Preparing Your Software Business For SaleJoe DurnfordCEO & Sr. Managing DirectorJD Ford & Company888-999-9495 x2010

2

What to Expect

1• M&A Market Update

2• Current Purchase Price Multiples

3• Industry Focus: Software and Technology Services

4• Sell Side Issues

5• Private Equity

OneM&A Market Update

4

Sustained Rebound in M&A Activity

Number of Announced Deals by Sector Annually

• As we expected, continued pursuit of growth by strategic in economically unexciting times resulted in a rebound in M&A activity in 2014 and so far in 2015 after volume dipped significantly in 2013

• Additionally, increased availability of leverage for private equity firms has helped them compete with strategic valuation and continue doing deals at a steady pace, yet Private Equity were net sellers in 2014 and YTD 2015

• M&A markets are robust and seller-friendly for quality companies with strong valuations for sellers and healthy competition among buyers• Computer and Technology nearly always at the top of “Most Active Industries”

Overall M&A Transaction Activity

Source: CapTarget

2011

2012

2013

2014

2015 TTM

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

1230

1253

1125

1391

1374

91

104

99

81

83

120

121

102

128

128

195

175

169

188

196

471

472

474

691

703

351

444

307

397

408

345

348

305

333

327

80

70

62

77

77

894

875

866

1091

1110

420

403

363

466

446

239

231

211

267

257

295

309

266

367

348

127

126

72

107

112

243

212

191

250

249

439

495

411

516

504

197

216

225

274

270

1185

1253

1085

1326

1403

150

166

161

154

139

120

90

108

115

110

Commercial ServicesCommunicationsConsumer DurablesConsumer Non-DurablesConsumer ServicesDistribution ServicesElectronic TechnologyEnergy MineralsFinanceHealth ServicesHealth TechnologyIndustrial ServicesNon-Energy MineralsProcess IndustriesProducer ManufacturingRetail TradeTechnology ServicesTransportationUtilities

5

M&A Market Fundamentals are Sound

Sellers Market for M&A

Drivers:• Grow market share and

expand geographically• Numerous mega deals

completed in 2014 and YTD 2015, but add ons more common

• Significant cash is available to both strategic and financial buyers

• Private equity frims must deploy capital and are aggressive in searching for deals, but still risk averse

• New capital structures designed to position acquisitions for growth

Buyers SellersDrivers:• Regulatory compliance

costs • Age demographics

trending toward selling• Healthy earnings for

past few years have increased valuations

• Internally generted capital is available for distributions

• Becoming more difficult to find and retain next generation management

• Greed and desire for greater liquidity. Fear is not a driver, but be ware

6

S&P 500 Constituents Total Cash & Equivalents ($ Millions)

Global Private Equity “Dry Powder” ($ Billions)

Strategic & Financial Buyers Are Flush with Cash

• Strategic buyers continue to have healthy balance sheets

• Cash balances spiked significantly at the end of 2014

• Members of the S&P 1500 ended the year with over $3 trillion in cash on their balance sheets

• Strategic buyers will continue to be active in the market in 2015 and have the liquidity to get and close deals quickly

Strategic Buyers

• The number of funds along with assets under management continue to grow

• Firms still have record levels of cash AKA “dry powder” to invest – increasing their equity available by $100 billion over 2013,. Now exceeding $1 Trillion of committed equity for investment

• Leverage markets have continued to open up and private equity have been able to increase valuations accordingly

Private Equity Buyers

Source: CapTarget

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q42008 2009 2010 2011 2012 2013 2014

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

$298$377 $407 $403 $406

$561

$801

$1,005 $1,071 $1,064$992 $927 $943

$1,062$1,208

7

Strategic vs. Financial Buyers - Volume

• Strategic buyers always outpace private equity in terms of deal volume • Strategic buyers have continued to ramp up their deal activity since it dipped during the recession – deal

volume is at record highs• Private equity firms continue to do deals at a normal pace but their share of deals overall declined since 2013• The increasing competition for deals both within the private equity community and between private equity and

strategic buyers should prove to have a positive effect on valuations for sellers

Deal Volume by Buyer Type (US-Based Targets)

Source: CapTarget

20102011

20122013

2014Q1 2015 TTM

708733

677609

626625

6068 6458 6678

6012

76017629

FinancialStrategic

TwoCurrent Purchase Price MultiplesStable Seller Friendly Multiples

9

Multiple Trends by Sector

Revenue Multiples by Sector (Cont.)

