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S2S Overview for Owners & Trusted Advisors

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Innovation in the capital markets has not kept pace with the United States’ transition from an asset-intensive manufacturing economy to an asset-light service economy. Leeward’s innovative investment structure is an exception. Learn how Leeward’s Sale-to-Service identifies and monetizes one of the economy’s most valuable assets.

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S2S Overview for Owners & Trusted Advisors

  1. 1. SALE-TO-SERVICE OVERVIEW For Owners & Trusted Adv isors
  2. 2. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION LEEWARD & CAPITAL INNOVATION The U.S. continues to transition from an economy based on tangible assets to a service economy based on intangible assets. Equity and non-bank lenders have filled the capital gap left by traditional banks, which have struggled to underwrite asset-light businesses. Specialty finance businesses and other lenders have only modestly innovated to lend to a service and knowledge-based economy that is evolving much faster. Leeward’s Sale-to-Service® was created to monetize one of the economy’s largest and most valuable intangible asset classes: mission- critical systems and data. Innovative intangible asset financing alternatives designed for the service economy will facilitate growth, innovation, and capital markets activity. Innovation in the capital markets has not kept pace with the United States’ transition from an asset- intensive manufacturing economy to an asset-light service economy. Leeward’s innovative investment structure is an exception. Leeward identifies and monetizes one of the economy’s most valuable assets.
  3. 3. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION SALE-TO-SERVICE VALUE PROPOSITION Leeward’s Sale-to-Service (“S2S”) is a low-cost non-dilutive off-balance alternative to unitranche and mezzanine debt and minority equity ideally suited for closely-held or related-party transactions. Mezzanine Leverage at the Cost Senior Debt: An S2S, which is similar to an operating lease, uses a three to six-year services agreement where all payments are operating expense. Behaves Like Preferred Equity: An S2S is off-balance sheet, has no traditional financial covenants, and behaves more like preferred equity rather than a traditional debt in distressed circumstances. Closely-Held & Related-Party Transactions: An S2S supports transactions where value is moving out of a business or from one party to another, including liquidity events and buyouts. Low Low High HighCost to Borrower Asset-Based Loan Cash Flow Loan Unitranche Mezzanine “As an unsecured creditor, an S2S behaves more like preferred equity.” CapitalStructure C O S T & L E V E R AG ES A L E - T O - S E RV I C E Equity S2S Cost to Customer S2S Behavior in Distress
  4. 4. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION TYPES OF INTANGIBLE ASSETS Trademarks CopyrightsDesign Rights Patents Trade Secrets Organizational Knowledge Proprietary Software & Data Brand & Reputation Critical Suppliers & Customers Research & Development Strategy & Market Intelligence Know-How I N T E L L E C T UA L P RO P E R T Y I N T E L L E C T UA L C A P I TA L Leeward is focused on proprietary software and data, also described as mission-critical systems and data. Most asset-light to asset-moderate businesses have server-based assets that meet this definition.
  5. 5. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION Unidentifiable Intangible Assets (Enterprise Value) Mission-Critical Systems & Data (Sale-to-Service) C O M P O N E N T S O F VA L U E M I S S I O N C R I T I C A L S Y S T E M S & DATA Formal Definition: Server-based intangible assets, also described as software and data, that are indispensable to the company’s business model and which cannot be easily replaced. Practical Description: If the company had no disaster recovery and the servers hosting these assets were destroyed, the company could not implement an entirely new system quickly enough and continue to serve its customers. Systems: These server-based assets can be heavily customized well-known ERP systems like SAP and Oracle or internally developed systems which have been built and enhanced over years and are proprietary to the business. Data: Leeward can value and monetize data separate from the company’s systems, making systems-light but data-rich businesses a fit for an S2S. Goodwill (Unidentifiable Intangible Value) Tangible Assets Identifiable Intangible Assets (Balance Sheet) MISSION-CRITICAL SYSTEMS & DATA Leeward’s Sale-to-Service monetizes mission-critical systems and data assets that are represented in a company’s enterprise value but often have little or no value on a company’s balance and sheet.
