Sgcapital Services Buying A Business

Buying a Business

1875 Century Park East, Seventeenth Floor, Los Angeles, CA 90067 Phone: 310.556.9900 Fax: 310.556.9901 www.sgcapital.com

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Why Buy a Business? Strategic Reasons Increased market share through elimination of competitor Expansion into new geographic markets Strengthened distribution capabilities Strengthened product offerings through addition of complementary products (opportunity to bundle) Creation of end-to-end product solution Access to new technologies Enhancement of product through convergence of technologies Accelerated entrance time into new market Ability to leverage capabilities/resources to enter faster growing market Increased customer and supplier diversity (eliminate reliance on major customer or supplier) Increased manufacturing capacity Additional management, technical and sales talent

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Why Buy a Business? (continued) Financial Reasons Increased cash position Strengthened credit profile Diversified revenue stream Revenue enhancement through cross-selling of products/services Cost reduction through increased buying leverage with suppliers Elimination of redundant sales, general, administrative and marketing costs Combined R&D efforts increase efficiency and cut costs Reduced overhead costs Elimination of redundant assets

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The SG Capital Buying Process Step1: Exploring Alternatives Step 2: Approaching Potential Targets Step 3: Valuation and Pricing Step 4: Conducting Due Diligence

Step 5: Negotiation and Structuring Step 6: Financing the Transaction Step 7: Integrating the Transaction 4

Step 1: Exploring Alternatives Developing Buyer Objectives Acquisition of stock vs. acquisition of assets vs. minority investment Price vs. certainty Confidentiality vs. timing

Assessing the Marketplace Availability of suitable businesses / investment opportunities Pricing expectations Assessing potential competitors

Identification of Opportunities Market intelligence on private company prospects Access to SG Capital clients who may be selling or divesting

Can your company use M&A effectively? Management bandwidth to integrate deals Credit capacity to do deals 5

Step 2: Approaching Potential Targets Approach Strategies Execute one-off approach vs. engaging in an auction process Manage multiple one-off approaches while ensuring highest possible level of confidentiality

Selling Process Dynamics Qualify potential seller to ensure real interest in selling Determine competitive dynamics of selling process Engage in advisor-to-advisor discussions to facilitate process

Timing Issues Due diligence (when and how much) Exclusivity (is it appropriate and, if so, when) Term sheet (when and how extensive)

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Step 3: Valuation and Pricing Principal Methodologies: Comparable Company Market Valuation Provides company’s implied value in the public equity markets through analysis of comparable companies’ trading and operation statistics Applies multiples derived from similar comparable publicly-traded businesses to company’s operating statistics Private companies may need to factor in a lack of liquidity discount Does not include a control premium Reliability depends on the level of comparability to other publicly-traded companies

Precedent Transactions Analysis Provides private market valuation in change of control scenario Applies multiples derived from similar precedent M&A transactions to company’s operating statistics Includes control premium Reliability depends on number of precedent transactions and their degree of comparability, as well as the relative supply and demand for the business at the time of the transaction Market cycles and volatility may also affect valuation

Discounted Cash Flow Analysis (DCF) Theoretical valuation Projects the company’s future unlevered cash flows for a period of time (typically five years or more) and calculates the present value of those cash flows and of the terminal value using an appropriate cost of capital and terminal value methodology Heavily dependent on cash flow and growth characteristics of the company and the terminal value assumptions Capital structure is reflected in valuation analysis through discount rate May include a control premium based on the terminal value multiple 7

Step 3: Valuation and Pricing (continued) Other Methodologies: Leveraged Buyout Analysis Determines the range of prices that a financial buyer would be able to pay for the business assuming a range of target rates of return Heavily dependent on the cash flow of the business as well as entry and exit value assumptions

Other Approaches/Factors Determine any specific sources or detractors of value in a particular transaction or industry Net operation loss carryforwards Synergies between merger partners Off-balance sheet (or contingent) assets or liabilities Break-up value Replacement cost analysis Asset value of reserves

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Step 4: Conducting Due Diligence Business Due Diligence Overview of the company and industry Description of products/services/technology Overview of sales, marketing, strategic relationships and customers Overview of personnel and facilities

Financial Due Diligence Historical financial statements and tax returns (3-5 years) Projected financial statements (2-3 years) Balance sheet review of assets and liabilities Contingent liability review Capital structure breakdown

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Step 5: Negotiation and Structuring Pricing Value of offer Form of offer (cash, stock, debt assumption, debt instruments)

Deal Structure Asset vs. stock purchase Tax structuring Earn-outs / contingent payments / management contracts Deal protections

Purchase Agreement Representations and warranties Indemnifications Post-closing Adjustments Covenants Conditions to close

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Step 6: Financing the Transaction Capital Structure Review Analysis of current company capital structure to determine if additional debt capacity exists

Identifying Potential Funding Sources Seller financing Third-party debt financing Asset-based financing Minority equity investments

Preparing the Credit Story Positioning the company Developing credible financial projections Performing credit ratio analysis (leverage and coverage ratios)

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Step 7: Integrating the Transaction Identify Joint Integration Team Define roles and responsibilities Dedicate the resources to team to allow them to drive integration

Execute Communications Plan Explain transaction rationale to the combined company’s constituents

Develop Detailed Day 1 Activities Plan Communications to employees, customers, investors, creditors, partners and others

Establish Formal Integration Program Management Office Develop 3-Month Plan of Integration Running parallel operations Consolidating operations Integrating the business Transforming to a new organization

Identify Sensitive Restrictions and Allowances Legal Operational

Charter and Conduct Formal Culture Assessment Develop Contingency Plans

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