Life After the Perfect Storm — Selling Privately Owned Businesses in Today’s Market

1. Life After the Perfect Storm — Selling Privately Owned Businesses in Today’s Market Bill Eastwood Doering & Eastwood, Ltd May 16, 2003

2. Overview -- Long Term M&A Market • The U.S. M&A Market Peaked in Terms of Transaction Value in 1999 at $1.4 Trillion, After Eight Consecutive Years of Unprecedented Growth •  Virtually All of the Drivers of M&A Activity Were Operating During the Latter Half of the 1990s Source: Mergerstat Doering & Eastwood, Ltd

3. Overview -- Long Term M&A Market  Middle Market M&A Activity May Be Somewhat More Resilient Than Large Deal Activity Doering & Eastwood, Ltd

4. The Perfect Storm -- Obvious Parts November 2000 — November 2002 • Poor Earnings • Rapidly Falling Stock Prices • No Longer Currency for Acquisitions • Recession/Slow Growth Economy • Excess Capacity • Geo-political Events • 9/11 • Iraq • Korea Doering & Eastwood, Ltd

5. The Perfect Storm -- Obvious Parts November 2000 — November 2002 • Loss of Credibility in Financial Statements and Corporate Management • Attitude That Acquisitions Do Not Increase Stockholder Value • World Com — MCI • Tyco — CIT • ATT — TCI Cable • Qwest — U.S. West • Lucent — Ascend • AOL — Time Warner Doering & Eastwood, Ltd

6. The Perfect Storm -- Less Obvious Parts November 2000 — November 2002 • Falling Interest Rates and Stock Prices Make Returns From Proceeds of a Business Sale Much Less Attractive • Entrepreneurs Evaluating Sale of Business Need Proceeds to Last the Remainder of Their Life • In 1999 Projecting 15% Stock Returns and 7.5% Fixed Income Returns, Lifestyle and Income Level Needs Were Much Easier to Satisfy Than In 2002 With Negative Stock Market Returns and 1% Money Market Rates • For Private Equity Funds, the Public Market Is No Longer a Reliable Exit Strategy Doering & Eastwood, Ltd

7. The Perfect Storm -- Less Obvious Parts November 2000 — November 2002 • Banks’ Risk Tolerance For Acquisition Financing Reduced • Average Equity Requirements to Obtain Financing Increased From 25% to 40-50% of the Purchase Price • Most Private Equity Acquisition Criteria Is Based on Return on Equity (“ROE”) of 25-35% Example: Doering & Eastwood, Ltd

8. The Perfect Storm -- Less Obvious Parts November 2000 — November 2002 Source: Leveraged Buyouts Doering & Eastwood, Ltd

9. The Perfect Storm -- Less Obvious Parts November 2000 — November 2002 • For a Private Equity Group with a 25% Hurdle Rate, Reduced Bank Financing Make the ROE Below the Threshold, Now a Deal is Not Doable Without Price Adjustments or Owner Financing EBIT = Earnings Before Interest and Taxes Interest at 7.5% PBT = Profit Before Tax PAT = Profit After Tax at 37% Tax Rate ROE = Return on Equity = PAT/Equity EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization Doering & Eastwood, Ltd

10. The Perfect Storm -- Less Obvious Parts November 2000 - November 2002 • Owners’ Failure to Accept Current Value of Business • During 1998-2000, Owner Had an Offer or a Friend in the Business Had an Offer 8-10 Times EBIT • Today’s Market 5-7 Times EBIT for Owner’s Industry • With Earnings Down 10%, Owner’s Business Only Worth 60% of Perceived Prior Value • Even Though Business Fundamentally Continues to Degenerate, Owner Waits Until the Market Returns to Prior Valuation Doering & Eastwood, Ltd

11. The Perfect Storm -- Less Obvious Parts November 2000 - November 2002 • Principal Types Of Businesses Sold During the Perfect Storm • Outstanding Business With a Competitive Advantage and a Growth Story • Businesses in Industries That Benefited From Consolidation (Costs and Pricing Power) • Banks • Cable Television • Oil and Gas • Distress — Must Sell Business Doering & Eastwood, Ltd

12. The Perfect Storm -- Less Obvious Parts November 2000 - November 2002 • Owners Who Accepted Realistic Prices • Buyers Stretch to Make Transaction Attractive, Often Including Seller Paper • Doering and Eastwood, Ltd. Is a Member of IMAP (“International Network of M&A Partners”), Which Completed 217 Transactions With Total Value in Excess of $4 Billion in 2002 Doering & Eastwood, Ltd

13. What Is Happening After The Perfect Storm • The Good News • Private Equity Firms Have Hundreds of Billions in Equity Capital • Financial Times in April 2 Article Estimates That the Largest 450 Private Equity Firms Had Over $250 Billion in Committed Funds • Assuming a 40% Equity Requirement, Capacity to Complete $650 Billion in Acquisitions • Private Equity Groups Acquire Questdex Phone Directory Business for $5 Billion+ • Increased Role in Middle Market Transactions • Pressure to Invest or Return Proceeds to Investors • Interest Rates Are at All Time Lows • Prices Are More Reasonable Doering & Eastwood, Ltd

