Survey report – SuMMer 2011 · the worst impressions. This is significantly different from previous iterations of the report. In the Fall 2010 report almost 35% of respondents reported

Survey report – SuMMer 2011

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PEPPERDINE PRIVATE CAPITAL MARKETS PROJECT | SURVEY REPORT V – SUMMER 2011

© 2011 | PEPPERDINE UNIVERSITY GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT. All Rights Reserved. | 1

TABLE OF CONTENTS PRIVATELY-HELD BUSINESS SURVEY INFORMATION ...................................................................................................... 9

Profile of Respondents ................................................................................................................................................ 9

BUSINESS APPRAISER SURVEY INFORMATION .............................................................................................................. 29

Profile of Respondents .............................................................................................................................................. 29

I-BANKER SURVEY INFORMATION ................................................................................................................................. 37


BROKER SURVEY INFORMATION ................................................................................................................................... 47


LIMITED PARTNER SURVEY INFORMATION ................................................................................................................... 55


Industry and Economic Outlook ................................................................................................................................ 59

ANGEL INVESTOR SURVEY INFORMATION .................................................................................................................... 63


VENTURE CAPITAL SURVEY INFORMATION ................................................................................................................... 75


PRIVATE EQUITY SURVEY INFORMATION ...................................................................................................................... 87


MEZZANINE SURVEY INFORMATION ............................................................................................................................. 99


BANKS SURVEY INFORMATION.................................................................................................................................... 111

Profile of Respondents ............................................................................................................................................ 111

ASSET-BASED LENDING SURVEY RESULTS ................................................................................................................... 127


FACTOR SURVEY INFORMATION .................................................................................................................................. 137


INDEX OF TABLES ......................................................................................................................................................... 149

INDEX OF FIGURES........................................................................................................................................................ 153



ACKNOWLEDGEMENTS

This research was made possible by the generous funding from the Denney Endowed Professorship.

Pepperdine University Dean Linda A. Livingstone, Ph.D.

Associate Dean David M. Smith, Ph.D. Mark Chun, Ph.D., Director, Center for Applied Research

Michael Sims Irina Shaykhutdinova Douglass Gore Diane King

Jesse Torres Juan Mena Darlene Kiloglu Jing Zhang

Michael Stamper Doris Jones

Survey Design, Distribution, and Other Support Robert T. Slee Ralph Adams

Michael McGregor Eric Williams

Tim Rhine Dan Deeney Barry D. Yelton John Graham Everett Walker Jeff Nagle

Samir Desai Greg Howath Richard J. Crosby Nevena Orbach

Leonard Lanzi John Dmohowski

Gray DeFevere Brad Triebsch

Jan Hanssen Gary W. Clark Robert Zielinski M. Todd Stemler

Kevin D. Cantrell Patrick George Scott Jones Sean Samet

Deidre A. Brennan Mark Walker

Eric Nath Kelly Szejko Gunther Hofmann Kevin Halpin

Michael Painter Andre Suskavcevic

James A. Nelson, MD Chris M. Miller John Davis Brian Cove

Larry Gilson Jeff Thomas Andrew Springer John Lonergan

Jeri Harmon Letitia Green

Gloria Guenther

Rob Brougham

Brett Palmer

Gary LaBranche

Steven Brandt Jamie Schneier Dat T. Do Troy Fukumoto

Andy Wilson Yingping Huang

Jason Baum Jason Kumpf

Hal Spice Jane Pak

Dennis Gano

Linh Xavier Vuong

Chris de Vries

Tucker Herring

Michael Nall



Organizational Support

Center of Applied Research

Los Angeles Venture Association (LAVA)

Business Valuation Resources (BVR)

International Factoring Association (IFA)

Commerical Finance Association (CFA)

National Association for Small Business Investment Companies (NASBIC)

Alliance for Mergers and Acquisitions Advisors (AM&AA)

Association for Corporate Growth (ACG)

Risk Management Association (RMA)

Harvard/USC Business Growth Conference

International Business Broker Association (IBBA)

Graziadio Alumni Network (GAN)

Exit Planning Institute

Virginia Active Angel Network (VAAN)

PE/VC Roundtable

National Association of Women Business Owners

California Bankers Association (CBA)

California Mortgage Bankers Association (CMBA)

California Small Business Association (CSBA)

Pepperdine Private Capital Markets Project Linkedin Group

Linked Business Linkedin Group

Valuation Linkedin Group

Deal Flow Source Linkedin Group

International Business Valuation Association Linkedin Group

Venture Capital Linkedin Group

Finance Club Linkedin Group

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S P o n S o r e D b y



FORWARD

By JOHN PAGLIA

In his definitive book Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests,

author and business appraiser Robert T. Slee describes the significant scope and massive reach of the private capital markets.

The private capital markets, he notes, encompasses and influences millions of companies and accounts for more than 99% of

U.S. businesses. In addition, private companies generate nearly half of the U.S. GDP and employment. Slee also emphasizes

that private capital markets are unique and not adequately described by corporate financial theory.

The significance of what Slee describes is evidenced in the tumultuous economic circumstance we have experienced

over the past few years. In October 2007, key indicators of the economy especially the major indices were reaching record

levels. The Dow was at 14,279.96 and leverage multiples were high. Flash forward to March 2009 -- the economy reached a

low not seen since the Great Depression. The Dow Jones Industrial Average closed the month at 6,443 and leverage was

largely non-existent.

The need for a real-world investigation of the inner workings of private capital markets led Robert and I to develop a

model to map the movements of both lenders and businesses that comprise the ever-changing private capital market system.

This became the Pepperdine Private Capital Markets Project (PPCMP), a critical step along the path of understanding and

increasing the value of private companies and our economy.

Professionals who work in the lending or investment arenas either for an institution or a specific fund are excellent

bellwethers of what is ahead for other businesses and consumers. Through two survey cycles and published summary reports

per year, lenders, investors and the businesses that depend on them will be able to make optimal investment and financing

decisions, and better determine where the opportunities to create lasting economic value may be realized. In August 2009 we

launched our first report in a project that has grown rapidly over the past two years. All four reports to date have been

downloaded more 15,000 times.

Now, with the Summer 2011 report the PPCMP has grown to more than 2,500 participants across the globe. With a

careful eye on previous data and trends, we are now seeing interesting developments as the economy has started to recover.

Specifically, of the 1,221 privately-held business owners approximately 48% of respondents reported that they were seeking

bank loans as a source of funding, followed by friends and family (21%) and private investors (11%). Overall bank loans as a

source of capital has the best impression from the survey respondents and crowd funding, factoring and family’s capital have

the worst impressions. This is significantly different from previous iterations of the report. In the Fall 2010 report almost 35%

of respondents reported friends and family as a current source of financing and in the Winter/Spring 2010 report 56% of

privately-held businesses highlighted that friends and family as a financial source.

Our findings indicate that the cost of capital for privately-held businesses varies significantly by capital type,

size, and risk assumed. This relationship is depicted in the Pepperdine Private Capital Market Line, which appears below.



