BILLOW BUTLER

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Chicago Bar Association Mergers Acquisitions
Subcommittee
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Discussion Topics
Valuation Methodologies Current Market
Conditions Billow Butler Company
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Valuation Methodologies
Public Companies

• Analysis of valuation multiples of comparable
  publicly-traded companies to gain insight into
  multiples for privately-held companies.
  Traditionally, small private companies are
  acquired at a discount to public multiples.

Comparable Transactions
Analysis of valuation multiples implicit in
recent acquisitions involving comparable private
and public companies. Takes into consideration
premiums/discounts for size of transactions.
Discounted Cash Flows

• Analysis of future cash flows and residual value
  discounted to the present using a return on
  capital rate required by investors requires the
  development of a 5-year financial plan.

Leveraged Buyout

• Analysis of the purchase price a financial
  investor group could pay given various return to
  investors parameters heavily dependent on the
  debt markets requires the development of a
  5-year financial plan.

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Quality of Earnings

• Historical Track Record of Growth Profitability
• Past or Current Trends Benefiting / Impacting the
  Company
• Customer Base Profile Concentration Contracts
• Quality of Earnings Persistence / Variability
• Achievability of Projected Financial Results
• Prospects and Opportunities for Continued Growth
• New Product Initiatives
• Capacity and Nature of Equipment and Facilities
  to Accommodate Future Growth

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Add-Backs

• Add-backs are items (normally expenses) that are
  currently incurred by the company that may not
  be incurred under the control of a prospective
  buyer
• These may include such discretionary items as
• Above-market executive compensation
• Consulting fees paid to investors or investor
  groups
• Family-member compensation
• Perquisites autos, life insurance, travel, etc.
• The other category of add-backs includes
  extraordinary or one-time items, such as the
  gain on sale of assets, life insurance proceeds,
  an unusual bad debt write-off, moving expenses,
  etc.
• It is important that each add-back can be tied
  back to the companys financial statements

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Add-Back Schedule
2001 2002 2003 Above Market
Salaries _______________(name) _____ _____ _____
_______________(name) _____ _____ _____ Bonus
_______________(name) _____ _____ _____ ________
_______(name) _____ _____ _____ Perquisites Trav
el Entertainment _____ _____ _____ Auto
Expenses _____ _____ _____ Dues
Subscriptions _____ _____ _____ Medical
Reimbursements _____ _____ _____ Other _____ __
___ _____ Other _____ _____ _____ Non-Recurring
Charges One-Time Excessive Bad Debt
Write-Off _____ _____ _____ Extraordinary
Gain (loss) On Sale of Assets _____ _____ ____
_ Other _____ _____ _____ Other _____ _____
_____
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Adjusted Income Statement
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Public Companies
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Comparable Transactions
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Discounted Cash Flows
Calculate Adjusted Free Cash Flow

Debt-Free Analysis
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Discounted Cash Flows
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Leveraged Buyout

• Senior Debt Financing
• Senior debt to cash flow of 2.5 3.5x
• Total debt to cash flow of 3.5 4.5x
• Mezzanine Financing
• Seek total return of 18 22
• With or without equity participation
• Private Equity Contribution
• Attention paid to underperforming portfolio
  companies
• Eager to make new investments
• Being pushed to invest up to 35 in equity
• Return expectations lowered to 20

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Valuation Summary
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Reasons for Differing Multiples
Perceived Ability to Generate Future Cash Flow
Financial
Intangible

• Growth opportunities
• Strength of management team
• Market position
• Strength of distribution channels
• Industry outlook
• Proprietaries, patents, know-how
• Customer diversity and tenure
• Technical capabilities
• Reputation and goodwill
• Barriers to entry

• Size
• Historical revenue growth
• Margins relative to peers
• Potential synergies
• Earnings history
• Asset utilization
• Asset intensity
• Excess capacity
• Cash conversion cycle
• CAPEX requirements

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Beauty is in Eye of Beholder
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Historical Deal Multiples
Source Mergerstat
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Multiples by Deal Size
Source US Bancorp Piper Jaffray
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Billow Butler Company
Billow Butler Company, L.L.C. Billow Butler
Company, L.L.C. is an investment bank dedicated
to advising middle market business owners on the
sale of their companies. With backgrounds at
leading investment and commercial banks, law
firms and financial consulting firms, our
professionals bring a level of expertise,
integrity and professionalism to the middle
market that is traditionally only available to
owners of larger companies. Our clients are
located across the U.S. and typically own
companies valued up to 100 million. They are
entrepreneurs and private equity groups that
intend to sell an entire company or they are
larger, public companies that desire to divest a
division. But, no matter their size, location or
ownership, our clients engage us with a common
goal in mind - maximize net proceeds, to ensure
transaction closure and achieve the best possible
terms with confidentiality, speed and minimal
burden on themselves and their corporate staff.
Since its inception in 1997, Billow Butler
Company has successfully closed over 25
transactions. Darrell M. Butler Managing
Director Mr. Butler has been involved in mergers
and acquisitions for more than 13 years,
participating in more than 100 transaction
assignments ranging in value from 3 million to
200 million. Mr. Butler has spoken before
members of the Institute of Management
Accountants, the Chicago Bar Association and
industry trade associations on topics involving
corporate finance and deal-making. Prior to
co-founding Billow Butler Company, he was an
accomplished associate/vice president at a
leading national investment bank, where he was
formally recognized as Top Associate for leading
the company in deals closed and fees generated.
Mr. Butler spent more than seven years at Arthur
Andersen as a financial consultant to Fortune
1000 clients. In addition to earning
consistently outstanding marks during his tenure
at Andersen, he is proud to have received the
Sequoia Award for mentoring in support and
development of his staff. He is currently the
treasurer of a not-for-profit educational
corporation and previously served six years as
treasurer of a 1.2 million not-for-profit
corporation. Mr. Butler holds an M.B.A. in
Financial Management and Strategy from The
University of Chicago Graduate School of Business
and a B.S. in Finance, with honors, from the
University of Illinois-Urbana/Champaign.