Revenue Multiples by Sector

Source: CapTarget

Commercial Services

Communications Consumer Durables

Consumer Non-Durables

Consumer Services

Distribution Services

Electronic Technology

Energy Minerals Finance Health Services0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

2.0x 1.7x1.2x 1.5x 1.7x

1.1x2.1x

3.7x3.0x

1.4x

2010 2011 2012 2013 2014 2015 TTM Average

Health

Techn

ology

Indust

rial S

ervice

s

Non-En

ergy M

ineral

s

Proces

s Indu

stries

Produ

cer Man

ufactu

ring

Retai

l Trad

e

Techn

ology

Servi

ces

Transp

ortati

on

Utilitie

s0.0x0.5x1.0x1.5x2.0x2.5x3.0x3.5x4.0x

3.1x

1.4x2.0x

1.5x 1.5x0.7x

3.1x

0.7x

2.5x

2010 2011 2012 2013 2014 2015 TTM Average

10

Multiple Trends by Sector

EBITDA Multiples by Sector (Cont.)

EBITDA Multiples by Sector

Source: CapTarget

Commerc

ial Se

rvices

Commun

icatio

ns

Consu

mer Dura

bles

Consu

mer Non

-Durable

s

Consu

mer Se

rvices

Distrib

ution

Servi

ces

Electr

onic T

echno

logy

Energ

y Mine

rals

Finan

ce

Health

Servi

ces0.0x4.0x8.0x

12.0x16.0x20.0x

9.5x 8.1x 7.9x10.6x

8.1x 10.2x 11.3x 10.5x7.7x 8.8x

2010 2011 2012 2013 2014 2015 TTM Average

Health

Techn

ology

Indust

rial S

ervice

s

Non-En

ergy M

ineral

s

Proces

s Indu

stries

Produ

cer Man

ufactu

ring

Retai

l Trad

e

Techn

ology

Servi

ces

Transp

ortati

on

Utilitie

s

Overall

Avera

ge0.0x2.0x4.0x6.0x8.0x

10.0x12.0x14.0x16.0x18.0x20.0x

11.6x9.8x

12.2x9.5x 10.7x

8.8x11.4x

7.9x10.3x 9.7x

2010 2011 2012 2013 2014 2015 TTM Average

11

Multiples by Transaction Size

• In some industries, multiples for larger companies tend to be higher• Companies with less than $5 million in EBITDA have limited appeal to private equity groups

and thus should consider making acquisitions to expand EBITDA• Services industries have the smallest price size spread historically• Energy and industrial services have the largest size spread • Buyers have been willing to pay higher multiples for companies with larger cash flow and

stronger brand/market presence

Multiples Vary by Size

EBITDA Multiples for Total Enterprise Values (TEV) Above and Below $500 Million (2010-2015)

Source: CapTarget

Commerc

ial Se

rvices

Commun

icatio

ns

Consu

mer Dura

bles

Consu

mer Non

-Durable

s

Consu

mer Se

rvices

Distrib

ution

Servi

ces

Electr

onic T

echno

logy

Energ

y Mine

rals

Finan

ce

Health

Servi

ces

Health

Techn

ology

Indust

rial S

ervice

s

Non-En

ergy M

ineral

s

Proces

s Indu

stries

Produ

cer Man

ufactu

ring

Retai

l Trad

e

Techn

ology

Servi

ces

Transp

ortati

on

Utilitie

s

Grand T

otal

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Avg EV/EBITDA Under 500mAvg EV/EBITDA Over 500m

ThreeIndustry Focus: Software and Technology Services

13

Transaction Volume by Sector

• Packaged software is the most active industry segment historically

• Prior to 2014 Internet software/services was the next leading sector; however, information technology services have overtaken this segment slightly

• Since hitting a low in 2009, all segments have rebounded moving back toward pre-recession highs

• 2015 is on track to have a record number of deals close

Transaction Volume Volume by Sector and Total

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*0

500

1000

1500

2000

2500

Data Processing Services Information Technology ServicesInternet Software/Services Packaged SoftwareTotal *Annualized

Source: CapTarget

14

Multiple Trends by Sector

EBITDA Multiples

Revenue Multiples

Source: CapTarget, excludes revenue multiples > 50x and EBITDA multiples greater than 100x

