shareholdings

Holdco $7,590,684 $3,102,480 $13,400,000 $24,093,164Shareholder A $0 $0 $0 $0 $16,062,109 $16,062,109Shareholder B $0 $8,031,055 $0 $8,031,055 $0 $8,031,055Shareholder C $0 $0 $0 $0 $8,031,055 $8,031,055Shareholder D $0 $2,409,316 $0 $2,409,316 $0 $2,409,316Shareholder E $0 $957,149 $0 $957,149 $0 $957,149Shareholder F $2,409,316 $0 $0 $2,409,316 $0 $2,409,316Total $10,000,000 $14,500,000 $13,400,000 $37,900,000 $37,900,000


Cash Flow Modeling — Ownership Realignment

• All existing shareholders would receive stock in Holdco in exchange for their current Oldco stock

• Holdco stock would then be redeemed four shareholders

• Proceeds then used to buy into Milwaukee and West Branches LLCs


Cash Flow Modeling — Sources and UsesShareholder

Holdco A B C D E F Total

Total Value $16,062,109 $8,031,055 $8,031,055 $2,409,316 $957,149 $2,409,316 $37,900,000Current OWS Ownership % 42.38024% 21.19012% 21.19012% 6.35704% 2.52546% 6.35704% 100.00000%

Source of Funds:

Redemption of Holdco Stock $0 $8,031,055 $0 $2,409,316 $957,149 $2,409,316 $13,806,836Total Source of Funds $0 $8,031,055 $0 $2,409,316 $957,149 $2,409,316 $13,806,836

Use of Funds:

Buy Into Milwaukee LLC $0 $0 $0 $0 $0 -$2,409,316 -$2,409,316Buy Into West Branches LLC $0 -$8,031,055 $0 -$2,409,316 -$957,149 $0 -$11,397,520Total Use of Funds $0 -$8,031,055 $0 -$2,409,316 -$957,149 -$2,409,316 -$13,806,836

Net Source / (Use) of Funds $0 $0 $0 $0 $0 $0 $0

Post-Holdco Ownership % 66.7% 0.0% 33.3% 0.0% 0.0% 0.0% 100.0%Post-Milwaukee LLC Ownership % 75.9% 0.0% 0.0% 0.0% 0.0% 0.0% 24.1% 100.0%Post-West Branches LLC Ownership % 21.4% 0.0% 55.4% 0.0% 16.6% 6.6% 0.0% 100.0%

ShareholderHoldco B D E F Total

Cash $10,000,000 $0 $0 $0 $0 $10,000,000Real Estate $1,100,000 $0 $0 $0 $0 $1,100,000CSV Life Insurance $2,700,000 $0 $0 $0 $0 $2,700,000Stock in Milwaukee $7,590,684 $0 $0 $0 $2,409,316 $10,000,000Stock in West Branches $3,102,480 $8,031,055 $2,409,316 $957,149 $0 $14,500,000Liabilites -$500,000 $0 $0 $0 $0 -$500,000Total $23,993,164 $8,031,055 $2,409,316 $957,149 $2,409,316 $37,800,000


Cash Flow Modeling — Holdco Redemption

• Holdco’s ownership in Milwaukee and West Branches LLCs redeemed over time next 7-10 years

• Cash flow projection to prove out redemption capability of each LLC

• Redemption of Holdco ownership used to fund exits of Shareholders A and C


Cash Flow Modeling — Holdco Redemption

CASH FLOW TO HOLDCO 2009 2010 2011 2012 2013 2014 2015 Total

MilwaukeeShare of Distributable Milwaukee Earnings 967,403$ 981,290$ 979,112$ 960,363$ 935,960$ -$ -$ 4,824,129$ Payment of Milwaukee Purchase Price 500,000 500,000 500,000 500,000 500,000 4,999,000 - 7,499,000 Additional Buy-in Amount 91,684 - - - - - - 91,684 Less: Increase/(Decrease) in Seller N/P (96,740) (98,129) (97,911) (96,036) (93,596) 482,413 - - Total 1,462,347$ 1,383,161$ 1,381,201$ 1,364,327$ 1,342,364$ 5,481,413$ -$ 12,414,812$

West BranchesShare of Distributable West Earnings 339,546$ 275,905$ 204,310$ 122,175$ -$ -$ -$ 941,935$ Payment of West Purchase Price 725,000 725,000 725,000 725,000 202,480 - - 3,102,480 Total 1,064,546$ 1,000,905$ 929,310$ 847,175$ 202,480$ -$ -$ 4,044,415$

HoldcoCash from Holdco, net of liabilities 9,500,000 - - - - - - 9,500,000

Total Cash Flow to Holdco 12,026,892$ 2,384,065$ 2,310,510$ 2,211,502$ 1,544,844$ 5,481,413$ -$ 25,959,228$

