Five key elements that drive the value of your business

Five Key Elements that Drive the
Value of Your Business
- M & A
www.mfsib.com

CONFIDENTIAL
Introduction
2
Who is Midwest Financial M&A?
Midwest Financial – Team
Five Key Elements that Drive the Value of Your Business

CONFIDENTIAL 3
Owners Always Ask, “What’s the Value of My Business?”
As CEO of an upper middle market investment banking firm, one of the first
questions a business owner, Board of Directors, CEO or President asks is,
“What is the value of my business?”
Over the next few pages, we review five key strategic elements that drive the
value of your business, which all business owners, CEOs, or Presidents should
focus on for future success.
5 Key Elements Driving Value

CONFIDENTIAL 4
Key Valuation Issues
Because there are many subjective factors that impact the value of a business, determining fair
market valuation is not an easy task. Too often, business owners get a mistaken view of value
when they hear the price that another business owner received. In my investment banking
business, I call this “the Valuation Gap”.
The valuation process to establish the value of a privately held business must consider the
quantitative, qualitative, tangible, and intangible factors associated with the business being
valued.
Business value is a combination of profitability, future certainty of profits, and the transferability
of the profits to a new business owner.
It’s important to understand the fair market value price at which your business would be
purchased.
Definition of Fair Market Value - The price at which a business would change hands between
a willing buyer and a willing seller, when the former is not under any compulsion to buy and the
latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant
facts.
Valuation – What Drives Value ?

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Primary Reasons to Obtain a Fair Market Business Valuation
Business Planning
Buy Sell Agreements
Compensation
Considering Other Business Opportunities
Divestitures
– Selling a Division
– Selling Part of the Business
ESOP
Estate, Gift, and Income Taxes
Family Limited Partnerships
Financial Reporting
Going Public - Initial Public Offering (IPO)
Goodwill Impairment
Mergers and Acquisitions
Need of Equity – Selling Shares and Percent of
the Business
Obtaining Financing of Re-financing
Re-capitalizations
Selling the Company
Stock Options Plans
Takeover Defense
Knowing the value of your business is a prerequisite to good management. If you
don’t know its current value and what drives it, you will never know where to lead
your business to success or how it will get there.

CONFIDENTIAL
Introduction
6

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I. Positive History of Financial Performance Over the Past Four Years
– Increasing Revenue and EBITDA
I find it interesting that countless business owners do not look at their company’s financial
results as carefully or as often as they should.
We closed one $60 million acquisition for a strategic buyer where the acquisition target’s
financials were in such poor shape that we had to spend $250,000 on a quality of earnings
report and we still weren’t sure that the historical financials were accurate. It was a great
acquisition for the strategic buyer, and we closed over all those issues, as they were
insignificant and the upside on the sales potential made the risk low.
What are the key metrics you should monitor? Although they depend somewhat on the type
of business and industry, there are several to consider.
The first key metric that a business owner must know is the increase (hopefully not a
decrease) in sales from period to period: Year over Year; Quarter over Quarter, and Month
over Month.

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I. Positive History of Financial Performance Over the Past Four Years
– Increasing Revenue and EBITDA Continued
The next key financial metrics are three profitability ratios: 1. Gross Profit Margin Ratio, 2.
Operating Profit Margin Ratio, and 3. Net Profit Margin Ratio.
Of these three, the first and most easily understood is gross profit margin. It tells how much
you’re making from every sale after the costs to produce your products or services. You
should calculate the gross profit margin as a percent of your net sales.
The operating profit margin ratio reveals the profit your business makes after paying the
variable costs of production, such as wages, raw materials, etc.
When you calculate this ratio as a percentage of your net sales it shows how efficient you
are in controlling the costs and expenses associated with your business operations. It is the
pretax profits of your business.
How are your past four years – increasing/decreasing revenue and EBITDA?

CONFIDENTIAL 9
II. Strong Defensible Strategic Position within Your Industry Niche
Your firm's current strategic position essentially determines
whether you will be able to earn average profits within your
industry.
Often a business owner, Board of Directors, CEO or
President will challenge us and clearly state that they want
to earn more than that. I share with them that the goal is
above average profits within the industry over the long-term
and there is no limit to how high they can grow above the
average.
The key issue here is whether you have a clearly definable
and understandable competitive advantage over your
competitors.
External changes such as competition, markets, business
models, environment, customer preferences and technology
diminish your competitive advantage over time.
The challenge is that what works today will not work
tomorrow.

