Impressionist SESSION THREE WORKBOOK Decisions and Notes for Modules 1 6 BSMARTer Business Simulation Management and Relationship Training
Executive Summary 1 Since inception, Impressionist Wealth and Investments has successfully managed two distinct business lines; wealth management and investment management. With continued success in both business lines, we have made the decision to fully combine both business lines into one firm. We believe this move will benefit our shareholders, employees, and most importantly our clients. We are extremely excited about this announcement. We made this decision for the following reasons: Simplify our ownership structure. Separate ownership of two distinct business lines was creating issues and complications. To remedy this, owners will now own a stake in a single entity. We will use a third party valuation service to value each business line separately, and current owners will exchange their ownership for value in the new entity. We see value in offering both services under one roof. Our Wealth Management arm can benefit by our in house Investment expertise. Our Investment Management side also benefits from our deep insight into Wealth Management and Financial Planning (part of our investment management value proposition is that we know how to run money for taxable individual investors we do it for our own clients). Both businesses will benefit from economies of scale as we can share overhead costs, spread out the costs of building our brand and invest more resources into both businesses. We also like the diversity of revenues the stability of our Wealth Management business will help in down markets and the scalability of our Investment Management business will offer us the potential of superior economics.
Executive Summary Cont 2 We decided against two separate entities however we do realize this decision comes with challenges. Several we have identified and are ready to face head on: Perceived conflicts of interest on the Wealth Management side. It will be important that our in-house investment committee for Wealth Management adhere to open architecture and select the best investment options available to clients, whether those our internal or external. We will also ensure that their compensation plan is product agnostic. The needs of our clients must always come first. Our competitors in the Investment Management space will highlight the fact that they do not offer Wealth Management. RIAs that utilize our Investment Management products may see us as a potential competitor. To mitigate this risk, we will be adopting a comprehensive rules of engagement policy for dealing with Investment Management clients. Our competitors in the Wealth Management industry will likely point out these perceived conflicts of interest to our clients and prospects. Again, this will require us to affirm our commitment to hiring best in class Investment Management. We also believe our ability to derive revenue from Investment Management within our Wealth Management segment, will allow for additional flexibility and competitiveness with respect to our Wealth Management pricing. We believe this will help off-set some of our competitive threats. Certain owners of todays business lines may balk at having their ownership stake merged into one firm. They could cite lack of control over their own destiny. Again, we believe the benefits of the combined business lines will more than off-set these concerns. In addition to merging into a single entity, we will also be addressing a number of corporate governance issues, including:, requirements of new partner admission, structure of the BOD and an update to our internal succession plans as noted in the following pages.
Fundamentals of Equity MODULE ONE
Changes in Equity 4 1. We now have one ownership structure - We had a third party valuation done on both the IM and WM business. Valuations were similar for both business, IM business has higher margins but WM business received a higher EBITDA multiple due to stability of the WM model. Combined entity has a valuation of 8.5X EBITDA. Owners of IM and WM business have exchanged their shares for ownership in combined entity. Potential multiple expansion for combined entity helped off-set some of the concerns of the owners on the IM side. 2. How will we deal with a departure like Eddies? And any other future departures? (see Succession Plan) Succession planning/buyouts - Future buyouts will be done over a period of 5 9 years depending on internal demand for equity from existing partners and cash flow needs of the business. Valuation will be based on most recent multiple coming from third party valuation. Shares will be offered first to new partners, and after that to existing partners. We will also look to offer liquidity opportunities to existing partners well in advance of their departure. In order to prevent a situation like we are currently going through with Eddie, wed like to begin transferring some ownership from the equity heavy Senior Partners to the Junior Partners. Junior Partners will be able to buy in over five years at a rate of Prime + 1.75%. *On the next page view the current ownership breakdown (as two entities). We will address the changes in equity (as one entity) under Partnership Agreements.
Changes in Equity cont 5 Membership and Ownership Interest Ownership as two entities WEALTH MANAGEMENT INVESTMENT MANAGEMENT 3. Eddies shares will be purchased by a combination of two new Associates that will be offered ownership (Paul and Fred) in addition to existing partners. 4. Over time it is our goal and expectation that ownership will be more widely distributed. This should enhance the liquidity of our shares. Having owners retire with > than 20% of the outstanding shares will be challenging as Impressionist continues to increase in value.
Valuation Principles and Experience MODULE TWO
Firm Value 7 Current firm valuation is $50MM. This gives us a current multiple of 8.5X EBITDA. This value was based on a discounted cash flow model. We will use this multiple until our next updated valuation in 12 months. (We do reserve the right however to obtain an updated valuation in the interim if approved by a majority vote of the BOD). All purchases will be based on this multiple until our next valuation. Based on the recent performance and growth of Impressionist Inc., we expect this multiple to expand into the 9X- 11X range. as we get closer to $100MM in revenue. Because of the potential for an increasing multiple, we expect strong demand for Eddies shares. Weve also taken action on a number of initiatives that we believe will positively impact our valuation: We have 2 year non competes in place, including non solicitation agreements Audited P &L going back 5 years Participating and benchmarking our KPIs with other top quartile firms. Board of Directors/Operating Agreement strong and in place The BOD addressed discounting Eddies payout because of quick departure and not willing to stick around Based on consultation with Tim Kochis and the operating agreement that was in place we understand that we must abide by our original Operating Agreement. We have updated the Operating Agreement to provide the firm with additional flexibility in the event that we once again face an unexpected departure. The Firm will retain the right to extend the terms of the buy out up to nine years (as opposed to the standard seven) with a Super Majority vote of the BOD. Financing will be similar to buy in, with an interest rate of Prime + 1.75%. *We will obtain an outside independent valuation every 12 months. We were using 24 months but based on the increased value and rapid growth we have decided on 12 months. We will use the discounted cash flow model that incorporates comparables to set valuation.
New Partnership Admission MODULE THREE
Criteria for New Partners 9 We believe that our ability to attract retain and motivate talented individuals will be the key determinant in our long run success. Nothing will be more critical to the firm than how we handle the admission of new partners to the firm. To be successful with this, we believe the process must be fair, transparent and will include a buy-in component (equity will not be given away). Our criteria will include a combination of factors: Experience Ethics and Integrity High personal standards/Job Performance Embraces the culture Emphasis on clients and relationships Willingness to learn The firms leadership committee comprised of the owners and management will set the criteria for ownership, help identify candidates, mentor candidates and decide on when to offer ownership when appropriate. Terms of the buy-in will be in accordance with those outlined in our LLC Agreement (7 years with financing at Prime + 1.75%) (See Succession Plan for talent assessment of two junior partners Paul Cezanne and Fred Bazille) For this particular partnership assessment, we utilized the IWS Talent Assessment Tool for each junior partner and cross referenced it with our criteria.
Partnership Agreements MODULE FOUR
Partnership Agreements 11 Redline of our term sheet Entity and Business Now operate as one LLC Board of Directors One Board consisting of our five largest owners: Claude Monet, Betty Morisot, Pierre- Auguste Renoir, Mary Cassatt and Edgar Degas. We will use an odd number to avoid ties in voting Each BOD member will have one vote, regardless of ownership percentage Th