John A. Lee, Senior Managing Director
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John A. Lee, Senior Managing Director [email protected] 610-205-6106. Michael J. Sobota, Vice President [email protected] 610-478-2294. FEBRUARY 2012. 236198v3. Table of Contents. I.Griffin Overview II.Comparable Public Company and Comparable Transaction Analysis

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John a lee senior managing director jlee go2griffin 610 205 6106

John A. Lee, Senior Managing Director

[email protected]

610-205-6106

Michael J. Sobota, Vice President

[email protected]

610-478-2294

FEBRUARY 2012

236198v3


Table of contents

Table of Contents

I.Griffin Overview

II.Comparable Public Company and Comparable Transaction Analysis

III.Preliminary Financial Analysis

IV.Sell-Side Process

V.Potential Purchasers

VI.Summary

Appendix

I.Selected Griffin Team Members


John a lee senior managing director jlee go2griffin 610 205 6106

I. Griffin Overview


Griffin overview

Griffin Overview

  • Established in 2001, Griffin is the largest middle-market corporate investment banking firm in Pennsylvania with over 40 Investment Banking professionals

  • Griffin is a FINRA licensed merger and acquisition advisory and institutional private placement investment banking firm serving middle market companies, family-owned businesses, financial institutions and private equity sponsors

  • Principals include former CEOs, CFOs, CIOs and several other executives who bring a wealth of management experience and ability to assist Griffin in looking at problems from the perspective of senior management

  • Unlike most investment banks, we have strong technical, financial and tax accountants with Big 4 backgrounds who provide efficient, timely and complete investment banking and placement services

Experienced

Focused

Driven


Investment banking services

Investment Banking Services


John a lee senior managing director jlee go2griffin 610 205 6106

II. Comparable Public Company and Comparable Transaction Analyses


Abc financial services overview

ABC Financial Services Overview

  • The Company is a privately held financial services firm that has two primary lines of business, the financial advisory business and the asset management business

  • Financial Advisory Business

    • The financial advisory business provides advice to corporations related to the issuance of their publicly-traded debt

    • The financial advisory business charges a fixed fee based on the complexity of the issuance. While some of these fees are retainer or hourly based, the vast majority are contingent on the underlying debt actually being issued. Once the Company is hired, however, it is rare that the debt issuance doesn’t close

    • Although the financial advisory business also has repeat clients, the majority of the revenue cannot be deemed recurring because it does not occur in consecutive years (typically the Company will do work for its repeat clients once every three-five years)

  • Asset Management Business

    • The asset management business manages corporate cash balances. The Company invests these funds primarily in short and medium–term fixed income securities

    • The asset management business charges a quarterly fee based on the amount of its asset under management (“AUM”). AUM is currently around $30 billion

    • The asset management business has a strong recurring revenue model because its client retention rate of close to 100%


Abc financial services overview1

ABC Financial Services Overview

  • The Company has a national platform with 30 offices in the U.S. staffed by approximately 400 professionals. It has grown from a small, local, 4-partner firm 35 years ago

  • In the early days, the Company relied on client contacts and relationships held by the individual partners. Today, the ABC name carries the same weight among corporate finance and treasury professionals that IBM carries with technology professionals. Indeed, “nobody ever gets fired for hiring ABC”

  • The feeling amongst the Company’s shareholders, particularly the older ones, is that this institutional value isn’t reflected upon shareholder retirement when the Company purchases the shares at book value

  • The Company has proven to be strongly recession-resistant

    • Revenue reached a record $100 million in 2011. The Company’s revenue CAGR from 2007-2011 was 8% and is projected to grow 10% in 2012

    • In 2011, approximately 55% and 45% of its revenue came from the financial advisory business and the asset management business, respectively

    • The Company has made several small financial advisory acquisitions in its past, but they have all been below $5 million in value because equity funding is limited to shareholder contributions and the Company’s lender doesn’t lend much to asset-light services companies. This shortage of acquisition capital has been frustrating, because the Company has several larger Asset Management acquisition opportunities in the $30-50 million range that have significant operating expense synergies with the Company’s asset management business


