Learn some key concepts related to buying and selling companies in the areas of commercial banking, valuation, law, and tax.

1. Meet Today's Economic Challenges
Explore Two Sides of the Coin...
"Growth through Acquisition vs.
Exit Strategies for your Business"
November 14, 2012
Elk Grove Village, Illinois

2. Presented by:
• The Private Bank
Thomas J. Doherty
• The Peakstone Group
Mark Horita
• Querrey & Harrow, Ltd.
Peter E. Converse
• Corbett, Duncan & Hubly PC
Ryan P. Giolitto
Moderated by:
Bruce H. Schoumacher
Querrey & Harrow, Ltd.

3. How Your Bank Can Help
in an Acquisition
Thomas J. Doherty
The Private Bank

4. How Your Bank Can Help in an Acquisition
 Commercial Bank’s Role in Acquisitions
 Include early as an advisor
 Leverage network for assistance
 Not an equity partner

5. Debt Equity
Must be repaid or refinanced. Can usually be kept permanently.
Requires regular interest payments; company must No payment requirements. May provide dividends, but
generate cash flow. only out of retained earnings.
Collateral assets must usually be available. No collateral required.
Debt providers are conservative. They cannot share any Equity investors are aggressive. They can accept
upside or profits, and wish to eliminate all possible loss downside risk because they fully share in upside as well.
or risks.
Interest payments are tax deductible. Dividend payments are not tax deductible.
Debt covenants may impose some restrictions on some Shared equity may lead to shared control and
decisions made by existing management. management over the day-to-day operations of the
company.
Debt allows leverage of equity. Equity holders share the company profits.
May impose restrictions on the compensation of owners Investors are consulted or can determine compensation
and officers as terms of loan. of owners and officers.
Restrictions on the sale of assets that have been used as Investors share in ownership of all assets.
collateral for a loan, or taking on of additional debt to
finance the purchase of assets.
Regular timely reporting of financial results to lenders. Investors usually have access to financial results at any
time.
Restrictions on transfer of ownership. As either majority or minority owners, investors
participate in all ownership issues.

6. Debt Financing
 Debt financing can be either short term or long-term. In either
case common lending principles apply. Lenders typically
consider the risk of lending to borrowers on the basis of:
• Credit history
• Cash flow history and projections
• Collateral available to secure a loan
• Character of the borrower
• Loan documentation: financial statements, tax returns, business plan
Long-term Short-term
Purchase, improve, or expand fixed assets such Raising cash for working capital, inventory
as a company’s facilities and major equipment. needs, or for accounts payable.
Requires the borrower to secure the loan by Commonly secured by collateral, but may be
providing collateral and thereby reducing the available unsecured if the lender is willing to
lender’s risk to non-payment of the loan. rely on the creditworthiness and reputation of
the borrower to repay the loan.

7. How Your Bank Can Help in an Acquisition
 Small Business Administration (SBA) Loans
 7A vs. 504 Programs
 Extended Term
 Lack of Equity Into Project
 Collateral Shortfall

8. U.S. Small Business Administration
(SBA) 7(a) Loan Program
 This is the SBA’s primary loan program where the SBA
guarantees major portions of loans made to small
businesses by private lenders.
◦ Eligibility: For-profit businesses with: good character, fair credit record; sufficient
management expertise; a feasible business plan; adequate equity in the business
– typically a minimum of 20%; sufficient collateral; and adequate cash flow to
repay debt from historical or projected cash flow.
◦ Use of Funds: Business acquisition or start-up, purchase or remodeling of real
estate, leasehold improvements, equipment purchases, long and short-term
working capital, inventory, and the refinancing of existing business indebtedness
that is not already structured with reasonable terms and conditions.
◦ Financing: Private lenders provide the loan. Typically, the Small Business
Administration (SBA) will guarantee up to 75% of loans (or up to 85% for loans
less than $150,000).

