Confidential Information Memorandum

Confidential Information Memorandum

William McNarland, CFA

Table of Contents

Executive Summary

2

Reason for the Opportunity

3

Competitive Advantages

5

TBX Process

6

Business Plan

7

Key Principals, Management, and Roles

8

Regulations

9

Corporate Structure and Governance

10

Executive Compensation & Potential or Perceived Conflicts of Principals

12

Offering Details

14

Financial Model

15

Key Risks

19

Appendix #1: Stress Tests

20

Appendix #2: Media Reports References

25

1

Executive Summary

The business practice of Financial Advisors is commonly referred to as their "books." With a substantial number of financial advisors in Canada and their average age is nearing retirement, a large supply of books is becoming available in the market. While the demand for purchasing these books are extremely high, lack of advisory, brokerage service, and financing options have created a deep barrier for buyers. This barrier provides a profitable opportunity for investors and shareholders of The Book Xchange. The Book Xchange (TBX) is a Canadian company that specializes in providing advisory, brokerage, and financing services to Independent Financial Advisors (IFA) who wish to sell their business practices (for retirement and/or other reasons), or buy a business practice to kick-start or expand their existing practice. In addition, TBX use the capital raised to finance, the purchase and sale of investment dealers, insurance agencies or bridge financing for investment offerings. The following confidential information memorandum (CIM) will provide a summary of the opportunity and will also highlight the key risks and disclose the perceived or potential conflicts of the principals.

2

Reasons for the Opportunity

There are six main reasons for a great opportunity for TBX.

1. Many books for sell in the market place 2. An aging reality 3. Ample buyers 4. Lack of financing available 5. Low multiples 6. Minimum competition

Many books for sell in the market place

The last sizable study on the Canadian marketplace for independent investment and insurance advisors was conducted by PWC in 2014 on behalf of Advocis. The table below shows the landscape of financial advisors in Canada.

Categories

Number of People

Insurance Based

44,074

MFDA Advisor

32,459

Bank Branch Financial Advisor

13,177

IIROC Non Bank Based

6,427

IIROC Bank Based

3,735

The table above breaks out the type of institution, licensing, and advice that the financial advisor is focused on. There is much overlap but in the report, they used their best judgement to classify a financial advisor in one of the categories. The following definitions were used:

Insurance Based: An advisor that mostly provides advice on life insurance and investments that are provided from insurance companies.

MFDA Advisor: An advisor that mostly provides advice on investments provided from mutual fund companies.

Branch Based Financial Advisor: An advisor that works for one of Canada's large banks and provides advice from investments provided mostly from the bank they work for.

IIROC Non-Bank Based: An advisor that mostly provides advice on investment and may provide investments ranging from stocks, mutual funds, and derivatives.

IIROC Bank Based: An advisor that mostly provides advice on investment and may provide investments ranging from stocks, mutual funds, and derivatives. This advisor works for one of the large banks owned IIROC licensed firms.

3

Within the groups above, we are going to focus our attention on the "Independent Financial Advisor" (IFA) which would fall into the category of MFDA, Insurance, or IIROC Non-Bank Based advisor. The number for IFA is estimated to be about 55,000; this is less than the table above as one accounts for the advisors in this category that may be part of a captive salesforce of companies such as Investors Group or Sun Life.

An aging reality

According to a report from management consulting firm McKinsey & Co., the average age of a US insurance agent is 59. As such, one-fourth of the industry's work force is expected to retire by 2018. And assuming a related MarshBerry study is correct, balancing out the numbers means hiring three young producers for every producer currently employed. The trends are not as readily available in Canada but research confirms that the aging statistics in Canada are similar for both independent investment and insurance financial advisors.

Ample buyers

There has been media reports that have speculated the number of buyers may be 10 to 50 times larger than the number of sellers.1 TBX principals have access to the sellers, which is an extreme competitive advantage.

Lack of financing available

Most IFAs do not have access to finance their books of business. Traditionally, financing is only provided by large firms where the financial advisor is considered an employee. Also, there is no small business financing available from banks.

Low multiples

The lack of financing mentioned above has created a buyers' market for those with financing where average price multiples of books of business range between two and three times the annual revenue. This is an equity yield of 33% to 50%. This high earning yield can easily support debt payments in the mid-teens.

Minimum competition

There is only one other identified company in Canada that offers similar services as TBX. Please refer to Competitive advantage for a full analysis on TBX's strong competitive advantage over our only competitor.

1 Please refer to Appendix #2: Media Reports References, for details

4

Competitive Advantages

TBX has only one competitor in Canada, Queenston Consulting of Winnipeg Manitoba. Their business model earns revenue in two ways. First, by charging sellers an advisory fee to value their books of business. Media reports suggest that this fee can range between $5,000 and $20,000 per file. Second, there is a variable success fee for selling a book of business.2 Media reports suggest that the fee is 10% on the first $100,000 and 5% on amounts above. Queenston works on behalf of sellers and only will sell books on an earn out or partial upfront sales amount. They will not allow IFA to sell their book for a sum up front. Queenston has not been able to find a source of capital to assist advisors in financing their book purchase. TBX has four competitive advantages compared to Queenston.

1. Since there are many more buyers than sellers, TBX naturally charges fees to the buyer and not the seller. There is no fee for the seller to use TBX, and this encourages listings.

2. TBX does not charge any advisory or valuation fees to the seller. Instead, if the buyer wishes to have an advisory service, TBX will refer them to a preferred supplier of advisory or valuation services.

3. TBX has access to capital to be used for leverage that allows it to provide transactions to sellers that include the bulk sale prices upfront. This allows the payments to potentially be considered a capital gain instead of income. This potentially can reduce or completely eliminate any tax consequences of the sales. With IFA books selling at multiples of 2 to 3 times, it makes sense for an IFA buyer to use leverage even though it has a high rate of 14% to 20%.

4. The scope of advisors contacted and approached will be much larger than done by Queenston. TBX's marketing effort will be able to reach out to over 30,000 identified IFAs across Canada.

2 Please refer to Appendix #2: Media Reports References, for details

5

TBX Process

The TBX process is explained below for the seller and buyer.

Initial Seller Step: Through an extensive marketing effort, the IFA seller finds out about TBX

services for IFA that wishes to exit their practice for retirement or other reasons. A seller profile is completed and is made available to all approved buyers.

Initial Buyer Step: After paying and completing an application and signing confidential and

funding agreement term sheet, they will become an approved buyer. Their unidentified profile will be listed on TBX site for sellers to view.

Negotiation and Execution: TBX will offer to provide a professional valuation to help the

buyer and seller obtain a fair price. TBX will stay involved in the negotiations and upon completion, will provide the agreed upon financing.

6

Business Plan

TBX business plan includes the following five steps.

Seed Capital: The initial seed capital will be funded by offering a $150K 1.5 Year note that will

have a yield of 20% interest and will include 2.5% equity in the company. This note will provide a 5% sales commission. This is expected to be completed within 30 days.

Initial Preparation and Set Up: Building website, marketing material, email scripts, legal

documents for buyers and sellers, and clearing up all other administrative matters. This is expected to be completed within 30 days after funding.

Ongoing Marketing: Data mining and building contact with 30,000 IFAs across the country.

Directors follow up with positive interest for buyers, sellers and investors.

Enter Profitability: It is expected that the company will be profitable after all expenses and

capital costs in the first year.

Reduce Cost of Capital: It is expected that after the first year and an audit is performed, the

cost of capital of the corporation can be reduced with lower-cost traditional financing that will allow for the early retirement of bonds as they come due.

7

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download