MDMN PartnersSESSION THREE WORKBOOKDecisions and Notes for Modules 1 – 6

BSMARTer Business Simulation Management and Relationship Training

Fundamentals of Equity

MODULE ONE

Changes in Equity

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Background Consideration

When the partners at MDMN decided to offer equity to Pete and Lane they had several goals in mind. First, they wanted to reward and recognize Lane and Pete for their contributions in turning the firm around. In addition, the Partners recognize that there is still an ongoing transition away from the silo organization, and the addition of Pete and Lane to the partner team would further foster the “team first” culture that they want for MDMN. Finally, the partners recognize the need to be proactive in planning for the future of MDMN, and offering equity to the next generation of partners was a key component of a longer-term succession strategy.In considering the extension of equity to Lane and Pete, the partners considered 3 different approaches:1. Offer Lane and Pete the ability to purchase shares currently owned by Don, as part of a longer-term succession strategy for Don2. Each partner would reduce his/her equity stake in order to enable Lane and Pete to buy-in3. Issue additional shares of MDMN for Pete and Lane to purchase.

The turnaround of MDMN was contingent upon many factors, one of which was Lane and Pete being willing to adjust their compensation. The partners recognize that this was not an easy transition, and to show their appreciation the partners were intent on offering favorable financing terms and giving Lane and Pete a discount from the valuation to be done. As partners, Lane and Pete will be expected to take on additional responsibilities in managing the firm, and each will have the opportunity to be compensated for those as well. The extension of equity to Lane and Pete has given the partners at MDMN an opportunity to engage with external consultants to advise them in areas of valuation, structure, financing, and succession. This event gives MDMN an opportunity to create the “blueprint” for future equity decisions, and the partners were unanimous in the decision to look for leading external consultants and their relationship manager to advise them through the process. While one of the partners, Mary Nedney, shared some concerns regarding the percentages and terms, she and the other partners agreed that, once the work with the consultant was complete and a plan was created, all would fully support the execution of the decisions made.

Changes in Equity

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Don’s Transition

Given that Don has addressed his illness, he is now healthy motivated to work for at least another 3 years. During that time he wants to help the partners continue their efforts in transitioning MDMN partners from it’s siloed wire house state into a firm that is more collaborative, open, and united in nature. He still wants to retire but go out on top knowing that he help found and create a great firm that will last forever. The partners met recently to layout the plats of Don’s transition. Some of the topics discuss are: Internal transition – They met to review Lane and Pete as partners and all agree that Pete and

Lane are strong candidates for partner. They’ve addressed Mary’s concerns and agree that it makes sense to consult a third part to value the firm and sell shares of the firm to Lane and Pete. The also agree that it make sense to continue to value the firm through an independent third party every few years to provide consistency and fairness in the pricing for future transactions, from future partners within the firm.

• Qualifications for Partner– (see Section for criteria defined below) • Straight buy-in – Partners decided to use a straight buy in method and they are working with

their Fidelity relationship manager and have identified Live Oak as a possible solution for lending.

• Introduction to partner / owner business activities with goal of book transfer• Discount to Internal Successors– Partners have agreed that in order to award qualified

internal candidates with the option to purchase shares that share will be discounted by 20% from the most recent independent market valuation to be complete every 3 years. consider discount

• Issuance new shares– Partners have agreed to issue new shares to new partners rather than dilute existing shares. The reason for this?..

Valuation Principles and Experience

MODULE TWO

Firm Value

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As our firm continues to grow and add not only new assets but new advisors and employees, understanding and having a clear grasp on the value of the overall enterprise is important. In addition, as we maintain our focus on streamlining our organizational structure, balancing partner compensation levels, and building a proactive succession plan, changes will require us to focus on the overall value of our firm.Overall, our preferred course of action would be to receive an external, un-biased professional valuation annually. We expect our business to continue to grow and change, so we feel the periodic reviews are a necessity. Plus, with the recent changes in the firm, addition of new members, and planned retirement of a partner, hiring a professional firm impartial to the business is preferable to conducting valuation internally which can consume resources and lead to disagreement.We would also like to get an expert opinion on the drivers of enterprise value so that as we grow and develop the business we can ensure these drivers are maximized to their fullest potential. Currently we believe the main drivers of valuation are; growth in our target market (younger HNW investors), ensuring consistent fees, high client retention, optimizing our service model (delivering the right amount of service), diligent expense management, key man risk (continuity & succession planning). As we continue to grow and develop the business we want to be as transparent as possible with the management team of the drivers of value so that they can keep these drivers in mind as they make business decisions. Based on internal and preliminary determinations, we feel the value of our firm is in the range of $4M and $10M. This is based on a projection of 4 – 7 times operating income of $1.5M which is our 2015 projected operating income.

