Our M&A Process Summarized

1

Staging the Company.

Staging the company is probably the most important step in the M&A process. It is during this step when a Client can truly bring out the value our of the company, and as such ease the pressures of downstream negotiations. Unfortunately, this is often the step that is overlooked or is not given the amount of care or diligence it requires. Often, both the Advisor and Client are eager to get to market for investment and are rushed to develop marketing collateral to do so. At TKSG, it is often suggested to clients that if the company is not in order and if the company is not demonstrating its full potential from the perspective of industrialization, we often will suggest a potential action plan to clients for improvement prior to the initiation of developing marketing collateral.

Consider the following: the difference in valuation between a General Machine Shop (performing aerospace work) and a Certified Aerospace Machine Shop, with Long Term Agreements with its customer base could be more than double. If the company has Intellectual Property, the valuation could be much higher.

Our goal at this stage in the engagement process is to work with the client to ensure that at the time of transaction, the firm is valuated at its highest possible fair market value. If we see the potential and time is permitted, TKSG can help to take a client firm to a higher level of industrialization, either through the enhancement (increase in certainty) of sales or operational improvements. In the past, some of these activities included helping certify a client to its industry standard (eg ISO or other customer specific) and develop, negotiate longer term agreements with key customer or customers. We will review the client firms shop floor and both its production processes, along with its virtual environment in its ERP (MRP, CRM, etc) systems. We will review the efficiency of a companys working capital and potential work out a strategy with the business owner to ensure that it is running efficiently and effectively as we enter into the marketing phase.

2

Documentation and Valuation Validation.

Either after or as the company is being staged, we will begin to document and/or valuate the company. Valuation may be completed internally or we may seek the support of a third party firm, usually at the discretion of the client. In some cases, the company has been valuated prior to engagement. In this case, we will consult with the valuator and ensure consistency, based on our assessment of the companies Industrialization.

Documentation at this stage is the development of the One-Page Teaser and the Confidential Information Memorandum (CIM). The availability of a CIM is widely expected by potential investors. While generating the CIM, we may take the approach of providing the company with a forecast, allowing us the opportunity to valuate the company both based on historical performance and using a proforma approach.

Note: We often recommend that the company have its financial statements audited by the end of this process. As well, if applicable, we may ask that Phase I Environmental Audit be obtained as well on its facility(s). Although not required at this stage, to a potential investor, this demonstrates both sincerity in the process and provides the company with credibility and certainty during negotiation. However note, audited statements may be deferred to after the Quality of Earnings Assessment. This will depend greatly on the discretion of the Investor.

We also suggest that during this time, non-business essential activities are reviewed and removed where possible. We will also ensure that the proper business structures are in place, should the business need to continue with certain agreements (such as a Lease agreement on a building that the owner retains). We will also review systems and processes, gauging efficiency in its business processes.

3

Going to Market.

Going to Market can take multiple approaches: Closed Marketing approach; working with a preselected group of investors; or Open Market Offering.

NOTE: Even though we are a Boutique firm, TKSG has access and is networked to hundreds of international investors, especially in the industrial sector.

The larger the Client firm, and/or the more IP-Related technology the Client represents to the market, the more likely the opportunity will be to engage strategic Investors as potential investment suitors. This is not to say that working with generalist investors could not be beneficial to a company as well. Often, the Generalist will support the company to get it to the next level; they are often more flexible in the financial structure of the company. Where they are able to obtain more favorable debt rates than their colleagues and competitors in the field, the generalist firm may have the opportunity to leverage these favorable rates in order to provide a target investment with a higher valuation.

Note: Our market approach may include a no-names approach. The CIM may be written with or without naming the Client company; this is contingent on the direct of the Client.

4

Negotiation, QOE and LOI.

We work with the Client and potential INvestors to secure the highest valuation for the company, in a Letter of Intent (LOI), subject to Due Diligence and Normalized Working Capital. We attempt to bring multiple Potential investors to this point in the process. In order to proceed any further, most investors will seek a period of exclusivity.

Contingent on the circumstance, we may be able to forgo this request, in order to bring multiple parties through the initial Due Diligence process of Quality of Earnings (QOE). In taking this approach, our goal would be to minimize the number of surprises to valuation which may come about during the QOE process or when a potential investor reviews Working Capital requirements. .

Common items of negotiation are as follows (not an exhaustive list):

  • Asset v. Share agreements:

    Most Investors will seek an asset deal, while most sellers will want a Share deal. This should not be a roadblock as it is very possible to agree to a deal that satisfies both parties.

  • Cash Free, Debt Free:

    Most Investors will seek a deal where a business owner will be permitted to withdraw and retain all cash from the company, however they will have to pay off all remain debt in the company.

  • Normalized Working Capital.

    As a minimum, guiding principles for Working Capital valuation need to be established at the time of LOI. Alternatively, working capital valuation and acceptance need to be defined shortly after the conclusion of the QOE process. Unfortunately, most investors leave Working Capital to the very end; possibly as a means to recover some capital as a result of risk determined through the due diligence. A common error among business owners is the expectation that Accounts Receivable belong to them as well at the end of transaction. To avoid uncertainties and doubt, it is for this reason we ask for any irregularities Accounts Receivable/payables to be settled prior to going to market.

  • On Going Participation in the Company:

    In the case of a company sale, the Investor may expect the Owner to continue to own a minority share of the company (or the Newco. or other) for a period of time after the sale. The owner may also be asked to continue working for the company as a consultant for a period after the sale

  • Exclusivity

    After the LOI is signed (Either after or before the QOE process), the investor will seek an exclusivity period (usually about 90 days) for the purpose of performing Due Diligence.

    • 5

    Due Diligence.

    As noted above, Due Diligence is usually kicked-off with a Quality of Earnings review by the investor. This includes a material level of Review of Earnings. Once complete, which may or may not include a change to valuation, we proceed to Due Diligence for: Operations, Legal, Tax, Accounting, Environmental, Human Resources, Sales, etc.

    We subscribe to two virtual Datarooms, where both systems require 2 levels of security, ensuring that data posted is protected. We will work with Legal Counsel, Accountants and other individuals supporting the transaction from both sides, to ensure that information exchange is efficient.

    We diligently work with the Potential Investors to gather required documentation for their Due Diligence; including building schedules and negotiating timelines. We also work with our Client firm to create the required supporting documentation. In some cases, this may be in duplication to the activities being performed by the Investor (eg. Forecasting). .

    6

    Closing the Deal.

    Along the path to Closing the Deal, our general philosophy is to mitigate surprises as much as possible. Therefore, our goal is that before any final negotiations, pricing is confirmed and supported by audited financial statements, normalized working capital is settled, and other key negotiating pieces are settled. Indeed, at this point in the process, the only condition should be legal documentation.

    Final Negotiation

    • We expect that before this point in the process, our Client has retained a Tax Specialist and that the Owners strategy to the transaction has been determined.
    • Investors Strategy for investment (at least in Strawman format) should be defined and aligned to the Client Tax strategy (If required)
    • Any sensitive Due Diligence tasks such as Customer Approvals or employee due diligence may be deferred to this point in the process for completion.
    • As a final step, Purchase Sales agreements (Legal Documentation) may precede the Financial Closing of the Transaction, subject to the completion of conditions. At this late stage, the time period for transaction close is governed by the legal teams and their level of comfort in the presented documentation.