ITEM 1. BUSINESS.

OUR BUSINESS

Overview

We operate a consulting and advisory services business with plans to acquire additional small to medium size businesses in a variety of different industries. Through our structure, we plan to offer investors an opportunity to participate in the ownership and growth of a portfolio of businesses that traditionally have been owned and managed by private equity firms, private individuals or families, financial institutions or large conglomerates. We believe that our management and acquisition strategies will allow us to achieve our goals of growing distributions to our shareholders and increasing shareholder value over time.

We seek to acquire controlling interests in businesses that we believe operate in industries with long-term macroeconomic growth opportunities, and that have positive and stable earnings and cash flows, face minimal threats of technological or competitive obsolescence and have strong management teams largely in place. We believe that private company operators and corporate parents looking to sell their businesses will consider us an attractive purchaser of their businesses. We also seek to acquire under-managed or under-performing businesses that we believe can be improved under the guidance of our management team and the management teams of the businesses that we will acquire in the future. We intend to make these businesses our majority-owned subsidiaries and intend to actively manage and grow such businesses. We expect to improve our businesses over the long term through organic growth opportunities, add-on acquisitions and operational improvements.

As an initial step in our plan to acquire small to medium size businesses in a variety of different industries our subsidiary, 1847 Management Services, Inc., or 1847 Management, acquired a 50% interest in each of PPI Management Group, LLC, or PPI Management, and Christals Management LLC, or Christals Management, from our Chief Executive Officer and controlling shareholder, Ellery W. Roberts. In connection with the acquisition of such equity interests from Mr. Roberts, we issued to Mr. Roberts 875,000 of our common shares pursuant to a securities purchase agreement, dated September 15, 2013, between our company and Mr. Roberts. Each of PPI Management and Christals Management are management consulting and advisory firms.

As a result of the acquisition by 1847 Management of 50% of the equity interests in each of PPI Management and Christals Management from Mr. Roberts, we operate a consulting and advisory services business focused on providing management consulting, finance, marketing, operational and strategic planning, relationship access, corporate development and merger and acquisition analysis services. We refer to the management consulting business operated by 1847 Management and its subsidiaries, PPI Management and Christals Management, as our management consulting business.

PPI Management acts as an advisor to PPI Acquisition Holdings, LLC, or PPI Acquisition, pursuant to an advisory agreement with PPI Acquisition. Under the advisory agreement, PPI Management provides PPI Acquisition and its subsidiary, Pawn Plus, Inc., or Pawn Plus, with management and consulting services in consideration for an advisory fee. Similarly, Christals Management acts as an advisor to Peekay Acquisition, LLC, or Peekay, pursuant to an advisory agreement with Peekay. The Christals advisory agreement is very similar to the PPI Management advisory agreement. Under the Christals advisory agreement, Christals Management provides Peekay and its subsidiaries with the same kind of management and consulting services that PPI Management provides to PPI Acquisition and Pawn Plus and Christals Management also receives fees for providing these services. To date, our management consulting business has not generated significant revenues.

Mr. Roberts is a manager of each of PPI Management and Christals Management and is responsible for providing consulting and advisory services to the clients of PPI Management and Christals Management. In part as an initial step in our plan to acquire small to medium size businesses in a variety of different industries, and in part as an attempt to minimize future conflicts of interest involving the splitting of Mr. Roberts’s business time, Mr. Roberts and the board of directors of our company determined that it would be in the best interests of our company to acquire such interests in PPI Management and Christals Management so that our company can operate such management consulting and advisory businesses and so Mr. Roberts’s business time will not be diverted away from the business and affairs of our company. Although we expect to continue to operate these businesses and generate revenues therefrom, we do not intend to expand our management consulting business by seeking new clients at this time. Instead, we plan to focus all of our efforts (other than efforts necessary to operate PPI Management and Christals Management) on identifying a platform acquisition, raising capital necessary to consummate a platform acquisition after it is identified, and completing a platform acquisition after the necessary capital is raised.

We believe that becoming a public reporting company and having our shares quoted on the Over-The-Counter Bulletin Board, or OTCBB, will facilitate our ability to raise capital to acquire a target acquisition in the future. On May 9, 2014, the SEC declared our registration statement on Form S-1 effective, which effectively caused us to become a public reporting company. Subsequently, a market maker filed an application with FINRA for our common shares to be eligible for trading on the OTCBB. On December 2, 2014, FINRA cleared our market maker’s request for an unpriced quotation on the OTCBB and OTC Link under ticker symbol “EFSH”. However, there can be no assurance that our common shares will ever be listed or quoted on a stock exchange or a quotation service or that any market for our stock will develop.