Abc financial services overview2

ABC Financial Services Overview

  • Like many professional services firms (i.e. law firms and accounting firms), the Company pays virtually all of its profits to its owners each year in the form of compensation (not distributions)

  • Reported EBITDA is used to fund income taxes and capital expenditures. Therefore, net income and EBITDA in 2011 were $1.0 million and $5.0 million, respectively

  • Based on a research performed on other financial advisory and asset management firm, the range of compensation expense/revenue ratio is 40-70%, with an average of 55%. The Company’s compensation/revenue ratio is 65%


Abc financial services overview3

ABC Financial Services Overview

  • The Board of Directors of ABC Financial Services Firm has the following objectives for any proposed transaction:

    • A transaction that would transform the Company from being run for maximum employee compensation to building long term shareholder value

    • Obtain partial liquidity for all of its 50 Managing Directors (“MD”) Owners, yet keep them incented going forward

    • A transaction partner(s) must have sufficient capital that can be used for larger acquisitions in the future

    • All 400 employees are to be retained post-closing


Methodology introduction

Methodology Introduction

  • The only true way to know what the Company is worth is to approach the market in a controlled, competitive process

  • However, prior to approaching the market, it is helpful to develop a preliminary range of value(1) for the Company based on commonly used methodologies, some of which may also be employed by prospective transaction partners

  • The methodologies Griffin will employ to develop its preliminary view of value include:

    • Comparable public company analysis

    • Comparable transaction analysis

    • Private Equity LBO IRR analysis

  • The type of partner will also influence value:

    • Strategic partners – Includes partners that are within ABC Financial Services (“ABC”) industry or related industry and see the acquisition as a long-term strategic growth opportunity

    • Financial partners – Includes financial investor groups that invest in private companies, with leverage buyout structures, with the intent to grow the business and then sell the company in three to five years in order to realize a return on their investment

(1) Procedures performed do not constitute a formal valuation but rather a range of possible values based on Griffin experience and recent market data. A formal assessment of the valuation of ABC Financial Services is subject to the Fair Market Value and Fairness Opinion Committee of Griffin.


Comparable public company analysis

Comparable Public Company Analysis

  • Based on Griffin’s understanding of ABC’s business, Griffin reviewed and selected public companies in the following categories that perform the same or similar services of ABC, including:

    • Investment Banking

    • Asset Management

  • Certain similar businesses are private and, therefore, do not have available public information


Comparable public company analysis investment banking

Comparable Public Company Analysis – Investment Banking

Source: CapitalIQ, data as of 01/16/12


Comparable public company analysis asset management

Comparable Public Company Analysis – Asset Management

Source: CapitalIQ, data as of 01/16/12


Comparable transaction summary

Comparable Transaction Summary

  • Griffin searched for comparable transactions announced or closed after January 1, 2009. Transactions were selected based on a review of ABC’s industry classification and key business description terms:

    • Investment Banking

    • Asset Management

  • The results yielded many transactions from which the most applicable ones were chosen based on their similarity to ABC’s business


Comparable transaction analysis select m a transactions investment banking

Comparable Transaction Analysis – Select M&A TransactionsInvestment Banking

  • Comparable transactions analysis yielded 22 transactions in this industry, only 1 of which disclosed the deal multiple

Source: CapitalIQ, data as of 1/16/12


Comparable transaction analysis select m a transactions investment banking1

Comparable Transaction Analysis – Select M&A TransactionsInvestment Banking

Source: CapitalIQ, data as of 1/16/12


Comparable transaction analysis select m a transactions asset managers

Comparable Transaction Analysis – Select M&A TransactionsAsset Managers

  • Comparable transactions analysis yielded 27 transactions in this industry, 7 of which disclosed deal multiples

Source: CapitalIQ, data as of 1/16/12


Comparable transaction analysis select m a transactions asset managers1

Comparable Transaction Analysis – Select M&A TransactionsAsset Managers

Source: CapitalIQ, data as of 1/16/12


Comparable transaction analysis select m a transactions asset managers2

Comparable Transaction Analysis – Select M&A TransactionsAsset Managers

Source: CapitalIQ, data as of 1/16/12


Comp analysis summary

Comp Analysis Summary

  • Comparable Public Company Analysis implies an EV/LTM EBITDA multiple of 6.8x and 5.2x (after illiquidity and size discount) for Investment Banks and Asset Managers, respectively

