The ACG Cup Competition Workshop Kenneth E. Jones Boathouse Capital February 10, 2014

I.Presentation Skills and Organization II.Valuation of Private Companies III.Private Company Financial Metrics IV.How to Avoid Mistakes What We Are Going to Cover

I. Presentation Skills and Organization

Some tips on how to deliver the best case:  Everyone should have a speaking part; not just pushing a button  State your assumptions  Use all relevant valuation methods  Provide a pitch book quality presentation  Use PowerPoint and Excel to create charts and graphs  Understandable and Pithy – re-write and edit it down to the essence; use oral skills to add color or explanations  Organization of Presentation  Be concise and use an orderly format  BUT, do not put detailed calculations in the main presentation – use an Appendix  Index, Executive Summary, Presentation, Conclusion, Appendices Presentation Skills and Organization The best case covers all the fundamentals and is professionally delivered both verbally and visually 1

II. Valuation of Private Companies

There are four most commonly used valuation methods 1. Comparable transactions 2. Comparable public companies 3. Discounted cash flow 4. LBO Valuation Valuation of Private Companies Valuation Methodologies 2

Theory: Companies bought and sold in similar industries can be used to value a private company. Use multiples of sales, EBITDA and EBIT. M&A multiples can be applied directly to private or public company earnings and sales without adjusting for a control premium Private sales are oftentimes difficult to get good information Adjustments to EBITDA may not be factored into the multiple (more about that) Many times, you can’t assemble enough transactions to be meaningful Only use transactions that have occurred in the last 24 months Use only those deals that make sense from a size perspective Valuation of Private Companies Valuation Methods – Comparable Transactions 3

Theory: Public companies are valued every second of every day by millions of investors. Every piece of public information is reflected in the stock price. Provides a quick means to value a company by referring to other publicly-traded companies in the same industry with similar operating and financial statistics Calculate valuation multiples, which can be applied to private company earnings Control premiums – stock prices are for minority positions. Must increase the value for control – what’s control worth? Finding the right companies is difficult – case studies typically give you the comparables Valuation of Private Companies Valuation Methods – Comparable Public Companies 4

Theory: DCF is a method of valuing a company utilizing the projected debt free cash flows discounted back to a present value using a discount rate computed using the Weighted Average Cost of Capital (WACC). DCFs typically derive the highest values The most assumption-laden method, all based on the future Need a realistic 5-year projected income statement and balance sheet (capital expenditures and working capital) Sales growth rate, margins and discount rates are key to value Graded on getting the method generally right, not necessarily the right answer Valuation of Private Companies Valuation Methods – Discounted Cash Flow (DCF) 5

Theory: By leveraging equity with debt and deriving an acceptable return on the equity, you can value the company based on market rates of return for debt and equity. Entails running a model using company projections and a market-based capital structure Must be knowledgeable about and apply market levels of debt and equity to the now leveraged company – usually contained in the case study if it’s something that’s expected Growth of private equity markets has made this method a necessary one Unlike a strategic acquirer, a LBO value ignores synergies Value obtained is sensitive to projections and aggressiveness of operating assumptions Valuation of Private Companies Valuation Methods – LBO Analysis 6

III. Private Company Financial Metrics

Private Company Financial Metrics  EBITDA – Earnings before interest, taxes, depreciation and amortization. Measure of cash produced by the company’s operations. The case often provides hints at adjustments to EBITDA.  EBITDA less CAPEX – Reducing EBITDA by the amount of capital expenditures derives a better measure of cash flow to service debt and taxes  Debt to EBITDA – Ratio of interest bearing debt to company’s LTM (last twelve months) EBITDA. This is the ratio that leveraged lenders use to determine the maximum level of debt a company can handle. With companies with less than $10mm of EBITDA, 3.0x – 3.5x is typical; over $10mm, 3.5x – 6.0x. Definitions 7

Private Company Financial Metrics  Senior debt – First lien bank debt – refer to case study for pricing  Subordinated or Mezzanine debt – Term debt that is second in priority to senior debt; typically provided by funds and private finance companies.  Equity Value – Market Capitalization for public companies (# of shares times the share price). For a private company equal to Enterprise Value minus debt plus cash (net debt).  Enterprise Value – Equal to interest bearing debt and equity value minus cash on the balance sheet (net debt). This is the value of a company. Also calculated by multiplying LTM EBITDA by a market multiple. Definitions (cont.) 8

Private Company Financial Metrics Example of an enterprise and equity value calculation: 9

IV. How To Avoid Mistakes

1) Use all appropriate valuation methods – the case will give you enough information to do those that are possible 2) Remember your audience and who hired you – the Board of Directors whose foremost fiduciary responsibility are to the owners of the business. You are not presenting to a professor or a class. 3) DO NOT get bogged down in the details in your presentation. Board members will ask a detailed question if they believe you glossed over something important. Put detail in appendix. 4) The cases typically give you more information than you need. You do not need to use everything that is in the case. 5) Make sure you answer the questions the Board is asking contained in the preamble of the case. How To Avoid Mistakes 10

6) Focus on Enterprise Value – many contestants only focus on Equity Value and forget about the Debt and Cash. 7) Have a handout that is identical to your presentation to the board on the screen. 8) Unless necessary, don’t regurgitate the financial statements in your presentation. 9) LTM earnings is the only relevant number to use for valuation purposes. 10) Make sure the presentation doesn’t switch between landscape and portrait. How To Avoid Mistakes 11

ACG Philadelphia Cup 2014 GOOD LUCK!!!