2011 OUTLOOK FOR MID MARKET FIRMS  Middle Market Firms are defined as companies having less than$500 million in revenue. As reported in many sources and databases Mid Market Firms are being sold, in M&A transactions, at EBITDA multiples of 6.8x to 7.3 x up from early 2010 levels of 5.8x EBITDA.

For companies in North America with under $100 million in sales (which are the smaller firms) in the Mid Market space, EBITDA multiples for M&A transactions are in the range of 4 to 6x EBITDA  Commercial and corporate lending in the USA is still more restricted than in Canada and leverage metrics, for buy-outs, and acquisitions indicate that senior secured or senior unsecured lending metrics have inched up to 3.3x EBITDA from 3x levels in early 2010. Subordinated debt floats in the 0.4 x to 0.5 x EBITDA levels, leading to total leverage metrics of under 4x EBITDA. These levels will likely not materially change for 2011. Valuations remain in a tight range with some upside expected for 2011, based on the following trends and factors:

a) succession will remain a driving motivation for sellers; b) corporate buyers will accelerate M&A, based on cash balances (i. e. $900 billion for Standard and

Poors 500 index) and market demands for size and scale;

c) private equity has large cash balances and competes with corporate buyers; and d) On a global basis the IPO market remains dominated by Chinese IPO's. The market value of all USA

IPO's in 2010 was approximately 60% from Chinese issuers. If the GM IPO, which skews this percentage, was excluded, the percentage for Chinese IPO’s would be significantly higher. China's GDP is growing more than 10% per year and will surpass the USA economy, although not on a per capita basis, by 2020-2025 time frame in total size and scale.

 Size and scale of companies may have become the single driving force with respect to enterprise valuations and as importantly, for access to capital. Business strategy, business models and niche competitive core competencies can be drivers for creating greater enterprise value. Business owners and entrepreneurs need to really understand the strategies that are driving the larger, public company competitors, in the general industry, in which you compete. Failure to understand these business models and strategies will result in restricted access to capital and limited enterprise valuation enhancement opportunities, notwithstanding the execution of your own strategy and business model. All business owners, from time to time, should consider him or herself to be a buyer of other businesses or a seller. This mindset, of a being a buyer or a seller, draws a special clarity to formulating your own strategy and business model. Resources and commodities, in the public markets, have drawn most of the smaller to mid-market public equity raises in Canada. Non resource companies need to demonstrate that they have the invisible hand of private equity at work in their business model. This means, if you do not want or can not attract private

equity or institutional equity, still you need to be structured as if you had private equity and employed strategies and business models that include: governance (advisory board of directors if not a formal board of directors ); strategy (vision, mission, goals); business model to execute; and written plans that benchmark forecasts or budgets to actual and monthly written management, discussion and analysis to accompany YTD financial results. The seat of the pants, sole decision-making, no governance business models can still exist and succeed, but they will not be accorded much access to outside capital (from third party arm's length investors) nor will they receive the highest enterprise valuation metrics that would otherwise be possible. Trends that affect all companies and every business without exception include, but are not limited to the following: a) Access to capital is being crowded out by resource/energy/commodity sectors and Chinese IPO's.

b) The race to get bigger will be accelerated, if you have $5 million in sales, you should have $10 million; $50 million should be $100 million and $100 million should be $500 million in the view of the capital markets.

c) Enterprise valuations will be higher for those who have a defined strategy, a business model that works and a market "niche" that can be defined as having a top five market share of that niche and that niche is growing within an overall industry or broader market segment.

d) Credit will remain a scarce resource with lenders acting fast if they see losses being funded on by credit lines (even with margin allowances) and with far more asset based lender growth. One large private equity fund, based in the USA, cited that all 77 companies in its billion dollar(s) portfolio only used asset based lenders.

e) Business combinations, strategic alliances, and other derivative forms of mergers and acquisitions will increase as will M&A increase for 2011.

f) Leveraged deals will still require as much as 50% equity, thereby leaving some tension on valuation multiples in order for private equity to get the returns on equity that they need for their limited partners.

g) Auction processes, for most middle market firms, will not generate the highest value in 2011. An auction process, used from the start of an M&A process can lead to the perception that the company is desperate or inexperienced at M&A. Private equity buyers, for the most part do not want to be part of an auction process and many stay out of these auction transactions where they would otherwise come in and bid. Many larger corporate buyers do not "acquire" much smaller competitors or do so only as "tuck -ins". The art for the sellers (in 2011) will be to create a pseudo auction at the end of a negotiated process based on a strategic fit.

h) Lead times for M&A will remain as long as they were in 2010 - there are now three levels of due diligence in most M&A transactions : a) exploration of strategic fit; b) exploration of valuation and then negotiation of value based on this exploration; followed by c) more formal legal, operational and financial closing due diligence.

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I) Ensuring access to capital is a full time process. When a business raises capital only when it is needed the company is accepting a market risk that is not necessary. Opportunistic raising of capital is the far more prevalent form of action, unfortunately, this opens an owner to higher costs and the possibility of not getting the capital required in a timely fashion or not getting the capital at an appropriate price or cost.

j) Business topics are no longer solely investor relations or press relation communication topics - business leaders and business topics have become mainstream 24/7 media "content". This means that if Motorola is split into two companies in the new-year or Valeant Pharmaceuticals acquires Vital Science (IBF client) for $10 million and then enters into a billion dollar merger with Biovail weeks later the trends and "headlines" have an impact on even the smallest business in these industries.

k) Deal terms and creativity will increase in order to bridge valuation gaps; employ financing techniques; mitigate due diligence concerns; and otherwise keep up with the “state of the art” larger, more public deals. Stalking horse bids, go shop possibilities, partial exclusivity and other techniques from related disciplines could and should be used by all advisors to benefit their clients.

l) Tax differentials will lead to more foreign interest in Canadian Corporate status. Many American business editorials are playing up the fact that Canada now has a federal corporate income tax rate that is half of the USA rate. Canadian companies also benefit from the SR&ED ("Shred") research income tax credits are regularly "counted" in the EBITDA of the Canadian company.

 

Conclusion

There is money available and M&A opportunities for all companies in any industry. It is very important for all mid market companies to implement private equity model and set up proper corporate governance, financial reporting (monthly budget to actual comparisons with MD&A discussions) based on a clear corporate vision and strategy.

M&A will continue at a greater rate than in 2010 and you need to be ready. Business strategy and business models are not just buzz words – you need a clearly effective business model.

If you don’t have an advisory board with at least three knowledgeable individuals, get one!!

Should you need assistance in with transaction (financings, M&A) or for properly preparing your company to enhance its enterprise value please contact Investor Based Finance Group.

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