  6. 6. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION SALE-TO-SERVICE Sale Leeward $ Customer Services Fees S A L E - T O - S E RV I C E AT T R I BU T E SS A L E - T O - S E RV I C E Valuation: An S2S uses a “With & Without” valuation approach to determine the value of a company’s mission-critical systems and data asset. Valuation & Leverage: While these assets comprise a large part of a company’s enterprise value, generally 30% to 70%, an S2S is still governed by traditional leverage ratios. Services Agreement: Rather than a lease or license agreement, an S2S utilizes a three to six-year service contract where all payments are operating expense. Termination & Repurchase Option: The customer can pay a fee to exit the S2S early and may then repurchase the assets or extend the S2S for up to fifteen years for a low fee. Leeward has effectively created a new standalone asset-class through the monetization of mission-critical server-based intangible assets recognizing value overlooked by the broader capital markets.
  7. 7. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION ~15% ~85% S2S & ENTERPRISE VALUE Intangible Assets & Goodwill These assets can be a combination of identifiable and unidentifiable intangible assets as well as goodwill. Tangible Assets Tangible assets make up a small part of an asset-light to asset-moderate company’s enterprise value. Sale-to-Service The fair market value of a company’s mission-critical system and data is generally between 30% to 70% of a company’s total enterprise value. Intangible Assets An S2S transaction leaves the business with lower intangible asset value but provides access to a low-cost non-dilutive source of capital for other strategic or financial purposes. Tangible Assets S2S transactions do not encumber or impact the company’s tangible assets. ~15% ~50% ~35% E N T E R P R I S E VA L U E S 2 S & E N T E R P R I S E VA L U E The value of these assets are represented in enterprise value or as goodwill on the balance sheet. An S2S allows owners access to this value without a sale of the business through a tax-efficient off-balance sheet structure.
  8. 8. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION ~25% ~50% ~25% ~60% ~40% S2S & CAPITAL STRUCTURE L E V E R AG E D C A P I TA L S T RU C T U R E S 2 S C A P I TA L S T RU C T U R E Equity Traditional leveraged capital structures generally require ~40% equity and for many asset-light businesses, the requirements can be higher. Debt Debt structures for most asset-light businesses include cash flow and unitranche loans with modest amortization. Sale-to-Service An S2S transaction is off-balance sheet and all payments are service expense to the company. Equity Leeward can support transactions with less equity because of an S2S’ credit and return profile. Debt Leeward can and usually will provide senior debt alongside its S2S investments, offering companies a complete capital solution. An S2S delivers equal or greater amounts of leverage at a lower after-tax cost. When a senior cash flow or second lien loan is required to meet an owner’s total capital needs, Leeward will provide that as well.
  9. 9. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION USE OF PROCEEDS & CAPITAL GAIN Liquidity Events Shareholder & MBO’s Family Transitions Strategic M&A Owners seeking to diversify their wealth but who do not want an investor sitting at their board table and do not want to increase risk by levering up the business. with high-cost debt. Shareholder and management buyouts and other closely-held transactions where the stakeholders do not want an outside equity investor in the transaction. Families seeking an ownership transition to the next generation and want the family to retain control. However, the founders also want a fair value for their shares. Strategic buyers seeking mezzanine-type leverage but want to avoid higher cost debt. An S2S is particularly effective for a smaller company’s efforts to acquire a larger competitor. Provided the seller takes back 30% or more of enterprise value, Leeward may provide all acquisition capital, allowing an independent sponsor direct equity at close without investment hurdles. Independent Sponsors S2S assets have a little to no value on the balance sheet and are acquired for a higher value resulting in capital gain. As a result, an S2S is a fit for transactions when one or more stakeholders will have capital gain in any case.
