3. Why “Exit Strategy” is Important
• Demographic Trends
• Typical Entrepreneur
Focused on business
“Exit Strategy” not on the agenda
The process is not known
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4. Alternatives
• Retain ownership
• Sell the business
• Go public
• Income trusts
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9. Preparing the Company
• Build a strong management team
• Consider splitting off high value real estate
• Maximize earnings “track records”
• “Clean up” the balance sheet
• Plan new capital investments
• Observe industry “cycles”
• Ensure MIS is in place
• Commission “Phase I” environmental assessment
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10. Valuation
• Multiple of EBITDA
• Why EBITDA
• Multiple range
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11. Case Study
ABC Products Ltd. Year Ended December 31
Consolidated Financial Results
Unaudited 2003 2004 2005 2006 2007
In thousands of dollars (Cdn)
Sales 61,000 59,800 63,200 57,400 62,300
Cost of sales 37,000 37,600 39,200 38,200 37,600
Gross margin 24,000 22,200 24,000 19,200 24,700
Gross margin (% of sales) 39% 37% 38% 33% 40%
Administrative expenses 13,200 12,000 12,500 17,100 12,900
Operating Income 10,800 10,200 11,500 2,100 11,800
Non-operating (income)/expenses 1,200 470 100 3,700 1,100
Net income before tax 9,600 9,730 11,400 (1,600) 10,700
Income taxes 3,840 3,892 4,560 (640) 4,280
Net income 5,760 5,838 6,840 (960) 6,420
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12. Case Study
ABC Products Ltd. Year Ended December 31
Normalized EBITDA Calculation
Unaudited 2003 2004 2005 2006 2007
In thousands of dollars (Cdn)
Net income 5,760 5,838 6,840 (960) 6,420
Addback
Interest expense 1,300 1,300 1,300 1,300 1,300
Income taxes 3,840 3,892 4,560 (640) 4,280
Depreciation and amortization 2,500 2,500 2,500 2,500 2,500
EBITDA* 13,400 13,530 15,200 2,200 14,500
Normalizing adjustments**
Loss/(gain) on sale of capital assets 14 - 18 (27) 11
Management bonuses and pension 550 550 600 620 620
Excess executive salaries above/(below) FMV 125 125 140 150 150
Related party rent above/(below) FMV 27 27 28 28 28
Tax restructuring costs - - - 89 -
CCRA valuation report - - - 12 -
CCRA penalties - 12 - - 33
R&D tax credits (120) (210) (300) (420) (170)
Supplier lawsuit settlement costs - - - - 370
Employee termination costs 81 - 19 450 21
Uninsured losses from gas explosion - - 440 - -
Other items 9 8 5 7 6
Normalized EBITDA 14,086 14,042 16,150 3,109 15,569
Normalized EBITDA (% of sales) 23% 23% 26% 5% 25%
* EBITDA defined as earnings before interest, taxes, depreciation and amortization
** Normalizing adjustments constitute items that are considered by management to be non-recurring
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13. Case Study
ABC Products Ltd. Year Ended December 31
Enterprise Value and Net Proceeds Calculation
Unaudited 2003 2004 2005 2006 2007
In thousands of dollars (Cdn)
Normalized EBITDA 14,086 14,042 16,150 3,109 15,569
Sustaining Capital Expenditure 1,000 1,200 1,600 600 1,100
Net EBITDA 13,086 12,842 14,550 2,509 14,469
Average of most recent three years normalized EBITDA 10,509
Purchaser's EBITDA Multiple 6.0
Implied Enterprise Value 63,056
Add
Cash and cash equivalents*** 2,800
Less
Interest bearing debt*** (13,400)
Implied net proceeds to seller (before taxes) 52,456
*** As at December 31, 2007
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