The document provides an update on the ESOP market environment in winter 2013. It summarizes that the ESOP market and M&A activity remained healthy in 2012, with capital readily available for new ESOP creations and company expansions. Transaction volumes were strong and valuations remained at reasonable levels. Going forward in 2013, new tax laws are expected to further drive ESOP transactions, while capital markets continue to be active in providing growth funding and liquidity options to ESOP companies.

1. PCE Investment Bankers
ESOP Market Update
Winter 2013

2. 2
Table of Contents
 Market Environment
 ESOP Structures
 ESOP News

3. 3
Market Environment

4. 4
Headlines
 Approaching record levels on
S&P 500
 Job growth
 Partial resolution to fiscal
cliff
 Debt ceiling fight part II

5. 5
Today’s Business Owner(s)
 Business is performing
 Valuations are at a reasonable level (see stock market)
 Tax rates have likely increased – especially in a sale of the
business
 Concerned with political climate
 Personal diversification important

6. 6
Middle-Market M&A
 Momentum from 2011 carried into 2012
 Valuations for well performing companies remained strong
 Volume of transactions compares to 2007
 Credit markets were very active
 Were 2013 transactions pulled into 2012?

7. 7
Quarterly M&A Activity (Q1 2010 – Q4 2012)
Source: CapitalIQ
2010: 6,680 deals
2011: 7,679 deals 2012: 7,783 deals
Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12
Transactions - $500MM - $1B 23 41 51 50 51 50 41 41 29 48 37 63
Transactions - $100MM - $500MM 157 175 215 237 210 243 238 221 211 225 198 247
Transactions - < $100MM 1346 1338 1411 1499 1529 1726 1607 1595 1583 1625 1641 1732
-
500
1,000
1,500
2,000
2,500
Transactions - < $100MM Transactions - $100MM - $500MM Transactions - $500MM - $1B
DealVolume

8. 8
Source: CapitalIQ
Private Equity M&A (North America)
Q1 '10 Q2 '10 Q3'10 Q4 '10 Q1 '11 Q2 '11 Q3'11 Q4 '11 Q1 '12 Q2 '12 Q3'12 Q4 '12
PE Value $20 $29 $36 $43 $39 $35 $37 $42 $32 $35 $40 $81
Total PE Transactions (Quarterly) 323 381 402 477 509 561 569 535 550 580 579 623
-
100
200
300
400
500
600
700
$-
$10
$20
$30
$40
$50
$60
$70
$80
$90
$inbillions
Deal Volume

9. 9
ESOP Market Today
The key factors for ESOP financing are positive
1. Financing is readily available at historically low rates
2. Company performance & valuations have improved

10. 10
The ESOP Market
ESOP Market divided into two general types of transactions
1. Shareholders who want liquidity
 New ESOPs
 Dividend to ESOPs
 Buyout of seller paper
2. ESOP Companies looking for capital to refinance or grow
 Organic expansion
 Acquisitions

11. 11
Growth Capital
Existing ESOP companies in need of capital to grow are most attractive
to capital sources
 Experienced borrowers
 Seasoned ESOP
 Tax advantaged
 Should borrow at lowest rates with best terms

12. 12
Growth Capital
In 2012 ESOP companies had an increase in institutional capital from
private equity and other private funds to support:
 Acquisitions
 Geographic expansion
 Vertical integration

13. 13
Liquidity Transactions
2012 was an active year for creation of new ESOPs:
 Return of liquidity to the market
 Uptick in valuations
 Pent-up demand from liquidity crisis
 Tax-driven transactions

14. 14
Liquidity Transactions
Stock sales to ESOP are expected to rise in 2013
 Large number of owners sat on sidelines in 2012
 Tax rate changes
 Income
 Capital gains
 Healthcare premium

15. 15
 ESOP financing market has become more competitive
 More entrants into senior market
 Higher level of interest from alternative sources
 Historically low rates (3-month LIBOR 0.31%)
 Flexible loan structures (longer amortizations, better pricing)
 Debt markets transitioning to a borrowers market
 Highly dependent on successful track record
 The bigger the better
Credit Market Update

16. 16
Alternative Lenders / Capital
 Institution pools of capital to lend money to ESOPs
 Secured & unsecured term loans
 Grew out of lack of senior debt in market
 Debt that acts like equity
 Underwriting Criteria
 Combination of asset based and cash flow
 Security Interest
 Situational
 Will take second lien on all assets; junior to the first lien lenders
 Current Market Conditions
 Available to ESOP companies; $3MM+ in EBITDA