Figure 1. Private Capital Market Required Rates of Return

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

Ban

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Pepperdine Private Cost of Capital Line Expected Returns by Capital Providers on New Investments

Spring 2011

1st Quartile Median 3rd Quartile



1st Quartile

Median 3rd Quartile

Bank ($1M CF loan) 5.2% 6.0% 6.5%

Bank ($5M CF loan) 5.0% 5.5% 6.5%

Bank ($10M CF loan) 4.5% 5.5% 6.4%

Bank ($15M CF loan) 5.0% 5.5% 6.4%

Bank ($25M CF loan) 4.0% 5.5% 6.0%

Bank ($50M CF loan) 4.4% 5.5% 6.5%

Bank ($100M CF loan) 3.0% 4.5% 5.5%

ABL ($1M Loan) 12.0% 16.0% 20.0%

ABL ($5M Loan) 8.0% 12.0% 15.0%

ABL($10M Loan) 5.9% 7.0% 13.0%

ABL ($15M Loan) 4.9% 6.3% 14.0%

ABL ($25M Loan) 4.5% 6.0% 11.0%

ABL ($50M Loan) 2.9% 3.0% 4.3%

ABL ($100M loan) 2.8% 3.0% 3.5%

Mezz ($1M EBITDA) 20.0% 20.5% 21.3%

Mezz ($5M EBITDA) 17.8% 18.0% 19.5%

Mezz ($10M EBITDA) 17.1% 17.6% 20.3%

Mezz ($15M EBITDA) 17.3% 17.5% 17.8%

Mezz ($25M EBITDA) 17.0% 17.0% 17.0%

Mezz ($50M EBITDA) 12.0% 15.0% 16.0%

PEG ($1M EBITDA) 26.5% 30.0% 35.0%

PEG ($5M EBITDA) 24.0% 27.0% 32.0%

PEG ($10M EBITDA) 24.0% 25.0% 28.0%

PEG ($25M EBITDA) 22.5% 25.0% 28.0%

PEG ($50M EBITDA) 20.0% 22.0% 25.0%

VC (Startup) 30.0% 40.0% 50.0%

VC (Early Stage) 24.8% 30.0% 33.8%

VC (Expansion) 21.3% 27.5% 25.0%

VC (Later Stage) 22.5% 25.0% 30.0%

Angel (Seed) 35.0% 55.0% 100.0%

Angel (Startup) 25.0% 50.0% 85.0%

Angel (Early Stage) 20.0% 40.0% 75.0%

Factor $100K/mo. 48.8% 65.4% 84.1%

Factor $250K/mo. 45.7% 55.2% 60.2%

Factor $500K/mo. 35.4% 48.8% 55.2%

Factor $1M/mo. 30.0% 36.9% 47.2%

Factor $5M/mo. 19.7% 27.3% 35.4%



A sampling of the key report findings include:

Business owners enthusiastic about growing, but lack resources. Nearly 95% of privately-held businesses owners report having the enthusiasm to execute growth strategies, yet just 53% report having the necessary financial resources to successfully execute growth strategies.

Business owner confidence has increased significantly over the past two years. Net increases were 1.3% in Fall 2009, -17.7% in Spring 2010, 18.1% in Fall 2010, 36% in Summer 2011 and forecast at 44%.

Investment bankers anticipate closing more deals in coming year. In the Summer 2011 report 72% of respondents said they expect to close less than 5 deals in the next 12 months. This is up from the roughly 20% of respondents in the Fall 2010 report that said they expected to close three transactions over the next 12 months.

Investment bankers indicate there is significant capital available for companies with more than $10 million in EBITDA. 68.6 % of respondents found that companies with $1 million in EBITDA were difficult or very difficult to arrange senior debt for. However as companied EBITDA increased the difficulty dropped dramatically.

The Private Capital Markets Project continues to be the foremost bi-annual look at the private capital markets as they

relate to the overall economy. Beginning to understand how these markets work in relation to the publically traded markets

will greatly improve the ability of lenders to work across markets. It will also enable business owners to make private capital

decisions based on a unique knowledge of how the markets are operating. Understanding how private business owners and

lenders are seeing the market gives us an interesting look at market confidence.

In closing, I would like to thank all of those who have worked with me to make this project a multi-year success. I

would also like to thank everyone who has taken the survey and read the report. The key to the success of the project are the

survey respondents and I invite everyone from the private capital industry to participate in the next survey which opens

August 29, 2011. We are also offering a certificate program on private capital markets which will be held again this fall. Please

visit http://bschool.pepperdine.edu/privatecapital for more information.

Again, thank you for your continued support and I hope you enjoy the Summer 2011 report.



PRIVATELY-HELD BUSINESS SURVEY INFORMATION

Of the 1,221 privately-held businesses that responded to the survey, 24% had businesses that involved manufacturing and 11% were in the engineering and construction industry. Approximately 59% of respondents have between 11 and 100 employees. Nearly 95% of business owners report having the enthusiasm to execute growth strategies, yet just 53% report having the necessary financial resources to successfully execute growth strategies. Other key findings include: Approximately 48% of respondents reported that they were seeking bank loans as a source of funding, followed by friends and family (21%) and private investors (11%). Overall bank loans as a source of capital have the best impression from the survey respondents and crowd funding, factoring and friends and family’s capital have the worst impressions. This different from previous iterations of the report – in the Fall 2010 report almost 35% of respondents reported friends and family as a current source of financing and in the Winter/Spring 2010 report 56% of privately-held businesses highlighted that friends and family as a financial source.

Of the respondents currently seeking financing, approximately 38% anticipate raising less than $100,000 in capital in the next year, followed by 19% reporting that they intend to raise between $100,000 and $500,000. In the Fall 2010 report, 19% respondents reported that they plan to raise capital between $3 million and $5 million.

Business owner confidence has increased significantly over the past two years. Net increases were 1.3% in Fall 2009, 17.7% in Spring 2010, 18.1% in Fall 2010, 36% in Summer 2011 and forecast at 44% for the next 12 months.

Profile of Respondents

The privately-held business survey results were generated from 1,221 participants. Respondents are geographically dispersed.

Figure 1. Region Entity Is Located

14.0%

10.0%

10.0%

9.0%

9.0% 7.0%

7.0%

5.0%

5.0%

5.0%

4.0% 4.0%

4.0% 3.0% 3.0% Great Lakes (MN, WI, MI, IL, IN, OH)Mid-Atlantic (DE, DC, MD, PA, VA, WV)West South Central (OK, TX, AR, LA)South Atlantic (NC, SC, GA, FL)West (NV, AZ, HI)North-Atlantic (NY, NJ, MA, RI, CT)West (Southern California only)Mountain (ID, WY, UT, CO, NM, MT)Multiple regions in U.S.Outside U.S.West North Central (MO, ND, SD, NE, KS, IA)North Pacific (AK, WA, OR)Multiple regions - U.S. and globalNew England (ME, NH, VT)East South Central (KY, TN, MS, AL)



PRIVATELY-HELD BUSINESS cont.

Businesses involved in manufacturing accounted for 24% of respondents followed by engineering and construction

(11%).

Figure 2. Industry

Approximately 92% of privately-held businesses responding have operated for more than two years.

Figure 3. Number of Years Operating

24.0%

11.0%

11.0%

9.0% 8.0%

8.0%

5.0%

4.0%

4.0%

3.0%

3.0% 2.0%

2.0% 2.0% 2.0%

1.0% 1.0% 1.0% ManufacturingEngineering and ConstructionOtherWholesale and distributionBusiness servicesInformation and TechnologyRetailHealthcareFinance, Insurance, and RelatedReal EstateClean / green technologyConsumer servicesLife sciencesAgriculture and miningTransportationRestaurantMedia and EntertainmentOil, Gas, and other utilities

4.0% 4.0%

9.0%

11.0%

18.0%

19.0%

20.0%

15.0% Less than 12 months

1-2 years

2-5 years

5-10 years

10-20 years

20-30 years

30-50 years

More than 50 years




Approximately 59% of respondents have between 11 and 100 employees. There are very few companies with more than

500 employees.

Figure 4. Number of Employees

Approximately 55% of the respondents are active control owners of their businesses, while only 1% are non-control

passive owners.

Figure 5 .Ownership Role

11.0% 7.0%

7.0%

21.0% 38.0%

13.0%

1.0% 1.0% 1.0% 50%) active

Control owner (>50%) passive

Shared-control owner (exactly 50%) active

Shared-control owner (exactly 50%) passive

Non-control owner (>50%) active

Non-control owner (>50%) passive

Manager or Executive with no ownershipinterest in the business




Approximately 27% of respondents have annual revenues between $1M and $5M, followed by 17% having between $5M

and $10M.

Figure 6. Annual Revenues

Approximately 48% of respondents reported bank loans as a a targeted source of financing followed by friends and

family (21%) and private investors (11%).