CONFIDENTIAL 10
II. Strong Defensible Strategic Position within Your Industry Niche Continued
Another challenge you face is that your current
competitive advantage declines as your competitors
attempt to find ways to copy or exceed your products or
services.
The following are four examples of ways to maintain your
competitive advantage:
1. Brand Domination – An established reputable brand
is invaluable and ensures that customers prefer your
brand over competitors.
An example is Coca-Cola who is a market leader and
enjoys a strong competitive advantage over its
competition.

CONFIDENTIAL 11
2. Hurdles to Market Entrance – If your business is one where
there is minimal chance of new competitors entering your industry
niche, then you are in a strong competitive position. The hurdles to
entry into your market are the key. Warren Buffet likes businesses
with very high hurdles to market entry, as he hopes they perform like
a monopoly.
An example is in the telecommunications industry when high
investment costs and government regulations are obstacles to new
firms who want to penetrate the industry niche.
3. Ability to Adapt Products – The strongest competitive position
for your business is one where you can immediately develop and
offer advantageous or new products that meet emerging customer
demand.
The quicker you can offer a new product at an attractive price, the
stronger your competitive position.
An example is the smart phone industry where Apple, Huawei, and
Samsung are offering new products, features, and benefits.
High Hurdles
Product
Required

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4. Product Differentiation – The more your customers
believe your products are unique or your company
provides superior customer service, the more loyal your
customers will be and the stronger your competitive
position will remain.
An example is the Caterpillar manufacturing company
which provides excellent spare parts service, or Ritz
Carlton, known for outstanding customer service.
Clearly, the stronger position you are in to continually win
over your competition within your industry niche, the more
profitable you will be over the long run.
As you critically look at your business, how do you
view your strategic position within your industry
niche?

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III. Managing Increasing Input Costs
Whether it’s a manufacturing business or a service business, the challenge is the same. As
costs rise, are you in a position to raise the prices you charge your customers to offset the
costs?
To affectively delve into this rising cost issue is to determine the leverage you have over your
suppliers and customers. How successful you are at managing your increasing production
costs impacts your net profits and position within your industry niche.
The challenge for a manufacturing or service business is the same with rising costs. When
your costs rise, can you raise your prices to your customers to offset the costs?
Dr. Michael Porter of Harvard has written extensively on this topic. Dr. Porter states that the
bargaining power of your customers affects your competitive environment and net profit
potential.

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III. Managing Increasing Input Costs Continued
The more your customers can exert pressure on you to
lower your price, improve your product quality, and
provide higher quality services at the same price, the
more influence they have over you.
The stronger the influence buyers have on an industry
niche the more competitive it will be and the harder it will
be to earn above average profits. However, if your
customers are at your mercy in terms of quality and
price, it’s far less competitive and it greatly increases
your net profit potential.
If you have the capability to increase prices without
losing your market, you are in a stronger competitive
position.
An example is the retail gas station industry which
immediately passes the increase of oil prices along to us.
Where are you in your capability to pass on your
increasing input cost to your primary customers?

CONFIDENTIAL 15
IV. Good Prospects to Increase Future Sales and Profitability Over the
Next Three - Four Years
When we work on the sale of a business, one of the early tasks is to develop a three- or four-
year future financial income statement forecast. In my investment banking world, this is
termed a Proforma Forecast. This sometimes is a challenge, as some owners, CEOs, or
Presidents do not complete a long-term forecast.
This Proforma income statement is like your historical income statement, except it projects the
future rather than tracks the past. It furnishes a crucial yardstick or budget for operating your
business going forward. If completed accurately and thoughtfully, it will furnish you with
valuable future financial data and help you make the most profitable choices for your business.
Have you completed a three- or four-year forecast? What does your future look like?

CONFIDENTIAL 16
V. What is the Strength and Depth of Your Management Team?
One of your company’s best strengths is your management team.
Although excellent management talent is often an intangible and hard to quantify, successful
companies are those that have continually recruited, trained, and retained a great
management team.
Our experience with many transactions for buyers and sellers has revealed that one of the
crucial factors to completing a sale of your company is the transferability of the existing
management team to new ownership. We have found a potential buyer will want to ensure
that the ongoing management team is competent and capable of maintaining the growth of the
business without the seller. If the business can’t survive and grow without your daily
interaction, its value will be diminished dramatically no matter how much it has grown or
generated profits in the past.

