UHY Advisors · Private and Confidential 7 Evaluating Your Business Foundation for the Future Evaluating your business for the future starts with understanding the pillars of your

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UHY AdvisorsM&A Strategies in the Current Market

June 5, 2020

Private & Confidential

Private and Confidential 2

Introduction

Jeremy Falendysz Director

Brandon BeauregardSenior Analyst

Corey MassellaManaging Director

The UHY Team


Introduction

▪ COVID-19 has upended traditional business models, requiring lean personnel teams and efficient remote working conditions to navigate this crisis. Stress levels remain high as businesses begin navigating the complexities of a “new normal”

▪ Now more than ever, owners should complete a self-analysis of themselves and their businesses. It’s just as important for owners to understand their own decision making. Standing at the top means the most responsibility, and is often an lonely position. Ask yourself these key questions:

▪ Are you in survival mode?▪ High stress scenarios can cause tunnel vision and thoughts revolving around

urgent needs now, rather than thinking long-term▪ Is your ability to make decisions clouded?

▪ Often a business is your baby and, for most, a vital part of your net worth▪ Business is personal, as it supports your life, kids, and family

The “New Normal”


Introduction

▪ Once you have determined your base needs are met, you can begin to analyze your business with an open mind. Here are some of the questions this presentation can help answer:

▪ Should you pour more money into your business to help it outlast this crisis?▪ Are you mentally and emotionally prepared to continue your business? Or are you

tired and looking to exit?▪ Are there opportunities out there? What options are available?

▪ Based on past experience in the auto industry, strong companies with viable business models can find opportunities, consolidations and available talent

▪ Before you make these decisions, you should evaluate your Business Viability

▪ Maslow’s Hierarchy of Needs refers to the classes of desires people face, from the simplistic need for security and health to the complexity of creativity and innovation. Owners need to analyze their current state and affirm all their underlying needs are met before considering their business’ direction

The “New Normal”


How can I evaluate my business foundation for the future?

What is the value impact to auto suppliers due to the recent pandemic?

Is acquisition financing available to fund a corporate acquisition today?

What are the next steps in considering either a sale or acquisition?

When should I ask an expert?

Can I really expect to sell my company in a market like this?

What is my competition up to?


Evaluating Your Business Foundation for the Future

▪ Before buying a home, you would have a home inspection completed to ensure there are no underlying issues that could impact the purchase

▪ If someone was to buy your business, would they find it has a strong foundation?

Assessing Your Business Foundation



▪ Evaluating your business for the future starts with understanding the pillars of your success, and using that information to make vital decisionsto generate the best outcome. As such, it is vital for business owners at all levels to assess their business viability, competitive analysis, income and M&A strategy

▪ All of these are highly subjective and dependent upon the auto sub-sector you serve. It also allows owners to reflect on their strengths and weaknesses in the market, as opposed to those of their auto peers

Assessing Your Business Foundation



▪ Business Viability is the likelihood of a business’ success and ability to deliver business objectives (i.e. generating wealth)

▪ Business viability is often assessed through what is known as the Pillars of Business Viability Model, a benchmark framework to identify components and decisions necessary for a business to survive and thrive in their industry market. The model breaks down into 6 core pillars of viability:

What is Business Viability?



▪ Market Viability is the measurable market demand or receptivity to the automotive products and services you provide to your respective auto customers. Certain data can often be obtained from outside market analysts, if it is not readily availableConsider:

▪ Market environment (e.g. size, sustainability, target market)▪ Competitors▪ Similar auto peers / product offerings / service offerings▪ Pricing

▪ Technical Viability is the ability of your business to deliver your primary products and services. It is important to consider both the tangible and intangible attributes you deliver Consider:

▪ Range of products and services provided▪ Availability and quality of products and services provided▪ Geographies served vs. location of target auto customers

Market and Technical Viability



▪ Business Model Viability refers to the actual business in terms of the way you deliver products and services to your target market. It is important to analyze the vulnerabilities of your service offerings and identify what makes them uniqueConsider:

