I. Some Recent History
II. Current Trends in M&ACapital Markets
III. How to Position Your Company for Sale
IV. Questions

I. Some Recent History

FDIC-Insured “Problem” Banks
Source: FDIC
Based on capital, assets, management, earnings, liquidity and sensitivity to
market conditions

FDIC Reserve Fund Balance
• In Billions of $$
Source: FDIC

US Unemployment Rate

US Consumer Confidence Index
Source: The Conference Board

II. Recent Trends In M&ACapital Markets

M&A Activity Has Continued To Improve
 M&A volume has increased modestly, driven primarily by activity in the middle market.
 Many companies and private equity firms are seeking acquisition opportunities, but a
M&A MARKET shortage of quality deals remains.
ENVIRONMENT
 Potential sellers are reluctant to sell with earnings only just recovering from the recession.
 Industries that were somewhat recession-resistant have experienced higher levels of M&A
activity.
 Increasing confidence in the economy has shifted focus away from cost cutting and toward
growth opportunities.
STRATEGIC
 Limited supply of deals and competition from private equity funds have driven valuations
BUYER MARKET up.
 Equity markets recovered at the end of 2011 as volatility decreased from highs in October 2011.
 Large surplus of uninvested capital following successful fund raising efforts in 2007 and
2008
PRIVATE  Buyout firms are eager to deploy capital as some face a “use it or lose it” decision with
EQUITY investment periods nearly over.
MARKET  Demand has exceeded the supply of quality deals, pushing up valuations and forcing firms to
lower return requirements.
 Financing markets have improved, particularly for large deals. However, for companies
with EBITDA of less than $2,000,000 “airball” financing remains extremely difficult.

Commentary on Middle-Market M&A Environment
 Although the economy continues to remain volatile, strategic buyers remain confident about undertaking acquisitions.
 Unemployment rates continued to improve over the last six months−unemployment rate for November 2011 ended
at 8.6%.
 Consumer confidence improved over the last two months of 2011, rising to 64.5 in December 2011, up from 40.9 in
October 2011.
 Personal savings rate has declined (dropped from 5.4% in December 2010 to 3.5% in November 2011).
 Strategic buyers who hoarded cash during the downturn and continue to hold record high cash balances now have
the confidence in their core businesses and are under pressure to demonstrate growth.
 The availability and terms for senior and junior debt to support acquisitions are as attractive as they have been since
late 2007.
 Leverage multiples in middle-market transactions have increased from 3.0x in 2008 / 2009 to 4.0x or greater
depending on the company and industry.
 With greater access to debt capital at more attractive terms, private equity firms are paying higher multiples.
 Private equity firms are sitting on a record high level of uninvested capital.
 Private equity firms currently have approximately $500 billion in uninvested capital, which translates into over $1.0 to
$1.5 trillion of purchasing power.
 Private equity firms raised large funds in 2006 and 2007 and have been unable to deploy that capital because of the
lack of opportunities in 2008 and 2009.
 Many private equity firms face a “use it or lose it” situation, and are desperately looking for quality opportunities.

Commentary on Middle-Market M&A Environment (cont.)
 A lack of quality deals lingers in the market, so attractive companies are demanding a
“scarcity premium.”
 Private equity firms have voiced concerns of being outbid by 1.0x to 1.5x on deals by other
sponsors.
 Right now, it is definitely a “seller’s market.”
 Valuation multiples in change of control transactions are trending up and are at a near three-
year high.
 Stock prices and trading multiples for the publicly traded strategic buyers have increased
from their lows in 2008/2009, which enables them to pay more without the transaction being
dilutive to existing shareholders.
 A rush to sell is expected in 2012 to avoid the potential capital gains rate increase.
 The number of deals in the market is expected to increase in 2012 as business owners will
be looking to monetize their investments prior to the scheduled increase from 15% to 20% in
capital gains rates at year end.
 With the increase in supply, buyers will be more selective and valuation multiples for less
attractive assets are likely to decline.

Aggregate U.S. Deal Volume
 M&A deal activity showed strong improvements in 2010 and continued to remain strong in 2011, especially in the first half.
 While M&A deal count in 2011 decreased by 1.5% over 2010, overall deal value increased by 15.9%.
 In the middle market, M&A activity remained stable with overall deal count decreasing by 1.3% in 2011, and deal
value increasing by 1.4%.
 However, middle market M&A deal activity slowed down significantly in the second half of 2011, with deal count
falling by 18.5% y-o-y and deal value decreasing by 17.4% y-o-y.
Overall U.S. M&A Activity Middle Market U.S. M&A Activity
Source: Thomson Financial as of 12/31/11 Source: Thomson Financial as of 12/31/11
Note: Middle Market defined as deals with enterprise values between $20 and $500 million

Deal Volume by Industry
 In 2011, purchase price multiples Deal Volume by Industry (2009 – 2011)
continued to improve from their
2009 and 2010 levels across most
industries.
 In 2011, deal volume
decreased slightly over 2010
levels for most industries.
 Buyers are reluctant to invest
in cyclical industries, and deal
volume and valuations reflect
this uncertainty.
 Distressed M&A has driven
activity across multiple
sectors in the last two years.

