1. TRANSFERRING A BUSINESS TO KEY EMPLOYEES For Privately Held Business Presented by: Sam G. Torolopoulos ATI Capital Group, Inc. ATICG © 2010ATI Capital Group, Inc.

2. ATICG © 2010ATI Capital Group, Inc.2 BUSINESS TRANSFER SPECTRUM For Financial Professional Use Only T R A N S F E R M O T I V E S EmployeesCharitable Trusts Co-OwnersFamilyOutside (Continue) Outside (Retire) Public  ESOPs  Management Buyout/Ins  Options  Phantom Stock  Stock Appreciation Rights  CRTs  CRATS  CRUTs  CLTs  CLATs  CLUTs  Gifts  SCINs  Annuities  GRATs  FLPs  IDGTs  Buy/Sell  Russian Roulette  Dutch Auction  Right of First Refusal  Negotiated One-Step Private Auctions  Two-Step Public Auctions  Consolidated Roll-ups  Buy and Build Recaps  Initial Public Offerings  Direct Public Offerings  Reverse Mergers  Going Private INTERNAL TRANSFERS EXTERNAL TRANSFERS T R A N S F E R C H A N N E L S T R A N S F E R M E T H O D S

3. ATICG © 2010ATI Capital Group, Inc.3 PUBLIC CAPITAL MARKETS Large Publicly Traded Companies Have unlimited access to capital Are focused on profit maximization Are not concerned about Tax minimization Are Strategic minded Are not concerned with creating personal wealth for the “owner” of the business.

4. ATICG © 2010ATI Capital Group, Inc.4 PRIVATE CAPITAL MARKETS Privately Held Companies Capital is limited to the owner’s guarantee Are concerned about Tax minimization Are primarily concerned with creating personal wealth for the “owner” of the business. Are tactical not strategic (wear many hats)

5. ATICG © 2010ATI Capital Group, Inc.5 DIFFERENCES THEREIN Very few if any privately held “C” corporations pay double tax. All/most “S” Corporations pay income tax. Owner of a private company is obsessed with minimizing or eliminating income taxes. Public companies do NOT pay income tax therefore, CEO could care less about the amount or rate of corporate taxation.

6. ATICG © 2010ATI Capital Group, Inc.6 DIFFERENCES THEREIN Officers of a publicly traded company can sell some, most, or all of their stock or vested options before retirement, at retirement or after retirement….there is a ready market for the stock. Officers of a privately traded company have no such ready market for their stock.

7. ATICG © 2010ATI Capital Group, Inc.7 DIFFERENCES THEREIN Owner of a private company seeks to grow family wealth (starting with himself) CEO of a public company seeks to grow share value and\or pay dividends Board of directors of a private company (if any) are reluctant to make changes to management Board of directors of a public company will act quickly to remove non-performing Mgt.

8. ATICG © 2010ATI Capital Group, Inc.8 DIFFERENCES THEREIN CFO of a public company strives to obtain capital at the lowest possible cost (WACC) Owner of a privately held business has VERY limited access to capital (will take what he can get) CEOs of privately owned companies think tactical CEOs of publicly traded companies think strategic

9. ATICG © 2010ATI Capital Group, Inc.9 POTENTIAL BUYERS A Corporation An Individual\Individuals A Qualified Plan

10. ATICG © 2010ATI Capital Group, Inc.10 HUMAN CAPITAL Every corporation has three basic categories of human capital Legacy Generation  Current owner or founder Next Generation or Senior Mgt. Rank and file employees

11. ATICG © 2010ATI Capital Group, Inc.11 BUSINESS OWNER’S MOTIVES Most business owners want to:  “leave a legacy” behind in their business  extract VALUE in an efficient manner that will not negatively impact the Company’s legacy  remain in control for a period of time

12. ATICG © 2010ATI Capital Group, Inc.12 MANAGEMENT’S MOTIVES Management wants to:  grow the business\take more risk.  to create VALUE that will first pay off the seller, and second increase their personal wealth.  See to it that control passes in an efficient but determinable manner.  Extract the value that they have paid for and created in order to enhance their personal wealth.

13. ATICG © 2010ATI Capital Group, Inc.13 BUSINESS OWNER’S UNKNOWNS Very few business owners:  know what their options are  understand how their motives impact the decision process  understand the opportunity cost of one option over the other  understand that their business has multiple values on the same day

14. ATICG © 2010ATI Capital Group, Inc.14 TRANSFER TO MANAGEMENT Making It Work For Everyone! For Financial Professional Use Only

15. ATICG © 2010ATI Capital Group, Inc.15 MOTIVATING THE SELLER Transition is a process not an event Quicker and more confidential than 3 rd party sale Deal structure can be more flexible Legacy of the Company continues Personal sentiment of the owner  “Mgt. has earned it”

16. ATICG © 2010ATI Capital Group, Inc.16 MOTIVATING THE SELLER Upside growth potential for both seller and management Can provide continued service to the Company as officer and\or director Control over “control”

17. ATICG © 2010ATI Capital Group, Inc.17 SELLER CONCERNS Deal structure  Cash, debt, earn-out Mgt. generally has no capital or “skin in the game” Loss of control Contingent liabilities Maintaining Mgt. enthusiasm  “Who gets what percentage?”