▪ Uniqueness of the model in terms of competitive advantages▪ Ability of competitors to replicate your product and service offerings▪ Ability to model and adjust to others with minimal effort▪ Ability to generate wealth

▪ Management Model Viability deals with the day-to-day management of the business and employees and how efficient the process isConsider:

▪ Identification of key professionals▪ Employee recruitment and retention▪ Management of intellectual property▪ Suitable organization structure

Business Model and Management Model Viability



▪ Economic and Financial Viability addresses the direct and indirect costs of the business to assess its profitability Consider:

▪ Overhead and cost model as compared to peers▪ Risks▪ Break-even point▪ Ability to generate economic value

▪ Exit Strategy Viability is an important part of both understanding the current value of your business and how this may fluctuate in the future, and can pinpoint important details to addressConsider how to:

▪ Maximize wealth upon exit (and what you can do TODAY to impact exit value LATER)▪ Identify potential buyers, investors/partners, and/or strategies▪ Create capital assets▪ Plan your ultimate exit strategy (it is NEVER TOO EARLY to begin this exercise!)

Economic and Exit Strategy Viability











▪ Now that your business has been analyzed to understand its strengths and weaknesses, it’s important to do the same for your auto peers / competitors

▪ Good business owners recognize where their competition excels and falls short in order to identify strategies to promote their own

▪ This process is known as Competitive Analysis



▪ Who are my current competitors in the auto supply value chain?▪ Market share?▪ Success rate?

▪ In what market(s) are my current competitors?▪ Niche?▪ Mass production?▪ Customer type?

▪ Are my competitors growing or scaling back?▪ Why?▪ How does this effect my business?

▪ How is my company distinguished from my competitors?▪ Competitor weaknesses to dominate?▪ Competitors strengths to overcome?

▪ What will I do if my competitors drop out?▪ How will you take advantage?▪ What will change about your business model?▪ Who will take their place?

▪ Who would be a good partner?▪ Other businesses to acquire as add-ons for my existing customers?▪ Which companies complement my services? Vice versa?

Questions to ask yourself











Professionals Can be of Great Service

▪ Consider hiring an outside consultant or analyst if:▪ Market data is not readily available to you▪ Time commitments for research and analysis are imposing on your ability to run a

business▪ Only one person is available to complete this analysis, as it increases the chance of

bias or missing important factors▪ You need assistance fully understanding your industry, market, and competitors

▪ Business Viability and Competitive Analysis are in-depth topics, even for experts. What is important is to seize the opportunity to get the best information to help your business succeed. The onus is on you as the business owner to choose the best way to help your business succeed, and sometimes requires informational analysis or viewpoints experts provide



Addressing the Business Gaps

17

▪ The answers to these questions guide how to approach your business

▪ Key tools like business viability and competitive analysis set you up to understand your business’s current situation and the related strengths and weaknesses. But how does a business overcome them?

▪ One often overlooked solution is M&A

▪ You could be buying, you could be selling, but regardless, every business needs an “always-on” M&A strategy to shore up weak points and capitalize on its strengths



How Can Experts Help Assess My M&A Strategy?▪ Final Scenario: Ask the same short- and long-term questions with regard to a

merger, partnership, or significant joint venture▪ What would your business gain?▪ What would it lose?▪ If your company has a distinct culture,

would it fit well with the newly merged entity?

▪ Is there a lack of culture, so that the personality of your company might be overtaken by the other company’s culture?

▪ How would you approach the target and what are you offering?

▪ How easily could the company integrate into yours?

Tip: Just jotting down notes throughout this exercise is an eye-opening experience, and may change owners’ or top management’s minds about their previous notions regarding acquiring, selling, or merging










Can I Expect to Sell my Company in this Market?

Deals ARE Getting Done!

