TEG Presentation MAMA 10022013
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Transcript of TEG Presentation MAMA 10022013
Confidential Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated
without consent of The Edmonds Group, LLC.
MAMA Conference, Orlando Florida
PERS Industry Valuations
October 2, 2013
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Summary
Introduction Valuation Drivers Valuations Q&A
INTRODUCTION
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Henry Edmonds
Over 28 years of capital markets experience Last 23 in the alarm industry
Started The Edmonds Group in 2004 Co-Founder (1990) and CEO of SLP Capital (thru 2004) Largest lender to alarm industry when sold to CapitalSource in 2004 Over $400M of alarm loans
Wall Street investment banker (1985-1990) $2B in transactions in the airline industry
MBA, Harvard Business School BS, with distinction, civil engineering, University of
Virginia
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
The Edmonds Group
Investment banking services Capital raising and mergers/acquisitions advisory
40+ transactions closed Average transaction size about $50 million Sweet spot $10 million to $300 million
$3.0+ billion transaction value Focused on security alarm and PERS industries Specialize in recurring revenue service businesses
Broad experience representing buyers, sellers, borrowers and capital providers
High level of client service
VALUATION DRIVERS
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Key Valuation Metrics
At the highest level, everything can be reduced to four key metrics: Cash flow Churn (attrition rate) Growth rate/new account volume Creation cost Only affects valuation when selling a company
Dealers must have the ability to provide good data on these metrics if they are going to maximize value!
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Key Valuation Metrics
Cash flow margin from existing customers Adjusted EBITDA and SSFCF
Churn rate Total lost RMR on a TTM or trailing 6 mo basis divided by
average RMR outstanding Canceled and change in over 90 days
Creation cost of new customers Total direct and indirect cost associated with new account
creation, less upfront revenue, divided by newly created RMR
Growth rate Net growth rate after replacing attrition
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
PERS Industry Metrics
Excellent Average Below Average
Growth Rate 20%+ 5%-20% <5%
Creation Cost as a multiple of RMR
<12x 12x-18x >18x
Margin (Existing Customers)
>85% 75%-85% <75%
Churn <25% 25% to 35% >35%
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Other Valuation Drivers
Size of transaction Company reputation/quality of management Quality of account and financial data Ease of reprogramming/line swing Sales model for generating customers Direct to retail or through health care organizations
Geography Local or national
Rate of unit recovery/redeployment Will be factored into creation cost
Contracts Contract form, term, how well organized
Billing profile ACH, credit card, invoice
VALUATIONS
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Valuation
Buyers have a target return on investment (ROI) True for strategic buyer or private equity investor
ROI is driven by cash flow buyer can expect from your company
Key metrics determine cash flow and cash flow growth rate Shrinking pool of accounts worth a lot less than company with an
efficient growth engine Comparable transactions provide important valuation
data points Few recent transactions in the PERS industry to look to But same dynamics apply for PERS as for alarms and other RMR
industries Plenty of data points in other industries
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Valuation Approach
Buyer will develop key assumptions based on target companies past performance
Determine a capital structure based on current market conditions Availability of debt and debt terms
Buyer will do a financial model for target company 5+ years into the future
Buyer’s required IRR will determine what buyer CAN pay Required IRR driven by buyer’s strategy, its investors, market
conditions, “next best alternative”
Negotiation will determine what buyer WILL pay Buyers never pay more than they think they have to
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Theoretical Company Profile
