1 What Drives Corporate Value? Michael Massey, CFA, CPA/ABV January 21, 2014

2 ABOUT MOSS ADAMS Established in 1913 Largest accounting and consulting firm headquartered in the West and one of the largest in the nation Nearly 2,000 personnel, including approximately 265 partners Founding member of Praxity, AISBL, a global alliance of independent accounting firms

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6 ASSET VALUED Common stock Preferred stock Restricted stock Debt Intellectual property Stock options Partnership or LLC interests

7 VALUATION PURPOSE Estate planning and reporting Financial reporting Mergers and acquisitions Employee stock ownership plan Tax reporting Personal financial planning

8 BUSINESS VALUATION PROCESS OVERVIEW Economic environment Industry analysis Company analysis Income approach Market approach Asset-based approach

9 ECONOMIC ENVIRONMENT National Regional Local How does the current economic environment impact value?

10 INDUSTRY ANALYSIS Impact of the economy on industry Industry trends Industry outlook Growth expectations Valuation methods commonly utilized in the industry How do industry factors impact value?

11 COMPANY ANALYSIS – NON-FINANCIAL FACTORS History +Long, profitable history -Startup stage company

12 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Products or Services +Diversified product or service base +Products with patent protection +Products or services with a high degree of differentiation or brand recognition +Recurring revenue streams -Reliance on one product or service, especially if obsolescence is an issue -Commodity products or services -Non-recurring revenue streams

13 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Markets and Customers +Geographic diversification +Diversified customer base -Geographic concentration -Customer concentration

14 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Competition +Niche dominance +Markets that value differentiation +Patented technology and/or quality advantages +Excellent brand recognition +First mover advantage -Competition based primarily on price -No recognition of differentiation -New entrants

15 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Suppliers +Diversified suppliers +Consistent quality -Dependence on one supplier -Inconsistent quality

16 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Management +Management depth +Succession plan in place +Verifiable results -Dependence on a key person

17 COMPANY ANALYSIS – NON-FINANCIAL FACTORS Employees +Many long-term employees +Good availability of skilled labor -High level of employee turnover -Labor shortages

18 COMPANY ANALYSIS – FINANCIAL FACTORS GROWTH + Solid, sustainable growth rates + Accelerating growth rates -Low growth or declining revenues -Growth that is too rapid (especially if working capital and capital expenditure requirements are high) Average Sales Growth80.0%20.0%15.0%10.0%31% Pretax Income Growth100.0%30%20%(5.0%)36% Total Asset Growth80.0%60.0%20.0% 45%

19 COMPANY ANALYSIS – FINANCIAL FACTORS PROFITABILITY + High, sustainable profit margins + Growing profit margins -Low profit margins -Declining profit margins -Volatile earnings Average Gross Profit79.0%82.0%81.0%78.0%80.0% Operating Profit5.0%7.0%8.0% 7.0% Pretax Profit6.0%8.0%10.0%9.0%8.25%

20 COMPANY ANALYSIS – FINANCIAL FACTORS EFFICIENCY + High ROA, ROE and asset turnover ratios + Improving trends + Low capital expenditure requirements -Low ROA, ROE and asset turnover ratios -Declining trends -High capital expenditure requirements Average Sales to Assets1.0x2.0x2.5x 2.0x Return on Assets5.0%14.0%20.0% 15.0% Return On Equity10.0%20.0%25.0%29.0%21.0% Sales to Net Fixed Assets12.0x20.0x25.0x26.0x21.0x

21 COMPANY ANALYSIS – FINANCIAL FACTORS LIQUIDITY + Above average level of cash and working capital + Low levels of working capital requirements + Particularly important for companies in seasonal or cyclical industries Average Current Ratio1.1x1.3x1.5x1.4x1.3x Quick Ratio0.9x1.0x1.1x0.9x1.0x Days Receivables Plus: Days Inventory Equals: Operating Cycle Minus: Days Payables Equals: Cash Cycle

22 COMPANY ANALYSIS – FINANCIAL FACTORS LIQUIDITY -Below average level of cash and working capital -Declining trends -High levels of working capital requirements Average Current Ratio1.1x1.3x1.5x1.4x1.3x Quick Ratio0.9x1.0x1.1x0.9x1.0x Days Receivables Plus: Days Inventory Equals: Operating Cycle Minus: Days Payables Equals: Cash Cycle

23 COMPANY ANALYSIS – FINANCIAL FACTORS SOLVENCY + Lower than average level of debt + High level of cash flows for debt service + Particularly important for companies in cyclical industries -Higher than average level of debt -Low level of cash flows for debt service Average Debt to Worth1.4x1.2x1.1x1.0x1.3x LT Debt to Capital40.0%38.0%30.0%32.0%35% Interest Coverage20.0x25.0x30.0x44.0x30.0x Cash Flow to Debt5.0x4.5x3.8x2.5x4.0x

24 INCOME APPROACH Capitalization of cash flow method Discounted cash flow method

25 EXAMPLE CASH FLOW CALCULATION

26 EXAMPLE CASH FLOW CALCULATION

27 MARKET APPROACH Guideline public company method Merger and acquisition method Prior transaction analysis Rules of thumb?

28 EXAMPLE MARKET APPROACH RESULTS

29 Stock Transactions > $1 Million; Source: Pratt’s Stats TRENDS IN US M&A MULTIPLES

30 TRENDS IN PUBLIC COMPANY MULTIPLES Source: CapitalIQ

31 ASSET-BASED APPROACH Discrete revaluation Collective revaluation

32 EXAMPLE ASSET-BASED APPROACH CALCULATION

33 DISCOUNTS AND PREMIUMS Control Lack of marketability Key person Blockage Lack of voting rights

34 INVESTMENT VALUE CONSIDERATIONS Synergies Buyer’s cost of capital Buyer’s valuation multiples

35 THANK YOU