UHY Alone Closed 5 deals in the Past 60 Days

U.S. M&A Activity Through the Crisis

Apr: 683May: 563June: 67

0

1,000

2,000

3,000

4,000

5,000

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22018 2019 2020

Wineman Technology, Inc.

has been sold to

CertTech, LLC

Kennedy Industries, Inc.

has been sold to

Vessco Holdings, LLC

an O2 Investment Partners portfolio company

The Paint Stripping Division of

Chemico Group

has been carved out and sold to

An Undisclosed Chemicals Supplier



AUTOMOTIVE Deals are Getting Done…but Activity has Slowed

Source: CapIQ

N.A. Automotive M&A Activity§ Deals ARE getting done!

§ But activity has slowed

§ Buyers are still looking§ Smaller buyer universe§ Opportunistic / value investors

§ COVID-19 Value Discount Receding§ Significant recovery (prior to re-opening!)

§ Owners are Preparing for Consolidation§ Funds for acquisitions§ Sale process preparation (30-45 days)

consolidation, who willbe consolidated, and how to react is key to making better decisions.Understanding the potential consolidation dynamic for your direct competitors.

2018: 284 2019: 286

0

10

20

30

40

50

60

70

80

90

100

Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4

2018 2019 2020 2021



N.A. Automotive Sub-Sector Breakdown

Source: CapIQ

Know Your Sub-Sector – And What it Means for M&A

§ Suppliers Continue to Lead the Way§ ~50% of current deal count

§ Retail Activity Strong§ Only sub-sector to increase as % of

deal share in Q2 2020

§ Auto-Tech has Slowed

§ For now

55% 52% 45% 44%

11% 11%

13% 12%

23% 22%

21% 28%

12% 15% 21%

16%

2018 2019 2020 Q1 2020 Q2

Auto-Tech

AutomotiveRetail

OEM's

Suppliers



What TYPES of Deals are Getting Done?

Pre-COVID During Pandemic Post-COVID

Seller Type Mixed (Healthy and Distressed) Distressed (or In-Process) Mixed (Healthy and Distressed)

Auto Sector All Sub-Sectors Outperformers All Sub-Sectors

Buyer Type Strategic / Consolidators Value / Opportunistic Mixed

Valuations Record Levels 25%+ discounts 90%+ of Pre-COVID Levels

Market Type Seller’s Market Buyer’s Market Balanced Market

COVID Impact [ ] Speed / Value Tradeoffs Value Constraints (Lenders)

[ ] Structure (Earn-Outs, Seller Notes) Slower Timelines (Lenders)

[ ] More / Longer Diligence

[ ] Operational Look-Back

[ ] EBITDAC Adjustments

Price Discovery Challenged(EBITDAC?)

Transaction Type Mixed M&A / Strategic Alliances Mixed

Divesting of non-core assets










What is the Value Impact of COVID-19?

EBITDA

§ 2019, 2020, TTM, 2021?

§ TTM = Wait 12 mos.?

§ EBITDAC?

Multiple

§ General market multiples?

§ Industry multiples?

§ Sub-Sector multiples?

§ Pre-Pandemic vs. Current?

§ Full or partial recovery?

M&A Value Drivers

Enterprise ValueX =



§ Profitability vs. peers?

§ Margin expansion or contraction?

§ Platform or add-on potential?

§ Annual revenue growth vs. peers?

Summary Observations

§ Magnitude of Add-Backs?

§ Credibility of add-backs?

§ Potential synergies?

§ Temporary vs. structural impacts?§ How have your customers been impacted

by COVID-19?

How Will Buyers (and Lenders, Targets) View My Numbers?

USD Millions

Sample Income Statements 2017 2018 2019 2020E

Revenue 40$ 45$ 50$ 40$ Growth % 13% 11% (20%)

Cost of Sales 32 36 40 32

Gross Profit 8$ 9$ 10$ 8$ % Gross Profit 20% 20% 20% 20%

Operating Expenses 4 5 5 5

Net Income 4$ 5$ 5$ 3$

Depreciation 1 1 1 1

Calculated EBITDA 5$ 6$ 6$ 4$ Management Adjustments:

Owner's Expenses 1 1 1 1 Other Adjustments 2 2 2 2 COVID-19 Adjustment - - - 2

Management Adjustments 3 3 3 5

Adjusted EBITDA 8$ 9$ 9$ 9$ % EBITDA margin 20% 19% 18% 21%



What Can I Do to Build Value Via Increased EBITDA?