  10. 10. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION FINANCIAL CRITERIA Because tax-sensitive customers benefit from the tax shield created by S2S service fees, companies located in States with high State tax rates, like California and New York, realize greater value. States with High Tax Rates An asset-light business with an EBITDA margin of 10% or more is often an indication that the business has complexity that requires the use of mission-critical systems and/or data assets. EBITDA Margins: 10% or Greater Because Leeward is an alternative to unitranche and mezzanine debt and target deal size is $10 million or greater, S2S candidates generally need EBITDA of $5 million or greater. EBITDA: $5M or greater While target investments are $10 million to $150 million, Leeward will consider smaller transactions when there is an opportunity for follow-on investments. Deal Size: $10M to $150M Leeward is focused on profitable middle-market businesses with enterprise values between $15 million and $250 million ideally located in States with high tax rates.
  11. 11. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION TARGET INDUSTRIES Business Services Financial Services Education Services Healthcare Services Consumer Services Transportation & Logistics Media & Telecom Asset-Light Manufacturing & Industrial E-commerce & Digital Marketing Service economy industries have a high concentration of businesses with mission-critical systems and data assets, but S2S candidates can be found across all industries, including asset-light manufacturing.
  12. 12. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION EXCLUDED CATEGORIES An S2S is inefficient for C-Corps due to double taxation. Acquisition targets can be a C-Corp if the transaction is an asset purchase and the acquirer is a pass- through entity. Entities Taxed as C-Corps Businesses with license income are not a fit for an S2S, but if revenue is based on anything other than license income, like transactions or commissions, it may be a fit for an S2S. SaaS Businesses An S2S is not a fit for distressed businesses, but Leeward may consider businesses with high-retention recurring revenue in excess of $10 million regardless of profitability. Distressed Businesses While pure growth capital and debt recapitalizations are not a fit, Leeward can provide growth capital or a debt recapitalization alongside an S2S when they are ~60% or less of total proceeds. Pure Growth or Debt Generally, asset-heavy businesses are not a fit when a strategic buyer would be interested in acquiring the company’s physical assets in bankruptcy, separate of the company’s S2S assets. Asset-Heavy Businesses While the following exclusions are easily identified, there are exceptions to each of these categories.
  13. 13. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION CRITICAL PATH FOR S2S TRANSACTIONS OW N E R S H I PC AT E G O RY U S E O F P RO C E E D S F I N A N C I A L S Overview ▪ An S2S acquires server-based intangible assets that have little to no value on the balance sheet. ▪ The assets are acquired for a higher value which results a in capital gain for the seller. ▪ Because of the gain on sale, an S2S is a fit for transactions where the use of proceeds would have had capital gain in any case. ▪ Liquidity Event ▪ Shareholder Buyout ▪ Management Buyout ▪ Family Ownership Transition ▪ Strategic M&A ▪ Independent Sponsor Acquisition Specifics Exceptions S Y S T E M S / DATA Critical Path Questions ▪ Leeward can provide growth capital and/or a debt recapitalization alongside an S2S when ~60% or less of total proceeds stay on the balance sheet. ▪ An S2S may be a fit for pure growth or debt recapitalizations when there is an NOL to offset capital gain and/or when alternative sources of capital are higher-cost or dilutive. ▪ An S2S is a low-cost non-dilutive alternative to unitranche, mezzanine, and minority equity. ▪ S2S candidates are profitable performing U.S. businesses. ▪ Ownership is usually closely- held and transaction are often related-party deals. ▪ Trailing twelve-month EBITDA of $5 million or greater ▪ Investments of $10 million or greater ▪ U.S. based businesses ▪ Owners must value the tax shield of the S2S service agreement payments. ▪ An S2S favors pass-through tax entities. ▪ An S2S’ asset purchase is inefficient for C-Corps due to double taxation. ▪ Limited Liability Corp ▪ Partnership ▪ S-Corp ▪ Other pass-through entities ▪ Mission-critical systems & data are server-based assets that are difficult, if not nearly impossible, to replace. ▪ If these assets were lost, the company would fail to serve its customers. ▪ These assets are common in asset- light to asset-moderate businesses as well as some asset-heavy businesses. ▪ Customized ERP ▪ Proprietary Technology ▪ CRM & Marketing Systems ▪ Supply Chain Systems ▪ Indispensable Data ▪ Other Mission-Critical Systems ▪ Leeward may consider businesses with EBITDA as low as $2.5 million under select circumstances. ▪ Businesses with recurring revenue in excess of $10 million may be a fit regardless of profitability. ▪ Acquisition targets can be a C-Corp if the transaction is an asset purchase and the acquirer is a pass-through entity. ▪ A C-Corp may also be a fit when alternative capital sources are costly or dilutive. Are ~40% or more of the proceeds used for one of the following transactions? Does the transaction meet the below financial criteria? Is the business one of these entity types? Does the business have mission-critical systems or data? ▪ Businesses with license income like software businesses are not a fit for an S2S. ▪ A business that looks like a software business but has revenue based on anything other than license income like transactions, commissions, or leads is a fit for an S2S.
