Basic ESOP Valuation The ESOP Association Las Vegas Annual Conference November 8, 2012 Basic ESOP Valuation Barry Goodman Arlene Ashcraft Pamela Steverango

Agenda Income Approach Market Approach Employee Communication Barry Goodman – Advanced Valuation Analytics, Ltd. Market Approach Arlene Ashcraft – Columbia Financial Advisors Inc. Employee Communication Pamela Steverango – Chartwell Capital Solutions

Barry Goodman – Advanced Valuation Analytics, Ltd. Income Approach Barry Goodman – Advanced Valuation Analytics, Ltd.

Capitalization Of Cash Flow Method Estimate the capitalization rate. Estimate the cash flow capacity. Divide the cash flow capacity by the capitalization rate.

Capitalization Rate Factor, expressed in %, used to convert anticipated benefits into a current value Considers interest rates, rates of return expected by the market, and risk of the anticipated benefits

Cash Flow Capacity The company’s ability to produce profit Looks at historical profit – not anticipated future profit Estimation Methods Most recent year Mean or weighted average Another way to estimate cash flow capacity- Projected Year

Net Sales and EBIDTA

Gradual Increase

Erratic History

Hockey Stick

Revenue Projections: Last Year and This Year

EBITDA Projections: Last Year and This Year

EBITDA Margin Projections: Last Year and This Year

Historic Success At Forecasting Next Year’s EBITDA

Discounts/Premiums Yes No Yes No Yes No Does the interest holder have control over the entity? Yes No Is there a public market for the interest? Is there a public market for the interest? Yes No Yes No Controlling, non freely traded value Controlling, as if freely traded value Non-controlling, as if freely traded value Non-controlling, non freely traded value

Appendix A: Balance Sheet

Appendix B: Income Statement

Arlene Ashcraft– Columbia Financial Advisors, Inc. Market Approach Arlene Ashcraft– Columbia Financial Advisors, Inc.

Market Approach Also called the “Sales Comparison Approach” Based on the theory of substitution In real estate, appraisers look at data on sales of comparable properties. In business valuation, the theory is the same. A business appraiser interprets transaction data to help guide the determination of appropriate multiples of various measures (cash flow, earnings, book value, etc.) to derive indications of value for the subject company

Market Approach The market approach consists of any/all of the following: An analysis of previous sales or offers for the subject company’s stock Sales of entire public or privately held companies similar to the subject company And/or sales of stock of publicly traded companies similar to the subject company

Market Approach-Value Drivers These are the same as in the income approach: Cash Flow Risk Growth All of the above influence the price paid for a whole company or a single share in a company

Market Approach-Value Drivers What drives value? Macroeconomic factors Industry factors Company specific factors Prices can change rapidly for publicly traded companies, as perceived changes in the above drivers become incorporated quickly into the share price

S&P 500 Index from January 2002 through September 2012 The chart below shows the variation in the S&P 500 Index over time. The horizontal line is the starting value for the S&P 500 in January 2002.

Snapshot: S&P 500 Index from Sept. 26, 2008 to Oct. 15, 2008

Market Data Issues with the market approach Comparability – determination and availability of data Each subject company is different and unique, but companies that have similar growth and risk drivers can still be appropriate to use as comparables Volatility-Public Companies Timely Data & Completeness of Data-Merged and Acquired Companies Positive features of the market approach Timely data Incorporates up-to-date perceptions of risks/benefits of investment “Real world” transactions

Market Approach – Public Companies Assessment of relative risk and return Selection and application of multiples Weighting of indications of value derived May change from year to year Usefulness of underlying data Indicated Value Minority Marketable

Market Approach – M & A Relatively similar approach as in the public company market method Assessment of relative risk and return Selection and application of multiples Weighting of indications of value derived May change from year to year Usefulness of underlying data Indicated Value Control Marketable or Control non-Marketable

Historical M&A Transaction Volume

Concluded Value Reasonable given value basis Strengths and weaknesses of each Final weighting of concluded values Implied multiples

Employee Communication Pamela Steverango – Chartwell Capital Solutions

Why? ESOP companies must share certain information with participants Annual participant statement Summary Plan Description (SPD) Summary annual report on the activity in the plan Additional disclosure for public companies

What? Some ESOP companies choose to share more financial information and communicate more with participants Value is determined on an annual basis by an independent appraiser and is not arbitrarily set by management There are a number of ways of looking at value There are external factors and internal factors that affect value, some of which are beyond your Company’s control Each Employee can impact value

Influencing Factors External Internal General & Regional Economic Condition Regulatory Considerations Specific Industry Condition Capital Markets Condition Internal Operational Factors Financial Performance and Outlook Vendor Relationships Customer Relationships Management Capabilities Personnel

