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good money for good companies business plan mezzanine capital for sme s jürgen hasler knut scherpe business plan

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good money for good companies outline 1 management summary 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 the window of opportunity situation in the relevant market the product boerner-fund b usiness modell revenue model m arket potential company team sales m arketing capital needed financials 1 1 1 1 2 2 3 3 3 3 3 4 4 4 6 6 6 7 8 8 8 8 10 12 14 2 the product 2.1 2.2 window of opportunity actual situation in the relevant market 3 business model 3.1 3.2 3.3 3.4 shorten the time lower the costs structuring the risks comparative advantages customer value 4 market potential 4.1 4.2 4.3 4.4 m arket structure relevant market m arket potential m arket position 5 marketing mix business plan

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good money for good companies 5.1 5.2 5.3 5.4 m edia attraction sales promotion price strategy product strategy 14 15 15 16 16 17 18 20 20 20 21 26 27 28 28 29 30 32 6 management team 6.1 6.2 bbg core company cooperating companies 7 financials 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 revenue m odel pricing in the market our prices and revenues capital needed profit and loss projection cash flow projection b alance sheet projection scenarios b reak-e ven projected liquidity for 2006 liquidity p lan b ad case business plan

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good money for good companies 1 management summary 1.1 the window of opportunity the demand for capital by small and medium sized enterprises is big especially growing sme s in germany need capital to invest bank loans are harder to get due to the pre-implementation of the rules of basel ii private equity could be a solution but capital amounts they demand for are mostly below 5 mio eur and therefore unattractive for institutional investors 1.2 situation in the relevant market for rising private equity first companies have to find potential investors which take a lot of time additionally capital investment companies choose very carefully the enterprises they invest in companies have to meet challenging performance criteria of their investors and the necessary due-diligence process is complex and expensive this is one crucial reason why the invested capital for each company is normally between 5 million eur and 40 million eur with interest rates ranging from 8 to about 20 percent 1.3 the product boerner-fund bbg will offer the boerner fund Ü to sme s with a capital demand between 1 and 5 million eur Ü also if they don t have an excellent rating Ü mezzanine capital which combines for the sme the advantages of debt capital with the advantages of private equity Ü in a reasonable time range below nine months Ü for very competitive interest rates which are between 7 and 12 Ü no investors take co-determination in their business an important argument for much family owned businesses businessplan page 1 36

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good money for good companies 1.4 business modell Ü the value-added chain is shortened by elimination of customized financial products Ü in contradiction to most existent fund models first the interested companies are searched rated then the money is raised at the capital market and directly provided to the companies no unemployed capital Ü by assembling more than 300 companies with needed capital between 1 mio eur and 5 mio eur risks can be systematically analyzed and clustered Ü thereby highly standardized rating processes can be introduced since the statistically valid failure probability countervails individual misjudgment Ü so a fair price for the portfolio can be reached by placing them as commercial papers at the capital market Ü interest rates from 7 to 12 are an attractive offer for many companies 1.5 revenue model at nearly every step of signing rating and placing a company a provision for our company bbg will be generated Ü the first step is that a sme willing to join the whole project by signing a contract of assignment this acquisition activity is part of the bbg betriebsberatungsstelle Ü the second step is the rating process which will not only generates an income for the rating agency and 300 probably new clients for creditreform rating but also a provision for the bbg who signed the contract of assignment before Ü the third step is reached if 300 companies are found and the tranche is placed successful at the capital market here a final provision could be paid in discussion to the bbg who made the acquisitions of 300 companies and made finally the whole deal for all partners possible businessplan page 2 36

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good money for good companies 1.6 market potential the estimated market potential embraces 4,500 companies in germany with an equity need between 1 mio and 5 mio eur and with a willingness to pay interest rates between 7 and 12 1.7 company team Ü the leading company of the whole process is the bbg bbg is completely owned by the bga the federation of german wholsale foreign trade Ü management team of bbg consists of two persons jürgen hasler knut scherpe Ü jürgen hasler 36 ceo has a long experience and distinctive skills in networking promoting sales and managing Ü knut scherpe cfo 35 has a long experience and distinctive skills in financials strategy business analysis and managing 1.8 sales marketing Ü sales marketing is mainly based on the network of bga with hundred consultants and 12.000 companies Ü an existent network to the media and politics will be used to adress the product to a large number of companies Ü additional marketing instruments will be used as well 1.9 capital needed the amount of capital needed for the start up period is 100.000 eur this investment will be provided by the bga if the board of directors will take positive decision the 31st of may 2005 1.10 financials when estimations will be met revenues and profits are generated in the first year yet businessplan page 3 36