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150.0x5.0x

10.0x15.0x20.0x25.0x30.0x35.0x

18.8x 18.6x 22.1x 18.0x 20.1x 18.0x 21.0x 17.2x 32.7x 16.8x 15.0x

Data Processing Services Information Technology Services Internet Software/ServicesPackaged Software Average

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150.0x2.0x4.0x6.0x8.0x

10.0x12.0x

3.9x 3.1x 3.1x 3.1x 2.2x 3.5x 3.3x 3.5x 3.1x 3.5x 3.2x

Data Processing Services Information Technology Services Internet Software/ServicesPackaged Software Average

15

Software Industry: Key Value Drivers

Revenue Model &

Growth Rate

Customer Concentration

IP/Product Differentiation

Total Addressable

Market

Internal Systems & Controls

Management Team &

Organizational Structure

Partnerships Profitability

16

The Metric/Economic Outlook: Where are we in the cycle

Y/Y

GD

P G

row

th

(’08

-’15

)

Sources: Bureau of Economic Analysis, Bureau of Labor EconomicsNote: U.S. GDP denominated in 2009 dollars

Historical data show a recession in the U.S. on average every 6-7 years since 1947, and double-dips within eight years of big recessions like the Great Depression

1.1% 0.8%

(0.3%)

(2.8%)

(3.5%)(4.1%)

(3.3%)

(0.2%)

1.6%

2.7% 3.1%

2.7%

1.9% 1.7% 1.2%

1.7%

2.6% 2.3%

2.7%

1.6% 1.7% 1.8% 2.3%

3.1%

1.9%

2.6% 2.7% 2.4%

2.7% 3.0% 2.8% 2.8%

(5.0%)

(4.0%)

(3.0%)

(2.0%)

(1.0%)

---

1.0%

2.0%

3.0%

4.0%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

'08 '08 '08 '08 '09 '09 '09 '09 '10 '10 '10 '10 '11 '11 '11 '11 '12 '12 '12 '12 '13 '13 '13 '13 '14 '14 '14 '14 '15 '15 '15 '15

(5.0%)

---

5.0%

10.0%

15.0%

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015Y/

Y G

DP

Gro

wth

(’

50-’

15)

The Metric/Economic Outlook: Tech Spending

17

Global IT Spending (% YoY Change)

Global IT Spending by Category ($BN)

6.0%

(10.0%)

8.0%

6.0%

2.0% 2.0% 2.1%

3.7%

2008 2009 2010 2011 2012 2013 2014 2015F

$620

$393

$514

$353

$456

Software

Computer Equipment

Tech Consulting &Systems IntegratinoSvcs.

CommunicationsEquipment

Tech Outsourcing & H/WMaint.

$2,336

Sources: Goldman Sachs, IDC, Forrester, and Gartner

Forrester: “Software’s leading position is not a surprise, because it is the focal point for tech innovation today, whether that innovation takes the form of cloud computing and adoption of SaaS, PaaS, smart computing and big data, real-time predictive analytics and smart process apps, or mobile computing and mobile apps and enterprise app stores.”

The Multiple/Discount Rate

18

Lower Rates = Higher Valuations

0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%16.00%18.00%

10-Year Treasury Yields (Jan. 1900 – Jul. 2015)

Source: Department of the Treasury

The Multiple/Risk Environment

19

CBOE Volatility Index (“VIX”) (2004-2015)

Source: CBOE, NYU Sterns research

Lower Perceived Risk = Higher Valuations

0

10

20

30

40

50

60

70

80

90

1/2/2004 2/26/2005 4/23/2006 6/18/2007 8/12/2008 10/7/2009 12/2/2010 1/27/2012 3/23/2013 5/18/2014 7/13/2015

3.00%

4.00%

5.00%

6.00%

7.00%

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Historical Risk Premium (1960-2014)

The Result: Multiples are High

20

42.6x 13.1x 15.2x 6.5

x 13.5x

7.8x 1.8x

1.1x

2.6x

2.6x

Tech Bubble (2000-2002)

Peak(1) Trough(2)

Great Recession (2007-2009)

Peak(1) Trough(2)