We believe that we will be able to raise capital to acquire businesses that we may target in the future. In such instance, we would attempt to enter into a binding acquisition agreement with the targeted company that conditions our obligations thereunder on our ability to raise capital to consummate the acquisition. We would attempt to obtain the exclusive right to acquire the targeted company for a period of time sufficient to allow us to raise the necessary capital. This methodology is consistent with the method previously used by our Chief Executive Officer, Ellery W. Roberts, to acquire small to medium sized businesses in the past. For the last five years, Mr. Roberts has been operating as what is known as a “fundless sponsor” and during this period he was responsible for acquiring Pawn Plus, Christals Management and Peekay with an aggregate purchase price of approximately $64.5 million. A fundless sponsor is an individual or group seeking acquisition candidates without having 100% of the equity financing in a committed private equity limited partnership or private equity “fund” required to complete the transaction up front (hence, they are “fundless”). Fundless sponsors raise the majority equity required to fund an acquisition after they have executed a letter of intent or definitive acquisition agreement with the targeted acquisition candidate and the closing of the acquisition transaction is predicated upon the buyer raising the requisite funds. Although they were acquired through the fundless sponsor approach, Pawn Plus, Christals Management and Peekay companies are currently fully funded.

With respect to our initial platform acquisitions, we expect that we will utilize the same fundless sponsor strategy that Mr. Roberts has employed in the past. We do not intend to directly use proceeds from our initial public offering to make acquisitions.

Our Manager

We have engaged our manager to manage the day-to-day operations and affairs of our company and to execute our strategy, as discussed below. Our Chief Executive Officer, Ellery W. Roberts, has approximately 20 years of experience in acquiring and managing small and middle market businesses. We believe the experience of Mr. Roberts in acquiring and managing diverse businesses of the size and general nature of those businesses that we plan to acquire will provide us with an advantage in executing our overall strategy. Mr. Roberts intends to devote a majority of his time to the affairs of our company.

Our manager owns 100% of the allocation shares of our company, for which it paid $1,000. Separately, our company and our manager have entered into a management services agreement pursuant to which our manager will manage the day-to-day operations and affairs of our company and will oversee the management and operations of our businesses. We will pay our manager a quarterly management fee for the services performed by our manager. In addition, our manager will receive a profit allocation with respect to its allocation shares in our company. See the section entitled “Our Manager” for further descriptions of the management fees and profit allocation to be paid to our manager. In consideration of our manager’s acquisition of the allocation shares, we agreed to the supplemental put provision in our operating agreement pursuant to which our manager shall have the right to cause our company to purchase the allocation shares upon termination of the management services agreement. See the section entitled “Our Manager—Our Manager as an Equity Holder—Supplemental Put Provision” for more information about the supplemental put provision.

Our company’s Chief Executive Officer, Mr. Roberts, is an employee of our manager and is seconded to our company. Our company will not have any other employees. Although Mr. Roberts is an employee of our manager, he reports directly to our company’s board of directors. The management fee paid to our manager will cover all expenses related to the services performed by our manager. See the section entitled “Our Manager—Our Manager as a Service Provider” for more information about the expenses reimbursed by our company and “Management” for more information about our Chief Executive Officer.

Market Opportunity

We seek to acquire and manage small to middle market businesses. We characterize small to middle market businesses as those that generate annual cash flows of up to $10 million. We believe that the merger and acquisition market for small to middle market businesses is highly fragmented and provides more opportunities to purchase businesses at attractive prices. For example, according to the Milken Institute 2013 Global Conference presentation on Mid-Market Private Equity, during the twelve-month period ended December 31, 2012, businesses that sold for less than $50 million were sold for a median of approximately 6.1 times the trailing twelve months of EBIDTA as compared to a median of approximately 7.5 times EBITDA for businesses that were sold for over $100 million. We believe that the following factors contribute to lower acquisition multiples for small to middle market businesses:

We believe that our management team’s strong relationship with business brokers, investment and commercial bankers, accountants, attorneys and other potential sources of acquisition opportunities offers us substantial opportunities to purchase small to middle market businesses.

We also believe that significant opportunities exist to augment the management teams and improve the performance of the businesses upon their acquisition. In the past, our Chief Executive Officer has acquired businesses that are often formerly owned by seasoned entrepreneurs or large corporate parents. In these cases, our Chief Executive Officer has frequently found that there have been opportunities to further build upon the management teams of acquired businesses beyond those in existence at the time of acquisition. In addition, our Chief Executive Officer has frequently found that financial reporting and management information systems of acquired businesses may be improved, both of which can lead to substantial improvements in earnings and cash flow. Finally, because these businesses tend to be too small to have their own corporate development efforts, we believe opportunities exist to assist these businesses in meaningful ways as they pursue organic or external growth strategies that were often not pursued by their previous owners.

