shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21500);(21492,21500)posrelh0posrelv0pib
shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21436);(21492,21436)posrelh0posrelv0pib
Driving Value for the Future 
Optimizing Business Value 
October 10, 2001 
The Executive Committee - TEC 
The OAK Group, Ltd. 
Investment Bankers to the Entrepreneur 
Today's Goals 
~ Discuss Merger and Acquisition Environment 
~ Exit Strategy Alternatives 
~ "Transaction Health Analysis" 
~ Value Drivers 
~ Transaction Process 
~ Action Plan 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21436);(21492,21436)posrelh0posrelv0pib
Ii	Today's M&A Environment 
~ 90 of all U.S. transactions are between $5MM and 
$200MM 
~ Number and value of mid-market M&A deals continues to 
grow 
~ Mid-market M&A trends 
~ Sellers motivation 
Mid-Market M&A 
Growth in Number of Deals 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21500,0);(0,0);(0,21500);(21500,21500)posrelh0posrelv0pib
10,000 
8,000 
6,000 
4,000 
2,000 
o 

1995 

1996 

1997 

1998 

1999 

2000 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21500);(21492,21500)posrelh0posrelv0pib
Mid-Market Drivers 
~ Industry consolidation 
~ Private companies are relative bargains 
~ Growth in private equity capital 
~ Growth in cross-border deals - Globalization 
~ Change in stock market values 
~ Implementation of common technology 
~ Acquisition is more cost effective than development 
Mid-Market M&A Trends 
~ 2/3 of owners plan to sell within the next five years 
~ Average age of owners has dropped 13 years since 
1990 
~ 50 of owners plan to remain with the company after 
the sale in a non-ownership role 
~ 1/3 of owners plan to retire after a sale 
Conclusion: Most business owners plan to exercise an 
exit strategy to optimize value and create liquidity in 
their businesses 

Data from the DAK/Rutger's University Annual M&A Survey 

Mid-Market Sellers' Motivations 

shapeType75fBehindDocument1pWrapPolygonVertices8;10;(21500,0);(13975,0);(13975,1879);(8096,1879);(8096,2190);(4729,2190);(4729,1250);(0,1250);(0,21496);(21500,21496)posrelh0posrelv0pib

Reduction 
16 

Capital 
Expansion 
7 

Management 
Issues 
5 

Outside 
Forces 
8 

Estate 
Changes 
28 

Exit Strategy Issues 

~ Planning your exit 
~ How long will it take to exit? 
~ An exit opportunity may find you - how to cope? 
~ You do not always control exit timing ..... 

If you were approached today would you be 
ready? 

shapeType75fBehindDocument1pWrapPolygonVertices8;8;(21500,0);(0,0);(0,21496);(12429,21496);(12429,9320);(13906,9320);(13906,7327);(21500,7327)posrelh0posrelv0pib
shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21436);(21492,21436)posrelh0posrelv0pib
shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21500);(21492,21500)posrelh0posrelv0pib
Value Drivers 

"In order to optimize a business's 
value you must understand and 
identify opportunities and 
minimize the purchaser's risk" 

Value Drivers Determining Multiple 
ifferentiated product 
•	Management depth 
•	Broad customer base 
•	Substitute suppliers 

•	Customer concentration 
•	Supplier dependency 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21500);(21492,21500)posrelh0posrelv0pib
OAK's "Transaction Health Analysis" 		
How Does Your Company Stack Up? 			
~ Sales Trends 	1 	2 	3 	cY 	5 		
~ Profitability - Recasting 	1 	2 	3 	jI 	5 		
~ Balance Sheet Strength 	1 	y 	3 	4 	5 		
~ Product Differentiation 	1 	2 	J 	4 	5 		
~ Depth of Management 	1 	2 		4 	5 		
~ Customer Concentration 	1 	2 	(j) 	4 	5 		
~ Supplier Dependency 	1 	2 	3 	4 	Q 		
~ Deal Killers 	1 	2 	3 	4 	(~ .~ 	
						Tht~Gtv"'lJd_V 	
Sales Trend Issues 
» How have your company's sales compared to your 
industry's 
» If you have outperformed 
•	Why 
•	Will it continue 
•	At what cost 
•	What is driving the performance 
» If you have underperformed 
•	Why 
•	Can you reverse (retard) the trend 
•	Is the trend short term or continuous 
•	What changes can be implemented 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21500);(21492,21500)posrelh0posrelv0pib
Sales Trends continued ... 
~ What can be done to improve company trend 
•	Organic growth 
•	Acquisition growth 
•	Product innovation 
• Increase-reconfigure sales force 
•	Measure effectiveness of marketing and advertising 
•	Enter new markets 
• Expand geographically 