9. Terms and Conditions
Loan Size Maximum loan amount is $5 million. SBA’s maximum guarantee is $3,750,000 or 75% of
loan amount.
Term Twenty-five years for real estate and equipment. Generally, up to ten years for working
capital.
Interest Rate Lenders set rates which may be variable within the following limits:
Loans of $50,000: Prime or Libor + 300bps, plus 2.25% if the maturity is less than 7
years, and Prime or Libor + 300bps plus 2.75% if the maturity is 7 years or more.
Loans of $25,000 -$50.000: Prime or Libor + 300bps, plus 3.25% if the maturity is less
than 7 ears, and Prime or Libor + 300bps, plus 3.75% if the maturity is 7 years or more.
Loans of $25,000 or less: Prime Plus 4.25% if the maturity is less than 7 years, and Prime
Plus 4.75%, if the maturity is 7 years or more.
NOTE: There is a prepayment penalty owed to SBA for loans with a maturity of 15 years
or longer.
Loan Fee 2.0% of guaranteed portion up to $150,000. 3.0% of guaranteed portion up to
$700,000. 3.5% of guaranteed portion up to $1,000,000. For loans greater than
$1,000,000, an additional 0.25% guaranty fee will be charged for the portion greater
than $1,000,000.
Collateral Assets purchased with loan proceeds. SBA and lender may require additional personal
and business assets as collateral.
Other Conditions For real estate loans, borrower must occupy 51% of an existing building and must
occupy 60% of new construction.
Additional Info Contact your current lender or www.sba.gov;
http://www.sba.gov/services/financialassistance/7alenderprograms/index.html , or
http://www.naggl.org/AM/template.cfm

10. How Your Bank Can Help in an Acquisition
 Bank Financing Terms
 Typical Terms and Advance Rates
 Accounts Receivable
 Inventory
 Equipment
 Commercial Real Estate
 Fees

11. Completing a Successful Acquisition
or Disposition
Mark Horita
The Peakstone Group

12. Economic Landscape …Mixed Signals
 Still forecasting growth
 Though choppy and differing by industry
 Fundamentals are there…but trend is slow
 But uncertainty coming from several areas
 China GDP
 European sovereign debt
 US uncertainty (election, taxes)
 Changes are occurring quickly
 Making it harder to develop forecasts and committed plans

13. Economic Landscape
 GDP …but slow
 Unempl /empl. …but slow
 Housing starts …but slow
 Purch mgr index …but slow
 Auto consum/prodn …moderating
Chicago Fed National Activity Index
 China GDP mid 2013 Standard deviation from trend, 3-month average.
3
 Dry bulk index mid 2013 2
1
0
-1
-2
-3
-4
-5
1967 1972 1977 1982 1987 1992 1997 2002 2007
Shading corresponds with recessions.
Source: Chicago Fed

14. M&A: What We’re Seeing…
Capital Overhang for
US-Focused Funds Raised by US Investors
Deal volume and valuations moderate $160 $146.54 $466B
 However “Dry Powder” is driving market $140 $500
$120
 PE firms: $450B $96.23 $93.61
$400
$100
 Corporations: $1.5T $80 $67.34
$300
 Banks: $1.5T $60
$41.64
$200
$40
$20.63 $100
 Highly competitive for “good deals” $20
$0 $0
 Conservatism…deals are taking longer 2005 2006 2007 2008 2009 2010
Source: PitchBook
Financing is competitive 8 U.S. Middle Market Deal Activity 70
 Has been moving down market 7.5 60
7
50
 Most recently, seeing some tightening on 6.5
6.2X 6.2X
6.5X
6.0X 6.1X 6.1X 40
5.9X
larger deals 6
5.5
5.6X 5.6X
5.3X
5.5X
5.7X
30
5.1X 5.2X
20
5
4.5 10
4 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010 2011 2011
TEV/Adj. EBITDA Deals/Quarter
Reported deals with values from $10-250m.
Source: GF Data Resources

15. Valuations – Rules of Thumb
Typical Valuations
EBITDA Comments
(EBITDA multiple)
> $10 8-12X • Headline grabbing transactions
• Ultra-competitive, efficient market
• 3-6X total leverage
$5-10 4-9X • Competitive
• Commercial banks returning in a big way
• 2-4X leverage
$3-5 3-6X • Equity market somewhat inefficient
• Debt markets somewhat dislocated
• Significant deal structuring
< $3 3-5X • Debt financing challenging
• Owners more challenged by deal process

