R I V E R S I D E A DV I S O R S , I N V E ST M E N T B A N K I N G FO R T H E LOW E R M I D D L E M A R K E T | 1

LOWER MIDDLE-MARKET REPORTM&A MARKETS OUTLOOK

Affiliate of PMCF

MARCH 2018

2018 ECONOMYThe U.S. economy finished strong in 2017 and is expected to gain strength in 2018 as consumer spending, pro-business policies of the Trump administration, and potential infrastructure spending feeds the economy. Consumer spending is supported by a robust job market that has a historically low employment rate of 4.1% and the passage of the Tax Cuts and Job Act increased “take-home pay” for most Americans. According to the Office of Management and Budget, the Trump administration has withdrawn or delayed 1,579 planned regulatory actions in 2017, effectively freeing businesses to focus on their customers and is unleashing business investment. The economic impact of consumer spending and business investment has led to consensus estimates for 2018 GDP to exceed 3.0%. If Washington agrees to an infrastructure spending bill, then GDP estimates may be revised higher.

With the economy steaming forward, businesses in most industries are apt to benefit, realizing increased revenue and cash flow. Business owners exploring strategic alternatives will benefit from developing detailed, supportable revenue plans and budgets that factor in the strong economy. Revenue plans created from a bottom up approach with an action plan to achieve

Riverside Advisors is dedicated to advising family and entrepreneur-owned businesses in the lower middle market with values up to $20 million.

the revenue will allow business owners to track progress and provide visibility for the full year projection. Bottom up revenue plans can be based on a sales channel, customer by customer or project by project basis, or other metric that logically tracks the business. Buyers of companies tend to pay higher valuations for businesses that have demonstrated visible growth.

Despite a reduced level of transactions in recent quarters, all signs point to a perfect time in the cycle to sell a business. Strong earnings growth, historically low interest rates (although rates are rising in 2018), enormous amounts of capital available, and strategic buyers seeking acquisitions to drive revenue are all creating a near perfect storm for sellers of well-positioned businesses. Valuation multiples continue to march higher as too few quality companies are on the market. 2018’s M&A market will make many business owners willing sellers and handsomely rewarded for their efforts building their business.

2 | R I V E R S I D E A DV I S O R S , I N V E ST M E N T B A N K I N G FO R T H E LOW E R M I D D L E M A R K E T

QUARTERLY GDP GROWTHThe U.S. economy grew 2.6% in 4Q17 representing a reduction from the past two quarters which both exceeded 3.0%. The 4Q17 growth was unfavorably impacted by two factors that should reverse in the first part of 2018. Non-farm inventory had a negative contribution of 0.7% and is likely to lead to an inventory build in 1Q18. Strong consumer spending led to imports increasing at their fastest rate in more than seven years and a negative contribution of 2.0% to 4Q17.

The Federal Reserve Bank of Atlanta’s GDPNow forecasting model is forecasting 1Q18 GDP of 3.2%. Overall expectations are very positive for 2018 fueled by continued deregulation, tax reform and strong consumer spending.