CONFIDENTIAL 17
V. What is the Strength and Depth of Your Management Team?
Continued
In his book, Good to Great, Jim Collins stresses that the truly great companies continue to grow
and have success not because of their great strategy, markets, products, or technology, but the
capacity to acquire, keep, and develop the right people.
“In fact, leaders of companies that go from good to great start not with “where” but with “who.”
They start by getting the right people on the bus, the wrong people off the bus, and the right
people in the right seats. And they stick with that discipline—first the people, then the direction—
no matter how dire the circumstances,” Jim Collins.
An example is Microsoft. Even after the departure of founder and CEO Bill Gates, it is still
considered one of the best managed companies.
What is the strength and depth of your management team?
MANAGEMENT TEAM

CONFIDENTIAL 18
Summary
I’ve found that it’s crucial for business owners to know the current value of their business.
Even if you have no intention of selling and you will be passing your business on to your next
generation, you should know its value.
Going through the valuation process gives insight into your company’s historical performance
and its potential future.
“Price is what you pay. Value is what you get.” Warren Buffett.
If you know the value of your business, you will be more prepared to make effective
management decisions that will make it more successful in the future. If you don’t
know the value of your business and what is driving its value, you could very easily end
up doing things and making mistakes that will destroy its value over the long-term.

CONFIDENTIAL
Introduction
19

CONFIDENTIAL
Midwest Financial – M&A
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Midwest Financial - M&A is a private investment banking firm serving business owners, entrepreneurs,
corporations, and investors active in the middle market. While some firms use terms “client” or “customer”, we
prefer to view you as a critically important “partner” in the process driving toward common goals and vision
for what you want to achieve.
Midwest Financial - M&A can assist you in achieving your goals and objectives by drawing on:
 More than 25+ years of investment banking transaction, financing, and operating experience.
 Extensive relationships with a diverse set of partners and buyers – strategic operating companies, private
equity firms, high net-worth and family offices across the globe. Our search process ensures we
understand their investment criteria, goals, and objectives.
 Multi-disciplined investment banking expertise as sellers, acquirers, operators, advisors, and investors in
multiple business segments.
 Diverse industry knowledge to understand the challenges and opportunities in your market, combined with
professional relationships that may add to your operating talent and management team pre-close.
 Battle-tested transaction expertise through experience in over 100 transactions.
 An emphasis on your long-term success rather than the near term impact of the deal.
 Midwest Financial - M&A provides the same services of the larger ‘Wall Street’ investment banking firms,
but with more personalized attention and commitment to your success.
 In our client-focused approach, we first take the time to learn and understand your needs, goals and
objectives.

CONFIDENTIAL
Who We Are
Midwest Financial – M&A is a middle market investment banking firm that assists owners of businesses with
making acquisitions to increase the size of their company or selling and transitioning out of their business.
We are a unique, client-oriented middle-market firm, offering a diverse array of services devoted to middle-market clients.
Our focus is founded on original ideas, long-term relationships, and building value for our clients.
We strive to help our clients achieve specific strategic and financial goals.
We are a confidential advisor with a history of providing innovative and independent advice. Our success is based on our
experience coupled with a clear understanding of each client’s objectives and our commitment to achieve unparalleled
results.
21
 Mergers and Acquisitions
 Acquisitions - Buy-side Representation
 Transitions - Sell-side Representation
 Transition Services
 Owner Sale and Exits
 Structuring and Negotiating Transactions
 Leverage Buyouts
 Management Buyouts and Buy-ins
 Joint Ventures
 Private Equity Transaction Services
 Origination
 Due Diligence – Valuation Services
 Business Valuations
 Value Prior to a Sale
 Estate Planning, Refinancing, etc.
 Raising Debt and Equity Capital
 Structuring and Securing Financing
 Private Equity - Venture Capital
Overview of Services

