{ "cells": [ { "cell_type": "markdown", "id": "dynamic-movement", "metadata": {}, "source": [ "## Business Plan ##\n", "\n", "

\n", "\n", "This document provides a detailed business plan for the proposed HTS Customer Finance Program.\n", "\n", "

\n", "\n", "*HTS Opco is the operating company HTS Engineering Ltd. engaged in the business of selling HVAC equipment and services in the province of Ontario.*\n", "\n", "*HTS Fico is a start-up finance company that provides financing for HTS Opco customers.*\n", "\n", "

\n", "\n", "It contemplates:\n", "\n", "+ creation of a standalone finance company, wholly-owned by HTS, to provide equipment financing to HTS customers\n", "+ credit risk model to support risk-based pricing of loans and ongoing monitoring of portfolio risk\n", "+ implementation plan, including partnership with 3rd party lenders. This allows initiation without requiring investment or new corporate structure\n", "+ once confidence is established, investment structured as mix of shareholder debt and equity to support 99.95% Value at Risk (VaR)\n", "\n", "As part of the plan, we propose:\n", "\n", "+ year 1: engagement with 3rd party lendering partners\n", "+ year 2: investment of ~$1M in HTS Fico\n", "+ year 5: investment peaks at ~$10M\n", "+ year 6+: engage 3rd party funding for debt to support future growth and repay shareholder debt\n", "\n", "Detailed projections are provided (see Financial Model section) with following highlights:\n", "\n", "+ by year 5, HTS FICO annual originations, sales, and net income reach **$15M, $1.5M, and $1.1M** respectively\n", "+ by year 15, HTS FICO annual originations, sales, and net income reach **$31M, $2.8M, and $2.5M** respectively\n", "+ investment generates **5-year IRR of 29.2%**" ] }, { "cell_type": "markdown", "id": "quality-meeting", "metadata": {}, "source": [ "### Strategic Objectives ###\n", "\n", "1. A customer finance program should increase sales for HTS Opco\n", " + via new customers and new markets\n", " + broader service offering for existing customers\n", " \n", "2. an HTS Fico can be a profitable venture in its own right\n", " + HTS Opco has several advantages (vs true FIs) that should enhance profitability\n", " + HTS Fico can leverage existing HTS Opco capabilities of equipment expertise, customer relationships, and service network (including for repossession and remarketing)" ] }, { "cell_type": "markdown", "id": "young-hopkins", "metadata": {}, "source": [ "### HTS Opco Advantages ###\n", "\n", "HTS Opco has several advantages in financing versus standalone finance companies.\n", "

\n", "\n", "**Existing Customer Relationships**\n", "\n", "+ financing product for long-term existing customers should decrease risk\n", "+ knowledge and comfort with customer's business practices\n", "+ reputational incentive of customer to make loan payments\n", "+ reputational considerations work both ways, however. Fico must be very careful to treat good customers appropriately.\n", "\n", "**Understanding Asset Value**\n", "\n", "+ market experts have better visibility to ongoing asset values\n", "+ know what products are / are not susceptible to obsolescence\n", "+ better risk profile of loans\n", "+ better market pricing\n", "\n", "**Profit from Resale**\n", "\n", "+ if HTS Opco products can be resold, potential to profit *again* from a repossessed piece of equipment\n", "+ additional considerations:\n", " + inventory management (handling, storage, impact on working capital)\n", " + product obsolescence" ] }, { "cell_type": "markdown", "id": "touched-birthday", "metadata": {}, "source": [ "### Loan Types ###\n", "\n", "Fico will engage in a handful of loan types, distinguished by their structure and risk profile.\n", "

\n", "\n", "**Core**\n", "\n", "+ bread and butter equipment finance\n", "+ serial numbered goods that are common and readily tradeable (where possible)\n", "+ sales for existing buildings, for parts and maintenance\n", "+ good portfolio diversification\n", "+ good asset value visibility\n", "\n", "**Environmental / Incentive-Induced**\n", " \n", "+ equipment purchases incentivized by government programs\n", "+ incentive typically involves a tax credit\n", "+ similar to core, with opportunity to transfer tax credit etc\n", "+ adds a wrinkle to the profit assessment (potentially much higher) and risk assessment (also potentially higher, as there is likely some uncertainty around whether customer will actually receive the incentive)\n", "\n", "**Off-Site Builds**\n", " \n", "+ larger, more complex products\n", "+ several additional complications offset by potential for greater profit\n", "+ what is the prevailing resale market?\n", "+ How unique is any one modular build? Impacts how closely the ongoing value of any one build must be monitored.\n", "+ Consideration around security: is the modular build distinct from the building, legally speaking. Rights to building fixtures at times can be disputed. May need to confirm or get acknowledgements from first morgtagers " ] }, { "cell_type": "markdown", "id": "expensive-tribe", "metadata": {}, "source": [ "### Evaluating Investment in HTS Fico ###\n", "\n", "There are three main considerations that will be explored in greater detail below.\n", "