New Partnership Admission

MODULE THREE

Criteria for New Partners

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MDMN had a great year but has to gear up for the next phase of growth and how to position the firm going forward. The firm retained Devoe & Co. for future valuations and consultative support.While Pete and Lane were anxious to become partners, they are concerned with making less money. The founding partners are concerned with how to incentivize existing partners and make future partnership attractive.The original founders revisited their partnership agreements with Pete and Lane becoming Partners. Now that MDMN has 5 partners, the firm needed to define criteria for future partners. Furthermore, they needed to plan for retiring partners and potential partnership exits.The original partners, Mary, Don, Roger and Peggy, considered what makes the ideal partner and what is his contribution. During initial conversations, the original partners considered the obvious and conducted an economic analysis of Peter and Lane in revenue and book composition/viability. They also had to consider Pete and Lane’s ability to manage and lead the firm. This was harder to do since their time with the firm has been somewhat prior to its management and structural overhaul in 2014. Other harder or more subjective aspects for the team thought through were their potential partners’ intellectual contributions and personal characteristics in the areas such as, integrity, accountability, stewardship. Peggy contacted their Fidelity relationship manager who provided a well-done template called the Assessment for Succession. Each partner completed the assessment for Pete and Lane. (attachment 1). https://fiws.fidelity.com/app/literature/view?itemCode=945196&renditionType=pdf&pos=SR They also created a grid to include new partners criteria: Revenue, team approach, tenure of 5 years with firm (even though Pete and Lane had 2), personal characteristics etc. ***Should partners only be advisors was another consideration, considering Peggy is not an advisor and holds a more administrative/managerial role.***what are the managerial roles for Pete and LanePete and Lane will have staff report to them…

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Criteria for New Partners

Partner Criteria areas of contribution Score: 1 - 10

Revenue/book viability $

Management Acumen(team appraoch and leadership)

Character: culture of compliance, stewardship, morals, accountability

Presence: reputation, community involvment, lead-generation

Intellectual ability: financial planning, investment management prowess

Partnership Agreements

MODULE FOUR

Partnership Agreements

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If MDMN wants to have a sustainable growing practice it has to act like a large company and institutionalize its processes and agreements.Peggy worked with an attorney on the agreement and updated all internal P&P to include the criteria for new partners. We established monthly partner meetings because of the importance of regular meetings to foster communication as we continue to evolve our firm from a true siloed practice to a more collaborative, team based firm. MDMN Board of Directors includes the CEO(Mary), CFO(Roger), CIO(Don) and COO(Peggy)Eligibility for Board consists of – five years of partnership, majority vote by existing board.MDMN also developed an advisory board comprised of: 2 MDMN partners and 2 outside individuals that are successful entrepreneurs.See next 2 pages for updated Partnership Agreement Term Sheet:

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Partnership Agreement

A. Entity and Business

1. MDMN is an LLC registered as Investment Advisor (RIA)

B. Board of directors 1. The company will be managed by the CEO. The CEO is hired by and reports to the BOD

2. The Board will consist of 5 members of the LLC.

3. Don, Roger and Mary were the members at the time of leaving Wachovia and therefore are founding members of the Board. Starting in 2015, the BOD will be elected every 3 years

4. The board will make decisions on most matters by simple majority, except for the situations identified throughout this Term Sheet

5. Each member of the board will vote with the units they own or represent – voting of the board is by % ownership. If someone on the BOD is not an owner, they will have one vote members even if they represent more than 50% of the units

6. The Board will meet annually. The meeting will be held on the first Monday in January of each year, or as soon after as practicable. Special meetings made be called when appropriate.

MDMN decided to update the partnership agreement “Term Sheet” to coincide with the changes to our income agreement.

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Partnership Agreement

C. Members and Ownership Interest

1. The current ownership is:

Don – 30% Roger – 30%Mary – 30%Peggy – 10%

2. There is an agreement that Lane and Pete will become owners in 2015. They will each own 7.5% of the firm.

3. The BOD agreed with Mary’s proposal to have both Pete and Lane buy their equity stake of 7.5% over multiple years.

4. Each member agrees that they will not compete with the firm for a period of 2 years after their resignation from the firm and that they will not solicit clients away from the firm for a period of 2 years following their departure.

5. Each member of the LLC need to execute and sign a non-solicit/non-compete agreement.

6. Owners can borrow money for the company from banks, other lending institutions on such terms as they deem appropriate for the viability and success of the firm. This will take a majority vote by the BOD

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Partnership Agreement

D. Compensation for Owners1. Owners will receive compensation as follows:

Don - $250,000 (now only a Partner) Roger - $250,000Mary - $250,000Includes $30,000 in management premiums Peggy - $180,000

Lane - $100,000 Pete - $100,000 + $50,000

2. Each partner will also receive 10% of the revenue they

manage.