  • Comparable Transaction Analysis implies an EV/LTM EBITDA multiple of 8.3x for Asset Managers while Investment Banks did not yield a sufficient population of transactions with disclosed multiples

  • Based on the comparable public company, comparable transaction analyses, and Griffin experience, Griffin would expect the range of value for ABC to be around 6.5x to 7.5x EV/EBITDA range


John a lee senior managing director jlee go2griffin 610 205 6106

III. Preliminary Financial Analysis


Preliminary financial analysis

Preliminary Financial Analysis

Overview

  • Griffin completed a detailed analysis of ABC to better understand the Company’s strengths and weaknesses

  • Griffin analyzed the Company’s financial performance to explain trends and variances

  • Griffin examined ABC’s financial statements “from the perspective of a buyer”


Preliminary financial analysis1

Preliminary Financial Analysis

Balance Sheet

Source: All information obtained from ABC audited financial statements.


Preliminary financial analysis2

Preliminary Financial Analysis

Income Statement – Company Projections

  • Griffin feels that potential transaction partners will discount the future growth rate to 5% from 10% to more conservatively underwrite the transaction


Preliminary financial analysis3

Preliminary Financial Analysis

Income Statement – Griffin Conservative Projections


Preliminary financial analysis4

Preliminary Financial Analysis

Valuation Analysis – No Compensation Cap


Preliminary financial analysis5

Preliminary Financial Analysis

Compensation Policies of Publicly Traded Investment Banks

  • Average compensation expense as a percentage of revenue for investment banks is approximately 55%

  • ABC Financial Services compensation as a percentage of revenue is 65%


Preliminary financial analysis6

Preliminary Financial Analysis

2011 Income Statement – Actual vs. Proforma for 55% Compensation Cap

  • If ABC Financial Services were to cap compensation at 55% of revenue, EBITDA would increase by $10 million and create significant equity value

  • Capital gains on the sale of stock are taxed at 15% (federal) vs. compensation taxed at 35% (highest marginal federal rate)

  • Average compensation per MD would decrease by $200,000 from $750,000 to $550,000. Based on compensation studies, $550,000 is in line with industry standards


Preliminary financial analysis7

Preliminary Financial Analysis

Valuation Analysis – 55% Compensation Cap


Preliminary financial analysis8

Preliminary Financial Analysis

Private Equity LBO Model – Assumptions

  • Middle of valuation range is 7.0x EBITDA = $105 million

  • Private Equity investor wants MDs to have “skin in the game” via retained or “rolled” equity investment

    • Griffin estimates approximately 28% Rolled Equity stake would be required ($26.5 million)

    • Aligns economic interest between Private Equity and MDs via “second bite of the apple” for MDs

      • Through the effect of leverage, the MDs still own 47% of the common equity post-closing

  • Prudent levels of leverage used: 2.5x Senior Debt, 1.0x Subordinated Debt

    • Reflects “asset-light” balance sheet

  • Assumes the Company is sold in 5 years for same exit multiple (7.0x)

    • Model #1: 10% growth Company projections used

    • Model #2: Conservative 5% growth model is used

  • Cash liquidity to MDs is substantial, but not so much per MD ($1.2 million average after-tax) to enable them to quit and retire post-closing

    • MDs will also have to sign a 5-year Non-Compete and Non-Solicit Agreement

  • Private Equity common ownership on a fully-converted basis of 53% provides a 20-24% IRR depending on the growth scenario utilized


Preliminary financial analysis9

Preliminary Financial Analysis

Private Equity LBO Model – Summary – 10% Revenue Growth


Preliminary financial analysis10

Preliminary Financial Analysis

Private Equity LBO Model – Summary – 5% Revenue Growth


John a lee senior managing director jlee go2griffin 610 205 6106

IV. Sell-Side Process


Typical engagement phases overview

Typical Engagement Phases Overview

In each phase, the client has the opportunity to control the direction of the process