Figure 7. Sources of Financing Currently Sought

6.0% 16.0%

27.0%

17.0%

18.0%

10.0%

3.0% 1.0% 1.0% $0

$1 - $1,000,000

$1,000,001 - $5,000,000

$5,000,001 - $10,000,000

$10,000,001 - $25,000,000

$25,000,001 - $100,000,000

$100,000,001 - $500,000,000

> $500,000,001

Unknown

48.0%

21.0%

11.0% 10.0% 8.0% 6.0% 5.0% 4.0% 2.0% 2.0% 2.0% 1.0% 1.0% 0%

10%

20%

30%

40%

50%

60%




Of those currently seeking financing, approximately 38% of respondents anticipate raising less than $100K in capital in

the next year, followed by 19% reporting they intend to raise between $100K to $500K.

Figure 8. Expected Level of Capital to Raise

38.0%

19.0%

11.0%

12.0%

7.0% 6.0%

3.0% 1.0% 1.0% 1.0% < $100,000

$100,000 - $500,000

$500,000 - $1 million

$1 million - $2 million










Almost all general business characteristics increased slightly Versus six months ago. Inventory (as a % of revenues),

reliance on credit card financing, owner compensation and probability of failure had negative growth in the last six

months.

Table 1. General Business and Industry Assessment: Today Versus Six Months Ago

Characteristics Decreased significantly

Decreased slightly

Stayed about the

same

Increased slightly

Increased significantly

Score (-2; 2)

Expenses (as a % of revenues) 9% 29% 27% 27% 9% 0.0

Inventory (as a % of revenues) 8% 23% 44% 20% 5% -0.1

Pretax income 7% 19% 29% 31% 14% 0.3

Capital expenditures (equipment or buildings)

10% 9% 48% 22% 11% 0.2

Unit sales 6% 14% 25% 35% 20% 0.5

Opportunities for growth 3% 6% 21% 40% 30% 0.9

Prospects for business expansion 4% 6% 22% 37% 30% 0.8

Access to growth capital 9% 12% 54% 18% 7% 0.0

Availability of bank financing 12% 12% 50% 20% 6% 0.0

Availability of equity financing 10% 12% 49% 19% 9% 0.0

Reliance on credit card financing (as borrower)

14% 7% 65% 11% 3% -0.2

Reliance on vendor or customer financing (as borrower)

8% 9% 63% 17% 3% 0.0

Demand for vendor financing by customers

6% 7% 57% 24% 6% 0.2

Prices of products or services 2% 9% 35% 43% 10% 0.5

Time to collect receivables 2% 7% 51% 33% 8% 0.4

Number of employees 3% 12% 44% 35% 6% 0.3

Owner compensation 10% 18% 51% 18% 4% -0.1

Size of industry in which you sell your products/services

5% 17% 43% 27% 8% 0.2

Competitive pressures 1% 4% 40% 38% 17% 0.7

Probability of failure 8% 16% 55% 16% 5% -0.1

General business confidence 4% 14% 28% 40% 14% 0.5

General business conditions 5% 17% 27% 41% 10% 0.3

Ability to assess and price risk on new investment opportunities

3% 10% 56% 25% 6% 0.2

Exit opportunities 7% 13% 53% 18% 9% 0.1




Participants of the survey believe almost all general business characteristics will increase slightly in the next 12 months.

Only reliance on credit card financing, vendor financing and probability of failure are expected to decrease in the

following 12 months.

Table 2. General Business and Industry Assessment Expectations over Next 12 Months

Items Decrease significantly

Decrease slightly

Stay about the same

Increase slightly

Increase significantly

Score (-2,2)

Expenses (as a % of revenues) 3% 23% 28% 36% 9% 0.24

Inventory (as a % of revenues) 1% 17% 50% 25% 6% 0.18

Pretax income 2% 10% 23% 45% 21% 0.72

Capital expenditures 2% 6% 41% 37% 13% 0.52

Unit sales 1% 5% 18% 47% 28% 0.97

Opportunities for growth 1% 4% 17% 47% 31% 1.02

Prospects for business expansion 2% 4% 22% 42% 30% 0.93

Access to growth capital 4% 7% 46% 33% 10% 0.40

Availability of bank financing 5% 7% 48% 31% 8% 0.30

Availability of equity financing 5% 7% 49% 29% 11% 0.35

Reliance on credit card financing 10% 12% 69% 7% 2% -0.21

Reliance on vendor or customer financing 7% 11% 66% 13% 3% -0.06

Demand for vendor financing by customers 4% 7% 64% 21% 5% 0.16

Prices of products or services 1% 5% 32% 52% 10% 0.65

Time to collect receivables 0% 6% 61% 28% 5% 0.31

Number of employees 0% 7% 37% 46% 10% 0.59

Owner compensation 2% 7% 48% 34% 9% 0.40

Size of industry 1% 11% 46% 32% 11% 0.41

Competitive pressures 1% 4% 40% 40% 16% 0.65

Probability of failure 8% 21% 57% 12% 2% -0.22

General business confidence 2% 8% 36% 42% 12% 0.54

General business conditions 2% 11% 35% 43% 10% 0.48

Ability to assess and price risk on new investment opportunities

2% 7% 53% 33% 5% 0.32

Exit opportunities 4% 8% 51% 26% 11% 0.33




The average increase to organic revenues over the last six months is 4.2% versus 6.7% in the last year.

Table 3. Change to Organic Revenues over Last Six Months

Change Percentage

Declined 80-100% 2%

Declined 60-80% 2%

Declined 40-60% 3%

Declined 30-40% 2%

Declined 20-30% 3%

Declined 15-20% 4%

Declined 10-15% 4%

Declined 5-10% 5%

Declined 3-5% 3%

Declined 1-3% 2%

Basically flat (+/- 1% growth) 14%

Increased 1-3% 5%

Increased 3-5% 5%

Increased 5-10% 11%

Increased 10-15% 8%

Increased 15-20% 7%

Increased 20-30% 7%

Increased 30-40% 4%

Increased 40-60% 4%

Increased 60-80% 1%

Increased 80-100% 1%

Increased more than 100% 2%

Average 4.2%




The expected increase to organic revenues over the next 12 months is 19.5% versus 32.9% in the last year.

Table 4. Expected Change to Organic Revenues over Next 12 Months

Expected change Percentage

Decline 80-100% 0%

Decline 60-80% 0%

Decline 40-60% 0%

Decline 30-40% 1%

Decline 20-30% 1%

Decline 15-20% 1%

Decline 10-15% 2%

Decline 5-10% 2%

Decline 3-5% 1%

Decline 1-3% 1%

Basically flat (+/- 1% growth) 8%

Increase 1-3% 5%

Increase 3-5% 9%

Increase 5-10% 16%

Increase 10-15% 13%

Increase 15-20% 11%

Increase 20-30% 9%

Increase 30-40% 6%

Increase 40-60% 4%

Increase 60-80% 2%

Increase 80-100% 2%

Increase more than 100% 6%

Average 19.5%

On average for respondents the most important reason to open their own business was opportunity to build value

followed by control/flexibility.

Table 5. Motive to Open Own Business

Motive 1 2 3 4 5 Rank

Opportunity to build value 39% 21% 13% 11% 16% 1

Control/Flexibility 20% 27% 26% 19% 8% 2

Opportunities for growth 15% 26% 31% 18% 11% 3

Lifestyle 14% 15% 20% 26% 25% 4

Family opportunities 16% 13% 14% 21% 36% 5




Approximately 62% of respondents currently are not seeking financing, which is up from 53% on the last year.

Approximately 20% of respondents are seeking a bank loan.

Figure 9. Currently Seeking Financing

Figure 10. Actively Seeking Financing in the Last Six Months

20.0%

12.0% 10.0% 9.0% 8.0% 7.0% 5.0% 4.0% 2.0% 2.0% 1.0% 1.0% 2.0%

62.0%

0%

10%

20%

30%

40%

50%

60%

70%

29.0%

9.0% 9.0% 8.0% 7.0% 6.0% 4.0% 4.0% 4.0% 4.0% 2.0% 1.0% 1.0% 0.0% 2.0%

53.0%

0%

10%

20%

30%

40%

50%

60%




Approximately 54% of respondents were not successful in obtaining financing, whereas 27% of respondents were able to

obtain bank loans.