  14. 14. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION CRITICAL PATH FOR INDEPENDENT SPONSORS OW N E R S H I PC AT E G O RY T R A N S AC T I O N O T H E R T E R M S Overview ▪ An S2S acquires server-based intangible assets with little value on the balance sheet resulting in a capital gain to the seller. ▪ The S2S gain is offset by the sponsor’s acquisition of the business. ▪ Leeward can be the sole capital provider and may not require an equity investment subject to specific deal terms. ▪ Cash consideration is generally within traditional unitranche or mezzanine leverage ratios. ▪ The seller takes back 25% or more of true enterprise value through a seller note or rolled equity, excluding earn-outs. Specifics Exceptions S Y S T E M S / DATA Critical Path Questions ▪ Leeward can provide growth capital and/or a debt recapitalization alongside its acquisition capital provided ~60% or less of total proceeds are intended to stay on the balance sheet. ▪ Leeward can provide low-cost non-dilutive acquisition financing to equity sponsored transactions as well. ▪ An S2S allows sponsors direct equity at close and a larger share of deal economics. ▪ Sponsors may receive board fees and salary. ▪ Leeward has no direct equity and no board seats, allowing sponsors greater autonomy. ▪ Customized ERP ▪ Proprietary Technology ▪ CRM & Marketing Systems ▪ Supply Chain Systems ▪ Indispensable Data ▪ Other Mission-Critical Systems ▪ Owners must value the tax shield of the S2S service agreement payments. ▪ An S2S favors pass-through tax entities. ▪ An S2S’ asset purchase is inefficient for C-Corps due to double taxation. ▪ Limited Liability Corp ▪ Partnership ▪ S-Corp ▪ Other pass-through entities Does the independent sponsor’s LOI have terms similar to the following? Does the transaction meet the below financial criteria? Is the business one of these entity types? Does the business have mission-critical systems or data? ▪ Businesses with license income like software businesses are not a fit for an S2S. ▪ A business that looks like a software business but has revenue based on anything other than license income like transactions, commissions, or leads is a fit for an S2S. ▪ Trailing twelve-month EBITDA of $5 million or greater ▪ Investments of $10 million or greater ▪ U.S. based businesses ▪ Leeward may consider businesses with EBITDA as low as $2.5 million under select circumstances. ▪ Businesses with recurring revenue in excess of $10 million may be a fit regardless of profitability. ▪ Acquisition targets can be a C-Corp if the transaction is an asset purchase and the acquirer is a pass-through entity. ▪ A C-Corp may also be a fit when alternative capital sources are costly or dilutive. ▪ Mission-critical systems & data are server-based assets that are difficult, if not nearly impossible, to replace. ▪ If these assets were lost, the company would fail to serve its customers. ▪ These assets are common in asset- light to asset-moderate businesses as well as some asset-heavy businesses.