3. Since Pete is more of a revenue contributor to the firm and is being groomed to take over Don’s CIO in a few years, the BOD agreed to increase Pete’s salary by $50K a year. This should help mitigate Pete’s ambivilence on becoming a partner

4. The board will review partner salaries following the first two years and establish new levels for partner compensation based off of benchmarking data and industry norms

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Partnership Agreement

E. Ownership Transfers

1. The board has to approve all new owners and can reject new owners for any and no reason

 2. The board can terminate an owner at its discretion with a

super-majority vote. 3. Transfers of equity between existing owners do not need

board approval and can be negotiated individually 4. Owners are required to retire at the age of 70. The firm

may choose to retain some of their services as employees or contractors.

 5. Owners can sell their equity back to the firm in a

retirement buy-out if they have met all criteria as follows – Been a producing partner for more than 5 years or non- revenue producing partner for 10 years, have reached the age of 65. The firm has up to 7 years to make payments on such buy-out. Valuation is being prepared by a valuation firm and will set an enterprise value.

 6. Partners who become deceased or disabled will be

bought out by the firm at the same valuation as in item 5. 

7. Partners who leave the firm voluntarily will be paid enterprise value multiple. Have to adhere to non solicit/non compete agreement or jeopardize losing earn out

 8. Owners can take an unpaid leave of absence for up to 1

month every 5 years (outside of normal vacation)

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Partnership Agreement

F. Management of the Firm

1. The firm is managed by the CEO. 2. Day to day management is provided by the executive

committee – Mary, Roger, Peggy and Don 3. Members of the Executive Committee and Mary can sign on

behalf of the firm

G. Special Decisions 1. Decisions that require super-majority:a. Selling more than 50% of the firm to a new ownerb. Terminating a partnerc. Borrowing more than $1 milliond. Transferring more than $100 million in AUM to a

new custodiane. Hire/Fire CEO

H. Distributions and Capital

1. The firm will distribute at least as much of its profits as necessary to meet the resulting tax liability to partner.

2. Each partner is responsible for filing their own tax return and making estimated payments

3. The firm cannot force partners to contribute more cash or other assets to the firm

I. Other 1. Explore Insurance Options for Partners: Key Man; Buy/sell agreements

2. Loans to the Company: nothing in this agreement shall prevent any member from making secured or unsecured loans to the firm by agreement with the firm

Founder Succession

MODULE FIVE

Succession Plan

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MDMN recognizes that our firm has made significant strides over the last 2 years transforming itself from a business of individuals to a true team culture. To further the team and truly form an enterprise we have decided to create succession plans for key roles. It is the intention of the team to have an internal transition so if one partner decides to retire, the remaining management team will take over and potentially replace the departing member. The succession plan is designed to build enterprise value by providing continuity in client service, transferability of relationships, and continue to preserve the “MDMN Brand” beyond the current management team and its current relationships.

One of our current founders and partner would like to start to phase out of the business and have more personal time which is another impetus to create our succession plan. This has raised several items to consider such as; the functional “day-to-day” management of his book that will likely transition to Pete and Lane, the leadership that is being provided and the amount of new assets that Don has contributed annually this will need to be carefully considered and a marketing plan for Pete and Lane, the “buy-out ” and time frame which is likely to be a 4 year transition with key milestones.

The team has enlisted the help of a 3rd party to document the 3 key items listed above (day-to-day responsibilities, leadership, ownership) for each and every management position that MDMN employs. The intention is that each management position would be documented so well that replacement, while not easy could be accomplished with as little business interruption as possible ensuring a seamless transition that would be invisible to clients. At the same time we would like to consider issuing shares to high potential non management team members.

In addition to the 3 items listed above we will have to create a business valuation, in order to create a fair market value so that a “buy – out” is fair and consistent among management. We expect that a discounted cash flow technique will be used by our consultant which is often the most accurate method for valuing RIA practices.

Other Initiatives

MODULE SIX

Other Initiatives

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Describe any other initiatives your firm will undertake.

Notes

Initiative Explanation

1. Non-compete/ Non-solicit Development of documents for management to reduce the chances of business loss due to key man departure

2. Vision of where we are in 5-10 years

Update mission, vision and values

3. Continue to evolve structure away from silos

Create opportunities to build an enterprise and lasting company.

4. Legal terms and conditions of partnership agreements and issuance of stock

Look for firms that have experience in drafting the legal documents for stock, and partnership agreements

5. Think about a replacement for Don

Evaluate the phase out of Don and the potential for a replacement –

6. Acquisition Consider and keep mindful of