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good money for good companies 2 the product 2.1 window of opportunity growing small medium-sized companies sme s need money for investments to grow further but conditions for refinancing are bad right now and become even harder in the near future this is because of the specific asset situation of a majority of sme s and because of new regulations especially basel ii most sme s in germany have a low private equity rate in comparison to other european countries as well as in comparison to american companies this is because of specific conditions in the german economy and the mentality of the leaders of typically private-owned german sme s in the past decades Ü on the one hand an underdeveloped capital market was not able to provide enough private equity to small companies also due to a lack of smart financial instruments e.g mezzanine capital Ü on the other hand leader of typically family owned companies have been reluctant to admit external influence on their company result is that nowadays private equity ratio often is low with the new regulations of basel ii which starts in 2006 bank loans will be harder to get without a sufficient basis of private equity and even if loans are given to the company private equity ratio will sunk further this in turn will rise capital costs in terms of interest rates further a vicious circle would take action the best way to go out of this would be to get private equity with as small influence as possible normally any investor wants a certain control over the company and a high return on investment even if the companies would accept this rules only a few of them would get money from investors recent ways to gather money for them are expensive due to inefficient work-flows and procedures 2.2 actual situation in the relevant market for rising private equity first companies have to find a potential investor which takes a lot of time additionally capital investment companies choose very carefully the enterprises they invest in companies have to meet challenging performance criteria of their investors and the necessary due-diligence process is complex and expensive this is one crucial reason why the invested capital for each company is normally between 5 million eur and 40 million eur with interest businessplan page 4 36

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good money for good companies rates ranging from 8 to about 20 percent within a year a typical capital investment company realizes only about 30 of these deals of course there are private equity funds which have focussed on sme s but all of them have chosen an quite inefficient way to gather and provide the money Ü first they search investors this takes time and persuasiveness since the potential investors don t know to which companies their money will go during this time the gathered money stands still Ü the second step is to find companies which fit the criteria in terms of risks volume etc Ü to evaluate the inherent risk of the company in a third step a long and expensive due diligence process is necessary unemployed money waits for companies money doesn`t work find investors find companies evaluate companies money provided three years of coordination and selection consequences of this procedure for the sme s are Ü high rates of return has to be paid by the sme s because of a long ramp up period Ü due diligence process is not appreciated very much by family owned businesses Ü relatively small funds with high costs for fund management and due diligence consequences for the fund management are Ü small funds have high costs to keep risks controllable Ü only a small group of sme s are the target group businessplan page 5 36

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good money for good companies 3 business model 3.1 shorten the time lower the costs our business model is based on an inverse proceeding in comparison to existent funds short way from the investors money to the companies money works immediately find companies rating placement money provided nine months of coordination and selection as illustrated in the graphic above Ü first step is to find enough companies interested in mezzanine capital low influence combined with the character of private equity it will takes six months to one year until enough companies are found they will sign contracts which include a clause that the contract only become effective if enough companies for the fund can be found in the next months Ü second step is a highly standardized rating-process made by our partner creditreform see management team this rating process needs less time than the due-diligence processes of other funds also because of better statistically validity of the overall data Ü third step is that an asset backed security abs transaction by which highly diversified papers will be offered to the capital market thus the necessary money is raised nearly immediately and will be provided directly to the companies 3.2 structuring the risks Ü a portfolio of signed contracts from 300 sme s with at least rated bb and better from different branches and different regions of germany is held by the asset manager the whole time of investment businessplan page 6 36