Typical engagement timeline

Typical Engagement Timeline

PHASES

Tailor Process

Confidential Competitive Atmosphere

2 weeks

I. EVALUATION

2 – 3 weeks

II. PREPARATION

III. SOLICITATION

4 - 6 weeks

IV. NEGOTIATION

4 weeks

V. FINALIZATION

8 - 10 weeks

Approximately 5-6 Months


Griffin s role and responsibilities

Griffin’s Role and Responsibilities

  • Interview and advise the Seller on goals and objectives of the process

  • Tailor transaction process to achieve the Seller’s goals and objectives

  • Determine and collect information from the Seller that is necessary to market the business

  • Compose comprehensive written materials describing the operational, strategic, managerial, and financial elements of the business

  • Anticipate and advise the Seller on potential “business” and “valuation” issues that may be raised during the transaction process

  • Research and develop a list of prospective strategic and financial buyers / investors, and work with the Seller to determine which parties to approach

  • Contact and qualify prospective buyers or investors and secure confidentiality agreements

  • Distribute written materials describing the business and address questions about the business

  • Solicit and negotiate multiple rounds of offers and prioritize relative to Seller’s goals and objectives

  • Arrange and prepare management for meetings with prospective buyers / investors

  • Manage buyer / investor due diligence process including the organization of comprehensive data room files to be shared with interested parties in the later stages of the process

  • Advise Seller on offers received and selection of a buyer / investor

  • In conjunction with the Seller’s attorney, assist with negotiation of transaction documents

CREATE COMPETITIVE ATMOSPHERE AND TRANSACTION MOMENTUM


Company s role and responsibilities

Company’s Role and Responsibilities

  • With Griffin’s assistance and advice, determine and prioritize the goals and objectives of the transaction process

  • Provide financial and operational information to Griffin for preparation of written materials describing the business

  • Review and approve written materials prepared by Griffin

  • Provide answers and / or information to Griffin in response to follow-up questions from prospective buyers / investors

  • Participate in presentations and facility tours with prospective buyers / investors

  • Provide Griffin with information for data room files, which will be shared with prospective buyers in the later stages of the process

  • Review offers and select buyer / investor based on consultation with Griffin

  • Respond to selected buyer’s / investor’s final due diligence requests

  • Review and execute transaction documents

STAY FOCUSED ON THE BUSINESS AND ACHIEVE BUDGET / FORECAST


John a lee senior managing director jlee go2griffin 610 205 6106

V. Potential Purchasers


Potential purchasers

Potential Purchasers

  • 2006-2008 were record-breaking private equity fund raising years. There continues to be a tremendous amount of liquidity in the U.S. private equity markets waiting to be deployed (estimated $500 billion)

  • U.S. Fundraising and the number of funds continues to slow drastically from Q4 2007 through Q4 2011. When 2007-2008 fund capital commitments expire in 2012-2013, private equity liquidity could dry up dramatically unless fund raising picks up

  • Griffin believes ABC has the characteristics of a private equity platform company

  • Based on Griffin’s recent experience with professional/financial services companies, Griffin believes ABC fits the criteria for at least 200private equity firms

Private Equity Buyers


Potential purchasers1

Potential Purchasers

  • Griffin anticipates ABC will also have significant interest from strategic buyers

    • Buoyed by record levels of corporate cash and poor organic revenue growth, strategic M&A buyer activity is strong

    • Foreign buyers are able to use the weak U.S. dollar to make favorable purchases

Strategic Buyers

  • Griffin anticipates strategic buyers to include:

    • Investment Banks

    • Asset Managers

  • The major issue with large strategic buyers is they will most likely not want the MDs to retain ownership. They will substitute the Rolled Equity for an Earn-out – an inferior solution

    • There will also be operational and strategic risk inherent in any strategic combination that is lessened considerably with a Private Equity partner

  • Commercial Banks

  • Consulting Firms


John a lee senior managing director jlee go2griffin 610 205 6106

VI. Summary


Summary

Summary

Questions and Answers

  • What is the value of ABC Financial Services Firm?

