4/6/2011 The Market Is Heating Up Are You Prepared? The Aerospace - PDF document

4/6/2011 The Market Is Heating Up … Are You Prepared? The Aerospace & Defense Forum March 18, 2011 January 2011 SLIDE 1 SLIDE 1 1 Aerospace A & D … Current Market Assessment It’s a good time to be in the A&D market • Market is heating up. • Transactions will occur at unexpected times. • You will receive inquiries. • You may get an unsolicited offer. • Are you ready? Are you ready? Are you prepared? Aerospace & Defense Aerospace & Defense 2 1

4/6/2011 Moss Adams Capital LLC Investment Banking for Private Companies Sale of Companies Strategic Advisory Buy-side Advisory • Affiliate of Moss Adams LLP Evaluate Strategic Alternatives • Registered Broker/Dealer Minority • Member FINRA & SIPC Recapitalization • 3 Offices in SoCal Transaction Readiness • Specialist in A&D suppliers, parts manufacturers, and parts manufacturers, and engineering design firms. Growth Equity Capital Formation Debt Aerospace & Defense 3 Common Situation: We have an Offer … then … • Delay due to accounting and tax matters. • Delay due to inability to produce requested information and documents. • Buyer discovers surprises … rather than Seller discussing on pro- active basis. • Appearance of undisclosed commitments, contracts, obligations. • Management team reliant upon key person(s) with no back-up. • Inability to support “add-backs” for non-recurring / one-time Inability to support add-backs for non-recurring / one-time expenses by the Seller. • Family business comingled with operating business. Aerospace & Defense 2

4/6/2011 Preparedness will bring out Full Value What drives value … What can be done to improve it? • The greater lead-time … the more you can do. • Transferrable operations, revenues and earnings. • Put the Financials in a condition to sell. • Beyond the financial statements … Operate company in “transferrable” form. • Plan the Tax Implications … Form of entity, wealth transfer, estate planning • Steps to take now. Being “Prepared and Ready” doesn’t mean the Company is for sale. Aerospace & Defense 5 Understand the Source of Initial Valuation Initial Valuation Proxy is a multiple of EBITDA EBITDA comes in many forms EBITDA comes in many forms As reported = per the prepared financial statements As presented = used as basis for valuation proxy As transferrable = condition of the business that will be transferred As strategic = if combined with another similar business EBITDA is measured over different periods Historical EBITDA Forward EBITDA Trailing Twelve Months EBITDA (“TTM”) Free-Cash Flow is relevant Action: Start tracking your TTM number and add-backs Aerospace & Defense 3

4/6/2011 Normalizing the Income Statement • Normalize owner/manager compensation • Clearly track discretionary and extraordinary items • Track fixed equipment purchases whether capitalized or expensed • Adjust for abnormal economics • Conform to accepted accounting practices • Produce monthly statements and summary reports Produce monthly statements and summary reports Action: Put the income statement in “normalized” condition Aerospace & Defense 7 The Balance Sheet at Deal Time Buyer will value deal on a “debt-free” basis. Normalize working capital Normalize working capital. • Most private companies have excess/surplus working capital. • What is “adequate” working capital for the business? • Hard to justify big changes at time of sale. CAPEX related debt. • Big equipment purchases often accompanied by debt or cap leases. • If recent purchase, the full earnings effect hasn’t been realized. • No credit in earnings, but still penalized for debt. Maintain the Fixed Asset schedule and depreciation schedule Action: Today’s balance sheet should approximate the one transferred. Aerospace & Defense 8 4

4/6/2011 Proxy for Value: Comparables and Multiples Buyer’s attempt to make comparisons between the relative valuations of comparable companies in the “marketplace” and the subject company. • Enterprise Value -to- EBITDA • Enterprise Value -to- FCF • Enterprise Value -to- Revenue • Price-to-Earnings (public companies) Public Comparables • Compare valuations of public companies • Similar companies, industries, or characteristics Private M&A Comparables: • T Transactions in competitor companies ti i tit i • Transactions in similar companies • Transactions in similar industries Action: Know the Comparables/Multiples for your Company Aerospace & Defense 9 Make “Rules of Thumb” work in your favor Rules of thumb will be frequently referred to … however … • They are not given any weight unless they are supported by other valuation methods; • They are applied only to transferrable revenue and earnings; • They will be relevant only if supporting evidence is available to inspire confidence among buyers and sellers; • They often get discounted in the due diligence process. Action: Know how “Rules of Thumb” apply to your situation. Aerospace & Defense 10 5

4/6/2011 Beyond the Financials: Build up your Strategic Value Tell the story: Formal strategic plan to define future business Customer/Program Factors Product or Capability Factors Strategic Factors Intellectual Property Factors Leadership & Reputation within Industry Leadership & Reputation within Industry Action: Create a Business Plan that presents the future opportunities Aerospace & Defense 11 Tax Planning -- Keeping the Value Significant value at stake E Early analysis of tax structure helps you retain post-deal consideration l l i f t t t h l t i t d l id ti Form of Entity Allocation of Purchase Price Current “Window” to Transfer Wealth Requires a tax specialist Requires a tax specialist Action: Find a transaction tax specialist Aerospace & Defense 12 6

4/6/2011 Tax Planning: A Window of Opportunity 2013 & 2013 & 2011 & 2012 2011 & 2012 2010 2010 Beyond Beyond Three Year Three Year Window Window “Silver “Silver Window of Window of Current Current for for Platter” For Platter” For Opportunity Opportunity federal and federal and Income, Gift Income, Gift Major Tax Major Tax state deficits state deficits (now (now Planning Planning & Estate & Estate will lead will lead extended) extended) extended) extended) Planning Planning Planning Planning to….??? to….??? Aerospace & Defense Steps to Take Now • Put Yourself through “mock” due diligence • Get Independently prepared financial statements; preferably audited. • Get corporate records complete, organized, and corrected. • Quality check all material contracts, licenses, agreements. • Create an organization chart with clear roles and responsibilities. • Analyze and assess tax implications of a sale. • Consider your form of entity (“C” Corp, “S” Corp, “LLC”) Aerospace & Defense 14 7

4/6/2011 In Closing • The opportunity will likely come at an unexpected time. • “Market multiples” will be tossed around. • Rules of thumb will be frequently referred to … however … the value will be determined by many other variables. • Assess your readiness and preparedness … regardless of intent to sell. • Be prepared. Be ready. Aerospace & Defense 15 8