Our Strategy

Our long-term goal is to begin making and growing distributions to our shareholders and to increase shareholder value over the long-term. Although we expect to continue to operate our management consulting business and we expect that our management consulting business will generate revenues for our company, we do not intend to grow our management consulting business through new engagements or otherwise. We acquired our management consulting business in part as a basis to build our business acquisition and management services business and in part so that the time that Mr. Roberts spends on business activities outside of our company would be minimized. We now plan to focus on acquiring other businesses. We believe that the scale and scope of these businesses will give us a base of cash flow from which to build our company. Our management consulting business alone will not allow us to generate distributions to our shareholders and we will only be able to make distributions to our shareholders if we acquire businesses in the future with sufficient cash flows to permit distributions to our shareholders. Therefore, we intend to identify, perform due diligence on, negotiate and consummate platform acquisitions of small to middle market businesses in attractive industry sectors.

Management Strategy

Our management strategy involves the operation of our current management consulting business and the identification, performance of due diligence, negotiation and consummation of acquisitions. After acquiring a company we will attempt to grow the company both organically and through add-on or bolt-on acquisitions. Add-on or bolt-on acquisitions are acquisitions by a company of other companies in the same industry. Following the acquisition of companies, we will seek to grow the earnings and cash flow of acquired companies and, in turn, grow distributions to our shareholders and to increase shareholder value. We believe we can increase the cash flows of our businesses by applying our intellectual capital to continually improve and grow our future businesses.

We seek to acquire and manage small to middle market businesses, which we generally characterize as those that generate annual cash flow of up to $10 million. We believe that the merger and acquisition market for small to middle market businesses is highly fragmented and provides opportunities to purchase businesses at attractive prices. We also believe, and our management team has historically found, that significant opportunities exist to improve the performance and augment the management teams of these businesses upon their acquisition.

In general, our manager will oversee and support the management team of our future platform businesses by, among other things:

We also believe that our long-term perspective provides us with certain additional advantages, including the ability to:

We intend to continually increase our intellectual capital as we operate our businesses and acquire new businesses and as our manager identifies and recruits qualified operating partners and managers for our businesses.

Acquisition Strategy

Our acquisition strategy involves the acquisition of businesses that we expect will produce stable growth in earnings and cash flows, as well as attractive returns on our investment. In this respect, we expect to make acquisitions in industries if we believe an acquisition presents an attractive opportunity. We believe that attractive opportunities will increasingly present themselves as private sector owners seek to monetize their interests in longstanding and privately-held businesses and large corporate parents seek to dispose of their “non-core” operations.

We expect to benefit from our manager’s ability to identify diverse acquisition opportunities in a variety of industries. In addition, we intend to rely upon our Chief Executive Officer’s experience and expertise in researching and valuing prospective target businesses, as well as negotiating the ultimate acquisition of such target businesses. In particular, because there may be a lack of information available about these target businesses, which may make it more difficult to understand or appropriately value such target businesses, we expect our manager will:

We expect the process of acquiring new businesses to be time-consuming and complex. Our Chief Executive Officer historically has taken from 2 to 24 months to perform due diligence, negotiate and close acquisitions. Although we expect our Chief Executive Officer to be at various stages of evaluating several transactions at any given time, there may be significant periods of time during which he does not recommend any new acquisitions to us.

Upon acquisition of a new business, we intend to rely on our Chief Executive Officer’s experience and expertise to work efficiently and effectively with the management of the new business to jointly develop and execute a business plan.

While we will primarily seek to acquire controlling interests in a business, we may also acquire non-control or minority equity positions in businesses where we believe it is consistent with our long-term strategy.

As discussed in more detail below, we intend to raise capital for additional acquisitions primarily through debt financing at our company level, additional equity offerings by our company, the sale of all or a part of our businesses or by undertaking a combination of any of the above.

In addition to acquiring businesses, we expect to also sell businesses that we own from time to time when attractive opportunities arise. Our decision to sell a business will be based on our belief that the return on the investment to our shareholders that would be realized by means of such a sale is more favorable than the returns that may be realized through continued ownership and will be consistent with the disposition criteria to be established by our company’s board of directors from time to time. Upon the sale of a business, we may use the resulting proceeds to retire debt or retain proceeds for future acquisitions or general corporate purposes. Generally, we do not expect to make special distributions at the time of a sale of one of our businesses; instead, we expect that we will seek to gradually increase shareholder distributions over time.