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good money for good companies Ü within the securitization process two different commercial papers with a high and a low risk will be emitted and placed at the capital market for e.g a price of 0.8 irs and 18 irs the average price of this placement is 7.99 weighted ror portfolio 300 sme Ü rating bbb to bb Ü wide branch spread Ü wide regional spread securitization 80 senior tranche ca 0,8 irs no risk 0,64 irs Ü probability of failure ca 1.5 p.a 20 junior tranche ca 18 irs high risk 4,24 rate of return ror 3,75 interest rate swap irs 7,99 minimum average interest rate for sme`s x costs and profit margin 3,60 irs 4,24 irs Ü after the placement the asset manager calculates the price of every risk cluster he still has in his portfolio and gives out the money to the sme s the demanded interest rates reach from 7 to 12 and have to be paid by the respective sme Ü every default of a company and its contract will reduce the amount of money in the junior tranche but this risk is taken by an investor in exchange for high possible profits 3.3 comparative advantages comparative advantages for the fund management in comparison to existing funds are big Ü Ü Ü Ü money from capital market is directly passed through to the sme s structuring risks and generating commercial papers limits risks a big group of sme s is targeted because through standardization a large fund with relatively low costs for the fund management is the result based on these comparative advantages a highly attractive offer can be made to the customer and nevertheless good profit margins can be reached as well businessplan page 7 36

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good money for good companies 3.4 customer value for the customer money from this fund is highly attractive because Ü Ü he gets fresh money also with low private equity ratios low rates of return has to be paid by the sme s because of a highly standardized product Ü rating process seems to be acceptable for family owned businesses result of these business model is that a fair deal is possible by which both parties win 4 market potential 4.1 market structure in march 2004 creditreform and bbg analysed the german mittelstand with the so called solvency index bonitätsindex by which 2.4 million companies are covered german companies by turnover medium sized companies by rating bonitätsindexes umsatz 1 bis 50 mio 241.540 bonitätsindex 100-110 111-129 130-149 150-159 160-179 180-194 195-203 204-212 213-229 230-235 236-243 244-264 265-290 291-300 301-310 311-325 summe unternehmen 105 859 2.553 2.360 11.307 24.174 31.832 27.774 80.504 20.494 12.741 25.728 27.229 4.130 3.807 2.396 277.993 ausfälle 0 1 9 13 68 175 258 303 913 310 283 623 836 280 334 295 4.701 ausfallquote 0 0,12 0,35 0,55 0,6 0,72 0,81 1,09 1,13 1,51 2,22 2,42 3,07 6,78 8,77 12,31 1,69 unternehme n in 0,04 0,31 0,92 0,85 4,07 8,7 11,45 9,99 28,96 7,37 4,58 9,25 9,79 1,49 1,37 0,86 100 33.586 12.047 1 bis 10 mio 10 bis 50 mio größer 50 mio bbb bis b 198.445 4.2 relevant market Ü more than 2 mio companies have revenues under 1 mio eur they are not our target group since demanded credit or equity volumes are too low businessplan page 8 36

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good money for good companies Ü companies with revenues above 50 mio eur are also not in focus since many private equity funds and banks are much more interested in this segment than in small and medium sized companies according to this appropiate competitive products for them are in the market which can t be beaten by our business model by these arguments market potential adds up to nearly 280.000 companies Ü now companies are of special interest for our product whose ranking is between bbb and bbÜ comparing the creditreform index with standard poors a transformation can be made by choosing all companies with failure rates above 0,5 and below 2 see the red zone in the graphic above Ü 71 percent of the companies are rated between bbb and bb Ü but these companies are absolutely not considered as investment grades attractive for investors and therefore until now not the target of private equity investors by these arguments overall market potential is narrowed to nearly 200,000 Ü since companies with turnovers are more likely to ask for private equity in the amounts targeted by us in the first step further splitting is reasonable rating of medium-sized companies umsatz >10 mio bis 50 mio risikoklasse 1 2 3 4 5 6 7 8 9 10 11 12 bonitätsindex 100 156 195 213 223 234 243 264 287 308 328 376 155 194 212 222 233 242 263 286 307 327 375 499 ausfallquote 0,46 0,50 0,75 0,75 0,91 2,00 1,66 3,42 4,45 13,75 17,24 18,00 summe risk 2-6 unterunternehmen nehmen in gesamt 2.116 6,3 9.001 26,8 8.624 25,7 5.575 16,6 2.039 6,1 692 2,1 2.898 8,6 1.321 3,9 741 2,2 164 0,5 331 1,0 84 0,3 33.586 100 28.829 businessplan page 9 36