  15. 15. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION SALE-TO-SERVICE TRANSACTION MAP C AT E G O RY C A N D I DAT E C R I T E R I A Critical Path Items Pass-through Tax Entity (S-Corps, LLCs, Partnerships) Mission-Critical Systems and/or Data (Not Always Apparent) Profitable & Performing ($5M+ EBITDA, 10%+ Margins, $10M+ investment) H I G HF I T L OW M O D E R AT E Use of Proceeds ▪ Control sale transactions to third parties ▪ Sole use of proceeds is debt recapitalization ▪ Growth (unless next best alternative is heavily dilutive) ▪ Liquidity Events ▪ Shareholder & Management Buyouts ▪ Family Ownership Transitions ▪ Strategic M&A ▪ Independent Sponsor Acquisitions ▪ Financial sponsor follow-on acquisitions ▪ Financial sponsor dividend recapitalizations (hold period three years or greater) Balance Sheet ▪ Asset-heavy (with exceptions) ▪ Asset-moderate to Asset-light▪ Asset-heavy to asset-moderate Alternative Cost of Capital ▪ Less than 6% ▪ Transaction objectives can be accomplished using only senior debt ▪ Greater than 10% ▪ No or modest warrants and equity ▪ 6% to 10% ▪ No or modest warrants Domiciled State Tax Rate ▪ Texas (None) ▪ Florida (None) ▪ *All States Are Viable for an S2S* ▪ California (13%) ▪ New Jersey (8.97%) ▪ New York (8.82%) ▪ Other States with high tax rates ▪ Georgia (6%) ▪ Virginia (5.75%) ▪ Colorado (4.63%) ▪ Other States with moderate tax rates This transaction map outlines Leeward’s investment criteria and highlights company and transaction attributes that offer the best fit for an S2S.
  16. 16. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION CAPITAL COMPARISON C AT E G O RY U N I T R A N C H E / M E Z ZS A L E - T O - S E RV I C E E QU I T Y * States with modest to high tax rates, after-tax cost decreases with early termination Transaction Fees ~2%~4% ~4%-6% Tax Deductibility Interest OnlyAll S2S Fees None Effective Cost of Capital 8% - 15%2% - 8% (*) 20% - 30% Availability of Funds 2.5x - 5x EBITDA2.5x - 5.5x EBITDA 4x - ~12x EBITDA Cash Flow Demands Modest Depending on AmortizationHigh Pre-tax, Comparable to 0.5% to 1% Per-Month Amortization After-tax None Board Rights VariousBoard Observer Board Representation Seniority Senior to Most Unsecured Creditors & Equity Critical Vendor - Senior to Other Debt & Most Unsecured Creditors Junior to All Creditors Covenants Modest to StrictMaterial Adverse Change Provisions No Covenants None Primary Use of Capital Recapitalization, Growth & M&ALiquidity, Closely-Held & Related- Party Transactions, M&A Liquidity, Growth & M&A Exit Sale or RefinanceMaturity or Termination Sale The following table offers a comparison of Leeward’s combined S2S and term loan structure to unitranche debt and equity from the borrower or customer’s perspective.
  17. 17. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION SALE-TO-SERVICE & OTHER LENDERS S A L E - T O - S E RV I C E & T H I R D - PA R T Y D E B T Asset-Based Loans: S2S customers with receivables, inventory, or other hard assets may have an asset-based facility that can coexist with an S2S without burdensome intercreditor terms. Third-Party Cash Flow Loans: An S2S will move ahead of most creditors in a reorganization. As a result, third-party cash flow lenders will not coexist with an S2S without intercreditor terms for which Leeward may or may not agree. Term Loan & S2S: In the event a transaction requires a senior cash flow or second lien term loan, Leeward will usually provide these as well. Leeward’s loans are independent of the S2S and are not cross-collateralized. Asset-Based Loan Term Loan Term Loan & S2S An S2S works alongside a third-party asset-based loan but generally not alongside other types of debt. When a senior or second lien term loan is needed, Leeward may provide that as well offering a complete capital solution.