Cash Flow to Shareholder A 8,017,928$ 1,589,377$ 1,540,340$ 1,474,335$ 1,029,896$ 3,654,275$ -$ 17,306,152$ Cash Flow to Shareholder C 4,008,964 794,688 770,170 737,167 514,948 1,827,138 - 8,653,076

ASSET ANALYSIS FOR HOLDCO 2009 S/H A S/H C

Share of Holdco Real Estate 1,100,000$ 733,333$ 366,667$ Share of Holdco CSV Life Insurance 2,700,000 1,800,000 900,000

Total Assets to Holdco 3,800,000$ 2,533,333$ 1,266,667$


Cash Flow Modeling — Example #2

• For-profit eating disorder health services company • Rapid growth, but with EBITDA margin > 15%• Undertaking aggressive growth and expansion plan• Believed a short window to expand nationally ahead

of competition existed, but had to move quickly• Was considering bringing in investors to provide

funding for growth• Needed a “detailed” bottoms-up model• Developed projected monthly balance sheet, income

statement, and cash flow statement for three years


Cash Flow Modeling — Financing Growth: Assumptions

Month Ending Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11

Days in Period-Balance Sheet 31 28 31 30 31 30 31 31 30 31 30 31 Days in Period-Income Statement 31 28 31 30 31 30 31 31 30 31 30 31

Wage Growth Per Year 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Gross Charges Growth Rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Operating Expenses Growth Rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Gross Charges Per DayIOP/IDP 19,361 $ 18,686 $ 20,179 $ 22,280 $ 22,280 $ 22,280 $ 22,280 $ 22,280 $ 22,280 $ 22,280 $ 22,280 $ 22,280 $ Residential - - - - - - - - - - - - Outpatient 28,098 28,113 31,467 31,915 31,915 31,915 31,915 31,915 31,915 31,915 31,915 31,915 Dietician 5,509 5,286 5,817 5,433 5,433 5,433 5,433 5,433 5,433 5,433 5,433 5,433 Medical & Labs 5,032 5,197 5,358 5,289 5,289 5,289 5,289 5,289 5,289 5,289 5,289 5,289 Fails & Misc + Accrual Adj. 1,458 1,319 1,542 1,625 1,625 1,625 1,625 1,625 1,625 1,625 1,625 1,625

Contractual Adjustments % of Gross ChargesIOP/IDP 44.7% 47.9% 47.2% 63.9% 41.5% 41.5% 41.5% 41.5% 41.5% 41.5% 41.5% 41.5%Residential 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Outpatient 53.1% 51.0% 48.8% 45.0% 45.4% 45.4% 45.4% 45.4% 45.4% 45.4% 45.4% 45.4%Dietician 37.5% 35.0% 30.9% 22.2% 26.8% 26.8% 26.8% 26.8% 26.8% 26.8% 26.8% 26.8%Medical & Labs 43.7% 44.1% 38.7% 36.1% 39.1% 39.1% 39.1% 39.1% 39.1% 39.1% 39.1% 39.1%Fails & Misc + Accrual Adj. 54.8% 70.7% 72.3% 76.2% 71.7% 71.7% 71.7% 71.7% 71.7% 71.7% 71.7% 71.7%

Operating ExpensesSalaries & Wages Per FTE 5,421 $ 5,317 $ 5,510 $ 5,471 $ 5,471 $ 5,471 $ 5,471 $ 5,471 $ 5,471 $ 5,471 $ 5,471 $ 5,471 $ Benefits & Payroll Taxes Per FTE 1,066 1,071 967 1,226 1,226 1,226 1,226 1,226 1,226 1,226 1,226 1,226 Professional Fees & Outside Services 117,575 178,116 119,270 148,252 119,261 120,133 122,944 125,254 124,754 114,847 113,827 115,384 Program Food Per Day 1,484 2,547 1,606 1,727 1,802 1,802 1,802 1,802 1,802 1,802 1,802 1,802 Occupancy 129,153 129,105 143,068 144,142 144,142 144,142 144,142 144,142 144,142 144,142 144,142 144,142 Depreciation - - - - - - - - - - - 309,097 Bad Debt Expense, net 30,317 18,289 33,580 34,162 34,162 34,162 34,162 34,162 34,162 34,162 34,162 34,162 Other SG&A 246,398 157,421 253,898 208,923 173,932 168,356 176,224 182,961 172,516 168,497 174,059 193,997


Cash Flow Modeling — Financing Growth: Balance Sheet

Actuals Actuals Actuals Actuals Forecast Forecast Forecast Forecast Forecast Forecast Forecast ForecastMonth Ending Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11ASSETS