QUARTERLY REAL GDP GROWTH Q4 2013 – Q4 2017

6.0% -

5.0% -

4.0% -

3.0% -

2.0% -

1.0% -

0.0% -

-1.0% -

-2.0% -Q4‘13

Q1‘14

Q2‘14

Q3‘14

Q4‘14

Q1‘15

Q2‘15

Q3‘15

Q4‘15

Q1‘16

Q2‘16

Q3‘16

Q4‘16

Q1‘17

Q2‘17

Q3‘17

Q4‘17

4.0%

-0.9%

4.6%

3.2%

5.2%

2.0%

2.7%

1.6%

0.5% 0.6%

2.2%2.8%

1.8%

1.2%

3.1% 3.2%

2.6%

Source: U.S. Bureau of Economic Analysis

LOWER MIDDLE-MARKET REPORTM&A MARKETS OUTLOOK

QUARTERLY M&A VALUE & VOLUME Q4 2014 – Q4 2017

$1,000 -

$900 -

$800 -

$700 -

$600 -

$500 -

$400 -

$300 -

$200 -

$100 -

$0 -

- 16.0

- 15.0

- 14.0

- 13.0

- 12.0

- 11.0

- 10.0

- 9.0

- 8.0

Transaction VolumeTransaction Value

Billi

ons

Tran

sact

ed

Thou

sand

s Cl

osed

Q4‘14

Q1‘15

Q2‘15

Q3‘15

Q4‘15

Q1‘16

Q2‘16

Q3‘16

Q4‘16

Q1‘17

Q2‘17

Q3‘17

Q4‘17

14.9

12.8

833937 908 913941 852 879780 880 732 729697 653

13.213.6

12.3

15.0

12.0 11.712.5

11.1

10.1

9.5 9.3

Source: Capital IQ, Deals Closed

MIDDLE-MARKET DEAL MULTIPLES (2003-2018 YTD Average)

- Total

-100-250

-50-100

-25-50

-10-25

-

Tran

sact

ion

Rang

e ($

mm

’s)

0x 1x 2x 3x 4x 5x 6x

6.3x1.3x

7.8x1.8x

6.9x

6.2x1.3x

5.6x1.0x

1.4x

7x 8x

TEV/EBITDA TEV/Revenue

Source: GF Data, February 2018

M&A MARKET ACTIVITYOverall transaction activity remains subdued compared to recent years. 4Q17 experienced 9,301 closed transactions, down 189, or 2.0 percent from 3Q17 and 3,154, or 25.3 percent from the prior year quarter. The drop in transaction volume in 4Q17 has continued the trend since 2015 of declining activity. The supply and demand effects of the lack of companies for sale is driving valuations ever higher.

4Q17 transaction value has seen a decrease of approximately 25.7 percent from the prior year quarter mirroring the reduced number of closed transactions.

The M&A market is anticipated to gain speed in 2018 as the overall economic environment, abundant capital and lower taxes should drive markets even at full valuations.

MIDDLE MARKET DEAL VALUATIONSTransaction size correlates to valuation: As transaction size increases, valuations tend to increase. Larger transactions have more access to capital, management depth, market position, breadth of products/services and customers. As a result, investors perceive risk to be lower on larger deals and pay higher multiples.

The chart to the right highlights EBITDA transaction multiples by transaction size. For transactions in the $10 to $25 million range, the historical (2003 - YTD 2018) average EBITDA multiple is 5.6x. This valuation is 2.2 turns lower than the average EBITDA multiple for transactions between $100 to $250 million. The valuation gap between large and small transactions appears to be widening when compared to previous reports which indicated a difference of 2.0 EBITDA turns.

R I V E R S I D E A DV I S O R S , I N V E ST M E N T B A N K I N G FO R T H E LOW E R M I D D L E M A R K E T | 3

MARCH 2018

LOWER MIDDLE-MARKET DEAL ACTIVITY

Throughout 2017, the uncertainty of tax reform, international trade and geopolitical tensions resulted in relatively flat transaction activity over the past 12 months. With some clarification on many of these matters, transaction activity should experience higher levels in 2018 than 2017.

Key Interest Rates 2/21/2018 1/19/2018 2/21/2017

Prime Rate 4.50% 4.50% 3.75%

LIBOR–1 month 1.60% 1.56% 0.78%

LIBOR–3 month 1.90% 1.74% 1.05%

U.S. Treasury–2 year 2.26% 2.06% 1.22%

U.S. Treasury–5 year 2.69% 2.45% 1.93%

U.S. Treasury–10 year 2.94% 2.64% 2.43%

Bank Financing Upfront Fees LIBOR Spread

Asset-Based Loans 25–50 bps 175–350 bps

Cash Flow 75–100 bps 350–550 bps

Mezzanine Financing Unsponsored Sponsored

Upfront Fees 2.0% 1.5–2.0%

Current Pay-Coupon 11.0–12.0% 10.0–11.0%

Payment-in-Kind (PIK) Interest 1.0–2.5% 0.5–1.0%

All-in IRR 14.0–16.0% 11.0–12.0%

Note: Bank and mezzanine financing guidance is based on discussions with mezzanine and commercial lenders.