  18. 18. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION LEEWARD UNDERWRITING F I N A N C I A L C O N S I D E R AT I O N S Trailing Twelve Month EBITDA & Effective Leverage: Leeward provides capital, including the S2S and term loan, within leverage and credit thresholds consistent unitranche and mezzanine debt. Current Balance Sheet: A company’s existing debt may impact the amount of Leeward’s S2S investment as existing debt should be recapitalized with new term debt rather than S2S proceeds. Cash Flow Projections: While the amount of the S2S investment is subject to the S2S appraisal, S2S fees must fit within the company’s projected cash flows net of working capital and capital expense requirements. EBITDA & Leverage Balance Sheet Forecast Leeward uses a cash flow lending framework to evaluate the credit profile of prospective investments.
  19. 19. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION CREDIT & S2S DILIGENCE I N T E R N A L & T H I R D - PA R T Y D I L I G E N C E Credit Evaluation: With the assistance of third-party service providers, Leeward undertakes traditional underwriting and credit diligence of the business and investment opportunity. S2S Diligence: With the assistance of a third-party firm experienced in technology diligence and software implementation, Leeward evaluates the mission-critical nature of the company’s systems and data assets. Investment Specific Diligence: Third-party management consultants, collateral audits, quality of earnings reports, industry and regulatory diligence, valuations, and other reports are engaged as needed. Credit Systems & Data Additional Diligence In addition to traditional internal and third-party diligence, Leeward also evaluates the mission-critical nature of the company’s systems and data assets.
  20. 20. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION EXPLAINER & MISSION VIDEOS Leeward’s “How an S2S Works” video offers a 90-second overview of the Sale- to-Service investment structure. This video is primarily designed for trusted advisors and other capital markets professionals. H OW A N S 2 S WO R K S W H E N A N S 2 S WO R K S M E S S AG E T O OW N E R S Leeward’s “When an S2S Works” video provides use of proceeds examples in five 90-second segments. The 90-second segments are used for specific audiences like management teams, families, and independent sponsors. Matt’s “Message to Owners” video speaks specifically to business owners. Matt discusses the loss of his family’s business and his mission in Leeward to help other families avoid what his family endured. Leeward’s “How & When a Sale-to-Service Works” videos offer case studies. In his “Message to Owners” Matthew Hagen discusses the loss of his family’s business and explains his mission in Leeward.
  21. 21. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION FREQUENTLY ASKED QUESTIONS K E Y QU E S T I O N S L E E WA R D R E S P O N S E 1. Implications – What is the impact to free cash flow? How does the customer have a low cost of capital but Leeward have a market rate of return? ▪ The S2S consumes more cash on a pre-tax basis compared to traditional financing solutions but consumes less cash on an after-tax basis. ▪ The customer’s low after-tax cost of capital is the result of all payments being operating expense similar to an operating lease. ▪ Owners with low taxable income like a financial investor, which mark up the basis of their investment in an acquisition and have high goodwill amortization, may not benefit from Leeward’s structure. ▪ Leeward’s returns to its investors are measured on a pre-tax basis and are at or above a market rate of return. 2. Tax Efficacy / Customer – What is the tax impact to the S2S customer? ▪ S2S customers will pay capital gain on the initial sale of the assets but all S2S fees will be operating expense, making Leeward’s S2S analogous to an ESOP. ▪ The capital gain for a liquidity event will mirror an equity sale but without dilution, which owners of closely-held businesses seeking a liquidity event should value. ▪ In a shareholder, management, or other buyout transaction, Leeward acquires the assets of the business and the proceeds are distributed to the selling shareholder. The shareholder also assumes the capital gain of the S2S given they will be paying capital gain in any case.
