Key Equipment Finance

Innovative Financing Solutions

Declan Mc Glone

UK Sales & Marketing Director

• Selling a TOTAL SOLUTION is more than selling technology.

• In today’s environment, just selling technology is NOT enough.

Leasing -- a Sales Resource

Companies are 100% Service-oriented.

Invest TODAY to achieve goals in the FUTURE.

Best Service = Latest Technology.

Technology decisions driven solely by the value-add achieved.

This is NOT a perfect world.

In a Perfect World...

Capital investment has slowed.

Existing resources are being reallocated to ensure viability.

Proactive moves to CUT costs and to DEFER investment.

Focus is on viability and liquidity.

Technology competes for economic resources in an

investment-adverse environment.

Today’s Economy...

NOT a cash shortage issue.

Businesses have more cash on their balance sheets than before the last four economic slowdowns.

Focus is on: Conserve cash Avoid capital outlays Maintain liquidity

ANY acquisition needs to "earn its keep" on a real time basis.

What This Means...

Companies depend on technology to operate and grow their businesses.

Technology is an engine to host a solution that provides a service needed to compete.

The "need" outlives the useful life of the specific asset.

The value of technology comes from USING it - not OWNING it.

Is Technology really even a real capital asset?

Leased Equipment earns its keep during its useful life.

Is Technology a Capital Asset?

Increasingly, Vendors don't want their clients to BUY their solutions; they want them to USE those solutions.

WHY?

• Account control• Influence future decisions.• Expense Baseline set for future enhancements.• Ability to "work" the BUSINESS SALE.

Vendor Interest

Allows the Client to:• Make the needed acquisition and still retain cash

reserves;• Justify through a business plan that ties actual cost to

incremental benefit.

A tangible recognition that:• The value of technology comes from using it, not

owning it;• Leasing maximises purchasing power;• Leased equipment earns its keep.

Client Benefits

Don't put yourself in the situation where you win the Technology Battle , but lose the Business Sale.

Deals are won based on BEST VALUE.

Don't short-change your value by ignoring the Business Sale.

Don’t Limit Yourself

Every acquisition requires a financial justification.

• If you're not proactive, it will either be done for you, not done at all, or another vendor will do it.

• You lose the opportunity to structure the justification and may lose out because someone else did.

Not understanding the Business Case will negativelyimpact your deal.

Not working in parallel with a finance provider couldset you up to lose the advantage

The Business Sale

• Focus away from SALE PRICE

• Put focus on OPERATING EXPENSE

• CONTROL THE FUTURE

• Make it easy to enhance in the future.

Don't just build the Technology Case - Make the Business Sale.

Add Value

Put your own focus on Revenue Value, not Sale Price.

Monthly Payment Usage Window Buying Power $15,000 36 Months $482,000 $15,000 48 Months $620,000

More importantly, you've just set the baseline for the future.

Enhanced capabilities tied directly to marginal expense increase.

Maximise Purchasing Power

• Introduce Leasing as a benefit at the BEGINNING of the campaign.

• Include a Leasing Alternative in EVERY transaction.

• Use the LEASING argument to develop and work the Business Sale.

• Determine how to best structure your transaction to best meet the client's Business Criteria.

Lead With Leasing

Operating Leases - FMVCapital leases - FMVHire PurchaseReceivables finance and Installment payment agreementsTo address:

Total Turnkey PackagesSoftware only financing Technology refresh programsUpgrade ProvisionsSale leasebackProgress payments

Basic Financial Products

When a Client BUYS your solution, they don't ever HAVE to buy again.

When a Client LEASES your solution, they HAVE to do something at the end of the lease term.

The Bottomline Benefit to YOU

Theory is nice, but it is practical

applications that yields REAL

business.

Some Examples

Fact – outdated technology is usually OWNED, not LEASED.

Client purchased a System four years ago for $5M.

Monthly Depreciation Charge of $83,333.00 + Cost of Capital Charge of $5,417.00 = $88,750.00.

Asset went on its books as a capital investment under a 5-year depreciation schedule.

Current Book Value = $1M

The Challenge...

Replace the System with new technologyList Price = $6M

HARDWARE = $3.1MSOFTWARE = $2.9M

Net REVENUE goal = $4.8M

Discount to List Price exceeds Book Value, so everything is OK?

WRONG!

Your Objective

You have just created a very adverse situation for your client's business plan and to your future strategy.

According to GAAP:

The new asset goes on the books at its Net Sale Price ($4.8M)

Amortisation schedule remains constant (60 months), but the monthly depreciation charge now becomes $80,000.00 + Cost of Capital Charge of $26,000.00 = $106,000.00.