14. What Is Happening After The Perfect Storm • The Good News • Strategic Buyers Are Acquiring Companies in Their Industry • First Data Announces $7 Billion Acquisition of Concord — Both in Credit Card Merchant Processors • Comcast Cable Acquires AT&T Cable Properties • Numerous Regional Bank Mergers • Acquisition Discussions Increasing Dramatically Between Potential Buyers and Sellers (Source: Business Week, April 21 P.82-83) • Large Companies Are Looking at Smaller Company Add-ons to Grow Without Huge Risks Doering & Eastwood, Ltd

15. What Is Happening After The Perfect Storm • The Good News • Private Business Owners Have Become More Realistic in Value Expectations • Aging Baby Boomer Population Is Under Increasing Time Pressure to Sell and Enjoy Retirement • Banks and Financial Institutions Are Cautiously Increasing Commitment to Buyout Loans • Buyers and Sellers Are Becoming Flexible and Creative - Seller Financing, Retained Equity, Earnouts Doering & Eastwood, Ltd

16. What Is Happening After The Perfect Storm • The Bad News • Perfect Storm Conditions Continue in Varying Degrees • Tenuous Economy • Rising Unemployment and “Spent Out” Consumers • Continued Accounting and Management Credibility Issues (Healthsouth) • Poor Potential Returns to Sellers With Business Sales Proceeds • Buyers VERY CAUTIOUS Doering & Eastwood, Ltd

17. What Is Happening After The Perfect Storm • Slight Increase in the Deal Closings in the Middle Market • Ability to Sell Varies Greatly Depending Upon Company and Industry • Committed Sellers Are Succeeding By: • Maintaining or Growing Earnings • Managing Their Business Well • Flexibility in Deal Terms Doering & Eastwood, Ltd

18. Value of Privately Owned Businesses • Types of Valuation • Fair Market Value -- Estates, Gifts, Disputes • Market Value -- What the Business Will Bring If Sold • Real Market Value Determined When Offers Are Received • Most Valuations Are Earnings Multiple Based (Example 5 Times EBIT) Doering & Eastwood, Ltd

19. Value of Privately Owned Businesses • Specialized Industries May Have Different Valuation Rules of Thumb • Computer Software — Multiple of Sales • Banks — Multiple of Book Value • Cable Companies — Price Per Subscriber Doering & Eastwood, Ltd

20. Value of Privately Owned Businesses • Market Valuation Approaches: • Highest Value —“Strategic” or Investment Value • Median Value —“Stand Alone” Value • Lowest Value — Liquidation Value • Market Comparable — Used for This Presentation • Recasting Earnings • EBIT Multiple — Most Common Measuring Rod; 3 to 7 Times EBIT — 6 to 12 Price Earnings Multiple Doering & Eastwood, Ltd

21. Value of Privately Owned Businesses • Factors That Differentiate a 3 Multiple Business From a 7 (an “A” Business From a “C” Business): • Industry • Size • Growth in Sales • Earnings — Growth and Consistency • Balance Sheet Strength • Perceived Competitive Advantage — Brands, Patents, Technology, Costs • Margin As Percent of Sales • Strength and Continuity of Management Doering & Eastwood, Ltd

22. Value of Privately Owned Businesses • Exceptions to the 3 to 7 EBIT Rule: • Each Buyer Will Have a Different Criteria for Valuation • Examples: • Private Equity Firms Evaluate Based on Projected ROE • Food Brand Purchaser May Project Savings in Costs From Adding a Brand to Its Existing Distribution System • Cable Company Computes Savings From Purchase of Programs Doering & Eastwood, Ltd

23. Value of Privately Owned BusinessesQuantitative Study By IMAPA 59 Member Middle Market Intermediary Group With Offices in 25 Countries Proprietary vs. Non-Proprietary Manufacturers — NAFTA Doering & Eastwood, Ltd

24. Value of Privately Owned BusinessesQuantitative Study By IMAP Multiples of EBIT — 2002 Transactions Doering & Eastwood, Ltd

25. When Should A Business Be Sold? • With Expert’s Assistance, Objectively Analyze Business’s Sales Prospects • When the Business Is Performing Well • When There Are Good Prospective Buyers Within a Reasonable Time • When the Owner Is Committed to Spending the Time and Money to Market the Business Properly Doering & Eastwood, Ltd

26. When Should A Business Be Sold? • When the Condition of Financial Records Is Sound • Are the Statements Audited? • Possibility of Restatement in Due Diligence • When Contingent Liabilities Are Limited and Estimable • Warranty Claims • Environmental • Employee Issues • Litigation Doering & Eastwood, Ltd