LOWER MIDDLE MARKET HISTORICAL VALUATIONSBased upon GF Data, a deal database derived from lower-middle market private equity funds, deal multiples in the $10 to $25 million range averaged 5.8x EBITDA for the first nine months of 2017. This is a slight decrease from the 6.0x EBITDA in 2016 and has been relatively consistent over the past 5 years. Prior to 2013, valuations for transactions between $10 to $25 million averaged approximately 5.6x EBITDA. The increase in valuations are partially driven by low interest rates, available capital fueled by Federal Reserve monetary policy, and the lack of quality companies available for sale.

EBITDA multiples reflect adjusted EBITDA covering a broad range of industries, and may not be indicative for a specific company. Well positioned companies with visibility of revenue and growth should receive attractive valuations in the current transaction market.

LOWER MIDDLE-MARKET DEAL MULTIPLES (Transaction Value $10-25 Million)

6.1x -

6.0x -

5.9x -

5.8x -

5.7x -

5.6x -

5.5x -

5.4x -

EV/E

BITD

A

2009-2012 2013 2014 2015 2016 2017*

5.6x

5.9x

5.8x

5.6x

6.0x

5.8x

Source: GF Data, *September 2017 YTD

Number of Deals12 Months Ended

Deal Size 12/31/2017 12/31/2016 Change$10M to $24.9M 482 471 2.3%Under $10M 917 988 -7.2%

Source: Factset

Aggregate Transaction Value ($Bil)12 Months Ended

Deal Size 6/30/2017 6/30/2016 Change$10M to $24.9M $7.9 $7.7 2.6%Under $10M 3.0 3.1 -3.2%

LEVERAGE MULTIPLES (Transaction Value $10-25 Million)

4.0x -

3.5x -

3.0x -

2.5x -

2.0x -

1.5x -

1.0x -

0.5x -

0.0x -2003-2012 2013 2014 2015 2017*

2.2x 2.4x 2.7x2.3x

2.9x

1.0x 0.8x

1.1x

1.0x

0.9x

2016

2.7x

0.6x

Senior Debt/EBITDA Subordinated Debt/EBITDA

3.2x 3.2x

3.8x

3.3x

3.8x

3.3x

Source: GF Data, *September 2017 YTD

The first nine months of 2017 saw transactions utilize higher levels of leverage to finance acquisitions.

RIVERSIDE ADVISORSRiverside Advisors is a middle market investment bank focused on family and entrepreneur-owned businesses. Led by professionals with more than 20 years of experience, Riverside is committed to meeting the unique needs of middle market companies and their owners. Services include sale advisory, acquisition advisory, readiness review and transaction planning, and capital raising.

Riverside focuses on lower middle market transactions up to $20 million in value. Transactions in excess of $20 million are executed by P&M Corporate Finance.

JOHN A. EBEManaging Director

312.602.3545 john.ebe@riversideadv.com

PHILIP C. GILBERTManaging Director

248.223.3326 phil.gilbert@pmcf.com

120 S. Riverside Plaza, Suite 2100 Chicago, IL 60606

Two Towne Square, Suite 425 Southfield, MI 48076

100% -

75% -

50% -

25% -

0% -2013 2014 2015 2016 2017*

39.3% 39.0% 43.4%44.0% 48.5%

13.0%

47.7% 43.5% 46.4%37.6% 37.1%

17.5% 10.2%18.4% 14.3%

Senior Debt Sub Debt Equity

Source: GF Data, *September 2017 YTD

CREDIT MARKET OVERVIEW• Lending environment remains favorable and appears to be

more aggressive in 2018• Larger deals enjoy more favorable terms as lenders look

for added assurance that comes from size• Non bank capital providers are aggressive and willing to

structure and price loans that traditional banks are unable to underwrite due to strict bank regulations

• SBA loans are available to finance smaller transactions and family transitions

CHICAGO OFFICE120 S. Riverside Plaza Suite 2100 Chicago, IL 60606

SOUTHFIELD OFFICETwo Towne Square Suite 425 Southfield, Michigan 48076

DEBT AND EQUITY CONTRIBUTION BY YEAR(Transaction Value $10-$25 Million)