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


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


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


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!


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


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%


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


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


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


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


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


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


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


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%


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


Attrition Sensitivities

Scenario Attrition Valuation as mult. of RMR



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


Creation Cost Sensitivities

Scenario Creation Cost




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


Margin Sensitivities

Scenario Avg. RMR

% Gross Margin *




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


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

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TEG Presentation MAMA 10022013

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