Growing Trend of Private Equity in F&I P&A Leadership Summit September 8th 2014 Confidential

Growing Trend of Private Equity in F&I Discussion Agenda Introduction to Houlihan Lokey Private equity interest in F&I Reasons to pursue a transaction Preparing for a sale Valuations and structure Due diligence What to expect with a private equity partner Key takeaways

Growing Trend of Private Equity in F&I Houlihan Lokey Houlihan Lokey is an international, advisory-focused investment bank with expertise in mergers and acquisitions, capital markets, financial restructuring, and valuation. The firm serves corporations, institutions, and governments worldwide with offices throughout the United States, Europe and Asia. Corporate Finance Financial Advisory Financial Restructuring

Growing Trend of Private Equity in F&I Craig Tessimond Bio Director in Houlihan Lokey’s Washington D.C. office, focused on leading the Financial Institutions Group coverage of the insurance industry Nearly fifteen years of experience providing corporate finance advisory services to the insurance industry; completed many billions of dollars of M&A and capital raising transactions Wealth of experience in both life and property casualty insurance, as well as specific expertise in the insurance services sector and F&I/warranty; advised in transactions involving Interstate, Safe-Guard, Warrantech, among others

Growing Trend of Private Equity in F&I Recent F&I/Warranty M&A Activity Number of F&I/Warranty Transactions Per Year

Growing Trend of Private Equity in F&I What is private equity? Private equity firms exist solely for the purpose of investing and acquiring equity ownership in companies Capital is sourced from institutions (pension funds, insurance companies, etc) and high net worth individuals Private equity partners raise funds to invest capital on behalf of these limited partners; typically with an investment horizon of three to five years although some may be longer Some firms are focused on specific sectors, while others are generalists; some are focused on very large transaction sizes while others are focused on the lower/middle market

Growing Trend of Private Equity in F&I What do PE firms look for? Companies in growing industries Possessing a unique competitive advantage Favorable industry trends Multiple avenues for growth (organic, acquisition, etc.) Recurring cash flow models Stable client relationships High barriers to entry Low capital expenditures High quality management

Growing Trend of Private Equity in F&I Why the PE interest in F&I? High cash flow business Stable, sticky client relationships Strong recurring, transactional revenue model Exposed to a broad and deep industry Provides high-value add for clients Favorable industry trends (F&I important to dealers) High barriers to entry High fragmentation and the potential for consolidation Continued product/service evolution creating opportunity Founder/operator transition

Growing Trend of Private Equity in F&I Impact of PE firms on the F&I sector Professionalization of the F&I industry due to the entrance of sophisticated owners F&I administrators must now be adept at servicing the needs of more sophisticated consumers and dealers Meaningful technological changes are impacting product pricing, delivery and administrative processing capability; the industry has become more efficient Consistent underwriting performance and cash flow generation through the financial crisis has lent credibility to the industry

Growing Trend of Private Equity in F&I Why consider a sale? To facilitate a founder or owner transition To provide liquidity for inactive, minority or legacy shareholders To access capital for growth initiatives, such as capital for acquisitions or new products or services To bring in external governance expertise To align your organization with a growth or value focused shareholder To help your business reach the next stage of its development

Growing Trend of Private Equity in F&I Preparing your company for sale Identify transaction objectives and priorities Recognize organizational strengths and weaknesses; support the process with capable people Prepare your financials; view your financials as a buyer would view them (i.e. “add backs”) Develop financial projections supported by tangible growth plans and new opportunities Track relevant metrics for your business in detail Determine your timeline and resource allocation; a sale takes management focus

Growing Trend of Private Equity in F&I Hiring advisors Investment bankers; identify buyers, prepare marketing materials, negotiate and close transactions Accountants/auditors; perform detailed financial diligence, prepare financial audits Consultants; prepare market/industry reports, identify organizational improvements, survey clients Attorneys; negotiate transaction documentation, identify/analyze liabilities in connection with a transaction Tax advisors; analyze tax consequences of a transaction for the company and the shareholders

Growing Trend of Private Equity in F&I What drives F&I valuations? Company growth prospects; organic, acquisition, etc. Profit margins; sustainability Source of earnings; underwriting, admin, commissions Business mix; niche or full product provider Size; bigger is better Client focus; retail or OEM, national or regional F&I companies are valued on cash “EBITDA”, or earnings before interest, taxes, depreciation and amortization Currently valuations run anywhere from 6 times to greater than 10 times for sizeable, growing platforms

Growing Trend of Private Equity in F&I Transaction structure and leverage Most PE firms employ leverage to facilitate returns Generally require selling shareholders to maintain an equity stake to align interests; PE firms are not managers Transaction Example (selling shareholders' post transaction ownership of 25%)* ($ in millions) Transaction Details Post Transaction Capital Structure XYZ Warranty Co Third Party Debt $40.0 EBITDA $10.0 Funds from PE Firm $30.0 Purchase Multiple 8.0 x Shareholder Equity Roll Total Enterprise Value (no debt) $80.0 Total Enterprise Value (levered) Cash Proceeds to Shareholders Proceeds from Debt Proceeds from PE Firm Cash Proceeds to Sellers $70.0 *ignores transaction expenses

Growing Trend of Private Equity in F&I Due diligence PE firms will undertake a substantive and detailed diligence review before making an investment Necessary for both their own investment committee and for lenders Focus on your business, operations, management, markets, customers, financials, technology and more PE firms will hire outside consultants and advisors to prepare diligence reports (quality of earnings, etc.) and attorneys to document the transaction Potential negative findings in diligence will have an impact on pricing or potentially kill a transaction

Growing Trend of Private Equity in F&I Timeline Transaction timelines are highly variable depending on a number of factors; however minimum timelines are several months up to 9 to 12 months to complete a transaction The most critical impediment to a timely transaction can be the ability of an organization to pull information for the buyer Financing markets and the broader economic environment are also risks to a transaction

Growing Trend of Private Equity in F&I What to expect after a sale PE firms are not operators; management will run the business Monthly reporting Forecasting and budgeting Growth plans Board meetings Debt service Another ultimate PE exit

Growing Trend of Private Equity in F&I Key takeaways PE firms are very active in F&I; they are knowledgeable buyers Can provide a means to affect organizational change (transition, growth, etc.) Are primarily driven to create value for shareholders Utilize leverage to generate returns Can create more efficient companies Are ultimately transaction driven; don’t realize a final return until a sale of the business