2012 MBA Venture Challenge Mays Business School Texas A&M University February 9, 2012

1. 2012 MBA Venture ChallengeMays Business SchoolTexas A&M UniversityFebruary 9, 2012 Presentation By Mike Skowronek ‘04 Strata Business Consultants

2. Focus of Presentation • Actual and Projected Financial Results • Exit Strategy and Valuation • Gap Analysis (SWOT/Value Drivers) 2012 MBA Venture Challenge

3. Presenter Background • Entrepreneurial banking background • Traditional valuation background • Exit planning for entrepreneurs • M&A 2012 MBA Venture Challenge

4. Actual and Projected Financial Results • Reasonable forecasts • Do they make sense – “smartest guy in the room” • Bottom up approach vs. linear approach • Granular • Easier to understand/more confidence in the numbers • Revenues consistent with capital investment • Focus on projected results because of characteristics of companies in the Venture Challenge 2012 MBA Venture Challenge

5. Actual and Projected Financial Results • Review in light of: • Market potential • Management team • Financial characteristics of guideline public companies and industry (if information is available) 2012 MBA Venture Challenge

6. Actual and Projected Financial Results • Growth in income is a function of management investment decisions • How much it reinvests and how well it reinvests can be determinants of growth 2012 MBA Venture Challenge

7. Actual and Projected Financial Results • Reinvestment examples • R&D • Expansion of distribution and manufacturing capacity • HR Development – new talent • Product pricing to undercut competition – gain market share • VS. DISTRIBUTIONS TO FOUNDERS/OWNERS 2012 MBA Venture Challenge

8. Actual and Projected Financial Results • Methods of Projections • Extrapolation if company has a history • Industry projections from securities analysts • Qualitative evaluation of company’s management, marketing strengths and level of investment • Results are highly dependent on the assumptions made and good judgment 2012 MBA Venture Challenge

9. Exit Strategy and Valuation • Financial Buyer • Hold for a period of time • Minimal integration • Possible consolidation of like companies • Appreciation • Sell for a profit • Seller may/ may not participate – proverbial two bites of the apple 2012 MBA Venture Challenge

10. Exit Strategy and Valuation • Strategic buyer • Keep valuable parts and discard other parts • Knowledge of industry, products, IP and processes • Sometimes some operations are shifted into the acquired company’s operations 2012 MBA Venture Challenge

11. Exit Strategy and Valuation • Who normally pays a premium price? • Financial Buyer, or • Strategic Buyer 2012 MBA Venture Challenge

12. Exit Strategy and Valuation • Valuation is not an exact science – even the IRS agrees! • Theories and methods of valuation are the same for early stage and established companies • The challenge for valuation of early stage • Negative earnings • Lack of history • Limited comparables 2012 MBA Venture Challenge

13. Exit Strategy and Valuation • Asset Approach – value of business’ assets less debt • Income Approach – converting anticipated benefit streams to value • Market Approach – compares subject company to similar investments that have been sold • Many methods within each of these approaches 2012 MBA Venture Challenge

14. Exit Strategy and Valuation • Possibly use an asset approach method or market approach method but not likely • Probably use an income approach – most likely the discounted cash flow (DCF) method • Value = PV of expected cash flows – the free cash flows that are available for distribution to investors each year 2012 MBA Venture Challenge

15. Exit Strategy and Valuation • Discount rate represents rate of return associated with risk of investment • Traditional Build Up Method (Ibbotson) • Risk free rate of return (4.1%) • Equity risk premium (6.7%) • Size risk (12.06%) • Specific company risk (5-10%) • Not uncommon for small company discount rate of 20%-30% 2012 MBA Venture Challenge

16. Exit Strategy and Valuation • Early stage discount rate • Expected return including expected return for VC • Probability of success – information available regarding failure rates for small businesses • Will be higher than traditional 2012 MBA Venture Challenge

17. Exit Strategy and Valuation • Discounted Cash Flow (DCF) Method • Develop projected cash flow for next ____ years • Develop projected terminal value at the end of the time period based on comparable companies or industry data • Apply discount rate that was developed for the specific company and calculate discounted cash flows for each year • Sum of annual discounted cash flows to calculate net present value to determine value of company 2012 MBA Venture Challenge

18. Exit Strategy and Valuation 2012 MBA Venture Challenge

19. Gap Analysis • Strengths – characteristics/opportunities • Weakness – disadvantage • Opportunities – chances to improve • Threats – external elements 2012 MBA Venture Challenge

20. Gap Analysis • Think Value Drivers – things that make a company valuable to a buyer • Management team – stable, talented, motivated • Reliable operating systems • Established and diversified customer base • Realistic growth strategy • Effective financial controls and quality financial information 2012 MBA Venture Challenge

21. Gap Analysis • Value Drivers – Continued • Proprietary technology • Good and improving cash flows • Operating profit margins 2012 MBA Venture Challenge

22. Gap Analysis • The Wild Card – External Elements • Macro and micro economic issues • Extrinsic factors impacted the M&A market – why 4 times EBITDA today vs. 8 times EBITDA in 2006? • Impact of regulations and law 2012 MBA Venture Challenge

23. Presenter Information • Mike Skowronek • Former senior banking executive who founded Strata Business Consultants in 2005. • Consultant to business owners: • Business valuation appraisals • Exit planning – design and implementation of plans • Merger and acquisition advisory services • Accredited Valuation Analyst (AVA) through the National Association of Certified Valuation Analysts (NACVA) • Certified Exit Planner (CExP) through Business Enterprise Institute and Member of Business Enterprise Institute’s Network of Exit Planning Professionals™ • MBA – Texas A&M University • Contact Information • 5851 San Felipe, Suite 850 Houston, Texas 77057 • mskowronek@strata-business.com • 713-494-9520 • www.strata-business.com 2012 MBA Venture Challenge