Current AssetsCash 523,648 $ 503,783 $ 702,680 $ 1,198,821 $ 1,043,987 $ 935,782 $ 885,085 $ 327,090 $ 305,006 $ 697,028 $ 956,850 $ 1,072,129 $ Accounts Receivable, net 2,021,906 2,010,671 2,014,955 1,973,582 2,055,316 2,168,381 2,177,911 2,406,410 2,379,295 2,687,470 2,734,361 2,811,367 TEPF Receivable 1,291 1,352 2,851 2,851 2,851 2,851 2,851 2,851 2,851 2,851 2,851 2,851 Interest Receivable 195,225 195,225 195,225 195,225 195,225 195,225 195,225 195,225 195,225 195,225 195,225 218,533 Prepaid & Other Current Assets 403,773 412,770 635,961 639,410 578,909 577,861 622,522 599,912 630,519 640,822 611,524 660,980

Total Current Assets 3,145,843 $ 3,123,801 $ 3,551,672 $ 4,009,888 $ 3,876,288 $ 3,880,100 $ 3,883,594 $ 3,531,487 $ 3,512,895 $ 4,223,395 $ 4,500,811 $ 4,765,860 $

Total Net Fixed Assets 11,628,319 $ 11,803,619 $ 11,857,188 $ 11,743,667 $ 12,327,549 $ 12,911,722 $ 12,929,604 $ 15,725,483 $ 15,744,553 $ 15,766,809 $ 15,788,802 $ 15,055,675 $ Total Other Assets 125,086 126,042 125,954 125,911 125,911 125,911 125,911 125,911 125,911 125,911 125,911 125,911

TOTAL ASSETS 14,899,248 $ 15,053,462 $ 15,534,815 $ 15,879,466 $ 16,329,747 $ 16,917,732 $ 16,939,109 $ 19,382,881 $ 19,383,358 $ 20,116,115 $ 20,415,524 $ 19,947,446 $

LIABILITIES AND EQUITY

Current LiabilitiesCurrent Portion of Long Term Debt 29,951 $ 29,951 $ 29,951 $ 29,951 $ 596,998 $ 1,164,046 $ 1,164,046 $ 1,276,189 $ 1,276,189 $ 1,276,189 $ 1,276,189 $ 1,276,189 $ Line of Credit 858,366 1,116,366 831,366 831,366 831,366 831,366 831,366 831,366 831,366 831,366 831,366 831,366 Accounts Payable 439,553 499,068 376,478 596,205 442,835 476,420 480,784 485,893 518,082 520,053 537,600 530,067 Accrued Expenses 581,871 572,911 693,141 615,182 607,458 657,225 663,693 671,263 718,963 721,883 747,886 736,722 Accrued Interest 123,905 123,905 123,905 123,905 123,905 123,905 123,905 123,905 123,905 123,905 123,905 161,106 Other Current Liabilities - - - - - - - - - - - -

Total Current Liabilities 2,033,645 $ 2,342,200 $ 2,054,841 $ 2,196,609 $ 2,602,562 $ 3,252,961 $ 3,263,794 $ 3,388,615 $ 3,468,505 $ 3,473,396 $ 3,516,946 $ 3,535,449 $

Long-term Debt & Capital Leases 10,023,860 $ 10,017,132 $ 10,750,279 $ 10,901,935 $ 10,901,935 $ 10,901,935 $ 10,901,935 $ 13,032,653 $ 13,032,653 $ 13,032,653 $ 13,032,653 $ 13,032,653 $ Lease Liability - - - - - - - - - 441,000 441,000 441,000

Total Liabilities 12,057,506 $ 12,359,332 $ 12,805,120 $ 13,098,544 $ 13,504,497 $ 14,154,896 $ 14,165,729 $ 16,421,269 $ 16,501,159 $ 16,947,049 $ 16,990,599 $ 17,009,102 $

EquityCommon Stock and Paid in Capital 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ Retained Earnings 2,840,742 2,693,130 2,728,694 2,779,922 2,824,250 2,761,836 2,772,380 2,960,612 2,881,200 3,168,066 3,423,924 2,937,343

Total Equity 2,841,742 $ 2,694,130 $ 2,729,694 $ 2,780,922 $ 2,825,250 $ 2,762,836 $ 2,773,380 $ 2,961,612 $ 2,882,200 $ 3,169,066 $ 3,424,924 $ 2,938,343 $

TOTAL LIABILITIES AND EQUITY 14,899,248 $ 15,053,462 $ 15,534,815 $ 15,879,466 $ 16,329,747 $ 16,917,732 $ 16,939,109 $ 19,382,881 $ 19,383,358 $ 20,116,115 $ 20,415,524 $ 19,947,446 $