16. Strategic Alternatives for Business Owners
Which path maximizes value?
 Managing Risk
Sell / Equity  Set realistic expectations
 Value to the seller vs buyer
 A business is worth whatever a
buyer will pay for it
Focus on Core Acquisition
Business Strategy  Understand options
 Structure vs price
 Earnouts, notes, rollover equity
Debt Restructuring
 Cash: Need vs. Want
 Emotional Considerations
 Your staff and/or family
 Continued Involvement

17. Strategic Alternatives for Business Owners
 Tax-Driven Exits
 Offense v. Defense
 Counter-Cyclical Plays
 EBITDA Multiple Math

18. A well-run process includes 4 essential steps: < handout details >
Preparation Marketing Negotiating Closing
Actions Pitfalls
 Analyze business  Fail to consider full range of options
 Analyze markets  Fail to anticipate and address what investors
care about
 Identify key issues and develop strategies
to address them  Fail to calibrate interests and expectations of
multiple shareholders
 Identify list of potential and preferred investors
(equity and/or debt)  Fail to understand real value (high or low)
 Recast financial statements  Under-market a company based on poor
positioning and documents
 Determine valuation range
 Evaluate deal structuring alternatives
 Develop compelling marketing materials (teaser,
CIM, presentation)
Many middle market sales have significant gaps in either
expertise or effort in at least one of these stages.

19. Preparation/Marketing: Sell-Side
Preparation Marketing Negotiating Closing
Preparation
 Recast financial statements
 Pitfall: Fail to anticipate and address what investors care about
Marketing
 Positioning
 Pitfall: Improperly position the business or conversely “List and hope”
Positioning

20. Negotiating/Structuring: Sell-Side
Preparation Marketing Negotiating Closing
Negotiating
 Using competitive process techniques to drive behavior
◦ IOI’s, management presentations, LOI’s
 Pitfalls: “High ball” offers, unsophisticated buyers
Closing
 Due diligence
 Managing fatigue
Actively managing the process

21. Having a good process: Buy-Side
Strategy Deal Creation Execution Capital / Financing
Preparation
 Crisp target profile leads to better and quicker outcomes
 What is objective for acquisition? …Product line, channel coverage, geography, skill sets
Execution
 Viewing the deal from both sides
 Why is the seller selling?
 Commercial realities, buyer risk, valuation expectations, TTM performance
 Compare funding organic growth
 Senior vs. Junior Debt vs. Equity. More options today: minority equity, strategic partners,
etc.

22. Overall Process Considerations
 Time and distraction to core business
 Efficient marketing
 Targeting in a highly fragmented market
 Financing implications
 Experience in negotiating/structuring
Getting the right help beforehand…
Building a team of advisors

23. Project LINK
 Background
 Integrated logistics company with unique value added capabilities, excellent
facilities and equipment
 $180M revenue, $22M adjusted EBITDA
 Very strong management team capable of supporting $500M company
 Growth in recent years driven by supply chain optimization and integration
 Reason for selling: seller planning for retirement, other interests
 Process
 Listed company with NYC, “bulge bracket” investment banker
 Well connected to high visibility PE firms. Very good “book”.
 Targeted mostly PE firms
 Several interested strategic and financial buyers found
What was outcome?

24. Project LINK …the rest of the story
 Reality
 Complex, asset intensive business, with unique combination of value added
manufacturing and with high customer concentration
 Investment banker had elevated earnings expectations…business actually shrank
 Very little interaction with management team…”small deal”
 Only resulted in 1 indication of interest by “bottom feeder” PE firm
 Business has found another investment banker and is now back in the market
 Key Lessons
 Poorly positioned for buyers comfortable with asset intensive businesses  should have
targeted strategics with prior experience and internal mechanisms to accommodate
 Seller’s process dragged out as business performance deteriorated, destroying value
 Investment banker had distant relationship with sellers and didn’t serve role as trusted
advisor