Strategic Buyer M&A Trends
 After peaking in 1998, strategic acquisitions fell precipitously and bottomed out in 2002.
 Since that time period, depressed public market valuations increased distressed M&A activity, as well as opportunistic
corporate buyers (with balance sheet flexibility), have sustained strategic M&A activity
 Financial buyers have been less aggressive on valuations due largely to expensive credit, subsequently allowing
many strategic corporate buyers to be more competitive in auctions.
 In 2011, strategic M&A deal activity decreased slightly by 0.4%, while aggregate deal value increased by 18.3% over 2010.
 Deal volume decreased by 7.8% y-o-y, and deal value decreased 10.0% y-o-y in the second half of 2011.
Aggregate Deal Value and Deal Volume – Strategic Acquisitions

While Loan Activity is Increasing, Markets Are Just Recovering
 As illustrated in the table below, the credit stats of recent deals are more
akin to the recovering market of 2003/2005 than the peak of 2006/2007.
 Additionally, loan spreads remain high by historical standards, both for
LBOs and dividend recapitalizations.
 Outer-edge leverage representing the most aggressive 20% of all deals
during the period below are still meaningfully lower than in the 2006/2007
“hot” leverage period.
Pre-Lehman Dec 2009-Aug Sep 2010-Dec Jan to Sep Sep to Dec
2001-2002 2003-2005 2006-1H07 2008 Sep-Nov 2009 2010 2010 2011 2011
Market tone Cold Recovering Hot Lukewarm Ice cold Thawing Lukewarm Recovering Lukewarm
FLD/EBITDA 2.6 3.08 4.09 3.78 3.22 3.26 3.84 3.87 3.98
Debt/EBITDA 4.01 5.05 6.01 5.5 4.23 4.54 4.97 5.28 5.11
Outer-edge leverage 4.75 6.26 8.05 7.34 4.84 5.79 6.24 7.06 6.34
% > 7x leveraged 0.00% 1.90% 17.72% 14.29% 0.00% 0.00% 0.00% 6.52% 0.00%
PPM 6.12 7.47 8.91 9.75 9.78 8.29 8.3 8.61 9.06
LBO loan all-in spread* 387 282 254 477 680 684 706 698 795
OID 99.30% 99.80% 98.90% 96.98% 97.93% 98.35% 98.68% 97.51% 97.66%
Equity 37.00% 32.60% 32.60% 40.80% 51.06% 44.23% 41.08% 35.10% 42.16%
Average LIBOR floor 267 NA NA 3.27 2.18 1.79 168 139 141
% w/floor 7% NA NA 31% 100% 100% 100% 98% 100%
*includes OID amortized over three year and excess current rate of LIBOR floors

And Credit Statistics Have Continued to Improve
 Leverage multiples have returned to 2005 / 2006 levels and institutions are looking to put money to work.
 Senior debt to EBITDA is now in the 3.3x range, with total leverage of 4.5x for middle-market sponsor-led deals.
 Private equity firms have nearly $500 billion in uninvested capital and are aggressively looking to deploy it.
Average Debt Multiple of Highly Leveraged Loans Private Equity Overhang
$175 $550
$159
$475
$140 $440
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2003 2004 2005 2006 2007 2008 2009 2010 1H11
Cumulative Overhang Under $100mm $100mm - $250mm
$250mm - $500mm $500mm - $1bn $1bn - $5bn
$5bn+
Source: S&P LCD, as of 12/31/11 Source: PitchBook Private Equity Database