Cash Flow Modeling — Financing Growth:Income Statement

Actuals Actuals Actuals Actuals Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast ForecastMonth Ending Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 2011

Gross ChargesIOP/IDP 537,330 $ 504,455 $ 594,286 $ 627,366 $ 642,519 $ 666,366 $ 682,519 $ 731,868 $ 681,691 $ 811,194 $ 781,691 $ 839,868 $ 8,101,153 $ Residential 702,000 628,500 718,500 696,000 719,200 696,000 812,200 951,700 966,000 1,044,700 1,078,500 1,114,450 10,127,750 Outpatient 768,086 729,336 927,452 902,911 869,061 910,391 889,634 961,377 893,522 988,888 952,749 1,026,498 10,819,905 Dietician 150,075 138,290 171,600 152,200 146,075 151,761 146,058 157,587 145,995 316,823 304,649 328,933 2,310,047 Medical & Labs 141,463 141,102 169,034 159,441 154,762 159,441 154,762 165,470 154,087 160,116 154,087 165,470 1,879,237 Fails & Misc + Accrual Adj. 39,598 33,519 44,463 44,470 42,707 44,370 42,704 46,074 42,685 44,389 42,685 46,074 513,737

Total Gross Charges 2,338,552 $ 2,175,202 $ 2,625,335 $ 2,582,388 $ 2,574,324 $ 2,628,329 $ 2,727,876 $ 3,014,076 $ 2,883,981 $ 3,366,109 $ 3,314,362 $ 3,521,293 $ 33,751,828 $

Contractual Adjustments & CostsIOP/IDP 227,162)( $ 241,050)( $ 265,635)( $ 397,218)( $ 261,464)( $ 271,538)( $ 278,073)( $ 298,564)( $ 277,901)( $ 331,502)( $ 319,423)( $ 343,408)( $ 3,512,938)( $ Residential (146,105) (48,187) (147,820) (73,535) (158,649) (153,531) (179,164) (209,936) (213,091) (230,451) (237,907) (245,837) (2,044,212) Outpatient (405,733) (367,959) (454,335) (402,367) (394,824) (412,580) (406,387) (440,015) (410,336) (455,830) (439,574) (472,521) (5,062,461) Dietician (56,073) (47,015) (52,142) (32,342) (39,019) (40,546) (39,015) (42,103) (39,001) (84,756) (81,499) (88,000) (641,510) Medical & Labs (62,271) (60,844) (70,493) (56,039) (61,139) (62,950) (61,139) (65,328) (60,856) (63,234) (60,856) (65,328) (750,479) Fails & Misc + Accrual Adj. 113,074 (10,572) 10,591 102,494 28,550 29,728 28,553 30,873 28,567 29,713 28,567 30,873 451,012

Total Contractual Adjustments 784,270)( $ 775,627)( $ 979,835)( $ 859,008)( $ 886,545)( $ 911,418)( $ 935,225)( $ 1,025,072)( $ 972,618)( $ 1,136,059)( $ 1,110,692)( $ 1,184,221)( $ 11,560,588)( $

Total Net Revenues (Receipts) 1,554,282 $ 1,399,575 $ 1,645,501 $ 1,723,380 $ 1,687,780 $ 1,716,912 $ 1,792,651 $ 1,989,004 $ 1,911,363 $ 2,230,050 $ 2,203,670 $ 2,337,072 $ 22,191,240 $ Net Revenues % of Gross Charges 66.5% 64.3% 62.7% 66.7% 65.6% 65.3% 65.7% 66.0% 66.3% 66.3% 66.5% 66.4% 65.7%

Total Operating Expenses 1,579,270 $ 1,471,182 $ 1,561,175 $ 1,591,386 $ 1,566,663 $ 1,637,097 $ 1,705,319 $ 1,723,983 $ 1,784,411 $ 1,866,395 $ 1,871,024 $ 2,659,435 $ 21,017,340 $ Operating Expenses % of Net Revenues 101.6% 105.1% 94.9% 92.3% 92.8% 95.4% 95.1% 86.7% 93.4% 83.7% 84.9% 113.8% 94.7%

Operating Profit 24,988)( $ 71,607)( $ 84,326 $ 131,995 $ 121,116 $ 79,814 $ 87,332 $ 265,021 $ 126,952 $ 363,655 $ 332,647 $ 322,363)( $ 1,173,900 $

Total Other Income/(Expense) 25,111)( $ 50,371)( $ 23,127)( $ 53,540)( $ 51,789)( $ 51,789)( $ 51,789)( $ 51,789)( $ 51,789)( $ 51,789)( $ 51,789)( $ 51,789)( $ 566,458)( $