25. Understanding the Acquisition Process
Peter E. Converse

26. Consider Alternatives to Acquisition or Disposition
 Alternatives to Acquisitions
Organic Growth
Disposition
 Alternatives to Dispositions
Management Buy-Out
Transfer to Family Members
Acquisitions
Windup of Operations/Sale of Assets

27. Understanding the Acquisition Process
 Basic Steps in Completing an Acquisition
 Preparing for the Acquisition
 Identifying the Target Seller (or Buyer)
 Negotiating a Preliminary Deal (Letter of Intent)
 Preliminary Due Diligence
 Negotiating Definitive Binding Agreements

28. Understanding the Acquisition Process
 Basic Steps in Completing an Acquisition (continued)
 Final Due Diligence
 Satisfying Pre-Closing Conditions
 Closing
 Satisfying Post-Closing Conditions

29. Understanding the Acquisition Process
 Preparing for the Acquisition-Buyer
 Financial Issues
 Operational Issues
 Which employees to retain?
 Integration of new business with old
 Acquisition vs. Organic Growth

30. Understanding the Acquisition Process
 Preparing for the Disposition-Seller
 Is the timing right?
 Other exit options (transfer or sale to
family, long-term employees)
 What are tax and estate planning issues?
 What due diligence issues may arise?
 Example: key lease about to expire
 Example: are proper software licenses in place?

31. Understanding the Acquisition Process
 Identifying the Target Seller (or Buyer)
 Seller or Buyer May Initiate Discussions
 Good Team of Advisors is Important
 Try to Understand the Other Side’s
Goals, Motives and Constraints
 Reality About What the Other Side is
Offering- Good and Bad
 Doing the “Disclosure Dance”-NDAs

32. Understanding the Acquisition Process
 Negotiating a Preliminary Deal (LOI)
 Goal: Letter of Intent (LOI) also called
Memorandum of Understanding (MOU)
 LOI is non-binding, sets forth major terms
 Playing “Chess” and “Bridge”
 What Really Matters to You?
 Look for Win-Win Opportunities
 More “Disclosure Dance”

33. Understanding the Acquisition Process
 Typical Deal Terms in an LOI
 Sale of Assets or Shares/Equity Interests?
 Purchase Price (Cash and Non-Cash)
 Assumed Liabilities/Excluded Liabilities
 Closing Date and Pre-Closing Milestones
 Broad Conditions to Closing
 Subsequent Employment/Non-Competes
 Non-Binding Statement of Intent

34. Understanding the Acquisition Process
 Preliminary Due Diligence
 Prior to Executing Definitive Agreements,
Some Additional Information Usually
Provided
 How Much: Usually Basic Financials, Not
Customer-Specific Information

35. Understanding the Acquisition Process
 Executing Definitive Binding Agreements
 Attempts to Cover All Significant Deal
Terms
 This Stage Often Brings Hidden Issues to
the Surface- Examples:
• Post-closing employment/consulting by selling
individual
• Employment for Seller’s Mgmt/Labor Force
• Allocating Purchase Price Among Assets

36. Understanding the Acquisition Process
 Final Due Diligence- Microscopic-Examples:
 Schedules of Assets
 Schedules of A/R and A/P
 Customer Lists and Agreements
 Copies of Leases-Property and Equipment
 Intellectual Property (Patents, TMs, etc.)
 Pension/Profit-sharing Plans

37. Understanding the Acquisition Process
 Satisfying Pre-Closing Conditions- Examples:
 Financing
 Approvals by Government Agencies
 Other Third-Party Approvals
 Execution of Employment Agreements by
Key Employees

38. Understanding the Acquisition Process
 Closing- Break Out the Champagne!
 Post-Closing Conditions

39. Tax Issues in Acquisitions
and Dispositions
Ryan P. Giolitto

40. Tax Considerations in Acquisitions
 Form of Assets Acquired
 Form of Acquired Company
 Purchase Price Allocations

41. Form of Assets Acquired
 Stock/Units or Assets?
 Buyers prefer to acquire assets
while sellers prefer to sell stock
 Competing interests often drive
negotiation