18. ATICG © 2010ATI Capital Group, Inc.18 SELLER CONCERNS Should a private equity firm be involved?  Control\Minority  What is P.E. exit strategy?  Where will that money come from?  Will management be willing to work that hard and stay that long?  Impact of P.E. representative on the board?

19. MGT. BUY OUT EXAMPLE ATICG © 2010ATI Capital Group, Inc.19

20. ATICG © 2010ATI Capital Group, Inc.20 ASSUMPTIONS Gross revenue = $50MM EBITDA = 10% of revenue Annual Growth = 10% Depreciation = Cap Ex at 2% of revenue Taxes = 34% Working Capital increases at 12% of revenue growth No existing debt

21. ATICG © 2010ATI Capital Group, Inc.21 ASSUMPTIONS Value @ 5X EBITDA $10MM bank debt Mgt. can raise $1MM P.E. infuses $14MM Annual Growth = 10% 100% of excess cash to pay down bank debt EBITDA value multiple @ 6X after three years

22. ATICG © 2010ATI Capital Group, Inc.22 MBO EXAMPLE In thousands CurrentYr. 1Yr. 2Yr. 3Exit Revenue 10% $50,000 $55,000 $60,500 $66,550 EBITDA10% 5,000 5,500 6,050 6,655 Depr.\Cap Ex.2% 1,100 1,210 1,331 Interest Exp.7% 700 568 413 Pre-tax income 3,700 4,272 4,911 Taxes34% 1,258 1,453 1,670 Working Cap. Incr.10% 550 605 666 Principal Pmt. 1,892 2,215 2,576

23. ATICG © 2010ATI Capital Group, Inc.23 MBO EXAMPLE CONT. ValuationCurrentYr. 1Yr. 2Yr. 3Exit EBITDA $5,000 $6,655 Multiple X5 X6 Value 25,000 39,930 Financed Bank Debt 10,000 (1,892) (2,215) (2,576) 3,317 Mgt. Equity 1,000 2,442 P.E. Equity 14,000 34,171 Totals $25,000 $39,930

24. ATICG © 2010ATI Capital Group, Inc.24 SELLER’S RESULTS “Cashes out” and receives $25,000 Remains on the board of directors Remains as an officer Possible incentives for growing the company Maintains privacy of the transaction

25. ATICG © 2010ATI Capital Group, Inc.25 FOR THE P.E. GROUP Purchased 93.33% of the equity $14MM/$15MM for 56% of the purchase price $14MM/$25MM. Value of P.E. equity went from $14MM to $34MM representing a 244% increase over three years.

26. ATICG © 2010ATI Capital Group, Inc.26 FOR MANAGEMENT Only came up with $1MM Mgt. equity went from $1MM to $2.442MM representing a 244% increase over three years Didn’t guarantee the $10MM loan $10MM loan reduced to $3.317MM Continuity of Mgt. position\board representation

27. ATICG © 2010ATI Capital Group, Inc.27 CONCERNS FOR ALL 100% of excess cash flow is used to pay debt not grow the Company. Where is Mgt. going to get the money to buy-out P.E. group? P.E. realizes lion’s share of actual equity growth. Undo emphasis on short-term results. Shareholders’ Agreements?

28. ATICG © 2010ATI Capital Group, Inc.28 CONCERNS FOR ALL Mgt. conflict of interest. Mgt. ongoing appetite for new Majority owners when P.E. sells. Owner motives outweigh Management motives.

29. EMPLOYEE STOCK OWNERSHIP PLAN A Pre-tax Management Buyout? ATICG © 2010ATI Capital Group, Inc.29

30. ATICG © 2010ATI Capital Group, Inc.30 WHAT IS AN ESOP ESOP = Employee Stock Ownership Plan An ESOP is a QUALIFIED PLAN under the Employees’ Retirement Income Security Act of 1974 (ERISA) See Sections 401(a), 4975(e)(7), and 501(a) of the Internal Revenue Code of 1986, as amended, and Section 407(d)(6) of ERISA, 1974

31. ATICG © 2010ATI Capital Group, Inc.31 UNIQUE FEATURES OF AN ESOP An ESOP trust “ESOT” has three very unique features: 1.ESOT must own “principally” stock in its sponsor company. 2.An ESOT is the ONLY qualified plan under ERISA allowed to BORROW MONEY!! 3.The trust can purchase the Company in “Stages” (multiple transactions).