Pre-tax Income 50,099)( $ 121,978)( $ 61,198 $ 78,454 $ 69,328 $ 28,026 $ 35,544 $ 213,232 $ 75,164 $ 311,866 $ 280,858 $ 374,152)( $ 607,442 $

EBITDA 24,944)( $ 71,564)( $ 84,413 $ 132,038 $ 121,160 $ 79,858 $ 87,376 $ 265,064 $ 126,996 $ 363,699 $ 332,691 $ 434,134 $ 1,930,922 $ EBITDA % of Net Revenues (1.6%) (5.1%) 5.1% 7.7% 7.2% 4.7% 4.9% 13.3% 6.6% 16.3% 15.1% 18.6% 8.7%

EBIT (Operating Profit) 24,988)( $ 71,607)( $ 84,326 $ 131,995 $ 121,116 $ 79,814 $ 87,332 $ 265,021 $ 126,952 $ 363,655 $ 332,647 $ 322,363)( $ 1,173,900 $ EBIT % of Net Revenues (1.6%) (5.1%) 5.1% 7.7% 7.2% 4.6% 4.9% 13.3% 6.6% 16.3% 15.1% (13.8%) 5.3%


Cash Flow Modeling — Financing Growth:Cash Flows

Actuals Actuals Actuals Actuals Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast ForecastMonth Ending Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 2011CASH FLOWS FROM OPERATIONS

Pre-tax Income 50,099)( $ 121,978)( $ 61,198 $ 78,454 $ 69,328 $ 28,026 $ 35,544 $ 213,232 $ 75,164 $ 311,866 $ 280,858 $ 374,152)( $ 607,442 $ Add Non-cash Charges:

Depreciation & Amortization - - - - 44 44 44 44 44 44 44 756,498 756,804 (Increase)/Decrease in Assets:

Accounts Receivable (104,336) 11,235 (4,284) 41,373 (81,734) (113,065) (9,529) (228,499) 27,115 (308,175) (46,891) (77,006) (893,797) Other Receivables 50,871 (61) (1,499) - - - - - - - - (23,307) 26,003 Due from Related Party - - - - - - - - - - - - - Other Current Assets 67,320 (8,996) (223,191) (3,449) 60,501 1,048 (44,661) 22,611 (30,607) (10,303) 29,298 (49,456) (189,887)

Increase/(Decrease) in Liabilities:Accounts Payable 149,136 59,515 (122,589) 219,727 (153,370) 33,584 4,365 5,108 32,190 1,970 17,547 (7,534) 239,650 Accrued Expenses 14,224 (8,960) 120,231 (77,959) (7,724) 49,767 6,468 7,570 47,700 2,920 26,003 (11,164) 169,074 Accrued Interest & Other Liabilities - - - - - - - - - 441,000 - 37,201 478,201

Cash Flows from Operations 127,115 $ 69,246)( $ 170,134)( $ 258,146 $ 112,956)( $ 596)( $ 7,770)( $ 20,065 $ 151,606 $ 439,323 $ 306,859 $ 251,079 $ 1,193,490 $

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of Equipment 168,196)( $ 175,300)( $ 53,569)( $ 113,521 $ 583,925)( $ 584,217)( $ 17,927)( $ 2,795,922)( $ 19,114)( $ 22,300)( $ 22,037)( $ 23,371)( $ 4,352,356)( $ Purchase of Other Assets 315 (956) 88 44 - - - - - - - - (510)

Cash Flows from Investing 167,881)( $ 176,256)( $ 53,482)( $ 113,565 $ 583,925)( $ 584,217)( $ 17,927)( $ 2,795,922)( $ 19,114)( $ 22,300)( $ 22,037)( $ 23,371)( $ 4,352,866)( $

CASH FLOWS FROM FINANCING ACTIVITIES

Change in Long-term Debt Principal 22,965)( $ 6,729)( $ 733,147 $ 151,656 $ 567,048 $ 567,048 $ - $ 2,242,862 $ - $ - $ - $ - $ 4,232,066 $ Change in Line of Credit Balance 178,000 258,000 (285,000) - - - - - - - - - 151,000 Distributions-Taxes (85,200) - - - - (65,440) - - (129,576) - - (87,429) (367,645) Distributions-Non-Taxes (25,724) (25,634) (25,634) (27,227) (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) (304,219)

Cash Flows from Financing 44,111 $ 225,637 $ 422,513 $ 124,429 $ 542,048 $ 476,608 $ 25,000)( $ 2,217,862 $ 154,576)( $ 25,000)( $ 25,000)( $ 112,429)( $ 3,711,203 $