Strategic Advantages

Based on the experience of our Chief Executive Officer and his ability to identify and negotiate acquisitions, we expect to be strongly positioned to acquire additional businesses. Our Chief Executive Officer has strong relationships with business brokers, investment and commercial bankers, accountants, attorneys and other potential sources of acquisition opportunities. In negotiating these acquisitions, we believe our Chief Executive Officer will be able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-owned businesses, management buy-outs and reorganizations.

We expect that the flexibility, creativity, experience and expertise of our Chief Executive Officer in structuring transactions will provide us with strategic advantages by allowing us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.

Our Chief Executive Officer also has a large network of deal intermediaries who we expect to expose us to potential acquisitions. Through this network, we expect to have a substantial pipeline of potential acquisition targets. Our Chief Executive Officer also has a well-established network of contacts, including professional managers, attorneys, accountants and other third-party consultants and advisors, who may be available to assist us in the performance of due diligence and the negotiation of acquisitions, as well as the management and operation of our businesses once acquired.

Valuation and Due Diligence

When evaluating businesses or assets for acquisition, we will perform a rigorous due diligence and financial evaluation process. In doing so, we will seek to evaluate the operations of the target business as well as the outlook for the industry in which the target business operates. While valuation of a business is, by definition, a subjective process, we will be defining valuations under a variety of analyses, including:

One outcome of this process is an effort to project the expected cash flows from the target business as accurately as possible. A further outcome is an understanding of the types and levels of risk associated with those projections. While future performance and projections are always uncertain, we believe that with a detailed due diligence review, future cash flows may be better estimated and the prospects for operating the business in the future better evaluated. To assist us in identifying material risks and validating key assumptions in our financial and operational analysis, in addition to our own analysis, we intend to engage third-party experts to review key risk areas, including legal, tax, regulatory, accounting, insurance and environmental. We may also engage technical, operational or industry consultants, as necessary.

A further critical component of the evaluation of potential target businesses will be the assessment of the capability of the existing management team, including recent performance, expertise, experience, culture and incentives to perform. Where necessary, and consistent with our management strategy, we will actively seek to augment, supplement or replace existing members of management who we believe are not likely to execute the business plan for the target business. Similarly, we will analyze and evaluate the financial and operational information systems of target businesses and, where necessary, we will actively seek to enhance and improve those existing systems that are deemed to be inadequate or insufficient to support our business plan for the target business.

Financing

We will finance future acquisitions primarily through additional equity and debt financings. We believe that having the ability to finance most, if not all, acquisitions with the general capital resources raised by our company, rather than financing relating to the acquisition of individual businesses, provides us with an advantage in acquiring attractive businesses by minimizing delay and closing conditions that are often related to acquisition-specific financings. In this respect, we believe that, at some point in the future, we may need to pursue additional debt or equity financings, or offer equity in our company or target businesses to the sellers of such target businesses, in order to fund acquisitions.

Corporate Structure

Our company is a Delaware limited liability company formed on January 22, 2013. Your rights as a holder of common shares, and the fiduciary duties of our directors and executive officers, and any limitations relating thereto, are set forth in the operating agreement, and may differ from those applying to a Delaware corporation. However, the operating agreement specifies that the duties of its directors and officers will be generally consistent with the duties of directors and officers of a Delaware corporation.

In addition, investors in our initial public offering will be shareholders in our company, which is a limited liability company, and, as such, will be subject to U.S. federal income tax under the partnership income tax provisions. Generally, under the U.S. federal partnership income tax provisions, our company will not be subject to federal income tax liability, although it would be required to file an annual information return with the Internal Revenue Service, or IRS. Instead, each of our shareholders will be required to report on his or her annual federal income tax return his or her allocable share of company income, gain, loss, deduction, credit and tax preferences. As part of our company’s annual information return, our company also will file with the IRS and issue to you a Schedule K-1 that describes your annual allocable share of our company’s income, gain, loss, deduction, and other items. As a holder of common shares, you may not receive cash distributions sufficient in amount to cover potential taxes in respect of your allocable share of our company’s net taxable income. The U.S. federal income tax rules that apply to partnerships are complex, and complying with the reporting requirements may require significant time and expense. See the section entitled “Material U.S. Federal Income Tax Considerations” of our registration statement on Form S-1, as amended, filed with the SEC on May 6, 2014, for more information.

