MERGERS & ACQUISITIONS. Michael Dudek, President (610)

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1 MERGERS & ACQUISITIONS Michael Dudek, President (610)

2 Preliminaries Who is an owner? Do you know your company s value? Within what degree of certainty? Do you believe there s a range of value? Who knows what drives value? Why are you here? 2

3 H M L ZYGOQUEST GROUP VALUE SCORECARD H M L Financial Measurements Stakeholder Measurements P&L Employees 1. Total financial performance M 25. Management team quality 2. Cash flow H 26. Employee quality M 3. Profit H 4. Gross margin H Suppliers 5. Revenue growth L 27. Quality of primary suppliers L 6. Revenue mix M 28. Adequate diversity L Balance Sheet Customers 7. Overall asset quality M 29. Quality M 8. Accounts receivable quality H 30. Sufficient diversity M 9. DSO H 31. Market opportunity M 10. Inventory quality M 11. Inventory turns M Major Value Adds 12. Fixed asset quality L 32. Excess owner compensation L 13. Accounts payable - DPO L 33. Outstanding profit/cash flow M 34. Substantial revenue growth M People Productivity 35. Owned facility L 14. Sales rep H 36. Leasing company L 15. Service tech M 37. IT capability M 16. Administration M 38. Exclusivity features L 39. Major marketplace M Financial Records 40. Market-share leader L 17. Organized M 41. Non-capital intensive L 18. Adequacy of controls M 19. Mgmt exception reports L Value Deflators 20. Info management M 42. Poor financial records M 43. Questionable assets M Operational Elements 44. Substantial debt L 21. Facility H 45. Substantial competition L 22. Operations clean/organized M 46. Loss trend L 23. Process efficiency M 47. Excessive litigation M 24. Recurring revenue M 3

4 Zygoquest Group - STAKEHOLDER ASSESSMENT Financial Objectives Revenue Profit Cash Enhance the value of your company by: FOCUSING ON STAKEHOLDERS OWNERS Customer Offerings Products Services Financing SUPPLIERS MANAGEMENT CUSTOMERS CREDITORS EMPLOYEES Organizational Structure Sales Marketing Production Administration Third Parties Lawyers Auditors Bankers Government

5 $$$ Valuation $$$ Quantitative Attributes Qualitative Attributes Tangibles & Facts Intangibles & Judgment 5

6 Hierarchy QUANTITATIVE VALUE R I S K Quantity Growth Cash Flow/Profit Revenue/Margins Balance Sheet Productivity Headcount Predictability Sustainability Risk Value Facts R E W A R D 6

7 Hierarchy QUALITATIVE VALUE R I S K Quality Risk & Return Management Team Product & Service Offerings Marketplace Competition Differentiators Opportunities Weaknesses Strengths Threats Judgment R E T U R N 7

8 7 Key Value Factors Growth Cash flow Productivity Revenue mix Predictability & sustainability Balance sheet quality Management info & analysis 8

9 7 Key Quality Factors Management team Product & service offerings Operations Stakeholders Marketplace Competition Internal controls 9

10 Big Picture Concepts &Tools 1. Value of growth 2. Value of cash flow 3. Impact of revenue mix 4. Impact of productivity 5. Balance sheet quality 6. Asset management opportunities 7. Management info and analyses 10

11 1. Value of Growth Revenue Profit Cash Growth is the ultimate #1 value enhancer asserts Mike Dudek of Zygoquest. 11

12 Are you kidding me? Of course not! These # s do not lie. 12

13 Value $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Zygoquest Group Growth Model Year 5% 10% 15% 20% 25% 30% 40% 50% 13

14 14 $17.09 $13.48 $10.54 $8.17 $6.27 $4.77 $3.58 $2.66 $1.95 $ $11.39 $9.29 $7.53 $6.05 $4.83 $3.81 $2.99 $2.31 $1.77 $ $7.59 $6.41 $5.38 $4.48 $3.71 $3.05 $2.49 $2.01 $1.61 $ $5.06 $4.42 $3.84 $3.32 $2.86 $2.44 $2.07 $1.75 $1.46 $ $3.38 $3.05 $2.74 $2.46 $2.20 $1.95 $1.73 $1.52 $1.33 $ $2.25 $2.10 $1.96 $1.82 $1.69 $1.56 $1.44 $1.32 $1.21 $ $1.50 $1.45 $1.40 $1.35 $1.30 $1.25 $1.20 $1.15 $1.10 $ % 45% 40% 35% 30% 25% 20% 15% 10% 5% Year Zygoquest Group Growth Model Initial Investment: $1.00

15 2. Value of Cash Flow Predictability Contracts & annuity streams Sustainability Risk of uncertainty Cash rules. Cash is awesome. Give me cash or give me growth exclaims Mike Dudek of Zygoquest. 15

16 3. Impact of Revenue Mix Revenue mix analysis (Products/Services/Supplies/Software) Functional P&L Triple P Report (Performance versus Plan versus Prior Year) Productivity Analysis A change in mix can double your profitability, but explains Mike Dudek of Zygoquest. 16

17 Functional P&L Impact of Revenue Mix 50% 50% Revenue Mix Equipment Service Supplies TOTAL Sales $500 $333 $167 $1,000 rev mix 50% 33% 17% Cost of sales $330 $60 $ % of rev 66% 18% 66% Gross margin $170 $273 $ % of rev 34% 82% 34% 50% Direct expenses $115 $127 $8 250 % of rev 23% 38% 5% 25% % of gm 68% 46% 15% 50% Operating contribution $55 $147 $ % of rev 11% 44% 29% 25% Administrative expense $150 % of rev 15% % of gm 30% Operating income $100 % of rev 10% Zygoquest Group 17