Today

As of 3/31/15

Index Value 4,941 1,114 2,812 1,269 4,964

EV/LTM Revenue

EV/LTM EBITDA

Source: Capital IQ, STRHNote: Bubble represents aggregate LTM revenue and LTM EBITDA multiples for the respective index(1) Tech Bubble peak as of 3/23/00 and trough as of 10/9/02(2) Great Recession peak as of 10/10/07 and trough as of 3/9/09

IPO: US Technology IPO Activity

21

U.S. Technology IPO Activity (Q1 1998 – Q2 2015)

Note: All technology IPOs on U.S. exchanges; Source: Capital IQ

1822

17

8

27

52

65

6060

44

51

12

36

36 5

7

02 1 2

6 7 8 8

16

84

81211

7 85

16

11

20

13

18

20

20 1

42 3

5

1311109

19

37

119

6 6 5

1412

1011

17

69

4

10

0

10

20

30

40

50

60

70

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

IPO: Growth at Scale is Key Public Market Consideration

22

Revenue Growth of Selected Software IPOs (at IPO)1

Revenue Run Rate of Selected Software IPOs (at IPO, $MM)2

107%

77%65% 63% 62%

51% 49% 48%40% 39% 38% 38% 33% 31% 29% 24% 24% 23%

$51

$101

$34

$104

$79 $99

$68

$108

$151

$96 $103

$62

$97

$63 $85

$97 $89

$60

Median: 39%

Median: $92

Source: Capital IQ and Wall Street research; Selected Software IPOs since 1.2013 with IPO valuation < $2.0bn(1) y/y revenue growth rate of last reported quarter prior to IPO pricing(2) Revenue run rate based on annualized last reported quarter prior to IPO pricing

Rule of Thumb: $100MM of Revenue or $50MM Recurring Revenue Growing at Least 25-30%

Monetization/Full Sale: Most Active Buyers – Strategic

23

• The 10 most active strategic software consolidators combined for 13 acquisitions in Q1 2015

• In Q1 2015, Microsoft was the most active strategic software acquirer with 5 completed acquisitions, including Revolution Analytics and Equivio, that support the company’s strategy to acquire cloud solutions for the Azure platform

• Google and IBM were also active in Q1 2015, with 5 combined acquisitions

# of Transactions by Strategic Buyers1,2

0

5

10

15

20

25

30

35

40

45

50

5 8 5 59

17 8

4 7

7

1012

85

5

35

57

5

8 99 7

5

9 2 85

28 9 6

4 6

10

44 3 1

3

12

15

1

48

3634

27 27 2623

20 20 20

#total

2015 Q1

2014

2013

2012

CashInc. Debt Capacity3

$70

$80

$54

$13

$9

$31

$54

$24

$2

$0.6

$95

$68

$14

$54

$7

$5

$5

$11

$1

$0.6

($BN)

Less Risk = Higher Valuation

24

Key Metrics

Valuation LTM Op. Metrics

3.5x EV / ‘15E Revenue

14.0x EV / ‘15E EBITDA

23.8x EV / ‘15E

P/E

14.3% Revenue Growth

68.6% Gross

Margins

14.8% EBITDA Margins

Source: Company filings, Thomson Financial, Capital IQ, STRH reports; # of public software companies analyzed: 165Note: Valuation charts represent median, 25th percentile and 75th percentile values based on Wall Street consensus

Valuation Metrics by Bus. ModelEV/2015E Revenue

EV/2015E EBITDA

3.3x

4.6x

2.1x2.5x

7.5x

5.5x

Perpetual

SaaS

11.7x

17.1x

10.4x

12.0x

27.5x

23.1x

Perpetual

SaaS

25

Software Sub-segment: SaaSValuation and Growth Profiles

26

Software Sub-segment: SaaSEBITDA Multiple & Rev. Growth Correlation

8.0x 9.0x 10.0x 11.0x 12.0x 13.0x 14.0x 15.0x 16.0x 17.0x0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Industry Focused Solutions Profitable Saas Smaller Market Cap