Figure 11. Successful Financing in the Last Six Months

Overall bank loans as a source of capital have the best impression from survey respondents. Crowd funding, factoring

and family’s capital have the worst impressions.

Table 6. Impressions About Capital Sources

Capital Source Very unfavorable

Unfavorable Slightly Unfavorable

Neutral Slightly favorable

Favorable Very favorable

Score (-3;3)

Friends and family 19% 18% 11% 18% 10% 15% 9% -0.22

Crowd funding/Crowd financing

13% 24% 15% 37% 7% 3% 1% -0.81

Angel investor 9% 13% 14% 23% 21% 14% 5% 0.12

Venture capital fund 10% 17% 14% 22% 19% 15% 2% -0.07

Mezzanine Fund 9% 14% 14% 35% 16% 11% 2% -0.12

Private equity fund 6% 12% 11% 24% 20% 20% 7% 0.51

Factor 15% 19% 13% 29% 11% 9% 4% -0.48

Asset-based lender 4% 6% 9% 21% 20% 29% 11% 1.08

Bank loan 6% 5% 6% 11% 15% 34% 22% 1.48

27%

9% 5% 4% 4% 3% 2% 2% 2% 1% 1% 0% 0% 0%

4%

54%

0%

10%

20%

30%

40%

50%

60%




Respondents reported venture capital, mezzanine and private equity funding as the most expensive source of capital,

whereas friends and family capital is considered to be the cheapest source of capital.

Table 7. Impressions of the Cost of Capital Sources

Capital source Very inexpensive

Inexpensive Slightly inexpensive

Neutral Slightly expensive

Expensive Very expensive

Score (-3;3)

Friends and family 10% 24% 19% 29% 10% 4% 4% -0.62

Crowd funding/Crowd financing

2% 6% 12% 42% 18% 16% 5% 0.50

Angel investor 1% 2% 5% 18% 24% 35% 15% 1.62

Venture capital fund 1% 0% 1% 11% 11% 36% 40% 2.32

Mezzanine fund 1% 1% 1% 16% 18% 40% 23% 2.02

Private equity fund 1% 1% 2% 12% 18% 41% 27% 2.14

Factor 1% 1% 3% 14% 19% 31% 32% 2.01

Asset-based lender 1% 4% 8% 18% 33% 26% 11% 1.25

Bank loan 2% 6% 11% 24% 32% 17% 9% 0.83

Overall respondents reported bank loans as the most beneficial source of financing. Crowd funding was reported as the

least beneficial type of financing.

Table 8. Impressions of Benefits Provided by Capital Sources

Capital source No benefits provided

Slightly beneficial

Moderately beneficial

Very beneficial

Extremely beneficial

N/A Score (0;4)

Friends and family 28% 21% 24% 13% 8% 7% 1.37

Crowd funding/Crowd financing 24% 19% 19% 5% 0% 33% 0.73

Angel investor 13% 20% 30% 18% 6% 13% 1.58

Venture capital fund 12% 18% 30% 22% 5% 12% 1.67

Mezzanine fund 16% 21% 27% 13% 2% 20% 1.22

Private equity fund 12% 16% 29% 23% 7% 13% 1.72

Factor 31% 24% 21% 6% 2% 16% 0.94

Asset-based lender 19% 22% 26% 17% 6% 10% 1.47

Bank loan 17% 21% 26% 23% 11% 2% 1.85




Bank loans are the most desirable source of financing for survey participants, whereas factoring is the least desirable

source of capital to obtain.

Table 9. Willingness to Obtain Financing

Capital source Not willing to use

Somewhat unwilling to

use

Neutral Somewhat willing to

use

Willing to use

N/A Score (-2;2)

Friends and family 34% 17% 13% 12% 22% 3% -0.29

Crowd funding/Crowd financing 27% 14% 21% 9% 6% 22% -0.46

Angel investor 20% 17% 18% 20% 19% 7% 0.00

Venture capital fund 20% 20% 18% 22% 15% 4% -0.09

Mezzanine fund 21% 16% 25% 14% 11% 12% -0.21

Private equity fund 15% 15% 19% 23% 23% 5% 0.25

Factor 32% 16% 22% 12% 8% 10% -0.51

Asset-based lender 10% 9% 18% 24% 33% 5% 0.60

Bank loan 4% 5% 7% 17% 66% 1% 1.35

Business owners were asked about their estimates of return expectations and terms from various capital sources.

Venture capital and private funds have the highest return expectations from the investment. They also have the highest

requirements of % of equity to be sold to qualify for their investment.

Table 10. Expectations of Capital Sources

Capital Source Return expectations from investment in the

business

Return expectations in general

% of equity sold to qualify for investment

% of equity sold to qualify for investment in

general

Friends and family 8.7% 9.2% 12.5% 13.2%

Angel investor 15.1% 16.8% 27.3% 27.7%

Venture capital fund 20.3% 21.7% 38.9% 40.2%

Mezzanine fund 15.5% 16.0% 27.0% 26.0%

Private equity fund 17.3% 18.0% 39.1% 40.4%

Factor 15.2% 16.4%

Asset-based lender 9.3% 9.7%

Bank loan 7.3% 7.6%




Most of the respondents did not seek friends and family financing after being denied from a bank loan, exhausting

personal savings or credit card resources. Most of the investments made through friends or family financing involved a

signed agreement, but were not reviewed by attorney and didn’t involve transfer of equity ownership. Of those that

promised equity approximately 33% also had a borrowing arrangement as part of the financing package.

Table 12a. Friends and Family Financing

Question Yes No

Did you seek friends and family financing after being denied for a bank loan? 29% 71%

Did you seek friends and family financing after exhausting personal savings such as savings accounts, investments, and home equity? 34% 66%

Did you seek friends and family financing after exhausting credit card resources? 19% 81%

Did the investment involve a signed agreement? 69% 31%

Was the investment written or reviewed by an attorney? 45% 55%

Did the investment involve the sale, transfer, or promise to transfer some equity ownership? 28% 72%

On average respondents were seeking $200 thousand to borrow from their friends or families, but were able to receive

only $150 thousand. The average interest rate was 6%, and average lending period was 24 months.

Table 12b. Friends and Family Financing

Question 1st quartile Median 3rd quartile

How much were you seeking? ($ thousands)

70

200

575

How much did you raise? ($ thousands)

50

150

500

If borrowed, what was the interest rate? 4% 6% 8%

If borrowed, how long until the money needs to be paid back (months)?

12

24

54

If borrowed, what probability would you assign to being able to pay the full amount back by the due date? (%) 100% 100% 100%

If an agreement was reached to transfer equity, what percent of the total equity was (or will be) transferred? (%) 3.5% 10.0% 25.3%

If an agreement was reached to transfer equity, what was the value of equity transferred (or will be transferred) at time of agreement as % of financing? ($ thousands)

87.5%

100%

100%




The average percentage of businesses applying for funding, which according to the respondents are qualified for the

investment, is shown in the table below.

Table 13. Percentage of Applicants Qualified for the Investment

Bank/Fund 1st quartile Median 3rd quartile

Bank loan 5% 10% 10%

Asset-based lending 5% 15% 15%

Factoring line 5% 10% 10%

Angel investor 1% 5% 5%

Venture capital fund investment 1% 1% 1%

Mezzanine fund investment 1% 5% 5%

Private equity fund investment 1% 4% 4%

Business owners were also asked about their expectations for various profitability ratios for their businesses. Average

expected annual return on book value of equity is 18.8%.

Table 11. Expected Annual Returns

Return Percentage

Annual return on book value of equity (%) 18.8%

Annual return on market value of equity (%) 16.2%

Annual return on book value of assets (%) 16.7%

Annual return on market value of assets (%) 16.2%

Only 12% of respondents use weighted average cost of capital to evaluate business performance.

Figure 12. Usage of WACC

12.0%

88.0%

Yes

No




Average WACC and cost of equity for respondents is 13.2% and 16% accordingly.

