1. Today's Merger & Acquisition Environment for PEOs John R. Hammett Managing Director, Head of M&A Cherry Tree Securities

2. © Cherry Tree Securities 2 Topics Historical Transactions Factors Driving M&A Among PEOs Valuation Trends Private Equity Buyers Key Take-Aways

3. History

4. © Cherry Tree Securities 4 Trend in PEO Deals

5. © Cherry Tree Securities 5 Trend in PEO Deals

6. © Cherry Tree Securities 6 Trend in PEO Deals

7. © Cherry Tree Securities 7 Trend in PEO Deals

8. © Cherry Tree Securities 8 Three Significant Activities TeamAmerica – VSource deal falls apart Gevity HR buys Remnants of TeamAmerica TeamStaff EPIX Two new announced acquirers: PML North America Encore Professional Employers

9. © Cherry Tree Securities 9 Who's Merging?

10. M&A Drivers

11. © Cherry Tree Securities 11 PEO History From a Dealmaker's Perspective Start-up & rapid expansion phase:  Low-cost of entry  Powerful business model  Unpenetrated markets  Insurance arbitrage promised profits  Easy insurance market

12. © Cherry Tree Securities 12 PEO History from a Dealmaker's Perspective Health-insurance wave:  Tempting self-insurance margins lead to exposure that kills many PEOs  Or drives them to merge with others

13. © Cherry Tree Securities 13 PEO History from a Dealmaker's Perspective Workers' Comp Wave I  Tempting self-insurance margins lead to exposure that kills many PEOs  Or drives them to merge with others

14. © Cherry Tree Securities 14 PEO History from a Dealmaker's Perspective Workers' Comp Wave II:  Major comp insurers pull out of PEO underwriting  Kills more PEOs  Or drives them to merge with others  Or drives them to seek stronger financial partners

15. © Cherry Tree Securities 15 PEO History from a Dealmaker's Perspective Scale and Specialty-Driven Phase  Economies of scale favor larger PEOs  Workforce specialization drives higher margin Medical – technical – professional specialists Traditional labor specialists with industry concentration  Winners will be big regional, national, and specialist firms

16. Valuation

17. © Cherry Tree Securities 17 Valuation Trends Definitions:  Enterprise Value (EV) (value without regard to debt, equity, or cash) = Market Capitalization (equity), plus debt, minus cash  EBITDA (approximate cash flow before financing or taxes) = Earnings before interest, taxes, depreciation, amortization  EV/EBITDA = price or value / earnings  EV/WSE = price or value per Worksite Employee

18. © Cherry Tree Securities 18 EV/EBITDA Trends

19. © Cherry Tree Securities 19 EV/WSE Trends

20. © Cherry Tree Securities 20 Valuation Trends

21. © Cherry Tree Securities 21 Valuation Trends

22. © Cherry Tree Securities 22 Today – 3 Markets Strategic – high value  Publics valuation range ~ $3,000 / WSE  Buying strong PEOs at ~ $1,000 / WSE  at or below 4 to 6 times EBITDA Strategic – bottom feeder  Large, medium, & small buying weak PEOs cheaply Private Equity Firms (financial buyers)  Buying at 4 to 6+ times EBITDA

23. Private Equity Demystified

24. © Cherry Tree Securities 24 Private Equity Firms Invest from a fund of capital  From $50 million to $ billions  Raised from insurance companies, pension funds, endowments, wealthy individuals

25. © Cherry Tree Securities 25 Private Equity Firms  Today: over $100 billion in uninvested capital  We estimate about 1,500 to 1,800 funds in USA  Cherry Tree tracks about 900 of them Industry specialists Generalists Deal size ranges

26. © Cherry Tree Securities 26 Value from Fund's Perspective Value = expected total cash return  Over an expected holding period of 3 to 7 years

27. © Cherry Tree Securities 27 Value from Fund's Perspective

28. © Cherry Tree Securities 28 Value from Fund's Perspective

29. © Cherry Tree Securities 29 Value from Fund's Perspective

30. © Cherry Tree Securities 30 Value from Fund's Perspective

31. © Cherry Tree Securities 31 Private Equity Value Drivers Predictability of future cash flows  Strong management that will stay (for awhile)  Demonstrated operating history of earnings Growth potential  Demonstrated historical growth  Strong industry and macro growth trends  Ability to grow without working capital or physical assets Exit opportunity  Strategic or bigger financial buyer willing and able to buy  Or an IPO

32. © Cherry Tree Securities 32 Private Equity Deal Structure Objective: match price and payments to minimize risk  Portion in cash  Portion in subordinated notes (seller or institution)  Portion in share of future earnings (earn-out)  Re-invested equity from sellers (10% to 40%)

33. © Cherry Tree Securities 33 Private Equity Triage To private equity firms, you are either: 1.A platform 2.A tuck-in 3.Or an Exit

34. Key Take-Aways

35. © Cherry Tree Securities 35 Key Take-Aways 1.PEO is an active M&A marketplace  Deals are fewer, but quality is better 2.Macro trends are continuing to drive consolidation  Small firms can't get the insurance at a good price; service demands are increasing  Economies and service capabilities of larger firms drive their value higher than smaller ones 3.Owners need to be either a buyer or a seller in the next 3 years 4.Strategics will buy at the bottom – or in the middle of the range 5.Certain Financial buyers will buy profitable PEOs if they believe in management, growth, and an exit

36. © Cherry Tree Securities 36 Prepared by: John R. Hammett Managing Director, Head of M&A Cherry Tree Securities 301 Carlson Parkway Minnetonka, Minnesota 55305 952-893-9012 © Cherry tree Securities, LLC all rights reserved