CY15E EV/EBITDA

CY14

E –

CY16

E Re

venu

e CA

GR

Solera Holdings

Dealertrack

Constant ContactTangoe

Constellation SoftwareSciquest

NICE systems

Sabre Corporation

27

Software Sub-segment: SaaSRev. Multiple & Rev. Growth Correlation

0.0x 2.0x 4.0x 6.0x 8.0x 10.0x 12.0x 14.0x-10%

0%

10%

20%

30%

40%

50%

Growth Saas Industry Focused Solutions Profitable SaaS Smaller Market Cap SaaS

CY15E EV/Revenue

CY14

E –

CY16

E Re

venu

e CA

GR

ServiceNow

Textura

Guidewire

inContact

Constant ContactMarin Software

Workday

NetSuiteVeeva

MarketoCornerstone On Demand

Tyler Technologies

BenefitfocusService Source

Solera Holdings

Sabre Corporation

Dealertrack SalesforceWageWorks

Service Source

Tangoe

NICE SystemsSciquest

Realpage

Five9

Valuation Analysis & Estimated Value Range

28

Valuation Analysis - Summary

Illustrative Valuation Matrix for ABC Technology, Inc.

Estimated Value Range

Capitalization of Earnings

Comparable Public Companies

Comparable Transactions

Discreet Market Inquiry

$8,

000,

000

$10

,000

,000

$12

,000

,000

$14

,000

,000

$16

,000

,000

$18

,000

,000

$20

,000

,000

Implied Total Equity Value

Valu

atio

n M

etho

dolo

gy

FourSell Side Issues

30

Positioning for Sale

Solid Business Prepared for

Sale

Have Strong Financial Controls• Good controller or CFO• Audit financials• Limited lifestyle expenses

Put a Team in Place• Engage experienced

advisors• Investment bankers and

legal counsel are key extracting value

• Environmental consultants – get site assessment in advance

• Wealth advisor- devise a personal wealth plan and know retirement needs

Be Reasonable• Understand current

market multiples• View from buyers shoes• Don’t be greedy

Grow• Recurring revenue• Improve EBITDA• Enhance margins

Diversify• Reduce upstream

and downstream concentrations

• Look at customers, suppliers and markets

Secure Customers• Nurture customer

relationships• Enhance customer

stickiness

Expand• Improve market

share• Top-tier competitors

get higher valuations

31

Illustrative Sell Side Process and Timeline

PHASE I: Pre-Transaction

Planning (2 – 6 weeks)

PHASE II:

Preparation & Marketing

(6 - 8 weeks)

PHASE III: Partner Selection & Due

Diligence (4 weeks)

PHASE IV: Closing the Transaction

(8 – 12 weeks)

• Extensively discuss goals and objectives of shareholders & management

• Coordinate integrated wealth protection, transfer and preservation plan

• Develop ideal transaction profile consistent with shareholder goals

• Collect due diligence – operational, management, market, industry and financial data

• Develop thorough understanding of the company’s business model and competitive position

• Perform earnings analysis & recast financials to reflect true economic earnings

• Develop a divestiture (sale) plan for the business

• Prepare a detailed assessment of value and selling price range

• Prepare financial models and forecasts

• Work with accountants/lawyers/estate and financial planners with respect to tax advantaged strategies

• Analyze strategic rationale for various buyers

• Identify potential obstacles to sale and deal with them directly and upfront

• Establish Virtual Data Room to be used during due diligence phase

• Create Executive Summary & Prepare the Confidential Information Memorandum

• Finalize list of potential buyers and analysis of buyer synergy opportunities

• Complete data room and begin work on management presentation

• Pre-qualify and contact potential buyers from the approved list

• Execute confidentiality and non-disclosure agreements with interested parties

• Present compelling case for an acquisition to buyer senior executives

• Distribute Information Memoranda to approved parties

• Facilitate flow of information to prospective buyers/investors

• Field inquires from interested parties to minimize company disruption

• Analyze letters of interest and qualifying buyer proposals

• Arrange visits with management for selected parties

• Prepare management presentation materials

• Facilitate negotiations relevant to the transaction and evaluate price, structure and conditions of multiple offers

• Value potential synergies• Advise on the structure of

competing transactions• Model multiple transaction

scenarios to evaluate net after-tax value and meeting of other objectives

• Orchestrate multiple simultaneous negotiations and competing offers

• Review business terms of transaction agreements

• Negotiate for maximum yield of indemnification escrows

• Analyze buyers’ financial capacity to close and closing conditions

• Value non-cash consideration• Negotiate employment, consulting

and other important transaction documents

• Manage buyers due diligence process

• Collaborate with legal, accounting and tax advisors to close the sale

• Continue to assist in negotiation of definitive purchase & sale and other ancillary agreements