Profitability - Recasting 

In today's environment, EBITDA is the single greatest 
factor influencing a business value: 
~ Presentation of Recast EBITDA is critical 
•	Excess salary and bonuses 
•	Inventory and other operating reserves 
•	Personal expenses 
•	Rent 

~ Can you substantiate 
•	Is there a documentable history 
•	Inventory management issues 
•	Take a physical inventory now for a baseline 
•	Keep better records 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21436);(21492,21436)posrelh0posrelv0pib
shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21436);(21492,21436)posrelh0posrelv0pib
II	Balancing Your Balance Sheet 
More Sellers leave money on the table because of 
excessive balance sheet strength than any other 
reason ... 
~ The problems of plenty 
~ Recast Balance Sheet 
•	Inventory valuation / reserves 
•	Market value of machinery / equipment / real estate 
•	Shareholders loans / equity 
•	Reserve for bad debts 
•	Patents, copyrights, intangibles 
•	Over / under funding of benefit plans 
Product Differentiation 
Business values increase in niche-differentiated markets 
~ Non-commodity products mean greater protection for 
income streams 
~ Processes and operational techniques can create barriers 
to competition 
} How can you stand out from the field 
•	What are your core competencies? 
•	Can you move towards greater differentiation? 
•	Can you buy/develop a proprietary product to 
manufacture and market? 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21496,0);(0,0);(0,21436);(21496,21436)posrelh0posrelv0pib
shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21500);(21492,21500)posrelh0posrelv0pib
Depth/Breadth of Management 
Premium value is paid for strong management 
> Are you vital to the business operation? 
> How developed is management under you? 
> Could the buyer do without you? 
> Non-compete agreement with key management 
> Does it make sense to employ stronger management? 
•	Which positions 
•	Identify anticipated benefits 
•	KEY-Cost justification 
	II 	Customer Concentration Risks 
>- How much concentration do you have? 
>- 80-20 rule 
>- Valuation impact depends on your industry 
>- Contracts 
} Transferability of contracts 
>- What can you do about too much concentration? 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21496,0);(0,0);(0,21436);(21496,21436)posrelh0posrelv0pib
shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21496,0);(0,0);(0,21436);(21496,21436)posrelh0posrelv0pib
Supplier Dependency 
~ How many suppliers do you utilize? 
~ Are you dependent on any suppliers? 
~ Do you have contracts in-place with the suppliers? 
~ Key Items: 
~ Leases 
~ Ownership of work for hire 
~ Assignable-transferable 
~ Are you "in the money" 
Supplier Dependency 
~ Changes that you may consider 
•	Add back-up suppliers 
•	Look outside the normal channels for suppliers 
•	Try to sign supplier contracts 
•	Try to lock-in pricing for long term 
•	Obtain assignment rights from your key suppliers and 
landlord 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21496,0);(0,0);(0,21436);(21496,21436)posrelh0posrelv0pib
Deal Killers 
~ Environmental issues 
~ Union and labor issues 
~ Tax issues 
~ Retention of key employees 
~ Transferability of key contracts and relationships 
~ Pension plan issues 
~ Ownership of Intellectual property 
Exit Decision 

~ Determine your exit timing 
~ Analyze your transaction health 
~ Develop a plan to improve your transaction health 
•	What you can and cannot change 
•	What is the cost of making these changes 
•	What is the risk in not implementing these changes 
~ Implementation of the plan 
~ Measure effectiveness of plan 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21496,0);(0,0);(0,21436);(21496,21436)posrelh0posrelv0pib
Preparing for a Business Sale 
~ Formation and utilization of your team 
• Roles and responsibilities 
~ Know your goals and objectives 
• Financial and non-financial 
~ How long will the process take? 
~ What are the critical steps along the way? 
~ What major issues should you anticipate? 
Different Types of Buyers 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21436);(21492,21436)posrelh0posrelv0pib
~ Strategic 
•	Same or related business lines 
•	Seek sales and earnings growth, shareholder value 
•	Expand for geographic diversity 
•	Desire synergies that reduce overhead and 
redundancies 
•	Provide higher prices than financial buyers 
~ Financial 
•	Motivation is ROI - Leverage is key 
•	More plentiful than strategic buyers 
•	Operations talent often not provided 
•	Higher multiples paid on a lower earnings base 
•	Add-on versus platform 