Table 12. Estimation of WACC

Coefficient Percentage

WACC 13.2%

Cost of equity 16.0%

Pretax cost of debt 7.8%

Tax rate 27.0%

Debt to market value 30.0%

Regarding capital expenditures planned for the next 12 months, the most important reason to invest into capital

expenditures for the survey participants is capacity expansion, followed by productivity.

Figure 13. Motivation for Capital Expenditures

Approximately 76% of respondents didn’t see any benefits from the economic stimulus programs over the past two

years.

Figure 14. Benefits from the Economic Stimulus Programs over the Past Two Years

31.0%

24.0% 9.0%

5.0%

2.0%

9.0%

5.0% 15.0% Capacity expansion

Productivity

Quality improvements

Yield improvements

Tax incentives

Acquisitions

Other

No planned capital expenditures

5.0% 9.0% 3.0%

7.0%

76.0%

Yes. Directly

Yes. Indirectly

Yes. Directly and Indirectly

Unsure

No




Most of respondents do not think the U.S. federal government need for financing will “crowd out” private investment.

Figure 15. Will the U.S. Federal Government Financing “Crowd Out” Private Investment?

When the timing is right, 53% of the respondents anticipate on transferring their ownership interest through sale of the

business, while only 1% plan on gifting their interest.

Figure 16. Ways of Transferring Ownership Interest

14.0%

11.0%

11.0%

14.0% 12.0%

22.0%

16.0% Strongly agree

Agree

Agree somewhat

Neither agree nor disagree

Disagree somewhat

Disagree

Strongly disagree

53%

10.0%

7%

5%

20%

1% 3% Sale of business

Bring in financial partner (sell part)

Employee stock ownership plan (ESOP)

Management buyout (MBO)

Family transfer

Gifting

Other




Most of the respondents are planning to transfer their ownership interest in more than five years from now, only 2%

plan to at the first available opportunity.

Figure 17. Anticipation of the Transfer

Most of respondents believe that government regulations and taxes and economic uncertainty are the most important

emerging issues facing privately-held businesses.

Figure 18. The Number One Emerging Issue Facing Privately-Held Businesses

4.0% 5.0%

32.0%

30.0%

20.0%

7.0%

2.0% In the next 12 months

Between 1 and 2 years




After 20 years

At the first opportunity when valuationsimprove

14.0%

31.0%

18.0%

10.0%

9.0%

6.0% 5.0%

6.0%

1.0% Access to capital

Government regulations and taxes

Economic uncertainty / confidence (Domestic)

Consumer / Business demand (spending)

Inflation

Ability to find qualified employees

International economic uncertainty

Competitiveness with foreign trade partners

Other




Business owners were asked where they are focusing their efforts today. Most of the respondents mainly focus on

increasing revenues from current products or services.

Figure 19. The Most Important Area to Focus On

Approximately 72% of respondents are over 90% confident that their businesses will survive in the next 12 months.

Figure 20. Probability of Business Survival in the Next 12 Months

11.0%

55.0%

7.0% 3.0%

21.0% 3.0% Reducing expenses

Increasing revenues from current products /services

Finding talented people

Searching for acquisition candidates

Expanding product / service lines

Other

1.0% 1.0% 1.0% 2.0% 2.0% 5.0%

3.0%

6.0%

8.0%

72.0%

0-10%

11-20%

21-30%

31-40%

41-50%

51-60%

61-70%

71-80%

81-90%

91-100%




Most of the survey respondents reported usage of the general documents and techniques to analyze their business

performance. Only usage of outside board of directors seems to be unpopular within privately-held businesses.

Figure 21. Usage of Financial Analysis

0%10%20%30%40%50%60%70%80%90%

100%

71.1% 62.4%

70.0% 78.3%

25.2%

75.3% 78.2%

63.9% 53.0%

94.9%

28.9% 37.6%

30.0% 21.7%

74.8%

24.7% 21.8%

36.1% 47.0%

5.1% yes

no



BUSINESS APPRAISER SURVEY INFORMATION

Nearly 39% of the 271 participants in the Business Appraisers survey hold the Certified Public Accountant designation

and approximately 60% of the respondents have over 10 years of experience in the business. The majority of

respondents expect to see an increase in the number of engagements, business confidence and business conditions over

the next 12 months. Other key findings include:

According to 32% of respondents the optimal number of business valuation organizations to best represent the

industry and serve business appraisers is three, while 28% believe one organization would be best.

In the Summer 2011 report, most of the companies valued by respondents have annual revenues that range

from $500,000 to $50,000,000. This is down from the Fall 2010 report in which the majority of valuations were

for companies that had annual revenues between $2 million and $50 million.

To estimate the cost of debt in their valuations 40% of respondents use prime rate and add 2-3%.


The Business Appraisers Survey results come from 271 participants. The respondents are geographically dispersed. The

largest concentration is in the West (16.0%) followed by the Great Lakes (14%) and the North Atlantic (11.0%).


4.0%

11.0%

9.0%

10.0%

14.0%

2.0% 3.0%

9.0%

3.0%

4.0%

16.0%

15.0% New England (ME, NH, VT)

North-Atlantic (NY, NJ, MA, RI, CT)

Mid-Atlantic (DE, DC, MD, PA, VA, WV)

South Atlantic (NC, SC, GA, FL)

Great Lakes (MN, WI, MI, IL, IN, OH)

West North Central (MO, ND, SD, NE, KS, IA)

East South Central (KY, TN, MS, AL)

West South Central (OK, TX, AR, LA)

Mountain (ID, WY, UT, CO, NM, MT)

North Pacific (AK, WA, OR)

West (CA, NV, AZ, HI)

Outside U.S.



APPRAISERS cont.

Approximately 60% of respondents have over 10 years of experience in the business.

Figure 23. Years of Experience

Nearly 39% of respondents hold a CPA certification while 35% have certifications provided by the American Society of

Appraisers.

Figure 24. Professionals Certifications Held

0.8%

5.3%

15.9% 17.9%

31.7% 28.0%

0.4% 0.4% 3.0%

7.8%

16.5%

29.9%

39.8%

2.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Less than 1 1-2 years 2-5 years 5-10 years 10-20 years More than20 years

N/A

Individually

Firm

39.0%

35.0%

30.0% 27.0%

14.0% 14.0%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

CPA AM, ASA or FASA ABV CVA or AVA CBA , AIBA, orMCBA

CFA



APPRAISERS cont.

Most of the companies valued by respondents have annual revenues from $500,000 to $50,000,000.

Figure 25. Size/Annual Revenues of Companies Valued

Operational and Assessment Characteristics

According to the majority of respondents all operational and assessment characteristics slightly increased versus six

months ago.

Table 13. General Assessment: Today Versus Six Months Ago


Decreased slightly

Stayed about the

same

Increased slightly


Score (-2,2)

Number of engagements 4.4% 11.7% 26.2% 36.9% 20.9% 0.8

Time to complete a typical appraisal 1.0% 17.3% 59.9% 19.8% 2.0% 0.1

Fees for services 1.0% 17.7% 61.6% 19.2% 0.5% 0.0

Competition for business from abroad 1.0% 1.5% 85.3% 11.7% 0.5% 0.1

Domestic competition 0.0% 0.5% 63.7% 31.9% 3.9% 0.4

Time to receive payment for services 0.5% 9.3% 62.0% 23.9% 4.4% 0.2

BV professionals at your firm 0.5% 4.9% 76.1% 17.6% 1.0% 0.2

Cost of capital 1.0% 19.9% 43.7% 32.0% 3.4% 0.2

Market (equity) risk premiums 1.0% 19.5% 56.1% 22.4% 1.0% 0.1

Discounts for lack of marketability (DLOM) 0.0% 10.7% 76.6% 11.2% 1.5% 0.0

Company specific risk premiums 0.0% 11.2% 67.3% 20.5% 1.0% 0.1

General business confidence 2.0% 9.3% 19.1% 65.7% 3.9% 0.7

General business conditions 1.5% 9.3% 19.6% 67.2% 2.5% 0.7

Ability to assess and price risk 0.5% 5.4% 61.5% 31.7% 1.0% 0.3

27.0%

45.0%

69.0%

57.0%

32.0%

18.0% 9.0%

0%10%20%30%40%50%60%70%80%



APPRAISERS cont.