… And U.S. Corporate Liquidity Should Create M&A Activity
 Balance sheet strength and debt service management became a critical
focus across all industries during the recession, but top-line organic
growth has continued to remain difficult, and input cost pressures are
tightening margins, leading companies to shift that focus toward
acquisition to increase profitability.
Measures of Corporate Liquidity
Industry Total Debt/EBITDA Current Ratio EBITDA/Interest Exp. Debt/Equity Debt/Total Capital
Consumer - Discretionary 2.4x 1.4x 6.7x 65.0% 39.4%
Consumer - Staples 1.3x 1.6x 9.8x 43.3% 30.2%
Energy 1.7x 1.2x 9.4x 66.0% 39.8%
Financial Services 2.9x 1.3x 6.1x 111.8% 51.1%
Healthcare 0.9x 2.1x 7.3x 23.3% 18.9%
Industrials 3.6x 1.3x 4.0x 93.3% 48.3%
Information Technology 1.4x 1.5x 12.8x 42.2% 29.7%
Materials 2.7x 1.3x 7.5x 64.6% 39.3%
Telecommunications 1.1x 0.8x 12.3x 58.7% 37.0%
Utilities 4.0x 1.3x 6.6x 95.4% 48.8%

Commentary on Valuation Multiples
 Larger deals receive higher multiples. EBITDA breakpoints:
 Less than $1 million
 $1 million-$3 million
 $3 million-$10 million
 $10 million+

Commentary on Key Deal Terms
 Buyers look favorably on Sellers willingness to stay involved (both
operationally and financially).
 Due Diligence is becoming more detailed and is extremely important!

III. How To Position Your Company For Sale

General Outlook for 2012 M&A
 General Outlook for 2012 Remains Promising for M&A
 90% of M&A Deal Makers Surveyed believe M&A in North America will increase
(55%) or stay the same (35%) in 2012
 But, M&A is Down (Globally) 62% in January 2012 versus January 2011 (Based
on Deal Value)
 And uncertainty is still high, due to Presidential election, Europe economic
situation, high unemployment, and continuing tight credit markets
 It is a Seller’s Market
 For the Right Selling Company!
 Strong performers looking to do a deal will do well – multiples are high for these
companies
 Sellers must position the Company to make it attractive for potential buyers

What Buyers Want
 Strong Trailing Twelve Month Results
 Repeated and Increasing Periods of Profitability
 Transferable and Strong Customer Relationships/Repeatable Revenue
 No Cult of Personality
 A Company that is Easy to Buy
 Flexible in Terms of Deal Points
 Diversified Customer Base (3 customers representing 85% of the
business means lower purchase price)

What Potential Sellers Should Be Doing Now
 Organize Your Company. Having an organized company makes you more
attractive−buyers are putting more time, money, and effort into diligence, and the easier
you make it for them, the better.
 Conduct a Sale Analysis of Your Business. Conduct a “readiness” assessment to
determine the steps necessary to bring your company to market, and then complete
those items.
 Get Your Financials In Order. Make sure your financials reflect reality. Buyers don’t
want to find out in diligence that the financials are wrong/incomplete.
 Get Your Management in Order. Who will run the business after the sale? Don’t
assume your buyer will want to insert its own people.
 Consider Third Party Necessary Actions/Consents.
 Protect Your Assets.
 Work to solidify and diversify your customer base.
 Identify key employees, and sign them to lock-up deals (could require change of
control bonuses/stay bonuses, etc.).
 Identify your intellectual property and protect it (through patents, assignments of
intellectual property, properly drafted license agreements)

What Potential Sellers Should Be Doing Now (Continued)
 Be Creative in Bridging the Gap in Ask and Offer Price. Seller financing
and earnouts are more and more common in uncertain markets. Although a
note would be better for the Seller than an earnout, if the deal is right, don’t
turn it down because of an earnout.
 Avoid These Mistakes:
 Going to market before you are ready.
 Not having reasonable and believable explanations for the skeletons in your closet
and how you have fixed them.
 Attempting to renegotiate the deal after the LOI is signed (absent significant
changes).
Know Your Reason For Selling. Your buyer will want to know.
Don’t Lose Track Of Your Business. Selling your business is difficult and time
consuming. Don’t take your eye off of the operations of your business.
Waiting Might Be Best. If you are looking for top dollar and know you will achieve
strong, consistent growth for the next few years, now might not be the right time to sell.

What Potential Sellers Should Be Doing Now (Continued)
 Retain the Right Experts To Help.
 Lawyers: Your general corporate lawyer might be great for most of
your legal business, but you need an M&A lawyer to help you with your
deal.
 Accountants: Are you comfortable that your potential buyer will be
confident in your accountant?
 Bankers/Brokers/Business Advisors: Are they experienced
enough in your size of company and your industry? Do they have
outside “go-to” help if needed?
 Tax Advisor: Make sure you understand how much Uncle Sam is
going to take.
 Valuation Expert: Do you know what your company is worth?

Questions

Cliff Bishop Michael Booth
cbishop@bradyware.com mbooth@ssdlaw.com
937.913.2538 937.222.2056