1. NOT Yet A Practical Guide to Valuation

2. Craig Kirsch Director of Acquisitions Being a business owner is like owning a boat…. The two happiest days are the day you buy it and the day you sell it!

3. Craig Kirsch Director of Acquisitions Agenda 1. Should I sell? 2. Types of Buyers and Risks 3. Valuing your company 4. Prettying up for the dance 5. The other option

4. Craig Kirsch Director of Acquisitions Capital Markets Unprecedented Capital Markets Unprecedented Capital Markets –Everyone is buying everyone else –Where do you fit in?

5. Craig Kirsch Director of Acquisitions Should I Sell? Only you know this answer Only you know this answer Things to consider: Things to consider: –Am I ready? –Why am I selling? –What is my company worth?

6. Craig Kirsch Director of Acquisitions Am I Ready…NOT YET NO THANKS! Big OFFER! Please, Please How ‘Bout Me?

7. Craig Kirsch Director of Acquisitions Five Years Later……

8. Craig Kirsch Director of Acquisitions Now I’m Ready Perfect timing is Seldom Perfect

9. Craig Kirsch Director of Acquisitions Why am I Selling Maximizing your company’s value? Maximizing your company’s value? –Good timing (industry changes, peak earnings, etc) Succession Planning? Succession Planning? Just want out? Just want out? Other business interest? Other business interest? Other outside interest? Other outside interest?

10. Craig Kirsch Director of Acquisitions Importance of Why Answers to these questions help determine: Answers to these questions help determine: –Potential buyers –Acceptable Buyer –Acceptable price –Legacy issues –Future involvement –Who you will sell to  Legacy issues –False start risk

11. Craig Kirsch Director of Acquisitions Buyer Profile and Risks TypeProfileRisk Succession - Son or daughter - Current management - Willing? - Able? - Carry note? Strategic - Industry player - Synergy - Higher price - Dissolve company - Employee loyalty - Sharing info Financial - Equity groups - Changes and exit - Seeking exit - Employee loyalty - Lower price

12. Craig Kirsch Director of Acquisitions What is my Company Worth? Valuation is complex and subjective Valuation is complex and subjective Appraisals (for selling purposes) are a waste of time Appraisals (for selling purposes) are a waste of time Value is purely a “risk/reward” equation (unless you get lucky) Value is purely a “risk/reward” equation (unless you get lucky)

13. Craig Kirsch Director of Acquisitions Risk/Reward Multiple of earnings (or EBITDA) Multiple of earnings (or EBITDA) –Multiple predicts income the buyer expects in return for his investment –Risk adjusted basis –Risk/Price inverse relationship RISK PRICE

14. Craig Kirsch Director of Acquisitions Two Scenarios Buyer 1Buyer 2 Earnings$1.0 mil$1.0 mil Multiple 5 8 Purchase price$5.0 mil$8.0 mil Anticipated Return 20% 12.5% What makes up the risk/return equation? What makes up your company’s risk/return equation?

15. Craig Kirsch Director of Acquisitions Buyer is Seeking Return Capital goes to investments that provides the best risk adjusted return Capital goes to investments that provides the best risk adjusted return

16. Craig Kirsch Director of Acquisitions Buyer’s Options Buyer has competing options: Buyer has competing options: –T-Bills (no risk) –Internet start up (high risk) Your company has its own risk profile Your company has its own risk profile –Different for every business and industry –Buyers assess risk differently

17. Craig Kirsch Director of Acquisitions Known Risks Buying a closely held company comes with some inherent risks: Buying a closely held company comes with some inherent risks: –No one knows your business like you do –Customer concentration –Lack of Liquidity –Lack of Management –Narrow economic Moat

18. Craig Kirsch Director of Acquisitions Risks Other risks become apparent during negotiations and due diligence Other risks become apparent during negotiations and due diligence –Certain risks are mitigated during negotiations and due diligence –There is always an analysis of risk/reward for the buyer The key for the seller is to mitigate risks The key for the seller is to mitigate risks

19. Craig Kirsch Director of Acquisitions Risk Comparison Back to our scenario Back to our scenario –Is 20% right (5 times)? –Is 12.5% (8 times) right? S&P 500 has returned 12.9% over the last 10 years S&P 500 has returned 12.9% over the last 10 years –What is the right number? –Depends on the buyer, the company and the industry

20. Craig Kirsch Director of Acquisitions Mitigate Risk If you are not an S-Corporation (or other flow through entity), elect S-Status immediately. If you are not an S-Corporation (or other flow through entity), elect S-Status immediately. –Ten year waiting period –Ways to mitigate –Talk to your accountant Consider non-compete agreements with key personnel (talk to your attorney) Consider non-compete agreements with key personnel (talk to your attorney)

21. Craig Kirsch Director of Acquisitions Mitigate Risk Demonstrate sustainable growth Demonstrate sustainable growth Keep customers a long time; keep blue chip customers longer! Keep customers a long time; keep blue chip customers longer! Manage returns and credits Manage returns and credits Watch bad debt Watch bad debt Understand and communicate economic moat (what makes you great) Understand and communicate economic moat (what makes you great) Cultivate and motivate management Cultivate and motivate management Be honest and forthright Be honest and forthright

22. Craig Kirsch Director of Acquisitions All Common Sense? YES! YES! Buyer does not know you or your business Buyer does not know you or your business –Credibility –Small stuff adds up –Be prepared –No surprises

23. Craig Kirsch Director of Acquisitions Other Stuff Be prepared Be prepared –Have answers to questions that may never be asked –Know your weaknesses –Know your walk away point

24. Craig Kirsch Director of Acquisitions Some More Other Stuff Broker or No Broker Broker or No Broker –Pick broker wisely –Beware of “exclusivity” and length of time –Beware of “upfront” fees –Transaction fees hurt (could be 6 – 8%) –Check references –How many deals currently (trick question) –Time and disruption

25. Craig Kirsch Director of Acquisitions Other Option – “Rex-Hide” Model Perfect Timing Perfect Timing Leadership and vision Leadership and vision Legacy and employees Legacy and employees Risk off the table - cash in your pocket) Risk off the table - cash in your pocket) Someone else’s risk – keep some upside Someone else’s risk – keep some upside Focus on core competencies Focus on core competencies Minimal disruption and confidential Minimal disruption and confidential No transaction fees No transaction fees

26. Craig Kirsch Director of Acquisitions Thank You! Craig Kirsch, Director of Acquisitions Rex-Hide, Inc. PO Box 4726 Tyler, TX 75712 903-593-7387 ckirsch@rex-hideinc.com www.rex-hideinc.com