For the next 12 months majority of respondents expect increase in the number of engagements, business confidence,

and business conditions.

Table 14. General Assessment: Expectations for the Next 12 Months


Decreased slightly

Stayed about the

same

Increased slightly


Score (-2,2)

Number of engagements 0.0% 3.4% 27.8% 59.0% 9.8% 0.8

Time to complete a typical appraisal 0.0% 4.9% 77.7% 17.5% 0.0% 0.1

Fees for services 0.0% 4.4% 60.8% 34.8% 0.0% 0.3

Competition for business from abroad 1.5% 1.5% 84.9% 11.2% 1.0% 0.1

Domestic competition 0.0% 1.5% 65.5% 29.1% 3.9% 0.4

Time to receive payment for services 0.0% 8.7% 81.6% 9.2% 0.5% 0.0

BV professionals at your firm 0.0% 0.0% 74.8% 24.3% 1.0% 0.3

Cost of capital 0.5% 5.8% 56.8% 35.9% 1.0% 0.3

Market (equity) risk premiums 0.0% 4.4% 70.7% 24.4% 0.5% 0.2

Discounts for lack of marketability (DLOM) 0.0% 9.8% 82.4% 7.3% 0.5% 0.0

Company specific risk premiums 0.0% 12.7% 72.7% 14.6% 0.0% 0.0



Ability to assess and price risk 0.0% 5.4% 71.2% 22.9% 0.5% 0.2

On average respondents use average risk-free rate of 4.35% and market-risk premium of 7%.

Figure 26. Rates and Equity Risk Premiums Currently Used

4.35

6.99

3.04 3.08 2.43

3.51 4.59

3.78

5.13

6.4

012345678



APPRAISERS cont.

Respondents use significant discount for lack of marketability (DLOM) that varies depending on the size of the company

and size of ownership.

Figure 27. Average Discount for Lack of Marketability (DLOM) for Controlling Interest

Figure 28. Average Discount for Lack of Marketability (DLOM) for Minority Interest

Figure 29. Control Premium Adjustment

13.98%

16.61%

20.7%

0

5

10

15

20

25

$250M in EBITDA $25M in EBITDA $1M in EBITDA

20.29 23.98

28.94

0

5

10

15

20

25

30

35


16.38% 16.14% 16.84%

0

5

10

15

20




APPRAISERS cont.

Explicit forecast periods used by respondents for different size of companies are almost the same and vary from 5.53 to

5.8 years on average.

Figure 30. Forecast Period Used (years)

The average long-term terminal growth rate used by respondents is 3.21%.

Table 15. Long-Term Terminal Growth Rate

Average Long-term terminal growth rate (%) 3.21%

To estimate cost of debt in their valuations, 40% of respondents use prime rate and add 2-3%.

Figure 31. Base for the Cost of Debt

5.53 5.72 5.8

0

2

4

6

8

10


7%

2%

12%

40% 5%

12%

7%

16% Prime rate

10-year note

20-year Baa bond rate

Prime rate + 2-3%

10-year note + 2-3%

20-year Baa bond rate + 2-3%

Cost of equity

Other



APPRAISERS cont.

According to 32% of respondents, the optimal number of business valuation organizations to best represent the industry

and serve business appraisers is three while 28% believe one organization would be best.

Figure 32. The Optimal Number of Business Valuation Organizations

Respondents were asked if they believe the following valution concepts reflect economic reality in the marketplace for

privately-held businesses. Among those concepts most believed to be representative is a size premium while the least is

total beta.

Table 16. Reflection of Economic Reality in the Marketplace for Privately-Held Businesses

Coefficient Strongly Agree

Agree Agree somewhat

Neither agree nor disagree

Disagree somewhat

Disagree Strongly disagree

Score (-3,3)

DLOM 2% 18% 33% 13% 17% 13% 4% -0.2

Control premium 1% 12% 28% 19% 17% 18% 6% 0.2

Size premium 2% 32% 35% 10% 13% 5% 3% -0.7

Public cost of capital 2% 17% 32% 10% 18% 16% 5% -0.1

Total beta 2% 6% 17% 28% 14% 21% 13% 0.6

According to business appraisers the most important issues that are facing privately-held businesses are economic

uncertainty, access to capital and government regulations. However, in the future respondents mostly anticipate

negative influences of inflation, government regulations.

28.0%

22.0%

32.0%

5.0% 3.0%

9.0%

0%

5%

10%

15%

20%

25%

30%

35%

One Two Three Four Five More than five



APPRAISERS cont.

Figure 33. Issues Facing Privately-Held Businesses

28.0%

17.0%

44.0%

1.0% 1.0% 2.0% 3.0% 2.0%

13.0%

25.0%

14.0%

21.0%

5.0% 10.0% 11.0%

1.0%

0%5%

10%15%20%25%30%35%40%45%50%

Acc

ess

to c

apit

al

Go

vern

me

nt

regu

lati

on

s/ta

xes

Eco

no

mic

un

cert

ain

ty(D

om

est

ic)

Infl

atio

n

Ab

ility

to

fin

d q

ual

ifie

dem

plo

yee

s

Inte

rnat

ion

al e

con

om

icu

nce

rtai

nty

Co

mp

etit

iven

ess

wit

hfo

reig

n t

rad

e p

artn

ers

Oth

er

Issue #1

Emerging issue



INVESTMENT BANKER SURVEY INFORMATION

The majority of the 284 respondents to the Investment Bankers survey are optimistic about deal flow and business sales

transactions for the next 12 months. They also expect a further tightening of due diligence efforts in the face of

improving conditions. Besides accessibility to capital, economic uncertainty and government regulation, inflation was

identified as an emerging issue that concerns Investment Bankers. Other key findings include:

In the Summer 2011 report 72% of respondents said they expect to close less than 5 deals in the next 12

months. This is up from the roughly 20% of respondents in the Fall 2010 report that said they expected to close

three transactions over the next 12 months.

The top three reasons for deals not closing were valuation gap (27.4%); lack of capital to finance (12.2%) and

unreasonable seller demand (10.3%).

Respondents indicated a general imbalance between companies worthy of financing and capital available for

the same. There is a reported shortage of capital for those companies with less than $10 million in EBITDA, but

a general surplus for companies with $25 million in EBITDA or more.


Information in this section is based upon 284 responses from the investment banker survey. The locations of

respondents’ business are diversified with largest concentrations in the West and Great Lakes regions.


4.0%

8.1% 9.1%

7.1%

13.1%

2.0% 2.0%

7.1%

4.0% 2.0%

13.1%

5.1%

6.1% 17.2%

New England (ME, NH, VT)





West North Central (MO, ND, SD, NE, KS,IA)East South Central (KY, TN, MS, AL)





Multiple regions in U.S.

Multiple regions - U.S. and global

Outside U.S.



I-BANKER cont.

Approximately 25% of the respondents didn’t close any deal in the last six months; 68% closed fewer than five deals,

while 5% closed between 6 and 10.

Figure 35. Private Business Sales Transactions Closed in the Last Six Months

Just 3% of the respondents don’t expect to close any deals in the next 12 months; 72% expect to close less than five

deals, while only 1% expects to close more than 16 deals.

Figure 36. Private Business Sales Transactions Expect to Close in the Next 12 Months

25.0%

68.0%

5.0%

1.0% 1.0%

0

1-5

6-10

11-15

>16

3.0%

72.0%

20.0%

4.0% 1.0%

0

1-5

6-10

11-15

>16



I-BANKER cont.

The majority of deals (52%) took seven to 12 months to close. Rarely did any deal take more than three years to close.

Figure 37. Average Number of Months It Took to Close a Deal

On average, about 40% of deals terminated without transacting over the past year.

Table 17. Percentage of Business Sales Engagements Terminated Without Transacting

Min value Max value Average value

% not transacted 0 100% 39.97%

Top three reasons for deals not closing: valuation gap in pricing (27.4%); lack of capital to finance (12.2%); unreasonable

seller demand (10.3%).