18 Functional P&L Impact of Revenue Mix 60% 40% Revenue Mix Equipment Service Supplies TOTAL Sales $600 $267 $133 $1,000 rev mix 60% 27% 13% Cost of sales $396 $48 $ % of rev 66% 18% 66% Gross margin $204 $219 $ % of rev 34% 82% 34% 47% Direct expenses $138 $101 $7 246 % of rev 23% 38% 5% 25% % of gm 68% 46% 15% 53% Operating contribution $66 $117 $ % of rev 11% 44% 29% 22% Administrative expense $150 % of rev 15% % of gm 30% Operating income $72 % of rev 7% Zygoquest Group 18

19 Functional P&L Impact of Revenue Mix 40% 60% Revenue Mix Equipment Service Supplies TOTAL Sales $400 $400 $200 $1,000 rev mix 40% 40% 20% Cost of sales $264 $72 $ % of rev 66% 18% 66% Gross margin $136 $328 $ % of rev 34% 82% 34% 53% Direct expenses $92 $152 $ % of rev 23% 38% 5% 25% % of gm 68% 46% 15% 48% Operating contribution $44 $176 $ % of rev 11% 44% 29% 28% Administrative expense $150 % of rev 15% % of gm 30% Operating income $128 % of rev 13% Zygoquest Group 19

20 Growth Objectives What is your growth objective? How do you intend to achieve it? How much is a good sales rep worth? What business are you in? RAZORS Where do most profits come from? BLADES After-market is forever contends Mike Dudek of Zygoquest. 20

21 Growth is Risky Growth is difficult or we would all do it all the time Uncontrolled growth is dangerous and expensive Unprofitable growth is deadly 21

22 Growth is Valuable Risk versus reward What are you willing to invest? How will you manage it? 22

23 4. Impact of Productivity Employees Operations High productivity drives above-average growth, profitability and value. High productivity is easy to recognize hen you see it. The keys to attaining excellent productivity - half is attitudinal and the balance is good management combined with hard work. After examine high productivity, you ll realize it s possible even though you may not be able to accomplish it yourself. Companies with outstanding productivity have excellent management, systems, processes and procedures, states Mike Dudek of Zygoquest. 23

24 5. Balance Sheet Quality Current assets Accounts receivable DSO Inventory turns Other current assets Current liabilities Accounts payables and accrued expenses DPO Deferred revenue Other current liabilities Long-term assets PP&E Other current assets Long-term liabilities Deferred revenue Debt When buyers derive valuation, they may not be overly concerned whether purchase price consideration is paid to owners or to third parties such as creditors; however, companies with excessive debt and delinquencies are virtually always heavily discounted, assures Mike Dudek of Zygoquest. 24

25 6. Asset Management Opportunities DSO Inventory DPO Deferred revenue Effective asset management is one of the primary overlooked opportunities by established business owners, CFO s and Controllers. The associated cash opportunity should be benchmarked and quantified, with accountability assigned to a primary decision-maker. How about investing this cash opportunity to drive value? How about investing it in growth, suggests Mike Dudek of Zygoquest? 25

26 Where is your AMO? (Asset Management Opportunities) NITRO NITRO 26

27 Here is your A M O Mike Dudek Zygoquest Group February ASSET MANAGEMENT OPPORTUNITY NITRO ASSET MANAGEMENT OPPORTUNITY QUANTIFIED ACCOUNT COMPANY AVERAGE INDUSTRY BENCHMARK VARIANCE EXCESS CASH INVESTMENT DSO (5.4) $202,096 EQUIPMENT TURNS SUPPLY TURNS PARTS TURNS RENTAL PAYBACK DPO DAYS OF AFTERMARKET DEFERRED (2.1) (18.6) 1.6 $44,534 $104,460 EXCESS CASH INVESTMENT REPRESENTS THE DECREASE IN ASSETS OR INCREASE IN LIABILITIES REQUIRED TO ACHIEVE INDUSTRY BENCHMARK FOR EACH MEASUREMENT EXCESS CASH INVESTED BEFORE DPO & AFTERMARKET = $266,630 (10.2%)OF RELATED ASSET & LIABILITY BASE INTEREST INCOME OPPORTUNITY AT 3.5% = $92 TOTAL EXCESS CASH INVESTMENTED = $371,090 OR 18,3% OF RELATED ASSET & LIABILITY BASE INTEREST INCOME OPPORTUNITY AT 3.5%= $248 RETURN ON INVESTMENT IMPACT ROI WITHOUT DEFERRED SERVICE 65.0% ROI AS REPORTED ROI RESTATED WITH OPPORTUNITY 164.0% % INVESTMENT BECOMES LESS THAN ZERO 27

28 7. Management Info & Analysis Quality of management information Management Exception Reports Financial statement and operational analyses Employee productivity, customer profitability, and product-line analyses Benchmarking to identify and opportunities 28

29 Example Management Reports Is your management team keeping you in the loop? Functional P&L Employee, customer and product-line performance Balance sheet account analyses show me the money (AR, AP, Inventory, Fixed assets, AP, Deferred revenue) Operations (Contact renewals and cancellations; farmers and hunters new deals; Leasing, leasing, and lease-end; etc.) 29

30 Important Concepts Formulate a basic strategy and plan Reinvent your management techniques With limited time Leverage yourself Manage business better Devise better tools and management information 30

31 $$$ Valuation $$$ Translate concepts & tools into actionable and manageable plans to enhance your value 31

32 MERGERS & ACQUISITIONS Michael Dudek, President (610)