PERS business $200K in RMR Avg. RMR $30/month Margin on existing customers 80% $30K fixed monthly overhead 30% churn 15x creation cost 30% net growth rate Growth above replacement of churn
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Valuation Assumptions - Example
Company purchased as a platform Company growth rate, attrition, creation cost and incremental
customer margin continue unchanged for 5 years Overhead grows at slower pace than RMR (7.5%) Margins increase as company scales
At year 5 and beyond, company would just replace attrition (zero% net growth.) Other metrics don’t change
Target ROI of 25% per annum Purchaser would get 3x their money if sell in 5 years
Bank line of credit available at 12x performing RMR 6% interest rate
Solve for purchase price
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Purchaser View – 5 Year Projections
YearPrior to
Acquisition Acquisition 1 2 3 4 5Income Statement:Revenue 2,100,000$ 2,759,111$ 3,710,697$ 4,990,475$ 6,711,634$ 9,026,402$ Expenses 420,000$ 551,822$ 742,139$ 998,095$ 1,342,327$ 1,805,280$ Fixed Overhead 372,636$ 401,565$ 432,740$ 466,334$ 502,537$ 541,551$ EBITDA 1,307,364$ 1,805,723$ 2,535,818$ 3,526,045$ 4,866,770$ 6,679,571$ EBITDA % 62% 65% 68% 71% 73% 74%Interest 155,453$ 180,901$ 206,539$ 231,372$ 253,954$ EBT 1,650,270$ 2,354,917$ 3,319,506$ 4,635,398$ 6,425,616$
Balance Sheet:Purchased RMR Remaining EOY 200,000$ 268,978$ 361,745$ 486,507$ 654,298$ 879,958$ Debt 2,400,000$ 2,819,063$ 3,247,169$ 3,670,519$ 4,068,847$ 4,413,031$ Equity 3,309,977$ 3,309,977$ 3,309,977$ 3,309,977$ 3,309,977$ 3,309,977$
Operating:Ending RMR 200,000$ 268,978$ 361,745$ 486,507$ 654,298$ 879,958$ RMR Created (Gross) 92,308$ 137,956$ 185,535$ 249,524$ 335,582$ 451,320$ Creation cost $ 1,384,615$ 2,069,333$ 2,783,023$ 3,742,856$ 5,033,725$ 6,769,801$ Creation Cost Mult. 15.0x 15.0x 15.0x 15.0x 15.0x 15.0xDebt/RMR 12.0x 10.5x 9.0x 7.5x 6.2x 5.0x
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Base Valuation
Valuation $5,709,997
RMR at purchase $200,000
Valuation as a multiple of RMR 28.5x
SSFCF (prior year) $615,056
Valuation as a multiple of SSFCF 9.3x
Adj. EBITDA (prior year) $1,307,364
Valuation as a multiple of Adj. EBITDA 4.4x
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Scenarios
The following tables show the impact of changing key metrics on valuation All scenarios assume a target ROI of 25% per annum
Growth ranges from 0% to 60% per annum Attrition from 20% to 40% Creation cost from 9x to 21x Existing Customer Margins from 70% to 85%
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Growth Rate Sensitivities
Scenario Net Growth Rate
Valuation as mult. of RMR
Valuation as mult. of SSFCF
Valuation as mult. of Adj. EBITDA
1 0% 16.7x 5.1x 2.1x 2 15% 20.4x 6.4x 2.9x Base Case 30% 28.5x 9.3x 4.4x 4 45% 44.5x 14.9x 7.3x 5 60% 76.1x 26.2x 13.3x
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Attrition Sensitivities
Scenario Attrition Valuation as mult. of RMR
Valuation as mult. of SSFCF
Valuation as mult. of Adj. EBITDA
1 20% 40.8x 9.6x 6.2x 2 25% 34.5x 9.5x 5.3x Base Case 30% 28.5x 9.3x 4.4x 4 35% 22.9x 9.2x 3.5x 5 40% 18.0x 9.4x 2.8x
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Creation Cost Sensitivities
Scenario Creation Cost
Valuation as mult. of RMR
Valuation as mult. of SSFCF
Valuation as mult. of Adj. EBITDA
1 9.0x 51.1x 11.4x 7.8x 2 12.0x 39.1x 10.4x 6.0x Base Case 15.0x 28.5x 9.3x 4.4x 4 18.0x 19.9x 8.4x 3.0x 5 21.0x 14.0x 8.3x 2.1x
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Margin Sensitivities
Scenario Avg. RMR
% Gross Margin *
Valuation as mult. of RMR
Valuation as mult. of SSFCF
Valuation as mult. of Adj. EBITDA
1 $20.00 70% 17.5x 16.0x 3.8x 2 $25.00 76% 23.7x 10.4x 4.1x Base Case $30.00 80% 28.5x 9.3x 4.4x 4 $35.00 83% 32.1x 8.8x 4.5x 5 $40.00 85% 34.8x 8.6x 4.6x
* Assumes Servicing Costs of $6/PERS account/month
Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.
Sensitivity Scenario Summary
76.1x
51.1x
40.8x 34.8x
16.7x 14.0x
18.0x 17.5x
0.0x
10.0x
20.0x
30.0x
40.0x
50.0x
60.0x
70.0x
80.0x
Net Growth Attrition Creation Cost Margin
Max and Min RMR Multiples from Scenarios
28.5x Base Case Scenario
QUESTIONS AND ANSWERS
Contact Information
Henry Edmonds The Edmonds Group, LLC
16 Lenox Place St. Louis, MO 63108
Ph: 314.422.4649 Email: [email protected]
Website: www.theedmondsgroup.com Facebook: www.facebook.com/TheEdmondsGroup
Twitter: TheEdmondsGroup