Accounting Treatment Surprise

When capital assets are "taken out of service" any remaining book value is written off against the income for the year in which the use was discontinued.

Your client now has a $1M write-off against its income.

Not a good way to win friends and influence people!

The Worst is Yet to Come

You create TWO arms-length transactions.

• SALE TRANSACTION (Client) – Selling the $6M Asset for $5.8M.

• BUY TRANSACTION (Client) – Buy the existing asset for $1M

• New asset goes on the books for $5.8M, amortized over 60 months at $96,666.00 plus Cost of Capital Charge of $31,417.00 = $128,083.00.

• Old asset is wiped by sale for $1M.

Arms-Length is critical to avoid Trade-In disguised as Sale reversal.

The Solution is simple.

Even IF you win this battle, you haven’t “fixed” the future.

Unless you don’t want to sell them anything for 5 Years.

And you may not even win because you’ve just asked your client to ADD $4.8M in debt to its balance sheet.

Let’s Go One Step Further

Assume 60-Month Lease Payment = $111,000.00

Assume Client’s “Incremental Cost of Capital” = 6.50%

Vendor Revenue Expectation = $4.8M

Propose Operating Lease!

Software is not relevant, as there is no “Salvage” value.

Software License of $2.9M at 6.50% for 60 months = $56,742.00

Net Lease Payment applicable to Hardware = $54,258.00

Lease Payment discounted at ICC < 90% of “Fair Market Value”

“Fair Market Value” cannot be perceived to exceed $3,084,610.00.

The 90% Test

Contract that allows the Client two options:• Purchase: $6,000,000.00 (Hardware -- $3.1M / Software --

$2.9M)• Lease for 60 Months at $111,000.00 per month.• Sale of Existing Asset for $1M.

Client Sees:• Current Book Value cleared with no loss.• Capital Asset replaced with Expense Item• $111,000.00 (Lease Payment) v. $128,083.00 (New Sale)

v. $88,750.00 (Current)

Vendor Sees:• Revenue of $4.8M+

The Answer

You’re not asking your client to take a $1M write-off.

You’re not asking your client to replace that write-off with $4.8M in new obligation.

You are asking your client to reduce its capital debt load and replace that with an expense item.

You are selling the benefits based on the incremental expense -- $111,000.00 v $88,750.00 offset by cost factors outside of the acquisition itself.

The Leasing Option changes the whole basis for justification.

Fact – 75% to 80% of Leased Systems never go to end of term.

Leasing benefits YOUR future!

Fact – none of this can be done unless you are engaging Leasing to work the business side of the transaction at the same time you are working the technology side.

Use the Resource Early!

• One of the most difficult things to do is to displace an incumbent.

• Ultimately, its not the technology or solution, its the economic ramifications.

• Sometimes, its because the incumbent was smart and planned ahead.

• Most of the time its simply because, left to its own devices a business will have a fractured acquisition.

• In addition, they will be Budget constrained.

New Business Capture

• "Clean-Up" Balance Sheet – Private company considering going public

– Company looking to acquire or be acquired

– Company seeking to boost its Return on Equity

• FACTS that set the climate for a technology acquisition.

• Just because a company "doesn't lease now" doesn't mean that there is no interest.

Changing Business Criteria

• Department Budget LimitationsTraditionally the mechanism that drives State and Local Government business.Capital Constraints also mean Budget Constraints.CIO tasked with "doing more with less" today and into the future.Facilitate today's needs and to plan for future needs.

• Management IncentivesOften paid based on meeting budgets and ROE objectives.Facilitate timing of transactions to work to the benefit of management.

Internal Motivations

None of these are possible unless you LEAD WITH

LEASING.

Don't put yourself in the situation where you win the

technology battle only to find out:

• The transaction is structured incorrectly to meet the client's business objectives

• Leasing is required and that the credit strength of the company won't support the deal you just "sold".

Think Ahead

It is important to remember that Leasing is not a cure for lacking strong financials;

KEF follows 'Market Standards' for credit review and approval.

Credit Approval is a balance of the Client's Sizing and Financial Rating, the quality of the asset being financed and the length of repayment term, (i.e. Risk).

Credit approval is NOT a 'given'.

Imperative to involve Leasing early in the sales cycle.

A Note on Credit

The Vendor who:

• controls the financial justification, • understands the business of the client and • displays technical competency will have

the BEST VALUE and will win the deal.

Vendor Confidence Wins Business

Thank You