17. 17
Debt Multiples
Senior Debt Junior Debt Security
< $3MM of EBITDA 1.5-2.5x
EBITDA
Less
Available
Asset Based /
Guarantees
>$3MM of EBITDA 2.0-3.0x 3.0-4.0x Asset Based / Cash-
Flow
>$10 MM of EBITDA 3.0-4.0x 4.0-5.0x Cash Flow Based
Pricing Libor + 3-5 Senior +5-10
Debt market continues to be segmented by Company size
EBITDA thresholds have dropped slightly for better advance rates /
terms
Additional refinement to pricing / terms & conditions based on
industry and company specifics

18. 18
Deal Multiples
Median ImpliedEnterprise Value / EBITDA (North American Targets)
(As of 12/31/2012)
Sector 2010 2011 2012
Consumer Discretionary 11.33x 10.78x 9.60x
Consumer Staples 5.81x 10.79x 8.24x
Energy 10.96x 9.35x 6.21x
Financials 12.18x 13.17x 11.33x
Healthcare 12.03x 11.98x 10.50x
Industrials 6.19x 8.57x 8.08x
Information Technology 11.25x 12.02x 10.30x
Last Twelve Months Ending December 31st of:

19. 19
ESOP Structures

20. 20
Structure of ESOP Transactions
Accommodating finance markets open up structuring options for
stock sales to ESOPs
In Out
1042 Tax Deferral Seller financing
Bank financing Acceleration of seller financing
Alternative financing Personal Guarantees
Partial transactions Redemptions
Non-recourse loans

21. 21
Liquidity Transactions
Return of the 1042 tax deferral
2012 2013 2013 w. 1042
Gain on Sale $20.0 $20.0 $20.0
Capital Gains
Tax
(3.0) (4.0) -
Healthcare Tax - (0.8) -
Net Proceeds $17.0 $15.2 $20.0

22. 22
Liquidity Transactions
Return of the 1042 tax deferral
2012 2013 2013 w. 1042
Gain on Sale 100% 100% 100%
Capital Gains
Tax
(15.0%) (20.0%) 0%
Healthcare Tax 0% (3.8%) 0%
Net Proceeds 85.0% 76.2% 100%

23. 23
Liquidity Transactions
1042 requirements:
 Must be a or convert to C-corporation to qualify
 Must sell stock directly to ESOP
 ESOP must own at least 30% of company
 Owners must have held stock for a minimum of 3 years
 Reinvest in Qualified Replacement Property (QRP) – tax deferral
for gain
 15-month reinvestment window of proceeds

24. 24
Liquidity Transactions
What does the desire for deferring capital gains mean for
ESOP structuring?
 Increase in partial sales or staged ESOPs
 Multiple classes of stock
 Increase in sales to existing C-Corp ESOPs
 Simplifies participation for institutional capital
 Structuring to maximize tax advantages to Company
 Opens up management incentive potential

25. 25
Liquidity Transactions
Reasons for the staged ESOP :
 Allows for preferred class of stock
 Management teams concerned about amount of debt
 Valuations have room to improve
 Partial ESOP provides flexibility into the future
 Sell more to ESOP in the future
 Sell entire Company in the future
 Keep ESOP ownership at a minority position
 Owners satisfied with partial diversification

26. 26
Terms and Conditions1
1Terms and conditions from HLHZ purchase agreement studies and PCE proprietary data
Strategic Financial ESOP
All Baskets 0.7% 0.8% 0.4%
Cap 12.0% 8.5% 8.0%
Survival Period 18 months 18 months 18 months
Escrow 8.3% 5.2% N/A
Escrow Period 18 15 N/A
Indemnifications as a percentage of purchase price

27. 27
Liquidity Transactions
Healthy M&A Activity
+ Active Financing Market
Healthy ESOP Market
Structuring options help mitigate tax increases
Fully valued transactions
Seller favorable reps and warranties
Meaningful liquidity & diversification

28. 28
Growth Capital
Institutional capital will show increased interest in ESOP
companies in 2013
 More varieties of capital open to ESOP owned companies
ESOPs have proven to be better investments than non-ESOP
owned companies
Private equity has adapted to participate more actively in ESOP
companies
All levels of debt active in ESOP companies

29. 29
Growth Capital
Different types of institutional investors want different things from
investing in ESOPs
Senior debt
• Wants to be repaid
• Earn spread over cost of funds
Uni-
tranche
• Enhanced return on capital
Mezzanine
/ sub-debt
• Higher current return
• Equity participation
Equity /
Structured
Equity
• Growth
• Equity returns

30. 30
Summary
 ESOP market is healthy and active
 Capital is available for ESOP company expansion and the
creation of new ESOPs
 New tax laws expected to drive additional ESOP activity
through 2013
 Expect capital markets to be more active in ESOP
transactions than in 2012

31. 31
ESOP News

32. 32
ESOP Legislation
 The election was mixed for ESOP advocates in Congress
 The "Promotion and Expansion of Private Employee Ownership Act
of 2011" (H.R. 1244/S. 1512) introduced in the House and the Senate
would encourage and support the formation of S corporation ESOPs.

