How I Find and Evaluate Troubled Assets Mike Stein CEO Pacific Production Technologies

Professional Contacts  Bankers –They often bring the deals with the most value and will tell you where the issues are They can “encourage” an owner to sell  Who the troubled assets may have already called: Lawyers- May have knowledge of troubled assets (work they have been doing for clients, etc) Accounting Firms- May have knowledge of clients who are troubled and may want help Turn around groups – Clients they have been trying to help look for a buyer or some type of relief  Private Equity firms and Investment Banking Firms (M&A Advisors) Careful here as pricing can get high and sophisticated sellers can be troublesome. 2

Where do I find potential targets?  First place I look for troubled assets is within my own industries Competitors Complimentary product lines  My Birddogs: Sales Channel Purchasing Professionals 3

How do I contact a potential target?  Professional Contacts  Cold calling or solicitation not very effective  I recommend contacting the principles directly with some name dropping to get them to listen to you  Paying them a personal visit is the most effective 4

How do I evaluate a potential target?  First Question: If I buy this business can I fix it? If fixable, is the Capital infusion needed within reason?  Second Question: Why would I buy this business? Is it strategic to my current business?  Do I believe I can grow both my current business and this new business better with the combination? Am I buying cash flow?  Careful here : “Troubled Asset” --- “Cash flow” ?????? 5

Why is this business distressed: THE BASICS  Sales are too low  Costs are too high  Debt is too large 6

If Sales Are Too Low:  Was the business successful at historically higher levels? (pre-economy down-turn),  Why are sales slumping: purely economic reasons ? Other conditions?  Product Technology gaps, channel problems, competition, customers have fled, pricing issues, etc.  Have sales bottomed out? Are you sure!!? 7

If Costs are Too High  Have fixed costs now become to steep for (new normal) sales levels? Can they be reduced with a more radical approach?  Are variable costs to high? Volume related? Are they just high?! 8

If Debt is Too Large:  The market is currently littered with companies that levered up in the good times and simply cannot support those levels.  The business maybe profitable at its new normal size but just cannot meet its debt obligations. 9

Pulling the Basics Together:  What do I think I can Fix  What impact will the fixes have on EBITDA  Napkin Proforma  Sales Growth - that’s later!!! 10

Strategic Add-on Acquisitions  Assets that are competitive or complimentary to my existing businesses are my first targets. (troubled or not)  Identify Dovetails (cost savings and combined growth opportunities) Operations Piece  Back office consolidation  Consolidated sourcing initiatives  Insurance and other benefits consolidation Growth Piece  Sales Channel: consolidate for cost savings or combine for broader reach of both companies products.  Products: Consolidation (elimination of a competitor) move their customers to your products. Combine products (complimentary products), increase overall product offering to both customer bases 11

A Few Words of Caution  After the evaluation and if you proceed to working on a deal, I strongly advise – DO NOT PAY TOO MUCH! The only thing you can’t change after a deal is done is the price. Consider it could be expensive and painful to fix – you should be compensated for that, not the seller For every opportunity to grow or save that you may have identified, there may be potholes that you have yet to discover  Don’t pay for the old results. Do your own forecasts.  Be careful that 1 (your business) + 1 (their business) doesn’t equal ZERO.  Do I have the right people? 12