42. Form of Assets Acquired - Comparison
Acquisition Consideration Assets Stock
Risk of Past Liabilities Seller Buyer
Write Off Purchase Price Buyer None
Title Transfer Complex Simple
Potential Double Tax Seller No

43. 338(g) Election
 338(g) election
 Allows purchaser to treat stock acquisition as asset
acquisition
 Purchaser pays tax on deemed asset sale
 Buyer and seller must be C corporation
 Seller must not be part of consolidated group (freestanding)
 Foreign targets eligible
 Beneficial to use target NOL’s or for foreign target

44. 338(h)(10) Election
 338(h)(10) election
 Allows purchaser and seller to treat stock acquisition as
asset acquisition
 Seller pays tax on deemed asset sale
 Seller must be a subsidiary or S corporation
 Foreign targets not eligible
 States do not treat election uniformly

45. Form of Assets Acquired Tips
1. Consult with a CPA regarding default tax
implications of asset/stock sale
2. Analyze the deal from both buyer/seller
perspective
3. Analyze potential 338(g)/(h)(10) elections on sale
4. Negotiate based on findings of analysis

46. Legal Form of Target – Why It Matters
 Buyer indifferent to type of target
 Legal form of target matters more to sellers
• Subchapter C corporations
 Potential double tax (tax on asset sale
followed by tax on dividend distribution)
• Subchapter S Corporations
 Potential built in gain tax
(previous C corporations)
• Limited Liability Companies (LLCs)
 Potential for hot assets

47. Double Tax on C Corporations
 One level of tax when assets are sold (15-35%)
 One more level of tax when sale proceeds are
distributed to shareholders (15-39%)
Tax on Assets
Sale
Proceeds C Corp
Received
Tax on
Shareholder
Dividend

48. Built In Gains Tax
 If previously a C corporation, appreciation in assets
occurring before conversion to S corporation are
taxed at C corporation tax rates
 Look back period runs up to 10 years

49. Hot Assets
 Taxed as ordinary income instead of capital gains
 Would be ordinary income if realized by
partnership prior to sale
 Can exist even when selling for a loss
 Buyers can make a section 754 election to step up
basis of hot assets sold

50. Identifying Hot Assets
 Unrealized receivables
 Cash basis receivables
 Depreciation recapture
 Inventory
 Redemption by partnership
– substantially appreciated only
 Sale of interest – all inventory

51. Legal Form of Target Tips
1. Know the legal form of your target
2. If a C corporation, assess double tax exposure
3. If an S corporation, assess built in gains tax
exposure
4. If an LLC/partnership, assess hot assets exposure
5. Understand the effects on the seller for optimal
negotiations

52. Purchase Price Allocations
 May or may not be agreed on
in advance Goodwill
Cash
 Drives tax treatment of asset
sale (buyers/sellers) Intangibles Investments
 Must be agreed upon mutually Fixed Accounts
Assets Receivable
by both buyer and seller
Inventory
 Buyers – depreciation/
amortization of assets purchased
 Sellers – gain/loss on sale of assets

53. Effects of Purchase Price Allocations
 Determines tax effects
 Seller prefers allocation to capital assets
 Buyer prefer allocation to short-term assets
 C corporations - consider allocations to
personal goodwill

54. Purchase Price Allocation Summary
Asset Type Buyer Amortization Period Seller Income Type
Fixed Assets 3-39 years based on type Capital Gain/Ordinary
Income
Goodwill 15 years Capital Gain
Non-Compete Agreements Useful life or 15 years based Ordinary Income
on type

55. Purchase Price Allocations Tips
1. Assess allocation to assets vs. intangibles
2. Assess viability of allocating purchase price to
personal goodwill in C corporation context
3. Agree up front to purchase price allocations to
minimize post-closing headaches
4. Analyze the tax effects of your purchase price
allocations

56. Summary of Tax Tips
1. Know the form and character of acquired assets
2. Know the legal/tax status of the target company
3. Know the effects of your purchase price allocation

57. Thank you.
Ryan P. Giolitto Peter E. Converse
Bruce H. Schoumacher
Thomas J. Doherty
Mark Horita
November 14, 2012
Belvedere Banquets
Elk Grove Village, IL