33. 33
ESOP Research
 July 2012 - An Analysis of the Benefits S ESOPs Provide the U.S.
Economy and Workforce (by Alex Brill)
 Compliments previous Georgetown (2010) and Penn (2008) studies

34. 34
Questions?

35. 35
PCE ESOP Practice

36. 36
PCE Investment Bankers
William A. Stewart, CFA
Will is a key member of PCE’s Employee Stock Ownership Plan (ESOP)
practice, with experience in executing sales to ESOPs, ESOP feasibility
studies and ESOP trustee & shareholder financial advisory services. Will is
engaged in all aspects of PCE’s investment banking practice, including buy-
side and sell-side mergers and acquisitions as well as private equity and debt
placements.
Will served as a vice president at SunTrust Bank’s private wealth
management group, with responsibility for over $300 million of assets, and
prior to that, was a SunTrust Bank credit officer underwriting commercial
and corporate loan packages with transactions ranging from $5 million to
over $100 million in value.
Will received his Economics Bachelor of the Arts degree from Denison
University. Will is a Chartered Financial Analyst (CFA) charter holder and
member of the CFA Society where he serves on the local Orlando board, a
member of the National Center for Employee Ownership, a board member of
the New South chapter of the ESOP Association and a series 7 & 24 license
holder.
PCE Proprietary and Confidential
P: 407.621.2124
wstewart@pcecompanies.com

37. 37
PCE Valuations
Robert Buchanan , J.D., ASA
Robert H. Buchanan brings more than a decade’s worth of valuation
experience to PCE. In addition to being a founding principal of PCE
Valuations, he is recognized as an industry expert and is frequently invited
to speak about valuation topics at industry seminars and professional
conferences throughout Florida and the U.S.
Bob’s professional experience encompasses hundreds of valuations for
merger & acquisition transactions, business planning, estate & gift planning
and filing, financial reporting, ESOPs and litigation support. In addition to
overseeing PCE’s business valuation group, he monitors legal developments
as well as IRS rulings and pronouncements impacting the valuation
industry. Researching and monitoring industry issues enables him to
provide timely and targeted analyses for clients.
Bob received a Bachelor's degree in finance from the University of Central
Florida, a Juris Doctorate degree from the Washington and Lee University
School of Law and is a member of the American Society of Appraisers.
PCE Proprietary and Confidential
P: 407.621.2120
rbuchanan@pcecompanies.com

38. 38
Representative Transactions

39. 39
Representative Transactions

40. 40
Representative Transactions

41. 41
PCE National and Regional ESOP Speeches
 “Advanced Financing: ESOPs in M&A”
2007 National ESOP Association Annual Conference
 “Fiduciary Aspects of Raising Money for ESOP Companies”
2008 ESOP Southeast Regional Conference
 “Subordinated Financing in Valuation”
2008 ESOP Southeast Regional Conference
 “Changing Dynamics of ESOP Financing”
2008 National S-Corp Conference for the ESOP Association
 “ESOPs: Exits, Acquisitions & Growth”
2008 ACG Intergrowth National Conference
 “Liquidity Strategies for Privately Held Companies”
2008 CFMA National Conference
 “Selling your business in a Challenging Economy: The ESOP Alternative”
2008 UBS – MacquireWoods – PCE Conference

42. 42
PCE National and Regional ESOP Speeches
 “Subordinated Financing & Reasonable Dividends”
2008 Southeast ESOP Chapter Meeting
 “Multi-Stage Transactions and Recapitalizations”
2008 National ESOP Association Annual Conference
 “Navigating the Sale to an ESOP: A Great Liquidity Option, Even in Stormy Seas”
2009 ESOP Southeast Regional Conference
 “Esops Surviving & Thriving – M&A Update and Value Drivers”
2009 New South ESOP Conference
 “Strategies for ESOPs”
2009 The McGehee Group Annual Advisors Conference
 “ESOPs in the Construction Industry”
2009 FICPA Construction Industry Conference
 “ESOP Transactions in Today’s Market”
2010 ESOP Association Tri-Chapter Conference
 “Valuation: On Trends and Current Issues”
2011 ESOP Association Tri-Chapter Conference

43. 43
PCE Investment Bankers
ESOP Market Update
Winter 2013