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TEG Presentation MAMA 10022013

TEG Presentation MAMA 10022013

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Published by TheEdmondsGroup
This presentation was made to a group at the Medical Alert Monitoring Association (MAMA) conference in Orlando, Florida in October 2013. In it Henry Edmonds from The Edmonds Group shares insights into valuations of companies in the Personal Emergency Response System (PERS) industry.
This presentation was made to a group at the Medical Alert Monitoring Association (MAMA) conference in Orlando, Florida in October 2013. In it Henry Edmonds from The Edmonds Group shares insights into valuations of companies in the Personal Emergency Response System (PERS) industry.

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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

Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.

INTRODUCTION

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 $2B in transactions in the airline industry

 Wall Street investment banker (1985-1990)

 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

Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.

VALUATION DRIVERS

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 Growth Rate Creation Cost as a multiple of RMR Margin (Existing Customers) Churn 20%+ <12x >85% <25% Average 5%-20% 12x-18x 75%-85% 25% to 35% Below Average <5% >18x <75% >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

 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

Direct to retail or through health care organizations

Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.

VALUATIONS

Valuation
 Buyers have a target return on investment (ROI)

 ROI is driven by cash flow buyer can expect from your

True for strategic buyer or private equity investor

company  Key metrics determine cash flow and cash flow growth rate

 Comparable transactions provide important valuation

Shrinking pool of accounts worth a lot less than company with an efficient growth engine

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 5+ years into the future Required IRR driven by buyer’s strategy, its investors, market conditions, “next best alternative” 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.

 Buyer will do a financial model for target company

 Buyer’s required IRR will determine what buyer CAN pay

 Negotiation will determine what buyer WILL pay

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
  

 At year 5 and beyond, company would just replace

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

attrition (zero% net growth.)

 Target ROI of 25% per annum

Other metrics don’t change

 Bank line of credit available at 12x performing RMR

Purchaser would get 3x their money if sell in 5 years 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
Year Income Statement: Revenue Expenses Fixed Overhead EBITDA EBITDA % Interest EBT Balance Sheet: Purchased RMR Remaining EOY Debt Equity Operating: Ending RMR $ 200,000 RMR Created (Gross) $ 92,308 Creation cost $ $ 1,384,615 Creation Cost Mult. 15.0x Debt/RMR Prior to Acquisition Acquisition $ 2,100,000 $ 420,000 $ 372,636 $ 1,307,364 62% 1 $ 2,759,111 $ 551,822 $ 401,565 $ 1,805,723 65% $ 155,453 $ 1,650,270 2 $ 3,710,697 $ 742,139 $ 432,740 $ 2,535,818 68% $ 180,901 $ 2,354,917 3 $ 4,990,475 $ 998,095 $ 466,334 $ 3,526,045 71% $ 206,539 $ 3,319,506 4 $ 6,711,634 $ 1,342,327 $ 502,537 $ 4,866,770 73% $ 231,372 $ 4,635,398 5 $ 9,026,402 $ 1,805,280 $ 541,551 $ 6,679,571 74% $ 253,954 $ 6,425,616

$ 200,000 $ 268,978 $ 361,745 $ 486,507 $ 654,298 $ 879,958 $ 2,400,000 $ 2,819,063 $ 3,247,169 $ 3,670,519 $ 4,068,847 $ 4,413,031 $ 3,309,977 $ 3,309,977 $ 3,309,977 $ 3,309,977 $ 3,309,977 $ 3,309,977

$ 268,978 $ 361,745 $ 486,507 $ 654,298 $ 879,958 $ 137,956 $ 185,535 $ 249,524 $ 335,582 $ 451,320 $ 2,069,333 $ 2,783,023 $ 3,742,856 $ 5,033,725 $ 6,769,801 15.0x 15.0x 15.0x 15.0x 15.0x 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 RMR at purchase Valuation as a multiple of RMR SSFCF (prior year) Valuation as a multiple of SSFCF Adj. EBITDA (prior year) Valuation as a multiple of Adj. EBITDA $5,709,997 $200,000 28.5x $615,056 9.3x $1,307,364 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 0% 15% 30% 45% 60% Valuation as Valuation as Valuation as mult. of mult. of mult. of Adj. RMR SSFCF EBITDA 16.7x 20.4x 28.5x 44.5x 76.1x 5.1x 6.4x 9.3x 14.9x 26.2x 2.1x 2.9x 4.4x 7.3x 13.3x

1 2 Base Case 4 5

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 40.8x 34.5x 28.5x 22.9x 18.0x Valuation as Valuation as mult. of mult. of Adj. SSFCF EBITDA 9.6x 9.5x 9.3x 9.2x 9.4x 6.2x 5.3x 4.4x 3.5x 2.8x

1 2 Base Case 4 5

20% 25% 30% 35% 40%

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 Valuation as Cost mult. of RMR 9.0x 12.0x 15.0x 18.0x 21.0x 51.1x 39.1x 28.5x 19.9x 14.0x Valuation as mult. of SSFCF 11.4x 10.4x 9.3x 8.4x 8.3x Valuation as mult. of Adj. EBITDA 7.8x 6.0x 4.4x 3.0x 2.1x

1 2 Base Case 4 5

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 $20.00 $25.00 $30.00 $35.00 $40.00 % Gross Margin * 70% 76% 80% 83% 85% Valuation as mult. of RMR 17.5x 23.7x 28.5x 32.1x 34.8x Valuation Valuation as as mult. mult. of Adj. of SSFCF EBITDA 16.0x 10.4x 9.3x 8.8x 8.6x 3.8x 4.1x 4.4x 4.5x 4.6x

1 2 Base Case 4 5

* 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
80.0x 70.0x 60.0x 50.0x 40.0x 30.0x 20.0x 10.0x 0.0x Net Growth Attrition 16.7x 14.0x 18.0x 51.1x 40.8x 34.8x 17.5x

Max and Min RMR Multiples from Scenarios
76.1x
28.5x Base Case Scenario

Creation Cost

Margin

Confidential – Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated without consent of The Edmonds Group, LLC.

QUESTIONS AND ANSWERS

Contact Information

Henry Edmonds The Edmonds Group, LLC 16 Lenox Place St. Louis, MO 63108 Ph: 314.422.4649 Email: hedmonds@theedmondsgroup.com Website: www.theedmondsgroup.com Facebook: www.facebook.com/TheEdmondsGroup Twitter: TheEdmondsGroup

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