    • Griffin believes the range of purchase price multiples for ABC Financial Services is 6.5x-7.5x

    • The equity value of ABC Financial Services depending on ABC Financial Services compensation cap. Below is a summary of equity value ranges:

  • We expect you to market the Company to strategic and financial buyers. What are the pros and cons of partnering with each type of buyer/investor?

    • Strategic:

      • Pros: 1) Likely to pay a higher price, 2)knowledge of the industry

      • Cons: 1) Likely will not allow ABC Financial Services to roll equity, and participation in future upside is limited to an earn-out, 2) Likely will not keep all 400 employees (i.e. will look for synergies), 3) Change in Company culture and integration risks

    • Financial:

      • Pros: 1) Will allow partial liquidity and rolled equity so MDs can take some chips off the table, yet still participate in future upside, 2) capital and incentive to make acquisitions, 3) Company culture and 400 employees remain as is

      • Cons: 1) Likely will not be able to pay as much as a strategic buyers, 2) Company will have to operate with more leverage


Summary1

Summary

Questions and Answers

  • What form of consideration to do you expect ABC Financial Services Firm to receive at closing? Post-closing?

    • Strategic: Likely cash and earn-out (earn-out percentage from 20-50%)

    • Financial: Part cash, part rolled equity (20% – 40% rolled equity)

  • What type of transaction capital structure should ABC Financial Services Firm expect if it is purchased by a financial buyer (i.e. senior debt, subordinated debt, equity)?

    • ABC Financial Services should expect a financial buyer to use senior debt, subordinated debt and equity to finance the transaction

    • ABC Financial Services should expect approximately 60% of the purchase price to be funded using debt and the remaining 40% to be equity from a financial buyer’s committed fund

  • Please explain your sell-side process and how long it will take?

    • 5-6 months (please refer to Section IV for a detailed timeline)


John a lee senior managing director jlee go2griffin 610 205 6106

Appendix I. Selected Griffin Team Members


Selected griffin team members

Selected Griffin Team Members

EXPERIENCE

  • Mr. Lee has over 18 years of investment banking and private equity investing experience with middle market commercial and industrial companies

  • Personally initiated or managed over 50 transactions as an investment banker, and 3 as a private equity principal

  • 50% of transaction experience is in sell-side mergers and acquisitions, 25% in private placements of debt and equity capital, and 25% in management buyouts and other buy-side merger and acquisition assignments

  • Experience includes Principal of Horizon Partners, Ltd (private equity investment firm), Director at Berwind Financial, L.P., and Investment Banking Officer at Crestar Securities Corp. Current President for the Philadelphia Chapter of the Association for Corporate Growth and past Board Director for Realpoint, LLC, Lantor, Inc., and AirWave Services Corp.

John A. Lee

Senior Managing DirectorGriffin Financial Group LLC

Contact Information:

Phone: (610) 205-6106

Email:[email protected]

Office Address:

620 Freedom Business Center

Suite 210

P.O. Box 61926

King of Prussia, PA 19406


Selected griffin team members1

EXPERIENCE

Mr. Sobota provides investment banking services to middle market commercial, industrial and services companies

Experience includes merger and acquisition advisory, capital raise and strategic planning services. Also advises clients on financial accounting matters

Public accounting experience with Deloitte & Touche LLP

As an Audit Manager led client engagements for Fortune 150 and other clients within the commercial, industrial and services sectors

Involved in the accounting aspects of mergers and acquisitions and private and public placements of debt and equity

Certified Public Accountant and member of the Pennsylvania Institute of Certified Public Accountants and the American Institute od Certified Public Accountants

Received a B.S. in Accounting and a B.S. in Finance from DeSales University

Selected Griffin Team Members

Michael J. Sobota

Vice President

Griffin Financial Group, LLC

Contact Information:

Phone: (610) 478-2294

Email:[email protected]

Office Address:

607 Washington St.

P.O. Box 1497

Reading, PA 19603


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