• Assist in structuring and closing the transaction

• Ensure timely follow through and settlement of any post-closing obligations

• Utilize JDF Proprietary approach to minimizing taxes and maximizing escrow yields

• Assist with post-closing items as needed

Finding the Right Buyer

32

Collaborate

Consider Both Strategic & Financial Buyers

Leverage Resources – Advisors and Relationships

Go International

Think Outside the BoxBe Thorough

33

The Value Gap

INCREASING VALUE GAP

If the company is not a top tier performer: lack

of buyer interest, difficult financing, and

lower mutliples

Value required by the selling shareholders

• Owners need post-closing cash that is adequate to sustain current lifestyle in low yield investment environment

• Entreprenuers see value in business not seen by third parties

• Owners don’t see company speicifc risks in the same light as buyers

Owner Value

Value potential buyers place on the business

• Valuations driven down by businesses realizing returns < cost of capital

• Buyers have become increasingly risk averse – higher discounts for risks

(i.e. customer concentration, earnings volatility, etc)

Market Value

VALUE GAPResult:Owners opt not to sellOwner sells but does not achieve liquidity objectives

Result:Buyers opt not to buyBuyers pass up good

opportunities

34

Bridging The Value Gap

• Demonstrate growth strategy and be prepared to support “Total Addressable Market” opportunity• Have well documented Intellectual Property Rights and be able to define any market disrupting elements• Ensure all key employees have non-competes and ideally incentives to remain after a sale (Talent has value)• Be willing to get creative in capturing value beyond current market multiples

Overcoming the Value Gap

Focus on Value Creation

Articluate Value & Negotiate Effectively

Achieve fair value that

meets owner needs and

expectations

35

Working Capital – How is it handled?

Post Closing Adjustment

What working capital was actually delivered? What is mechanism for true up?

Working Capital Escrow 90 to 120 days

Setting the TargetFixed Amount or a range?

Why is it an Issue?Buyers view it as an asset they are purchasing, Sellers often view it as something that is rightfully theirs

How is it Defined?(Current Assets, excluding cash) – (Current Liabilities, excluding interest bearing debt) = Net Working Capital

36

Market Standards – What to Expect

Reps & Warranties• Knowledge Qualifiers• Survival Period

Indemnification• Baskets• Caps• Escrows

Indemnification Summary (10-year period, Percentages shown as a percent of purchase price)    Mean Median Max MinAll Baskets 0.8% 0.7% 8.2% 0.1%

Deductible 0.8% 0.7% 8.2% 0.1%Dollar-One 0.7% 0.7% 2.3% 0.1%

Cap 13.3% 10.0% 100.0% 0.5%Survival (Months) 19 18 96 6 Escrow 7.8% 7.1% 26.7% 0.5%Escrow (Months 19 18 96 1

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New Deal Tool: Reps and Warranty Insurance

Pros: Limits seller’s exposure if breach of reps and warranties occurs Eliminates 12-24 month indemnity escrow, which is typically 10-15% of Purchase Price Makes deals easier when shareholder groups are diverse and have different levels of indemnification Can provide buyers an edge up in a competitive sale process Helpful to limit risk in cross border deals

Cons: Sellers and buyers must pay insurance premium and pay a deductible if a claim is made Coverage may have broad exclusions of coverage, and does not eliminate risk Some reps may not be covered such as environmental reps when potential exposure is significant Takes~30 days to obtain Inserts another party into the mix

• Can be structured as a security or indemnity: • Most common: As an indemnity it replaces all or part of the traditional seller indemnity for breaches of reps and warranties• Less common: As a security it stands behind a seller’s indemnity for breaches of reps and warranties

• Insurance providers charge a premium, which is usually split by buyers and sellers• Allows sellers to choose to pay a premium to be covered for breaches instead of having a percentage of purchase price held in escrow for 12-

18 months• Premiums usually range from 2-5% of the limit of liability purchased• Deductibles are typically 1-3%

Overview

FourPrivate EquityPrivate Equity deal dynamics and the formula for creating value for buyers and sellers

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Private Equity

• Private Equity multiples are generally lower than those paid by strategic buyers but not always - especially for premier companies

• Valuation is largely dependent on capital structure and availability of leverage

• After hovering at low levels during the recession, leverage multiples have rebounded thus propelling valuations upward to record highs