NET CHANGE IN CASH 3,346 $ 19,865)( $ 198,897 $ 496,141 $ 154,834)( $ 108,205)( $ 50,697)( $ 557,995)( $ 22,084)( $ 392,022 $ 259,823 $ 115,279 $ 551,827 $ Cash - Beginning of Period 520,302 523,648 503,783 702,680 1,198,821 1,043,987 935,782 885,085 327,090 305,006 697,028 956,850 520,302 Cash - End of Period 523,648 $ 503,783 $ 702,680 $ 1,198,821 $ 1,043,987 $ 935,782 $ 885,085 $ 327,090 $ 305,006 $ 697,028 $ 956,850 $ 1,072,129 $ 1,072,129 $


Cash Flow Modeling — Financing Growth:Ratio

Actuals Actuals Actuals Actuals Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast ForecastRATIOS Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 2011

Liquidity Ratios

Current Ratio 1.6 1.3 1.7 1.8 1.9 1.8 1.8 1.5 1.4 1.7 1.7 1.8 1.8Quick Ratio 1.3 1.1 1.3 1.5 1.5 1.5 1.4 1.1 1.0 1.3 1.4 1.4 1.4Cash Days on Hand 10.0 8.7 13.0 21.0 19.1 15.5 12.8 1.7 0.2 5.4 8.2 9.1 10.1

Activity Ratios

Gross Charges/Avg. Receivables 14.0 14.1 15.4 15.8 15.0 15.1 14.8 15.5 14.7 15.6 14.9 15.0 14.3Net Revenues (Receipts)/Avg. Net Fixed Assets 9.8 9.0 9.2 10.2 9.9 10.3 10.3 6.8 4.8 5.4 5.5 5.8 10.6Net Revenues (Receipts)/Avg. Assets 2.8 2.8 2.8 2.9 2.7 2.8 2.9 2.8 2.4 2.6 2.6 2.6 4.0Cash Oper. Expenses (excl. Occup.)/Avg. Payables 47.8 41.8 42.6 40.5 36.5 44.7 43.2 43.3 44.5 43.1 43.8 42.7 49.0Cash Oper. Expenses (excl. Occup.)/Avg. Accrued Expenses 29.1 31.7 27.3 28.0 29.0 29.0 29.0 29.0 29.0 29.0 29.0 29.0 51.8Operating Working Capital (excl. Cash) % of Net Revenues (Receipts) 8.2% 7.9% 8.6% 7.1% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 10.4%

Average Days Receivables 26.1 26.0 23.8 23.2 24.8 24.8 24.8 24.8 24.8 24.8 24.8 24.8 25.6Average Days Payables -7.6 -8.7 -8.6 -9.0 -8.5 -8.5 -8.5 -8.5 -8.5 -8.5 -8.5 -8.5 -7.4Average Days Cash Conversion 18.5 17.2 15.2 14.2 16.3 16.3 16.3 16.3 16.3 16.3 16.3 16.3 18.1

Profitability Ratios

Net Revenues (Receipts) / Gross Charges % 66.5% 64.3% 62.7% 66.7% 65.6% 65.3% 65.7% 66.0% 66.3% 66.3% 66.5% 66.4% 65.7%EBITDA Margin 0.4% (9.7%) 2.0% 4.3% 7.2% 4.7% 4.9% 13.3% 6.6% 16.3% 15.1% 18.6% 8.1%EBIT Margin 0.4% (9.7%) 2.0% 4.3% 7.2% 4.6% 4.9% 13.3% 6.6% 16.3% 15.1% (13.8%) 4.7%Pre-tax Margin 0.1% (9.9%) 3.3% 3.8% 4.1% 1.6% 2.0% 10.7% 3.9% 14.0% 12.7% (16.0%) 2.8%Pretax Return on Equity 0.0% (3.7%) 1.4% 1.7% 1.8% 0.7% 1.0% 5.6% 2.0% 8.0% 6.9% (9.5%) 15.8%Pretax Return on Assets 0.0% (2.1%) 0.8% 0.9% 0.9% 0.4% 0.5% 2.2% 0.8% 3.0% 2.7% (3.6%) 6.0%


Working Capital Analysis — Example

• Telecommunications client being acquired• Closing working capital adjustment being negotiated• Client had been trying to more effectively manage

working capital, but only evident in last few months• Needed assistance in justifying a lower working

capital balance was reasonable going forward• Performed financial analysis of ratios and sensitivity• Performed a visual analysis• Prepared a pro forma for client negotiation with

buyer


Working Capital Analysis — Analyze Historical Ratio

2010 2010 Used in 3 Mo Used in 12 MoJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Min Avg Max Pro Forma Pro Forma