Transaction Case Study 
~ Vector: Telephone Interconnect 
Company 

•	Revenue 
•	Reported Net Income 
•	Reported Pre Tax Profit 
•	Reported EBITDA 
•	Privately held C Corporation 
•	NY headquarters 
•	Strong east coast presence 
•	Owners in their 40's 

$60,000,000 
$2,250,000 
$3,750,000 
$4,205,000 

Average industry multiple: 5.2 times EBITDA & 10 times after-tax 

Transaction Case Study 
~ Recasting Income 

Reported Net Income 
Reported Pre Tax Profit 
Adjustments: 
Excess owner's salary 
Owner's perquisites 
Excess rent 
Non-recurring expenses 
Recast Pre Tax Profit 
Interest 
Depreciation 
Recast EBITDA 

$2,250,000 
$3,750,000 
1,380,000 
210,000 
220,000 
390,000 
$5,950,000 
75,000 
380,000 
$6,405,000 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21496,0);(0,0);(0,21436);(21496,21436)posrelh0posrelv0pib
Transaction Case Study 
~ Target buyer profile 
•	Financial/Strategic acquirers 
•	Voice/data integration strategy 
•	Foreign buyer searching for U.S. foothold 
•	Appropriate size 5-20 times sellers revenues 
~ Seller's considerations 
•	Owners willing to stay on for two to three years 
•	Job security for management and employees 
•	Earn-out 
•	Cash versus stock 
Transaction Case Study 
~ Successful Acquirer 

Morse Datacomm 
• Revenue 
• Corporate Structure 
• Strategy 

$800,000,000 
Public, Foreign 
Voice data integration 
Develop U.S.foothold 
Cross-sell services 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21496,0);(0,0);(0,21500);(21496,21500)posrelh0posrelv0pib
Transaction Case Study 	I 	
~ Value Creation 				
	Vector 	Vector/Morse 		
	Current 	Projected 		
				
Revenue 	$60,000,000 	$82,000,000 		
Reported Pre Tax Profit 	3,750,000 			
Recast Pre Tax Profit 	5,950,000 	10,170,000 		
Recast Net Income 	3,570,000 	6,100,000 		
Recast EBITDA 	6,405,000 	10,200,000 		
	Times 7.1 	Times 4.4 		
	45,000,000 		

Transaction Case Study 
~ Deal Structure 

Consideration 
Payment terms 

$45,000,000 
55 Cash, 45 Stock 

- Tax deferral via tax-free exchange addresses seller's 
tax concern 
0.- Stock value: downside protection via contractual stock 
put 
--- Employment Agreement: includes options & incentives 
based on post-closing performance; protects 
buyer/provides upside for the seller 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21436);(21492,21436)posrelh0posrelv0pib
shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21496,0);(0,0);(0,21436);(21496,21436)posrelh0posrelv0pib
Transaction Case Study 
~ A Great Deal 
"Based on synergies developed as a result of this 
acquisition, we believe that a price of 4.4 times 
projected first year EBITDA represents tremendous 
value to our shareholders." 
Morse Datacomm 
"With a purchase price equal to 12.6 times last year's 
recast net income, we believe that optimum value was 
realized for our Company." 
Vector 
Multiples of What? 
~ Transaction multiple based on $45MM purchase price 

Multiple Source 	Actual Financials 	Recast Financials 	
Revenue 	.75 times 	.75 times 	
EBITDA* 	10.7 times 	7.1 times 	
Projected EBITDA* 	4.4 times 	4.4 times 	
Pre Tax Profit 	12.0 times 	7.6 times 	
Net Income 	20.0 times 	12.6 times 	
* Earnings Before Interest, Taxes, Depreciation and Amortization 

shapeType75fBehindDocument1pWrapPolygonVertices8;4;(21492,0);(0,0);(0,21436);(21492,21436)posrelh0posrelv0pib
Summary 
~ Growth in mid-market M&A continues 
';> Need to be ready 
~ Know where you are in the decision process 
~ Know your "Transactional Health" 
~ Form the action program 
~ Build your team 
~ Drive value and get paid for it