27. Who Are The Buyers? • Strategic Buyers • A Buyer in the Same Business As the Seller (May Also Be an Extension of Existing Business) • Examples: • First Data Buys Concord Credit Card and ATM Processing • Wells Fargo Acquires First National Bank of Lincoln Doering & Eastwood, Ltd

28. Who Are The Buyers? • Financial Buyers — (“Private Equity Funds & Leverage Buyout Groups”) • Use Equity Provided by Institutions, Pension Funds, Insurance Companies and Other Investors • Borrow Money to Increase the Return • Examples: • Carlyle and Welsh Carson Acquire QwestDex (Telephone Directory) • Texas Pacific Acquires Burger King Doering & Eastwood, Ltd

29. Who Are The Buyers? • Funds Raised Over $800 Billion From 1997-2002 • Hundreds of Billions Left for Investment • Thousands of Buyout Funds With Billions in Capital Can Generally Borrow 1-2 Times Equity to Buy a Company Doering & Eastwood, Ltd

30. Who Are The Buyers? • Many Different Types of Buyout Funds • Each Has a Profile of Types of Investments Pursued by Size and Industry • Some Look to Consolidate a Niche Industry • Example — Hicks, Muse Radio Stations • Almost All Have a Limited Ownership Time Horizon (5 Years Average) to Sell the Company • Most Encourage Management to Own Part of the Company (5% — 20%) Doering & Eastwood, Ltd

31. Who Are The Buyers? • Look for 25% — 35% Return on Equity • Have Different Minimum EBIT Thresholds • Some Acquire Only Very Large Companies • KKR • Hicks, Muse • $5 Million, $2 Million (Most Common), $1 Million • Most Consider Even Smaller “Add-ons” That Complement an Existing Business Doering & Eastwood, Ltd

32. Who Are The Buyers? • Private Investors • Local Entrepreneur Buys Printing Business Doering & Eastwood, Ltd

33. Financing Sources • Strategic Buyer — Cash Flow From Operations; Existing Bank Lines; or Project Specific Financing • Private Equity Funds: • Equity 30-50% • Loans — Banks and Other Financial Institutions • Asset Based Loans • Revolver — Accounts Receivable, Inventory • Term Loan — Fixed Assets • Cash Flow Based Loans • Mezzanine Debt • Seller Financing Doering & Eastwood, Ltd

34. Structure of the Deal Affects Value • C Corporation With Value Substantially in Excess of Equity Brings Less Than Comparable Company (Subchapter S, LLC) That Can Sell Assets Without “Double Taxation” in Middle Market Transactions • Licenses, Leases, Inherited Liabilities and Other Contracts Doering & Eastwood, Ltd

35. Structure of the Deal Affects Value • Currency • Cash Is King • Seller Financing Brings Higher Price • With Bank Financing More Difficult and More Expensive to Obtain, Importance of Seller Financing Is Increasing — Particularly on Deals Valued Under $20 Million • Stock Swap — Tax Deferral and Liquidity Consideration, Negative Stock Market Risks Doering & Eastwood, Ltd

36. The Marketing Process • Prepare Business for Sale • Dressing Up Prior to Sales Effort • Maintain Management Continuity • Utilize Pass Through Entity (Sub S, LLC) • Identify and Resolve Litigation, Intellectual Property, Environmental and Other Contingent Liabilities • Determine Reliance on Key Customers or Suppliers • Identify Personnel Issues • Obtain Audited Financial Statements Doering & Eastwood, Ltd

37. The Marketing Process • Offering for Sale • The Team Is Critical – Lawyer, Accountant, Trusted Financial Adviser, and Investment Banker • Determine Advisability of a Merger and Acquisition Professional • Business Value Less Than $1 Million, Usually Not Advisable • Business With Less Than One-half Million EBIT • If M&A Professional Desirable, Evaluation and Choice Is Critical Doering & Eastwood, Ltd

38. The Marketing Process • Communication Among Team Members Critical • Be Aware of Deal Snipers Doering & Eastwood, Ltd

39. The Marketing Process • Business Sales Strategy • Prepare a Business Summary or Offering Memorandum and Teaser • Identify Potential Buyers • Open Negotiation Process: • With One Purchaser at a Time • To a Few Prospects (“Selective Marketing”) • With a Controlled Auction to All Qualified Prospects Doering & Eastwood, Ltd

40. The Marketing Process • Major Legal Documentation • Confidentiality Agreement • Letter Of Intent • Due Diligence • Definitive Agreement and Closing • Management Must Concentrate on Running the Business Doering & Eastwood, Ltd

41. Conclusions • Successful Businesses Are Marketable • A Marathon, Not a Sprint • Seller Must Be Realistic About Price and Timing • Having a Trusted Team Critical • Do Not Ignore Running the Business. If Business Falters, All Other Work Is Wasted Doering & Eastwood, Ltd