[via email]
October 23, 2012
Mr. Sharif Tanamli
Managing Director
Lenox Hill Capital Advisors, Inc.
75 Rockefeller Plaza, 17th Floor
New York, NY 10019
Dear Sharif:
Per our telephone conversations and based on the confidential information memorandum dated September 2012, this letter sets forth the non-binding preliminary indication of interest by Succession Leadership Capital, LLC (“SLC”), in acquiring Rayburn Musical Instruments Pennsylvania, LLC (“Zeswitz” or “Company”).
Thank you again for bringing this opportunity to our attention. As a former music student, I thoroughly understand the vibrant role of musical education in the lives of young men and women. Furthermore, as an entrepreneur and investor, I deeply appreciate Zeswitz’s capabilities and strong history of excellent service in the Pennsylvania, New Jersey, and Maryland area.
Together with you, [the Sellers], I look forward to exploring ways to keep Zeswitz in considerate and capable hands. Together, we can determine if SLC is the right buyer to deliver a bright future for Zeswitz and the young musicians and educational communities that depend on its excellent service.
For your consideration, the outline of our proposal is as follows:
- Enterprise value: Based on Zeswitz’s projected and adjusted EBITDA for the twelve months ended December 31, 2012, of approximately $1.54 million, we would value the company at 4x EBITDA, or $6.14 million on a total enterprise debt-free, cash-free, and tax liability-free basis. Our valuation assumes that the financial condition of the Company is reasonable as presented in the Offering Memorandum dated September 2012 and that additional inventory described on page 11 of the memorandum is included in the purchase to help manage seasonal variability in rental demand. Buyer and Sellers would agree to pay for their own outside expenses relating to the transaction, including legal, banking, and advisory fees.
- Form of consideration: SLC would create a new company (“Newco”) to purchase 100% of the stock or assets of the Company for cash and other consideration. While it is our preference to structure the transaction as a purchase of assets, we are prepared to consider a purchase of the Company’s stock under a structure that would preserve the tax deductibility of goodwill. In our contemplated structure, SLC would require Sellers to hold an earn-out note equal to $1.54 million in total.
- Working capital: The purchase price would be subject to the Company’s having a mutually agreed-upon level of working capital at closing. The target working capital would be determined after a review of the monthly working capital balances over the last year. Working capital would be defined as current assets (excluding cash and tax-related assets) less current liabilities (excluding debt and tax-related liabilities).
- Financing: SLC will fund the required equity for the transaction from its own funds. We would introduce our financing sources early into the process in order to establish our capital structure. SLC may also raise senior debt sourced through customary financial institutions.
- Timing and approvals: We anticipate closing the transaction within 60 to 90 days of signing a letter of intent. By request of the Sellers and with full cooperation to speed the due-diligence process, SLC can make every effort to close by December 31, 2012, to avoid any new tax consequences that may arise in the new year. The decision to consummate a transaction will be made solely by SLC. There are no other outside approvals required.
- Management: It is the intention of SLC to retain certain employees of the Company. However, we have not had any discussions with management to determine if there would be any employees who would not be part of the transaction. A key managers’ equity options plan would be put in place to allow the management team to earn additional equity interests in the form of Newco common stock.
- Due-diligence requirements: Our indication of interest is subject to customary operational, financial, and legal due diligence as well as reaching mutually satisfactory arrangements with the key managers of the Company and the execution of sale and purchase agreements. At the appropriate time, SLC would also perform due diligence on the Company’s major customers and suppliers. To assist us during due diligence, we would expect to engage outside advisors in the areas of legal, accounting, environmental, insurance, and employee benefits.
- Background: The key members of SLC have significant operational, strategic, and financial experience to lead and grow the Company. We would encourage [the Sellers] to speak to our group of advisors during the engagement to understand our qualifications, backgrounds, and objectives.
- Contact:
Randy M. Shayler II
President and Managing Director
Succession Leadership Capital, LLC
(617) XXX-XXXX
Randy@SuccessionLeadership.com
Thank you for your consideration. Upon your review of this letter, I look forward to hearing from you to schedule a conference call to discuss our proposal and our mutual availability for an in-person management meeting.
Sincerely yours,
Randy M. Shayler II
President and Managing Director