§ Be pro-active in this environment

§ PPP loan and other government programs§ Take advantage of opportunities

§ Pursue prospective new customers§ Distracted peers?

§ Pursue prospective new markets and/or geographies

§ Reconsider cost structure§ Any low hanging fruit?

§ Proactively look at EBITDA from a buyer’s lens§ Add-backs / clean numbers§ Pick all low hanging fruit§ Pre-emptively complete a Quality of Earnings review



Multiples Have Been Supported by Rising Leverage

U.S. Middle Market Valuations

2.9x4.6x 4.5x 4.3x

5.4x6.9x

5.5x 5.6x 5.8x 5.9x 5.5x

4.0x

3.5x4.6x 4.3x

4.4x

5.1x

4.3x5.4x 5.5x 5.7x 6.1x

6.9x

8.1x9.1x

8.6x

9.7x

12.0x

9.8x

10.9x 11.3x 11.5x 11.6x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Debt/EBITDA Equity/EBITDA EV/EBITDA



Sources: Capital IQ; LMC May 2020

A Buyer’s Lens: U.S. Sales Outlook Improving, Risks Remain

N.A. Light Vehicle Sales (MM’s)

13.210.4 11.6 12.8

14.5 15.6 16.4 17.4 17.5 17.2 17.2 17

12.313.9 14.7

11.2

1.5

0

2

4

6

8

10

12

14

16

18

20

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Mili

ons o

f Veh

icle

s

US LV Sales Volume Risk



Sources: Capital IQ; LMC May 2020

A Buyer’s Lens: N.A. Production Recovery Path

N.A. Light Vehicle Production (MM’s)

16.9 16.3

12.414.1

15.8 16.7

0.5

0.80.7

0.5

0

2

4

6

8

10

12

14

16

18

20

2018 2019 2020 2021 2022 2023

Production Volume Risk

31%12%



Source: Capital IQ

Know Your Sub-Sector – And What it Means for M&A

~5% Discount Today

Pre COVID-19 COVID-19 Lows Current Market

Auto Sub-Sector EV / LTM EBITDA EV / LTM EBITDADiscount

(vs. Pre-C19)EV / LTM EBITDA

Discount(vs. Pre-C19)

Interiors and Exteriors 5.5x 4.0x 27% 5.2x 4%

Powertrain 7.3x 5.3x 27% 7.1x 2%

Diversified 8.8x 6.0x 31% 8.3x 6%

Chassis 5.1x 3.8x 25% 4.7x 8%

Automotive Retail 13.4x 10.8x 19% 14.5x (8%)

OEMs 10.2x 9.0x 12% 10.5x (2%)

Auto-Tech 12.8x 9.5x 26% 12.6x 1%

Supp

liers

Oth

er

~25% Discount(Near Complete Recovery)



Buyer’s Value

A Buyer’s View of Value

Discounted Cash Flow

Private Transactions

Premiums Paid

Public Companies

= Pre-COVID-19= Current

5.5x5.0x 7.0x6.0x 6.5x 7.5x 8.0x4.0x 4.5x EBITDA Multiple:

Strategic ConsolidatorsValue / Opportunistic Buyers



How Can MBEs Avoid Value Discounts?

§ Why do buyers sometimes apply a value discount to MBEs?§ Certain MBE contracts WILL be lost (lower future revenue and EBITDA)§ Certain MBE contracts MAY be lost (risk and uncertainty)§ Smaller ACTUAL or PERCEIVED universe of potential buyers (other MBEs)§ Less ACTUAL or PERCEIVED competitive tension

§ What is the typical value discount buyers ascribe to MBEs?§ Depends on structure of customer agreements/relationships§ 0% – 20% in most cases

§ What strategies can be employed to minimize or avoid such value discounts?§ Detailed revenue analyses§ Positioning other strengths (no other competition, highest quality products)§ Highlighting the strength / duration of actual or perceived “at risk” relationships§ Maximizing the number of MBEs in the sale process










Is Acquisition Financing Currently Available?

