“I Will Return!!” (not GEN MacArthur) A Charter Class member returns to speak on PE Valuation Bruce B. Bingham, FASA, FRICS 23 September 2013

1 Value – A useless word by itself. Fair Market Value (“FMV”) – Amount at which property would change hands between a willing buyer and a willing seller where neither is acting under compulsion and when both have reasonable knowledge of the relevant facts. Fair Value – Statutory standard of value used in courts usually involving dissenting shareholders’ litigation. Going Concern Value – Assumes the business continues as a viable operating enterprise, including intangibles such as trained workforce, licenses and operating procedures. Investor Value – Value to a particular buyer/investor considering his or her specific personal circumstances, knowledge of the transaction and potential synergy. Total Capital Value – Value of Fair Market Value of 100% of the equity plus the market value of long term debt. Usually used in calculating performance ratios. Liquidation Value – Value from piecemeal sale of assets. (Opposite of Going Concern Value). Can be orderly or forced. Typically low end of value spectrum. Book Value – An accounting term for the value of total net assets minus total liabilities on the balance sheet. Intangibles usually excluded. Minority Value – Value reflecting an ownership position of less than 50%. Frequently expressed as a discount. Control Value – Additional value inherent in a legally controlling interest, reflecting the power of control. Frequently expressed as a premium. Marketable Value – Value of an equity assuming a pre-established market in which that equity can be exchanged. Non-marketable Value: – Decreased value due to the limitation in the marketability of an equity. Opposite of Freely Traded Value. Usually expressed as a discount. Getting Started – Definitions

Getting Started – Key Questions What definition of value? What is being valued? Premise of Value? Valuation Date v. Report Date Type of Report? Distribution? 2

3 Approaches – Cost Approach Premise –Value equals FMV of Assets Minus FMV of Liabilities Mechanics –Value Each Tangible and Intangible Asset –Subtract Market Value of Liabilities Advantages Drawbacks - Useful for asset intensive businesses- No consideration of "going-concern" or profit - Preferred by lenders- Intangibles defensible, but difficult - Facilitates purchase price allocation- Cumbersome valuation process - Excluding intangibles, can represent - Lack of information "liquidation" value

4 Approaches – Market Approach Premise –The value of the target can be estimated by looking at prices paid for minority or controlling interests in the public marketplace –Ex-Ante approach Mechanics –Identify "comparable" companies –Calculate multiples and adjust for target company –Apply multiples to adjusted subject company financial statements –Produces minority, marketable value –Apply premiums or discounts as appropriate Advantages Drawbacks -Value based on actual prices paid - Does not take into account synergies for comparable companies -Use of hard numbers- Focuses on historical results -Multiple multiples- Multiple multiples can lead to a divergence of indicated values - Requires estimation and application of premiums and discounts

Market Approach - Nuances Guideline Company or Representative Transactions Multiples Relevant to Industry Being Valued. TIC or Equity Multiples? Comparable Company Medians or Averages? Haircuts to multiples. Adjustment from Minority, Freely Traded Basis. For Transaction Comps, Lookbacks before 15 September 2008 Forward Multiples? An IB tact that mixes approaches 5

6 Income Approach – Premise and Mechanics Overview Premise –The Value of the target can be estimated by forecasting the future financial performance of the business and identifying the cash flow that the business generates –Forward-looking approach Mechanics Overview –Forecast the target company's financial performance (income statement, statement of changes, and balance sheet) –Identity the cash flow-negative or positive-in each forecasted fiscal year –Estimate the value of the target at the end of the forecast period (terminal value) –Estimate the target's risk-adjusted cost of capital –Discount the forecasted cash flows and the terminal value amounts by the cost of capital –Subtract actual borrowings at valuation date (long-term and short-term) to estimate the value of the business to its owners

7 Income Approach – Advantages & Drawbacks Advantages –The DCF method forces you to translate future benefits from a business into hard dollars. –The DCF method forces you to understand the target's business –The DCF method allows one to identify the expected cash flow that may be used to service debt –You can reflect the impact of the business cycle in the DCF analysis Drawbacks –It is difficult to forecast with any degree of accuracy. You can compensate by developing different operating scenarios and measure their impact on value. –Certain key assumptions can wildly alter DCF values –It is difficult to value the target at the end of the forecast period –DCF value, including synergies, may result in the buyer overpaying for the target

Income Approach - Nuances Hockey stick projections “Reasonably Objective Basis” Perpetual Growth Rate Projection Period WACC –Beta –Company Specific Risk Premium –Baa as a Proxy for Cost of Debt –Tax Adjusted Cost of Debt 8

Conclusion of Value Risk in Market Approach v. Risk in Income Approach BBB’s Cherry-Picking Postulate: If information exists with which to apply an approach to value, then you better use it (or explain why not). Use experience and professional judgment in reconciling your indications of value from the various approaches. No formulas or averages. Explain basis for weighting. 9