LTM Sales ($ millions) 119 119 120 118 115 114 113 112 112 116 119 118 112 116 120 LTM COS ($ millions) 85 86 86 84 81 81 80 78 79 84 85 86 78 83 86 LTM Cash Oper. Expenses ($ millions) 27 27 27 28 28 27 27 27 26 28 28 28 26 27 28

Days of Receivables 65.4 65.6 65.3 65.9 67.0 66.6 66.4 66.0 65.7 63.5 63.4 64.4 63.4 65.4 67.0 63.8 65.4Days of Inventory 57.1 55.8 55.0 53.9 55.0 54.0 53.7 54.5 56.1 53.6 53.2 53.0 53.0 54.6 57.1 53.2 54.6Days of Payables 60.8 59.3 59.0 58.4 58.4 57.2 56.1 55.1 56.1 54.4 53.4 53.4 53.4 56.8 60.8 53.7 56.8

Other Current AssetsPrepayments ($000s) - 45 103 257 257 236 433 461 288 274 274 274 - 242 461 274 242Prepaid Maintenance ($000s) 381 531 548 453 443 455 426 403 678 549 633 685 381 515 685 622 515Prepaid Rent ($000s) - - 23 - - - - - 45 45 - - - 9 45 15 9

Other Current LiabilitiesCustomer Deposits (Days of Revenue) 10.9 11.3 11.6 11.6 12.7 13.1 14.1 14.8 15.7 16.0 16.4 17.2 10.9 13.8 17.2 16.5 13.8Deferred Revenue (Days of Revenue) 29.0 28.5 28.0 28.4 29.0 29.1 29.5 30.0 30.0 28.8 28.3 28.4 28.0 28.9 30.0 28.5 28.9Total 39.9 39.8 39.6 40.0 41.7 42.3 43.6 44.8 45.7 44.8 44.7 45.6 38.8 42.7 47.2

64.2 65.4 66.0 65.3 65.2 65.0 63.5 62.9 65.3 60.5 59.8 58.9 58.9 63.5 66.0 59.7 63.5

SENSITIVITY ANALYSIS - LTM 12 Mo Avg Pro Forma Cash-free, Debt-free Net Working Capital ($ millions)

61.4 1.4 52.8 3.6 50.6 1.8 9.8 4.0 24.9 4.0 57.5 # 3.2 63.4 2.0 54.8 3.2 52.6 2.2 11.8 3.3 26.9 3.3 60.5 # 2.9 65.4 2.7 56.8 2.7 54.6 2.7 13.8 2.7 28.9 2.7 63.5 # 2.7 67.4 3.3 58.8 2.2 56.6 3.2 15.8 2.0 30.9 2.1 66.5 # 2.5 69.4 4.0 60.8 1.7 58.6 3.6 17.8 1.4 32.9 1.4 69.5 # 2.2

Accrued Exp.

Accrued Expenses (Days of Cash Operating Expenses)

Days A/R Days A/P Days Inv Cust. Dep. Def. Rev.


Working Capital Analysis — Perform Visual Analysis

61.0

62.0

63.0

64.0

65.0

66.0

67.0

68.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Days of Receivables

12 Month Avg 65.4 Days

50.0

51.0

52.0

53.0

54.0

55.0

56.0

57.0

58.0


Days of Inventory


48.0

50.0

52.0

54.0

56.0

58.0

60.0

62.0


Days of Payables


36.0

38.0

40.0

42.0

44.0

46.0

48.0

50.0


Customer Deposits + Deferred Revenue (Days of Revenue)



Working Capital Analysis — Prepare Pro Forma for Negotiation

Actual (Last 12 Months) Pro Forma-Using 3 Mo. Avgs. Pro Forma-Using 12 Mo. Avgs.Low (Dec '10) Average High (Nov '10) Last 12 Months Next 12 Months Last 12 Months Next 12 Months

Current Assets:Accounts Receivable, net 24,945,967$ 20,814,664$ 23,875,207$ 20,616,091$ 23,891,946$ 21,160,930$ 24,523,359$ Inventory, Total 14,735,241 12,488,467 15,394,115 12,550,720 14,618,362 12,864,580 14,983,928 Prepayments (1) 273,845 263,757 273,845 273,845 - 241,778 - Prepaid Maintenance 684,857 515,248 632,742 622,056 622,056 515,248 515,248 Prepaid Rent - 37,584 - 15,000 15,000 9,396 9,396

Total Current Assets 40,639,910$ 34,119,720$ 40,175,909$ 34,077,712$ 39,147,364$ 34,791,931$ 40,031,931$

