High level overview presentation introducing valuation concepts for valuing closely held businesses.

1. V ALUATION of C LOSELY H ELD B USINESSES Richard A. Warner Principal Great Lakes Valuations 224-764-2280 [email_address]

2. Agenda Introductory Comments Business Appraisal Concepts Approaches to Valuation Wrap-Up

3. Selected Business Demographics Source: 1997 US Census material Business Size by Employees Average Annual Revenues Average Number of Employees 1 to 4 $321,000 2.1 5 to 9 $792,000 6.6 10 to 19 $1,600,000 13.4 20 to 99 $5,701,000 39.2 100 to 499 $27,056,000 192.2 500 to 999 $540,467,000 688.6

4. Why Do We Need Valuations? Mergers & Acquisitions Estate Planning and Wealth Management Family Law – Marital Dissolution Shareholder Disputes & Oppression Succession Planning/Buy-Sell Agreements ESOPs

5. Other “Stuff” Attorney – Appraiser Roles & Relationships Objectivity & Bias Appraiser Skills, Knowledge, Certification

7. Present Value Would you rather have $10,000 now, or $14,025 five years from now? Future Value Present Value Investment Yield 5% 7% 10% ? $10,000 2011 $14,025 2016

8. Balance Sheet Basics = Current Assets $41,500,000 Tangible Assets $41,000,000 Intangible Assets and Goodwill $126,500,000 + + Current Liabilities $25,000,000 Long Term Debt (including current portion) $34,000,000 Equity $150,000,000 $209,000,000 $209,000,000 = + + Box analysis diagram ©Financial Valuation Group International

9. Income Statement Basics Revenue: $6,000,000 Less Cost of Goods Sold $4,500,000 Equals: Gross Margin $1,500,000 Less Operating Expenses Selling Expenses $450,000 General Expenses $450,000 Administrative Expenses $450,000 Equals: Operating Profit $150,000 Plus/minus Other Income/Expenses $0 Earnings Before Taxes $150,000 Income Taxes (40%) $60,000 Net Income After Taxes $90,000

10. D EFINING the E NGAGEMENT Who is the client? Who is the appraiser? What is the specific interest being appraised? What is the valuation date? What is the purpose of the appraisal? What is the standard of value? What type of report is needed? Schedules? Fees?

16. C APITALIZATION OF I NCOME Basic capitalization formula: PV = E 1 /c Where: E 1 = expected economic income at the end of next year c = capitalization rate Example: If E 1 = $100,000 and c = 20% then PV = $500,000

17. D ISCOUNTED C ASH F LOW The value of a business is the present value of the “income” it can reasonably be expected to generate in the future… Basic DCF formula: What about after the forecast period? Where “ d ” is the discount rate…

18. D ISCOUNTED C ASH F LOW – T ERMINAL V ALUE One method is to calculate the terminal value using a capitalization of income method… Where: PV = Terminal Value E n = “Earnings” during last period of forecast k = discount rate (required rate of return) g = growth rate of E n in perpetuity n = number of periods in the projection period

20. D ISCOUNT AND C APITALIZATION R ATES – B UILD-UP E XAMPLE Risk free rate = 5.1% General equity risk premium = 7.2% Size Premium = 9.3 Specific risk premium = 4.0% Discount rate = 25.6%

21. D ISCOUNTED C ASH F LOW E XAMPLE

22. C ONTROL AND M ARKETABILITY Controlling Interest Value Marketable Minority Interest Value (“WSJ Listed Price”) Nonmarketable Minority Interest Value Control Premium Minority Interest Discount Discount for Lack of Marketability

23. Application of Discounts and Premiums Value on a control, marketable basis $100.00 Less discount for lack of control (25%) 25.00 Value on a minority, marketable basis $75.00 Less marketability discount (35%) 26.25 Value of minority, non-marketable interest (51.25% discount) $48.75

25. Q UESTIONS…….