CONFIDENTIAL
Introduction
22
Who is Midwest Financial M&A

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Professional Team – Background and Qualifications
Matthew M. Wirgau – President and CEO
Matthew M. Wirgau is president and managing member of Midwest Financial – M&A, a middle market investment banking firm. He has
extensive experience in representing buyers and sellers, business valuations, due diligence, leveraged buyouts, negotiating and
structuring transactions, and other transaction services.
Mr. Wirgau is highly experienced in working with private equity firms, private investors, and middle market companies seeking to make
acquisitions. He provides a wide variety of support services from the initial contact with an acquisition target to the closing of the
transaction.
He works with numerous private equity firms, investor groups, and middle market companies. This work includes completing searches for
acquisition opportunities, meeting with owners, conducting due diligence, completing the valuation analysis, advising on offers and term
sheets, assisting with negotiations and deal structures, coordinating the closings, and assisting with integration and transition.
Since 1995, Mr. Wirgau has been a successful entrepreneur acquiring, managing, growing and selling privately held companies. He has
owned and operated a manufacturing company and a financial services firm. Prior to that he was President and CEO of a professional
services firm; served as a Senior Vice President of a real estate development firm; and was the Manager of Corporate Planning and
Acquisitions of a large privately held holding company. Mr. Wirgau served as a Deputy Administrator of the Federal Transit Administration
and as Special Assistant to the Secretary of the U.S. Department of Transportation for Elizabeth Dole.
Mr. Wirgau is also active in many civic and community activities. He served as Board Member of the Regional Transit Authority of
Southeast Michigan from 2013 – 2016. Previously, he served as a member and Chairman of the Board of Directors of the Suburban
Mobility Authority for Regional Transportation (SMART), the public transit agency in suburban Southeast Michigan. From 1994 to 2000 he
was a member of the Executive Committee of the Michigan State Chamber of Commerce.
Mr. Wirgau is an Adjunct Professor of Finance at Walsh College in Troy, Michigan, where he teaches graduate level classes on Business
Valuations, Mergers and Acquisitions, and Finance. He is also a published author: Fairness Opinions: No Longer A Laughing Matter, co-
authored with Michael B. Rizik Jr., The Thomas M. Cooley Law Review, Winter 2009; and Technical Note on Leveraged Buyout Valuation
Analysis, a paper developed for MBA and Masters of Finance graduate programs, investment banking training seminars, and other
professional finance training courses. He served on the Board of Directors of a public company for eight years.
He is a regular guest speaker at numerous M&A conferences, business valuation seminars, and other business development events.
Mr. Wirgau holds an MBA from The George Washington University in Washington, D.C. (Graduated with Honors; Beta Gamma Sigma
Honor Fraternity) and a Bachelor of Science in Accountancy.

CONFIDENTIAL 24
Professional Team – Background and Qualifications
James W. McDowell, Jr. – Managing Director
James W. McDowell, Jr., was a director of WellPoint Insurance Company until Jan. 2005 and a director of Anthem Insurance, Inc. since 1993.
Merged in 2004-2005, WellPoint is now the United State's largest insurance company with combined revenues of $32 billion. Mr. McDowell
served as the head of Corporate Governance for the Board of Directors.
He founded McDowell & Associates (business management consulting) in 1992 after serving as Chief Executive Officer of Dairymen, Inc.
from 1980 to 1992, a $2.1 billion vertically integrated milk and dairy products food company. He is a director of the Fifth Third Bank,
Louisville Kentucky, also serves as the Vice- Chairman of Navigator Telecommunications, a national competitive local exchange telecom
services company (Little Rock, Arkansas), and of StarSat, Inc. (telecommunications).
Mr. McDowell is Chairman of the Independent Board of Directors of the Parr USX China Fund (HPCHX). The fund is a $20 Million mutual fund
that invests in Chinese companies listed on U.S. Exchanges.
Mr. McDowell also serves as Chairmen of Heusen Hearing Institute. Mr. McDowell was formerly the Chairman of the Board of the former Blue
Cross Blue Shield of Kentucky, and a Trustee of the University of Kentucky.
Richard Mueller – Director
Richard C Mueller founded Control Technique Inc. in 1980. He served as president and CEO from 1980 – 2012. Control Technique provides
turn-key electronic, hydraulic and pneumatic systems for special machines, automation and Robotic systems. The company also specializes
in Design, manufacturing, installation and service throughout the United States and Europe.
During Mr. Mueller’s leadership, Control Technique grew from a startup to an organization grossing twenty-five million in annual sales. He
sold the company in December of 2012. Midwest Financial, M&A managed the entire transaction.
Prior to his time at Control Technique, Mr. Mueller completed his studies at Wayne State University and was employed at various engineering
firms in Detroit as a mechanical design engineer. In 1970, he accepted a position at Marposs, which is an international machine tool
company specializing in electronic gauging machines. Mr. Mueller obtained extensive experience in the machine tool industry in the United
States and Europe during his time as manager of engineering and manufacturing for north America until 1980.
Since the sale of Control Technique, Mr. Mueller has worked as an executive coach and consultant for various companies throughout the
United States. His wide range of experience and leadership make him a valuable asset for Midwest Financial, M&A.

CONFIDENTIAL
Offices in Bloomfield Hills, MI and Delray Beach, FL
2211 S. Telegraph Rd, P.O. Box 7744, Bloomfield Hills, MI 48302
www.mfsib.com
25
For a no obligation, confidential consultation, please contact:
Matthew M. Wirgau
President and Managing Member
248.408.7260
mwirgau@mfsib.com
Investment Banking Services
- M & A

Five key elements that drive the value of your business

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