  22. 22. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION FREQUENTLY ASKED QUESTIONS K E Y QU E S T I O N S L E E WA R D R E S P O N S E 3. Early Termination of the S2S – How is early termination triggered and what is the impact to the customer and Leeward? ▪ The customer has the right to terminate the S2S after an agreed upon period, generally two years. ▪ The termination fee is predetermined and is an operating expense like the monthly S2S fees. ▪ If the S2S is terminated early, the after-tax cost of capital to the customer decreases which incents early termination. ▪ Termination is at the customer’s option unless a material adverse change provision in the S2S agreement is triggered which brings the termination fee immediately due. 4. Asset Repurchase – How does the company get its systems and data assets back at the end of the S2S? ▪ Upon termination or maturity of the S2S, the customer has the right to repurchase the assets on commercially reasonable terms. ▪ The company can also extend the S2S for up to 15 years for a commercially reasonable fee. ▪ Most S2S customers will reacquire the assets which generally will have a low residual value. 5. Bankruptcy / Residual Value – Where is the S2S positioned structurally from a bankruptcy perspective? What are the sensitivities around residual values of the S2S assets? ▪ In the event of a reorganization, the S2S agreement is classified as an executory contract and cannot be modified. Provided the company cannot easily replace its systems and/or data, the S2S rises to the level of critical vendor status, preserving the value of the S2S contract. ▪ In select transactions, there may be secured financial assets, but in most transactions, the assets will have no or modest residual value in liquidation. ▪ Leeward’s returns do not rely on a sale or residual value of the assets at the end of the S2S.
  23. 23. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION FREQUENTLY ASKED QUESTIONS 6. Physical Location of Systems & Data – What happens to the assets once they are purchased by Leeward? Is there execution risk? ▪ Provided the company’s systems and data assets are located in a third-party data center, they do not need to be moved. ▪ The existing datacenter contract is assigned to Leeward concurrent with the purchase of the assets. ▪ In the event the assets are in the company’s physical office, they will need to be relocated to a datacenter prior to close. K E Y QU E S T I O N S L E E WA R D R E S P O N S E 7. Cybersecurity – Who is responsible for cybersecurity? ▪ Leeward is responsible for complying with the customer’s security requirements, but Leeward is not held liable for a breach if in compliance of the company’s requirements. 8. System Upgrades – What does Leeward do with the assets. Can the assets be modified or upgraded? ▪ Leeward is not a value-added service provider and only modifies the assets at the company’s request. ▪ With Leeward’s consent, the customer can modify, upgrade, or outright replace the systems at their expense. ▪ These terms are similar to a triple-net-lease in real estate where the building belongs to the landlord, but the tenant can modify the property at their expense with the owner’s consent.
  24. 24. CAPITAL FOR CLOSELY-HELD & RELATED-PARTY TRANSACTION LEEWARD CAPITAL MANAGEMENT Matt’s fifteen-year tenure as the CEO of a large data and technology-enabled logistics business led him to recognize the untapped value of a company’s systems, processes, and data. Matt implemented the first Sales-to-Service transaction for his family-owned manufacturing and logistics business, American Forest Products, and started Leeward to deliver a similar capital solution for other closely-held businesses. Matthew began his career with Arthur Andersen, LLP in Mergers & Acquisitions and is now a regular speaker on intangible asset strategy & finance. Matthew received a BA in Political Science and BS in International Business from the University of Southern California and an MBA from Harvard Business School and has been a member of the Young Presidents Organization for over 17 years. mhagen@leewardcapitalmgt.com I (469) 718-7333 Leeward Capital Management is a specialty finance business located in Dallas, Texas. Leeward’s Sale-to-Service® (“S2S®”) investment structure offers a low-cost non-dilutive alternative to unitranche and mezzanine and debt and minority equity. An S2S monetizes the value found in a company’s mission-critical systems, processes, or data through a structure similar to a sale-leaseback. Leeward provides capital between $10M and $150M for closely-held and related-party transaction including liquidity events, management & shareholder buyouts, family ownership transitions, independent sponsor acquisitions, and M&A. Leeward’s S2S is well suited for asset-light to asset-moderate service businesses, but companies with mission-critical systems and data can be found in all sectors . www.leewardcapitalmgt.com | (469) 284-5166 ABOUT LEEWARD CAPITAL MANAGEMENT, LLC ABOUT MATTHEW HAGEN

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