\n", "\n", "1. How much capital should HTS Opco invest in HTS Fico, both initially and ongoing?\n", " + requires risk modeling, growth plan\n", "\n", "2. What is return on invested capital in HTS Fico?\n", " + requires risk modeling, growth plan\n", " + what is loan hurdle rate? \n", " \n", "3. What is impact on HTS Opco Working Capital and liquidity for other needs?\n", " + must be incorporate in HTS Opco projections\n", " + investing any amount of capital will, at the time of investment, reduce working capital\n", " + over time, HTS Fico can accumulate its own equity to fund growth\n", " + over time, HTS Fico can obtain 3rd party funding\n", "\n", "**Other Considerations / Needs**\n", "\n", "+ HTS must develop a robust Loss Model, as outlined in this document.\n", "+ Competitive Environment\n", " + many of HTS Opco's competitors or businesses in related industry have finance divisions.\n", " + [Enercare Commercial Loan Contract](https://www.enercare.ca/sites/default/files/assets/library/builder/pdfs/3.2_enercare_commercial_hvac_contract_tc.pdf)\n", " + [Johnson Controls focused on energy retrofits](https://www.johnsoncontrols.com/-/media/jci/be/united-states/services-and-support/optimization-and-retrofit-services/files/be_brochure_energyretrofits.pdf?la=en&hash=C9A5588A5E92E125EAAF7480C0DAECF42086FD0B)\n", " + [Johnson Controls financing brochure](https://www.johnsoncontrols.com/-/media/jci/be/united-states/services-and-support/financing/files/be_overview_equipfinancing.pdf?la=en)\n", "\n", " + what kind of credit facilities are available for these types of assets?\n", " + not much in Canada but BDCs, private lenders, even Banks in the US\n", "+ Capital / Corporate Structure\n", " + HTS Opco should provide seed capital\n", " + HTS Fico should be a separate legal entity\n", " + more clearly see HTS Opco and HTS Fico liquidity positions\n", " + more clearly see return on HTS Fico investments\n", " + brown dollar HTS Fico-supported sales\n", " + liability benefits\n", " + advantages in acquiring standalone 3rd party funding\n", " + Capital Mix\n", " + ficos generally support high leverage (relative to opcos) with debt funding provided by depositors (banks) or other FIs (large equipment finance companies use securitization etc.).\n", " + at startup, HTS Fico is funded entirely with Equity, its return hurdles will be too high to be competitive in the market.\n", " + Solution: HTS Opco could fund HTS Fico with *both* Debt and Equity\n", " + HTS Opco debt would charge prevailing market interest rate\n", " + this mix can be explicitly achieved with separate companies, or achieved through brown dollars\n", "\n", "+ Implementation\n", " + initiate with 3rd party lending partners (banks, BDCs, etc.)\n", " + build process comfort internally\n", " + evaluate credit risk profile of opportunities to taylor risk model and pricing\n", " + allow for handful of \"quick wins\" before committing capital\n", " + start with existing customers\n", " + strong, broader relationship should improved credit performance\n", " + start with smaller loans in core segments; increases likelihood of success in short term\n", " + start in only one or two main jurisdictions\n", " + start with very narrow sales team (maybe just one person)\n", " \n", "+ Administration\n", " + Documentation\n", " + loan / lease agreement drafted by lawyer\n", " + registration of financing statements (PPSA / UCC)\n", " + PAD document\n", " + Collection\n", " + could piggyback on current process for ARs\n", " + may need to add bulk, periodic EFT pulls (via bank/Ceridian)\n", " + Realization\n", " + should partner with 3rd party provider(s) to handle pickup, transportation, etc.\n", " as required\n", " + protect should be truly recoverable" ] } ], "metadata": { "celltoolbar": "Edit Metadata", "kernelspec": { "display_name": "Python 3", "language": "python", "name": "python3" }, "language_info": { "codemirror_mode": { "name": "ipython", "version": 3 }, "file_extension": ".py", "mimetype": "text/x-python", "name": "python", "nbconvert_exporter": "python", "pygments_lexer": "ipython3", "version": "3.8.20" } }, "nbformat": 4, "nbformat_minor": 5 }