Figure 38. Reasons for Business Sales Engagements Not Transacting

12.1%

52.5%

15.2%

2.0%

0.0%

0.0% 0.0%

18.2%



I-BANKER cont.

Table 18. Median Deal Multiple by Size of Company (financial buyers only)

Industry $1M EBITDA

$5M EBITDA

$10M EBITDA

$15M EBITDA

$25M EBITDA

$50M EBITDA

$100M EBITDA

Service 4.0 5.0 6.0 7.0 7.0 8.0 12.0

Manufacturing 4.0 5.0 6.0 5.3 6.0 7.0 10.0

Retail 3.5 5.0 6.0 7.0 6.0 7.5 8.5

Wholesale 4.8 5.3 3.3 4.0 6.5 7.0 8.0

Distribution 4.3 5.3 5.0 4.5 5.3 6.5 6.0

Oil and gas 4.5 4.0 4.0 5.0 6.0 7.0 NA

Restaurant 3.0 3.0 3.5 4.0 6.0 6.0 NA

Health care 5.0 6.5 6.8 6.0 6.0 7.0 7.0

Technology 5.0 7.0 8.0 9.0 8.0 10.5 9.0

Media and entertainment

5.5 5.5 4.0 7.0 7.0 8.0 7.5

Average 4.4 5.2 5.3 5.9 6.4 7.5 8.5

Table 19. Equity Needed to Get a Deal Done (financial buyer only)

Average Value

$1 million EBITDA 52%









I-BANKER cont.

As compared to six months ago, respondents indicated that deal flow was up considerably and business health had

increased. Furthermore, confidence showed signs of improvement.

Table 20. Compare Current Period with Six Months Ago

Decreased significantly

Decreased slightly

Stayed about the same

Increased slightly


Average

Deal flow 2.4% 4.1% 17.6% 39.4% 36.5% 1.0

Private business sales 4.2% 5.5% 30.9% 40.0% 19.4% 0.6

Private business sales by auction process

5.5% 11.6% 45.2% 27.4% 10.3% 0.3

Ratio of businesses sold/total listings

4.9% 10.4% 49.3% 27.8% 7.6% 0.2

Senior leverage multiples 2.0% 9.5% 35.4% 49.0% 4.1% 0.4

Total leverage multiples 3.4% 7.5% 34.2% 51.4% 3.4% 0.4

Deal multiples 3.9% 5.8% 33.8% 53.2% 3.2% 0.5

Business exit opportunities 3.4% 7.4% 26.2% 52.3% 10.7% 0.6

Amount of time to sell business 0.6% 20.8% 51.3% 16.9% 10.4% 0.2

Difficulty selling business 2.0% 28.1% 47.1% 14.4% 8.5% 0.0

Business opportunities for growth 1.3% 5.2% 25.5% 60.8% 7.2% 0.7

Business access to growth capital 2.6% 9.2% 37.5% 44.1% 6.6% 0.4

Businesses probability of failure 5.2% 35.7% 39.0% 16.9% 3.2% -0.2



Strategic buyers making deals 1.3% 2.0% 28.1% 58.2% 10.5% 0.7

Margin pressure on companies 0.6% 14.3% 45.5% 31.2% 8.4% 0.3

Presence of foreign capital seeking deals

0.7% 4.8% 52.4% 34.5% 7.6% 0.4

Buyers focusing on later stage companies

0.0% 1.4% 50.0% 39.0% 9.6% 0.6

Financial buyers interest in minority (non-control) transactions

1.3% 6.7% 53.0% 30.2% 8.7% 0.4

Efforts on due diligence by buyers 0.0% 0.7% 48.0% 35.5% 15.8% 0.7

Efforts on due diligence by banks 0.0% 1.4% 52.7% 29.5% 16.4% 0.6



I-BANKER cont.

Investment bankers were asked if purchasing premiums were present when strategic buyers were involved.

Approximately 34% of respondents didn’t witness any premium paid by strategic buyers, while 48% saw premiums lower

than 20%.

Figure 39. Premium paid by strategic buyers in order to compete with financial buyers

Respondents indicated a general difficulty with arranging senior debt for businesses with less than $10 million in

EBITDA.\

Table 21. How Difficult to Arrange Senior Debt for Transactions over the Past Six Months

Very difficult

Difficult Somewhat difficult

Neutral Somewhat easy

Easy Very easy Average

$1M EBITDA 41.3% 27.3% 19.8% 8.3% 2.5% 0.0% 0.8% -1.9

$5M EBITDA 12.7% 14.4% 33.9% 23.7% 10.2% 1.7% 3.4% -0.8

$10M EBITDA 6.6% 10.5% 15.8% 25.0% 27.6% 11.8% 2.6% 0.0

$15M EBITDA 5.8% 5.8% 19.2% 19.2% 28.8% 19.2% 1.9% 0.2

$25M EBITDA 6.5% 4.3% 17.4% 21.7% 19.6% 21.7% 8.7% 0.4

$50M EBITDA 11.4% 5.7% 5.7% 20.0% 28.6% 14.3% 14.3% 0.5

$100M+ EBITDA 12.9% 6.5% 3.2% 25.8% 22.6% 12.9% 16.1% 0.4

34%

25%

23%

9%

3% 1%

5% No

Yes, 0-10% more

Yes, 11-20% more

Yes, 21-30% more

Yes, 31-40% more

Yes, 41-50% more

Yes, >50% more



I-BANKER cont.

Respondents also indicated a general difficulty with arranging junior debt for businesses with less than $10 million in

EBITDA.

Table 22. How Difficult to Arrange Junior Debt for Transactions over the Past Six Months

Very difficult Difficult Somewhat difficult

Neutral Somewhat easy

Easy Very easy Average

$1M EBITDA 51.60% 21.50% 12.90% 7.50% 2.20% 1.10% 3.20% -2.0

$5M EBITDA 29.80% 14.90% 20.20% 11.70% 16.00% 3.20% 4.30% -1.0

$10M EBITDA 22.40% 3.40% 15.50% 20.70% 25.90% 6.90% 5.20% -0.3

$15M EBITDA 18.90% 10.80% 2.70% 21.60% 27.00% 13.50% 5.40% -0.1

$25M EBITDA 15.60% 12.50% 6.30% 25.00% 15.60% 18.80% 6.30% -0.1

$50M EBITDA 20.70% 6.90% 6.90% 20.70% 13.80% 24.10% 6.90% 0.0

$100M+ EBITDA 23.10% 7.70% 11.50% 11.50% 19.20% 19.20% 7.70% -0.2

Respondents were asked about the frequency of various attributed that were required to close a business deal. Seller

financing, contingent earnouts, and lowered multiples of EBITDA were required in over half o the closed deals.

Table 23. Components of Closed Deals

Average value

Seller financing/Seller note 54.80%

Contingent earnout 53.40%

Lowered multiple of EBITDA 54.20%

Lowered amount of equity sold

34.00%

Investment bankers reported on valuation gaps for non-closed deals. They report that nearly half (48%) of deals had a

valuation gap of between 16% and 25%.

Figure 40. Valuation Gap for Non-Closed Deals

2%

10% 10%

27% 21%

14%

7%

3%

6%

0-5%

6-10%

11-15%

16-20%

21-25%

26-30%

31-40%

41-50%

Greater than 50%



I-BANKER cont.

Table 24. Expectation About the Future 12 Months

Bankers are optimistic about deal flow and business sales transactions for the next 12 months. They also expect

a further tightening of due diligence efforts in the face of improving conditions.