32. ATICG © 2010ATI Capital Group, Inc.32 TAX ADVANTAGES OF AN ESOP ESOP structures have the following tax advantages: Seller can defer tax on sale indefinitely  30% or more for “C” corporations only Seller can be a participant in the ESOP  Only if tax deferral on sale is not elected Company tax deducts the principal and interest on ESOP buyout loan  Available for “C” and “S” Corporation ESOPs

33. ATICG © 2010ATI Capital Group, Inc.33 TAX ADVANTAGES OF AN ESOP “S” Corporation ESOP pays no tax on pre-tax income for the percent owned by the ESOP.  If 100% “S” Corporation ESOP, then 100% of pre-tax income free from tax.

34. ESOP EXAMPLE ATICG © 2010ATI Capital Group, Inc.34

35. ATICG © 2010ATI Capital Group, Inc.35 ASSUMPTIONS Gross revenue = $50MM EBITDA = 10% of revenue Annual Growth = 10% Depreciation = Cap Ex at 2% of revenue Taxes = 0% Working Capital increases at 12% of revenue growth No existing debt

36. ATICG © 2010ATI Capital Group, Inc.36 ASSUMPTIONS Value @ 5X EBITDA $25MM Seller Note Five year vs. three year horizon for MBO Mgt. need not raise ANY capital Annual Growth = 10% 100% of excess cash to pay down bank debt EBITDA value multiple @ 6X after five years

37. ATICG © 2010ATI Capital Group, Inc.37 ESOP EXAMPLE CurrentYr. 1Yr. 2Yr. 3Yr. 4Yr. 5Exit Revenue 50,000 55,000 60,500 66,550 73,205 80,526 66,550 Growth10% EBITDA10% 5,000 5,500 6,050 6,655 7,321 8,053 Depr.\Cap Ex.2% 1,100 1,210 1,331 1,464 1,611 Interest Exp.7% 1,750 1,603 1,419 1,192 1,064 Pre-tax income 2,650 3,237 3,905 4,664 5,378 Working Cap.10% 550 605 666 732 805 Debt Repayment 2,100 2,632 3,240 3,932 4,573

38. ATICG © 2010ATI Capital Group, Inc.38 ESOP EXAMPLE CONT. Valuation CurrentYr. 1Yr. 2Yr. 3Yr. 4Yr. 5Exit EBITDA 5,000 8,053 Multiple X5 X6 Value 25,000 48,318 Financed Equity N/A 39,795 Seller Debt 25,000 (2,100) (2,632) (3,240) (3,932) (4,573) 8,523 Debt Balance 22,900 20,268 17,028 13,096Totals 48,318

39. ATICG © 2010ATI Capital Group, Inc.39 SELLER’S RESULTS “Sells” for $25MM plus interest (over $7MM in interest in our example buy yr. 5). Does not have to pay tax on sale. Can receive lump sum for balance at time of bank refinancing during year three or four. Remains on the board of directors. Remains as an officer. Possible incentives for growing the company via cash based incentives.

40. ATICG © 2010ATI Capital Group, Inc.40 SELLER’S RESULTS Can be paid more quickly due to Company paying less tax for “C” corporation or NO tax for “S” Corporation. Continuity of transition. Has Mgt. buy-in from day one. No P.E. involvement. Seller is a more flexible lender in case of economic downturn.

41. ATICG © 2010ATI Capital Group, Inc.41 FOR MANAGEMENT No down payment, no guarantee on loan. Ownership in the ESOP as participants. No P.E. group on board of directors. Continuity of Mgt. position\board representation. Clear understanding of process on day one. Can earn additional equity via synthetic equity. Increased compensation under “cash-based” incentive plans. Will accumulate more equity value in the ESOP than with MBO.

42. ATICG © 2010ATI Capital Group, Inc.42 CONCERNS FOR ALL 100% of excess cash flow is used to pay debt not grow the Company. Company must set aside money to meet repurchase obligation on ESOP stock Seller in control longer 5 yrs. vs. 3 yrs. At the end of 5 yrs. Company still has $17MM in total debt. Shareholders’ Agreements?

43. ATICG © 2010ATI Capital Group, Inc.43 CONCERNS FOR ALL Owner motives outweigh Management motives. Stock in ESOP allocated based on payroll (no extra management incentive). Administrative requirements of managing ESOP. Trustee of ESOP has some say in Mgt.

44. ATICG © 2010ATI Capital Group, Inc.44 Contact Information Sam G. Torolopoulos, CPA/ABV, ASA  1674 Keller Parkway, Suite #140. Keller, Texas. 76248  214-920-1616, fax 214-920-1617  sam@aticg.com Web Site: www.aticg.com