Source: Pitchbook

U.S. Middle Market Valuations

2.9x4.6x 4.5x 4.3x

5.4x6.9x

5.5x 5.6x 5.8x 5.9x 5.5x

4.0x

3.5x4.6x 4.3x

4.4x

5.1x

4.3x5.4x 5.5x 5.7x 6.1x

6.9x

8.1x9.1x

8.6x

9.7x

12.0x

9.8x

10.9x 11.3x 11.5x 11.6x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Debt/EBITDA Equity/EBITDA EV/EBITDA

Leverage Will Continue to Inform Value


Is Acquisition Financing Currently Available?

What Does the Lending Environment Look Like?

Pre-COVID During Pandemic Post-COVID

Lender Type Mixed (Highly Aggressive) Relationship / In-Process Only Mixed (More Selective)

Leverage 3.5x Senior, 4.0x Total Cautious Approach 3.0x Senior, 3.5x Total

Structure? Not Required Cautious Approach More Common

COVID ImpactEarn-Outs

New Deals Challenging Seller Notes

More Buyer Equity

(Lower Valuations)

Unusual Delays (Black Box)










Next Steps in Considering Either a Sale or Acquisition

What are the Next Steps?

For Potential Buyers For Potential Sellers For Capital Raising

Determine Target Criteria Value Assessment Capital Structure Assessment

Launch Buy-Side Search Process Begin Prep. Process (ASAP) Prepare Financial Package

Identify Targets Launch Sale Process Launch Capital Raising Process

Agree to Price / Terms Sign Letter of Intent Sign Term Sheet

Complete Diligence Complete Diligence Complete Diligence

Close Acquisition Close Sale Close Financing

4 – 6 Months 6 – 9 Months 2 – 3 Months

Market Timing will be Critical to a Successful Transaction!



Bold, well-executed M&A duringdownturns is an important

mechanism for recovery, survival, and growth

§ COVID-19 has caused fundamental changes to the overall economy. While some shifts are temporary, other thingswill never be the same, and leaders can turn to M&A to help push through these unprecedented times§ Following crisis-induced downturns, M&A has historically generated strong returns: By repositioning

through M&A, leaders can drive resilient growth and outmaneuver market uncertainty. Firms who bought ina downturn tend to have a higher total shareholder return (over a 3 year period) than their sector average

§ Suppressed valuations are only part of the equation: Opportunities that may not have been available in anup-market may be possible during crisis, or new openings for growth may emerge (i.e., Strategic M&A).Companies can take advantage of the environment to execute its strategic acquisition agenda and positionthe business to exceed industry-average growth once the economy normalizes post crisis

§ Now can be a great time to thoughtfully put M&A to work for you: Those who strategically leverage M&A aspart of a holistic response to COVID-19 over the next 1-2 years will be more likely to (i) outmaneuver marketuncertainty and (ii) outperform their competitors who did not over the next several years

22%30%

Increasefrom M&A

duringdownturns -11%

Increase from M&A

duringepidemic outbreaks

Decrease from M&A

during financial

shocks

Everyone Should Have an M&A Strategy in the Current Market

Source: Capital IQ, Accenture

Shareholder Return from M&A During Downturns



Key Takeaways

§ Don’t Panic

§ Evaluate yourself as an owner and the foundation of your business

§ Are you a buyer – there are opportunities out there!

§ Are you a seller – you can get a great deal done today!

§ Deals ARE getting done!

§ Determine the right strategy for your company AND assemble the right team


Contacts

Jeremy Falendysz Director

[email protected](313) 324-7134

Brandon BeauregardSenior Analyst


Corey MassellaManaging Director


Documents

UHY Advisors · Private and Confidential 7 Evaluating Your Business Foundation for the Future Evaluating your business for the future starts with understanding the pillars of your