Decrease significantly

Decrease slightly

Stay about the same

Increase slightly

Increase significantly

Average

Deal flow 0.60% 1.30% 13.10% 53.80% 31.30% 1.1


Private business sales by auction process

1.40% 4.90% 30.80% 46.90% 16.10% 0.7

Ratio of businesses sold/total listings

0.70% 4.80% 29.30% 52.40% 12.90% 0.7

Senior leverage multiples 0.00% 2.70% 41.30% 52.00% 4.00% 0.6

Total leverage multiples 0.70% 4.00% 39.10% 53.60% 2.60% 0.5

Deal multiples 0.00% 6.50% 29.00% 60.60% 3.90% 0.6


Amount of time to sell business 0.70% 24.80% 60.80% 10.50% 3.30% -0.1

Difficulty selling business 1.30% 33.80% 50.60% 10.40% 3.90% -0.2


Business access to growth capital 0.60% 5.80% 35.70% 50.60% 7.10% 0.6




Strategic buyers making deals 0.70% 1.30% 31.10% 53.00% 13.90% 0.8


Presence of foreign capital seeking deals

0.00% 3.40% 46.20% 41.40% 9.00% 0.6


0.00% 3.40% 48.30% 40.80% 7.50% 0.5

Financial buyers interest in minority (non-control) transactions

2.80% 5.50% 53.80% 33.80% 4.10% 0.3





I-BANKER cont.

Accessibility to capital and economic uncertainty remain the most concerning issues facing privately-held businesses

today with 75% of nomination.

Figure 41. Number One Issue Facing Privately-Held Businesses Today

Besides accessibility to capital, economic uncertainty and government regulation, inflation was identified as an emerging

issue that concerns I-Bankers.

Figure 42. Number One Emerging Issue Facing Privately-Held Businesses

38%

12%

37%

1% 2% 4% 2% 3%

Access to capital


Economic uncertainty (Domestic)

Inflation


International economic uncertainty

Competitiveness with foreign tradepartners

Other

15%

24%

14% 15%

5%

14%

10%

3%

Access to capital


Economic uncertainty (Domestic)

Inflation


International economicuncertainty

Competitiveness with foreigntrade partners

Other



I-BANKER cont.

Respondents indicated a general imbalance between companies worthy of financing and capital available for the same.

There is a reported shortage of capital for those companies with less than $10 million in EBITDA but a general surplus for

companies with $25 million in EBITDA or more.

Table 25. Balance of available capital with quality companies

Companies worthy of financing GREATLY exceed capital

available

Companies worthy of financing exceed capital

available

General balance between

companies worthy of

financing and capital

available

Capital available exceeds

companies worthy of financing

Capital available GREATLY exceeds

companies worthy of financing

Score

$1M EBITDA 28.60% 37.10% 20.00% 11.40% 2.90% -0.8

$5M EBITDA 13.20% 30.90% 32.40% 17.60% 5.90% -0.3

$10M EBITDA 5.70% 17.00% 39.60% 24.50% 13.20% 0.2

$15M EBITDA 4.90% 22.00% 29.30% 31.70% 12.20% 0.2

$25M EBITDA 6.30% 15.60% 31.30% 18.80% 28.10% 0.5

$50M EBITDA 13.80% 10.30% 13.80% 31.00% 31.00% 0.6

$100M EBITDA 18.50% 11.10% 14.80% 22.20% 33.30% 0.4

> $100M EBITDA 14.80% 11.10% 14.80% 11.10% 48.10% 0.7



BROKER SURVEY INFORMATION

Seventy-two percent of the 121 participants in the Broker survey said they expect to close less than five deals in the next

12 months. This is up significantly from the Fall 2010 report in which 18% of respondents said they expect to close two

transactions in the next 12 months. Besides accessibility to capital, economic uncertainty and government regulation,

international economic uncertainty and inflation emerged as additional issues that concerns brokers. Other key findings

include:

The majority of deals (57%) took less than 1 year to close with the largest concentration being the in 7-12

month category. Another 15% took about a year and a half and rarely did a deal take more than 3 years to

close.

58.4% of respondents said they believe general business confidence will increase slightly over the next 12

months compared 37% of respondents who answered the same way in the Fall 2010 survey.

In the Summer 2011 report the top reason for deals not closing was valuation gap in pricing (21.4%) whereas in

the Fall 2010 lack of capital to finance drove nearly 46% of reported engagements to be terminated without a

transaction.


Responses to the business broker survey are based upon surveys from 121 brokers. Approximately 17% of respondents

are from the South Atlantic region and 14% are from the West Coast.

Figure 43. Location

6%

3%

7%

17%

6%

3% 3%

7% 8%

2%

14%

3%

2% 19%

New England (ME, NH, VT)





West North Central (MO, ND, SD, NE, KS, IA)

East South Central (KY, TN, MS, AL)





Multiple regions in U.S.

Multiple regions - U.S. and global

Other - Outside U.S. - Please enter



BROKER cont.

Approximately 25% of the respondents didn’t close any deals in the last six months; 65% closed less than five deals, while

another 6% closed 6-10 deals.

Figure 44. Private Business Sales Transactions Closed in the Last Six Months

Just 3% of the respondents don’t expect to close any deals in the next 12 months; 72% expect to close less than five

deals, while only 1% expects to close more than 16 deals.

Figure 45. Private Business Sales Transactions Expect to Close in the Next 12 Months

25%

65%

6%

1% 3%

0

1-5

6-10

11-15

>16

3%

72%

20%

4% 1%

0

1-5

6-10

11-15

>16



BROKER cont.

The majority of deals (57%) took less than one year to close with the largest concentration being in the seven- to 12-

month category. Another 15% took about a year and a half. Rarely did any deal take more than three years to close.

Figure 46. Average Months It Took to Close a Deal

On average, about 44% of deals terminated without transacting over the past year

Table 26. Percentage of Business Sales Engagements Terminated Without Transacting

Average value

% not transacted 43.74%

Top three reasons for deals not closing: valuation gap in pricing (21.4%); lack of capital to finance (17.5%);

insufficient cash flow (11.7%)

Figure 47. Reasons for Business Sales Engagements Not Transacting

17%

39% 15%

5%

2% 2%

2% 18%



BROKER cont.

Table 27. Deal Multiples of EBITDA by Size of Company

Industry $100K

EBITDA $500K

EBITDA $1M EBITDA $5M EBITDA

Service 2.5 2.7 3.4 NA

Manufacturing 3 3 4.1 4.1

Retail 2.5 2 5.75 NA

Wholesale NA 2 NA 3.1

Distribution 4 3.2 7 5

Oil and gas NA 1 NA 4

Restaurant 2.6 2.35 2 NA

Health care 4 3 4.75 6

Technology 5 6 2.6 11

Media and entertainment

NA NA 5 NA

Average 3.4 2.8 4.3 5.5

Relative to six months ago, deal flow and confidence improved significantly. Respondents also indicate increased due

diligence efforts by both buyers and banks.

Table 28. Compare Current Period with Six Months Ago

Decreased

significantly Decreased

slightly Stayed about

the same Increased

slightly Increased

significantly Score

(-2 to 2)

Deal flow 9.50% 6.30% 23.20% 47.40% 13.70% 0.5


Ratio of businesses sold/total listings 9.10% 11.40% 48.90% 23.90% 6.80% 0.1

Deal multiples 4.40% 18.90% 50.00% 22.20% 4.40% 0.0


Amount of time to sell business 1.10% 18.20% 45.50% 19.30% 15.90% 0.3

Difficulty selling business 2.30% 23.00% 36.80% 18.40% 19.50% 0.3







1.20% 2.40% 56.60% 33.70% 6.00% 0.4





BROKER cont.

Table 29. Deal Multiples of Revenue by Size of Company

Industry $100K

Revenues $500K

Revenues $1M

Revenues $5M

Revenues

Service 2 1.9 1 1.7

Manufacturing 0.45 0.65 1 0.75

Retail 0.3 0.7 1 0.6

Wholesale 0.3 0.4 0.4 0.5

Distribution 0.3 0.3 0.4 0.5

Oil and gas NA NA NA NA

Restaurant 0.7 0.3 1 0.4

Health care 1 1 1.3 1.8

Technology 3 3.2 2.4 2.4

Media and entertainmen

Documents

Survey report – SuMMer 2011 · the worst impressions. This is significantly different from previous iterations of the report. In the Fall 2010 report almost 35% of respondents reported