Business Valuation Issues

1. Step by Step Process for Selling Your Business to Your Employees Business Valuation Issues 20th Annual OEOC Conference - April 21, 2006 Rosanne J. Aumiller, CPA/ABV, ASA rja@barneswendling.com 216.566.9000

2. Introduction • Barnes Wendling has served Northern Ohio’s closely-held businesses since 1946. • Our core clients are privately owned middle market companies. • We consider confidentiality, independence, senior level involvement, integrity, & relationship building to be critical success factors.

3. Where to Find Us Akron 1799 Akron-Peninsula Rd. #222 Akron, OH 44313 (330) 701-0128 Cleveland 1215 Superior Avenue, Suite 400 Cleveland, OH 44114 (216) 566-9000 Sheffield Village 5050 Waterford Drive Sheffield Village, OH 44035 (440) 934-3850 Sandusky 1616 Sycamore Line Sandusky, OH 44870 (419) 627-2770 Norwalk 48 Executive Drive Norwalk, OH 44857 (419) 668-8296 www.barneswendling.com

4. Estate and Gift Tax Planning Buy Sell Agreements Succession Planning Family Limited Partnerships ESOPS Mergers and Acquisitions Intangible Asset Valuation Financial Modeling Buyer/Seller Due Diligence ESOP Feasibility Study Appraisal Review Appraisal Consulting Raising Capital / Re-Capitalization Acquisitions Divestitures Business & Strategic Planning/Budgeting/Forecasting Capital Budgeting Debt Restructuring Obtaining Financing Business Valuation Litigation Support Forensic Accounting Corporate Finance

5. Some Questions Raised... • What should an ESOP Trustee look for in an appraiser? • What is a business valuation? • What creates value in the ESOP sponsoring company?

6. Organizations & Credentials American Society of Appraisers • ASA Accredited Senior Appraiser American Institute of CPAs • ABV Accredited in Business Valuations National Association of Certified Valuation Analysts • CVA Certified Valuation Analyst Institute of Business Appraisers • CBA Certified Business Appraiser

7. Number of Professionals American Society of Appraisers - 2,313 Accredited Members American Institute of CPAs - 1,701 ABV Holders Nat’l Assoc. Cert. Val. Analysts – 4,800 CVA Designees Institute of Business Appraisers – 465 CBAs It Boils Down to A Relatively Small Number Source: Borrowman Baker

8. What Is a Business Valuation? • Product • comprehensive written report • gives the reader a logical, supportable value conclusion • company history, products/services, personnel, markets, economy, analysis, conclusion • Service • key is client should understand content

9. Valuations Have Multiple Uses XYZ Company may have different “values” depending on the “level of value” and the “standard of value”

10. The Valuation Process • Identify • Purpose – ESOP transaction or annual update • Level of Value - control or minority • Standard of Value - fair market value • Date of Valuation • Key Issues – adjust owners' comp; leverage

11. Minority vs. Control InterestImpact on Value Control • Ohio 2/3 ownership or • Greater than 50% voting or • As defined in a shareholder agreement • Large enough block to control mgmt. decisions Minority • Discounted value • No individual ability to affect mgmt. decisions

12. Synergistic (Strategic) Value Controlling Interest Value Minority Discount Control Premium { Marketable Minority Interest Value - as if freely traded on an active public market Discount for Lack of Marketability Non-marketable Minority Interest Levels of Value

13. Standards of Value ALL ASSUME CASH EQUIVALVENT VALUE • Fair Market Value - hypothetical willing buyer/seller, refer to Rev Ruling 59-60 • Investment Value • Strategic Value • Fair Value

14. IRS Revenue Ruling 59-60Set the guidelines for valuing private interests Fair Market Value “The amount at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”

15. IRS Revenue Ruling 59-60 Eight factors to consider: • Nature of the business & history • Economic & industry outlook • Book value of stock & co. financial condition • Earning capacity • Dividend paying capacity • Intangible value - goodwill or other • Sales of stock and size of block • Market price of similar public stocks

16. DOL Requirements • ESOP cannot over pay for stock – adequate consideration • FMV as of transaction date • Utilize qualified valuator as professional advisor to the trustee • Valuator – independent of ESOP, Company & selling shareholder(s) • Similar to IRS Revenue Ruling 59-60

17. Two Key Drivers • Future Cash Flow Available to Shareholders • Volatility or Risk Associated with Future Cash Flow

18. Factors that Drive Value • Internal Factors: Quantitative Qualitative • External Factors: Economic climate

19. Factors that Drive Value Total Invested Capital • After initial valuation stock price may decline if leveraged • As debt is repaid, stock price increases

20. How is a Business Valued? Approach Method Value is based upon…. Estimated future profitability (cash flow) Discounted Cash Flow or Capitalized Earnings INCOME Historical profitability/ (cash flow) Private company transactions involving similar businesses Comparable Sale or Guideline Company MARKET Public company stock prices ASSET Adjusted Net Assets Appraisal of hard assets

21. Discounts and Premiums • Minority discount • Control premium • Lack of marketability • Key person discount • Blockage discount

22. Marketability Discount Model: Liquidity Hierarchy

23. What goes into our work? THE KNOWLEDGE AND EXPERIENCE OF BW’s CONSULTING PROFESSIONALS Industry Data Research Insight (Standard &Poor's Public Company Data) Partnership Profiles (Database of limited partnership transactions) Pratt's Stats Database (Private company transactions) FactSet Mergerstat Transaction Data Various trade and industry publications Unique Resources BW’s Proprietary Internal Database (Given the number of engagements we have completed, we have a huge body of valuation data) ScanUS (Mapping software used to graphically display relevant data can be a powerful analysis tool) WELL-RESEARCHED, DEFENDABLE RESULTS & OPINIONS External Resources Financial Consulting Group (Access to the knowledge of hundreds of valuation professionals) CPA Associates International Association of Certified Fraud Examiners

24. What Information Do We Need? Financial & Operational Data • Capital expenditures over the last 5 years and plans for the future • Distributions/dividends paid • Industry data the company may receive as part of a trade group • Sales by product line • Summary of employees by function, organizational chart, terms of labor contracts if applicable • Owners compensation for last 5 years • Complete document request will be provided • Five years of financials and tax returns • Business plan or budget for next 1 to 5 years • Shareholder agreements • Fixed asset/depreciation schedules • Terms of debt • Terms of capital and operating leases • Identify competitors • Management structure

25. Valuation Process Timeline Data Request – List to Client Analyze Financials/ Operational Data Site Visit and Interview Apply Valuation Methods Client gathers data Present Final Report to Client Final MSDP Week 1 Week 2 Week 3 Week 4 Draft Report Identify Key Issues Research Comparable Transaction Data

26. Conclusion • Challenge - to balance objectivity with providing a reasonable value range to meet client’s needs • Questions? • Thank you