• As such, total debt used in transactions has increased to near record highs

• The lower middle market continues to be the segment of the PE market with the most activity

Private Equity Private Equity Deal Types

Private Equity Debt % for BuyoutsPrivate Equity Capital Structure Multiples

Source: PitchBook

2008 2009 2010 2011 2012 2013 20140.0x1.0x2.0x3.0x4.0x5.0x6.0x7.0x8.0x9.0x

10.0x

4.4x 3.8x 4.6x 4.5x 4.4x6.6x 6.0x

2.9x 3.8x3.6x 3.7x

2.9x

3.4x 4.0x

Debt/EBITDA Equity/EBITDA

2008 2009 2010 2011 2012 2013 2014

50%

52%

54%

56%

58%

60%

62%

64%

66%

68%

60%

50%

57%55%

60%

66%

60%

2008 2009 2010 2011 2012 2013 20140%

10%20%30%40%50%60%70%80%90%

100%

$1 B +$500 M - $1 B$100 M - $500 M$25 M - $100 MUnder $25 M

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Most Recent PE Transaction Activity by State

30

1013 0

6

2

1

177

6 0 1 23

31 1928 17

64

96

40

15 0113 2

54

2

15 12

50

15

1 124

7

2

14

Q2 2014 transaction activity:• Northeast leads with

123 deals• West: 109 deals• Southeast: 103 deals• Midwest: 101 deals• Southwest: 61 deals

Regional PE Activty Highlights

111

217

1

20

8

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Not All Debt Created Equal

The availability and type of debt available is dependent on a couple of factors that make it more or less “attractive” (in terms of cost, risk and flexibility):

1. Market conditions2. Type of borrower: institutionally backed vs. individual borrower

Institutional

•More flexible covenants (less risk)•Equity cure rights (less risk)•Long-term relationship thinking (less risk)•Lower interest rates (cost)•Lower amortization (flexibility)

Individual

•Often requires personal guarantees (more risk)•Most of the cash flow based market is not available (cost, availability)

•Lender not general thinking long term about relationship (more risk)

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Private Equity & The Rational For Leverage

• Private Equity relies on debt in buyouts and transactions to help provide liquidity to shareholders upon buyout or recapitalization as well as to enhance returns for all shareholders upon harvesting of the investment

• Most private equity deals involve senior debt equivalent to 2.0x to 3.0x EBITDA of the selling company

• Most deals are leveraged less aggressively today than they have been in the past due to tighter banking covenants and more conservative investing approaches overall

• While business owners may be debt averse inherently, many private equity groups have learned to take a disciplined approach to utilizing leverage in a positive manner to achieve results that surpass those that would be obtained via the use of equity alone

Overview

• Assume a hypothetical recapitalization of a company with $15.4 million in EBITDA and an enterprise value of $100 million (6.5x multiple)

• The proposed transaction is to recapitalize the company with a 75% purchase of equity from the existing shareholders allowing them to retain 25% ownership in the new entity

• The private equity firm utilizes sr. debt in the transaction of 2.0x EBITDA or $30.8 million

• The private equity firm provides equity of $44.2 million• Capitalization and proceeds to shareholders is shown in the table

below:

Case Study Assumptions

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Case Study (Cont.)

• If the private equity firm didn’t use leverage the results of the transaction would be entirely different

• The results of two alternative transaction structures are shown in the tables:

• Alternative 1: No debt, same proceeds to selling shareholders

• Alternative 2: No debt, same pro forma ownership

Effects of the Use of Leverage

Reduced Ownership %

Reduced Proceeds

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Closing CommentsClosing Comments

1 Industry Dynamics are favorable for Acquisitions

2 Purchase multiples and EBITDA are expanding

3 Taxes are big motivator to close before year-end

4 Understand Buyers Motives

5 Be focused and disciplined on your desired outcomes

6 Integration planning and execution is parmaount

7

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Joe DurnfordCEO & Sr. Managing DirectorJD Ford & Company

9 Sedgwick DriveThe Consulate BuildingEnglewood, CO 80113Telephone: 303.867.7749E-Mail: durnford@jdford.comWeb: www.jdford.com

© 2015 JD Ford & Company LLCSources:

GF Data Resources

JD Ford & Company Proprietary Data

Cap Target

Pitchbook