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good money for good companies rating of small companies umsatz 1 mio bis 10 mio risikoklasse 1 2 3 4 5 6 7 8 9 10 11 12 bonitätsindex 100 156 195 213 223 234 243 264 287 308 328 376 155 194 212 222 233 242 263 286 307 327 375 499 ausfallquote 0,34 0,75 0,98 1,14 1,24 2,08 2,40 2,84 7,31 11,20 20,32 26,64 summe risk 2-6 unterunternehmen nehmen in gesamt 2.017 0,8 24.758 10,3 48.481 20,1 31.871 13,2 51.465 21,3 14.690 6,1 22.818 9,5 28.252 11,7 7.554 3,1 3.418 1,4 3.513 1,5 2.703 1,1 241.540 100,0 107.127 170.000 of course could the business model be of interest for all companies but first marketing focus should be medium-sized companies the second step should go to the smaller ones Ü market potential in a very restricted classification contains 30.000 companies Ü in a little broader demarcation market potential embraces 200.000 companies in total about 200.000 sme s are considered as target group for our financial product 4.3 market potential question is for how many firms our product is attractive and which volumes can be placed in march 2004 creditreform and bbg tried to find out with a dedicated questionnaire they analyzed the opinions of 4,232 german sme s entrepreneurs about their financial situation and asked them also for planed actions in the future Ü most of them have a moderate business development and an equity ratio beneath 20 Ü 44 of them need private equity from all sizes of companies and branches businessplan page 10 36

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good money for good companies Ü only 10 of the companies have a capital need over 500,000 eur 11 need between 250,000 and 500,000 eur and 37 need between 100,000 and 250,000 eur 40 of the sme s need less than 100,000 eur amount of capital needed 100.000 euro 250.000 to 500.000 euro total 1851 wholesale 271 retailers 170 construction 309 manufacturing 450 services 651 0 31 44 50 26 35 56 39 100.000 to 250.000 euro 500.000 euro 37 50 50 26 32 35 20 7 11 9 10 11 5 2 14 14 10 100 5 Ü about 75 of the companies which need private equity are willing to accept external investors but two thirds of them do not wish any co-determination Ü finally 8 of all questioned 4,232 sme s are willing to pay 11 to 12 per year for private equity and a further group of 7 of the sample is willing to pay 8 to 10 for liable equity sme s price sensitivity for private equity -willingness to pay to 5 total 1253 wholesale 195 retail 101 construction 197 manufacturing 330 services 430 0 20 11 22 19 21 24 23 26 24 50 6 7 27 39 32 13 8 9 10 15 13 15 7 6 15 16 8 5 9 2 11 12 23 4 16 24 29 24 23 100 9 4 15 8 by matching the answering profiles to the total group of sme s with a solvency between bbb and bb about 15 of companies could be interested for our product businessplan page 11 36

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good money for good companies this means 4,500 companies have an estimated capital need from 1 mio to 5 mio eur and about 25,500 sme s have an estimated capital need from 100,000 eur to 1 mio eur by questioning a small group of 37 entrepreneurs from this target group three key factors became evident Ü they are really willing to wait up to nine months for the capital if it is really cheaper than other financial products Ü costs for rating and contracting should not exceed an amount of one percent of total capital requirements Ü entrepreneurs who have heard before from the boerner fund e.g from the media or from their association are more likely to deal financial issues with this association 4.4 4.4.1 market position intensity of competition the financial market for the german mittelstand is competitive but most of the private initiatives are focused on the high-level segment of sme s with revenues over 50 mio eur and a rating better than bbb it is the state owned kfw mittelstandsbank which offers financial products at very competitive or even subvention prices when we discuss t e lack of money in h germany s enterprises the major problem for the kfw is that they are depending on the willingness of the bank sector which passes their products through their channel of distribution in the past the kfw had very often take over bad risks the banks were unlike to finance any more but with their portfolio the kfw gives price signals which are hard to compete for a private owned financial enterprise this is probably the reason why the competition in the discussed segment of sme s with a rating worse than bbb and revenues between 1 mio to 50 mio eur is dominated by the kfw and regional förderbanken only private banks with cross selling effects are able to compete with the conditions offered by kfw co but with the regulation of basle ii it will be more difficult for the bank sector to use these internal cross selling effects for investments in sme s in order to know what kfw thinks and does the federation of german wholesale and foreign trade has established a very strong contact to nearly all levels of businessplan page 12 36

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