Company Operational Factors Other Technology Administration Business Development Activity Risk Relative Size Industry Position Quality of Earnings Customer Concentration Product Diversity Geographic Diversity Leverage Off B/S Liabilities Personnel Depth and strength of management team Longevity and expertise of key personnel Ability to attract key personnel Strong HR department Profitability Margins Fixed Cost Leverage Volatility Growth Diversification of end markets Breadth and depth of service specialties Geographic diversification Corporate growth strategy and vision Reputation in marketplace

How? Clarify expectations Initial Communication What does it mean to think and act like an owner in your company? How does this differ from perceptions people have about ownership? Initial Communication Start from the participant point of view Make it understandable Seemingly “ungrateful” or probing questions could be a good sign No questions could be a bad sign

Initial Communication Sample Outline Benefits of an ESOP How an ESOP Works How the ESOP Buys Stock Required Players and Roles Benefits and Risks of Ownership Sub S Corporation Status

Initial Communication Sample Outline Who is Eligible to Participate in the ESOP? Who gets Allocations of Contributions? When Will I Receive my Benefit and How is it Paid? Value of Company Stock and My Account Vesting Summary Plan Description

Questions? ?

Speaker Information Barry Goodman Advanced Valuation Analytics, Ltd. 1901 L Street NW | Suite 605 Washington, DC 20036 202-296-2777 bgoodman@advancedval.com Arlene Ashcraft, CFA, ASA Columbia Financial Advisors, Inc. 720 SW Washington Street | Suite 650 Portland, OR 97205 503-222-0562 aashcraft@cfai.com Pamela Steverango, CFA Chartwell Capital Solutions One Market | Spear Tower | 36th Floor San Francisco, CA 94105 415-293-8200 pamela.steverango@chartwellcapitalsolutions.com

Barry R. Goodman, CFA, ASA, CPA/ABV, CBA, CFP Barry has the following professional designations that require an examination: Chartered Financial Analyst Certified Business Appraiser Certified Public Accountant Accredited in Business Valuation Accredited Senior Appraiser - American Society of Appraisers Fellow - Financial Analysts Federation Certified Financial Planner In addition, he is active in the following organizations: American Society of Appraisers (Business Valuation Specialty) American Institute of Certified Public Accountants Greater Washington Institute of Certified Public Accountants (Valuation Committee) Employee Stock Ownership Association (Business Valuation Advisory Committee/Chairman of Leverage Buyout Sub-Committee) National Economists Club Washington Society of Investment Analysts Barry R. Goodman Advanced Valuation Analytics, Inc. 1901 L Street, NW Suite 605 Washington DC 20036 202-296-2777 bgoodman@advancedval.com

Arlene L. Ashcraft, CFA, ASA Principal and Shareholder Arlene Ashcraft has been engaged in business appraisals since 2005. She specializes in ESOP valuation and financial advisory services and appraisal assignments for litigation support purposes. Ms. Ashcraft is an Accredited Senior Appraiser of the American Society of Appraisers designated in Business Valuation, and a Chartered Financial Analyst. She is the current Treasurer of the American Society of Appraisers Portland, Oregon Chapter and Editor of the American Society of Appraisers Business Valuation E-Letter. Ms. Ashcraft earned her Masters of Business Administration from Portland State University in 2004. She is a member of the ESOP Association and an associate member of the ESOP Association’s Valuation Advisory Committee. Ms. Ashcraft has been a speaker on ESOP valuation issues at conferences and webinars sponsored by the National Center for Employee Ownership. Arlene L. Ashcraft Columbia Financial Advisors, Inc. 720 SW Washington Suite 650 Portland OR 97205 503-222-0562 aashcraft@cfai.com

Pamela D. Steverango, CFA Managing Director Pamela has provided financial advisory services to privately held companies since 1986. She is recognized as a leading authority on business valuation, particularly with respect to Employee Stock Ownership Plans and other qualified ERISA plans. Pamela is a nationally recognized speaker on ESOP business valuations. She has been a featured speaker for The ESOP Association, the National Center for Employee Ownership, The ESOP Association - California/Western States Chapter, the AICPA, and for individual organizations on ESOP valuations and fiduciary issues as they relate to ESOP valuations. Pamela is an active member of The ESOP Association’s Ownership Culture Committee, the National Center for Employee Ownership, The ESOP Association - California/Western States Chapter, the CFA Institute and Security Analysts of San Francisco. Pamela is a Chartered Financial Analyst charter holder. She earned a Bachelor of Science degree in psychology from Oregon State University. Pamela also holds a Master of Business Administration degree, with an emphasis in finance, from Golden Gate University. Pamela Steverango Chartwell Capital Solutions One Market Street, Spear Tower Suite 3600 San Francisco CA 94105 415-293-8200 pamela.steverango@ chartwellcapitalsolutions.com