Current Liabilities:Accounts Payable 18,358,076 12,597,225 14,018,152 12,667,151$ 14,753,975$ 13,387,759$ 15,593,297$ Accrued Expenses 5,394,420 4,540,794 4,404,180 4,608,303 4,853,764 4,897,958 5,158,848 Deferred Revenue 9,101,853 9,191,072 8,948,965 9,222,079 10,687,448 9,354,010 10,840,343 Customer Deposits 8,135,522 5,568,595 7,721,713 5,350,068 6,200,184 4,459,354 5,167,936

Total Current Liabilities 40,989,871$ 31,897,686$ 35,093,010$ 31,847,601$ 36,495,370$ 32,099,081$ 36,760,425$

Cash-free, Debt-free Net Working Capital

( 349,961 )$ 2,171,867$ 5,082,899$ 2,230,111$ 2,651,994$ 2,692,850$ 3,271,506$


Due Diligence

• Usually focused on accounting, legal, and IT• However, accounting is backward looking• Finance is forward looking• Buyers care most about the future• Financial consultants may be able to provide a

perspective lacked by other due diligence providers…• Especially, where a relationship already exists

(i.e. prior valuation consulting services provided)


Valuation Multiples (and Size Data)

• Based on our own valuation engagements (Minneapolis office only, since 2000)

• Maintain a database of over 550 valuations with over 280 data points for multiples

• Creates institutional knowledge• Can be a basis for general discussions, determining

reasonableness, marketing and practice development, testimony, etc.


Valuation Multiples*

*From Minneapolis office engagements only


Valuation Multiples*


Sales Multiples EBITDA Multiple EBIT MultipleYear Count Median Mult. (1) Count Median Mult. (1) Count Median Mult. (1)2000 13 0.55 11 4.36 11 6.442001 15 0.59 12 5.69 13 7.202002 21 0.47 20 5.52 20 7.072003 19 0.40 19 8.25 19 9.052004 19 0.30 16 5.39 16 6.962005 21 0.55 19 4.30 18 5.262006 33 0.58 31 4.22 30 5.492007 36 0.70 33 6.41 32 7.732008 24 0.67 22 5.18 20 7.032009 21 0.99 20 6.14 18 8.762010 30 0.65 24 6.89 24 7.992011 30 0.60 28 5.36 27 6.84

Overall 282 0.58 255 5.39 248 6.86

(1) Multiples calculated based on Enterprise Value (MVIC less Cash) excl. Non-Operating Assets.


Size Data*• If a client or prospect asks…

– Q: What is the typical size of a company for which you have prepared a valuation? A: $15 million in sales

– Q: What is the largest company? A: $2.3 billion in sales– Q: What is your sweet spot? A: $5-35 million– Q: What is the typical DLOC / DLOM?A: 20% / 25%

• Can you answer these questions? Do you want to?


Sales EBITDA EBIT E.V. (1) Equity DLOC DLOMAll Years Median 16,306,157$ 1,307,503$ 830,960$ 5,884,371$ 4,900,000$ 20% 25%All Years Average 64,087,035$ 9,033,947$ 6,316,582$ 33,676,286$ 20,901,967$ 19% 25%25th Percentile 4,765,739$ 406,069$ 215,296$ 2,074,467$ 1,937,743$ 11% 20%75th Percentile 34,950,402$ 4,358,985$ 3,283,697$ 15,177,526$ 15,506,913$ 25% 30%Largest 2,258,648,000$ 287,707,000$ 268,350,000$ 747,960,015$ 408,000,000$ 40% 45%

(1) Enterprise Value calculated as MVIC - Cash - Non-operating Assets.


How do I get Involved?


Consider

• Consider who client might initially look to…– Most likely their accountant OR– Their CFO or controller

• CPAs often do not typically have the right skill set or are uncomfortable making the needed assumptions and estimates

• CFOs and controllers are too busy doing their job

• Here’s where we come in…


Pathways

• One of the best paths to our clients is through our own people– Get to know attest and tax people in your office– Get involved in audit assistance—this is invaluable

for face time and demonstrating your skills– Give internal presentations at Industry meetings

or Office meetings– Be responsive when people ask for help; attest

and tax people want to know you will treat their client like they do


Network

• Network with transaction and corporate attorneys– Find out if people in your office know any

transaction or corporate attorneys– Talk to attorneys you have worked with in the

past; ask for introductions to other attorneys in their firm

– Present to relevant organizations in the business or professional services community

– Go to law school (yeah, right)


Creativity

• Be creative– Set reasonable expectations for yourself and for

the client– Be confident in your ability to deliver– Start small and work your way up

– Key difference between appraisals and consulting…Consulting is not something the client HAS to do, it is something they WANT to do


Questions

valuation transactions

Documents