Optimizing Enterprise Value

Optimizing Enterprise Value NEFA Presentation March 15, 2019 Jim Jackson and Bob Rinaldi

Bob Rinaldi-Bio/Info • President – Bob Rinaldi, LLC Advisory Services • Innovative financial executive who creates and assists in the implementation of strategic plans, growth strategies, and developing successful solutions to independent lessors, banks, service providers, manufacturers, and international firms. • 30 plus years of industry experience including Information Leasing Corp. / Provident Bank, President National City Capital Canada, EVP National City Commercial Capital (now PNC), SVP CSI Leasing, and CEO of Commercial Industrial Finance. • International Speaker and Published Writer • BS- Michigan State University

Jim Jackson-Bio/Info • Managing Director and M&A Practice Leader for The Alta Group, LLC • Provide M&A advisory services, debt and equity placement, valuations and due diligence services • 30 plus years of industry experience including Signal Capital, AT&T Capital, Founder Deutsche Financial Services, CFO MicroFinancial / TimePayment. • MBA Babson College – Wellesley, MA • Recent transactions include a bank –owned equipment finance company valuation, Verdant Commercial Capital’s acquisition of Intech Funding, Marlin’s acquisition of Fleet Financing Resources, and Fuyo General Lease Co., Ltd.’s significant investment in Pacific Rim Capital.

Optimizing Enterprise Value • Creating a business strategy, environment, operating platform and customer experience that will make your organization more valuable to potential funding sources, potential acquirers, customers and key stakeholders.

Predictable Earnings Growth and History • A history of stable and predictable earnings growth provides consistency and greater certainty to expected future results. • It is acceptable to have outlier results for a given year, but the cause of the variance should be explained in detail and accompanied by an explanation of what has been done since to avoid the possibility of it happening again in the future.

Audited or Reviewed Financial Statements • Financial statements that are audited or reviewed by an accounting firm who has experience in the equipment finance and leasing industry provides additional comfort to an investor, funding source, or acquirer. • A number of proposed transactions have failed to close due to improper revenue or expense recognition which is generally identified during the due diligence process. • Revenue and expense recognition of documentation fees, interim interest, initial direct costs, etc. can be potential problem areas.

Expertise in a Growing Market Segment • All else being equal, a Company that has an expertise in an equipment segment or market niche that is expected to grow over the next several years will have more value than one that is expected to decline or remain flat. • These high growth target companies are generally very attractive and acquirers will typically pay a significant premium to enter or expand into growth markets which would otherwise take years for the acquirer to accomplish with organic resources. • Consider the contrast of an organization that has a niche in the high growth construction equipment segment vs. an organization with a niche focus on landline phones.

Management Experience and Depth • An organization that is operated by a professional seasoned management team will be more valuable. • Industry reputation, honesty, and integrity are key factors and will be closely scrutinized by potential acquirers and funding sources. • Acquirers will specifically want to invest in management teams that have operated companies successfully and profitably through both good and bad economic cycles and have demonstrated proficiency in both markets. • Owners should Identify and groom a possible successor within the senior management team who could transition into the top role with little or no disruption to the business.

Deep Client and Funding Relationships • Acquirers and investors will be more willing to invest in companies that have long and deep client and funding relationships which provide a higher probability of continuing the relationship. • A high percentage of repeat customer relationships will provide a indication that the Company delivers a strong customer service based value proposition. • The level and quality of your funding relationships plays a role in your perceived value. • Always a good idea to request and receive portfolio performance reports from those funding sources that you sell transactions to on a non- recourse basis.

Document Policies and Procedures • Develop and implement conservative policies and procedures: • Schedule of Authority • Accounting Policies and Procedures • Initial Direct Costs • Credit Authority and Guidelines • Pricing • Loss Reserves, Non-accruals, Charge-offs • Buyouts and early terminations • Residual setting policies and asset sale authorities • Sales, Use and Property tax compliance

Budgets / Forecasts and Variance Analysis • Create and Maintain annual budgets and periodic forecasts and prepare variance analysis reports • These demonstrate that senior management has a formal financial plan in place and financial targets that it is striving to achieve. • Understand your specific value drivers and know the specific reasons that you are under or over budget and forecast revenues and expenses (volume / margin / portfolio quality / residual realization / fee income, etc.) • Identify specific action items at each reporting period which will improve future results.

Compute and Understand Your Metrics • Create and maintain monthly rolling metrics for your organization. • Metrics help to identify business and performance trends and allow you to make corrections and adjustments quickly. • Potential acquirers and investors will want to know these metrics as well as they provide an expectation for a return on their invested capital.

Diversity of Revenue Sources • An organization will have greater value if it can diversify its revenue sources • Companies should strive to limit concentration levels which create significant economic risk in a number of areas: • Equipment Concentration Risk • Vendor Concentration • Customer Concentration • Geographic Concentration (State or Region)

Compliance and Security • An organization will have greater value if its platform and operations provide strict data security, backup, and compliance • IT systems that encrypt customer / vendor personal information, bank account/ ach payment information, etc. • Systems that only show on screen or print the last 4 digits of SS. • Ability to send and to receive secure email files and information from customers and vendors. • Well thought out redundant systems and disaster recovery plans that protect against business interruption and data loss. • SOC 1 and SOC 2 compliance

One Stop Shopping • Strive to increase your wallet share of vendors and customers. • Acquiring and maintaining clients is expensive • An organization’s value increases if it can demonstrate: • That it can profitably offer a wide range of credit approvals within acceptable risk limits • That it can originate and service a wide range of financial product types (leases, loans, EFAs, working capital, etc.) • Provide ancillary services • Insurance, life cycle management, etc. • Ability to cross sell product to acquirers customer base and have a customer base that the acquirer can cross sell into (bank products).

Demonstrate Capacity and Ability to Scale • Select technology platforms that will accommodate growth and scale beyond their current usage. • Strive to build an efficient organization that can accommodate additional growth without adding significantly more headcount or resources. • Focus on market segments that can provide for additional market share and growth through increased penetration. • Be prepared to respond to the question: • If I acquired or invested in your company and provided you with access to unlimited amounts of low cost capital, how would you invest it and how much larger could you grow in the next 3 to 5 years?

Questions / Comments ?

Optimizing Enterprise Value