Our company has two classes of limited liability company interests—the common shares, which were offered to the public in our initial public offering, and the allocation shares, all of which have been and will continue to be held by our manager. See the section entitled “Description of Shares” of our registration statement on Form S-1, as amended, filed with the SEC on May 6, 2014, for more information about the common shares and allocation shares.

Our board of directors will oversee the management of our company and our businesses and the performance by our manager. Initially, our board of directors is comprised of three directors, all of whom have been appointed by our manager, as holder of the allocation shares, and at least one of whom is an independent director. Following this initial appointment, two of the directors will be elected by our shareholders.

As holder of the allocation shares, our manager will have the continuing right to appoint one member to our board of directors for every four (4) members constituting the entire board of directors at any time. Appointed directors will not be required to stand for election by our shareholders. See the section entitled “Description of Shares—Appointed Directors” of our registration statement on Form S-1, as amended, filed with the SEC on May 6, 2014, for more information about our manager's right to appoint a director.

The chart below presents our current corporate structure:

Emerging Growth Company Status

We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

Our Management Consulting Business

On September 15, 2013 our subsidiary, 1847 Management, acquired a 50% equity interest in each of PPI Management and Christals Management from our Chief Executive Officer, President, Chief Financial Officer, and Chairman, Ellery W. Roberts, and we issued to Mr. Roberts 875,000 common shares (85.4%) of our common shares in consideration therefor.

Through our subsidiary, 1847 Management, and our indirect subsidiaries, PPI Management and Christals Management, we operate a consulting and advisory services business focused on providing management consulting, finance, marketing, operational and strategic planning, relationship access, corporate development and merger and acquisition analysis services. PPI Management acts as an advisor to PPI Acquisition pursuant to an advisory agreement with PPI Acquisition. Under the advisory agreement, PPI Management provides PPI Acquisition and its subsidiary, Pawn Plus, with management and consulting services in consideration for an advisory fee. Similarly, Christals Management acts as an advisor to Peekay, pursuant to an advisory agreement with Peekay. The Christals advisory agreement is very similar to the PPI Management advisory agreement. Under the Christals advisory agreement, Christals Management provides Peekay and its subsidiaries with the same kind of management and consulting services that PPI Management provides to PPI Acquisition and Pawn Plus and Christals Management also receives fees for providing these services. To date, our management consulting business has not generated significant revenues.

Advisory Agreements

Each of PPI Management and Christals Management are parties to advisory agreements with the companies that they advise. Following is a summary of the respective advisory agreements.

PPI Management Advisory Agreement

On December 31, 2012, PPI Management entered into an advisory agreement with PPI Acquisition. PPI Acquisition owns Pawn Plus. Pawn Plus was founded in 1993 and operates five full-service pawn facilities spread across four counties in southeastern Pennsylvania and one pawn facility in northeastern Ohio. Pawn Plus makes collateralized loans, buys gold jewelry and previously owned merchandise from the public, and derives revenues through the resale of these items in its retail locations and by converting gold through the refining process into revenue. Additionally, Pawn Plus purchases new and refurbished merchandise directly from vendors for resale in its stores.

Under the advisory agreement, PPI Management was retained as a consultant to render management and consulting services to PPI Acquisition and its subsidiary, Pawn Plus. The services to be performed by PPI Management include management, finance, marketing, operational and strategic planning, relationship access, corporate development and analysis of potential mergers and acquisitions. The advisory agreement has no specific term and either PPI Acquisition or PPI Management can terminate the advisory agreement upon notice to the other party at any time and for any reason or for no reason whatsoever. As compensation for the services provided by PPI Management, PPI Acquisition is required to pay PPI Management a fee equal to 5.75% of PPI Acquisition’s earnings before interest, taxes, depreciation and amortization, or EBITDA, payable as follows: (i) 3.75% of EBITDA for any fiscal quarter is payable quarterly in advance and (ii) the difference between 5.75% of EBITDA for any fiscal year and the aggregate quarterly payments previously paid with respect to fiscal quarters in such fiscal year, payable yearly in arrears. The advisory agreement also requires PPI Acquisition to reimburse PPI Management for all reasonable and documented out-of-pocket costs and expenses, including the fees and expenses of accountants, attorneys, third-party consultants and other advisors retained by PPI Management in connection with services rendered under the advisory agreement.

PPI Acquisition and certain of its affiliates are parties to a note and warrant purchase agreement, or loan agreement, with a certain lender that impose restrictions on PPI Acquisition’s ability to make payments to PPI Management under certain circumstances. Specifically, no fees or other amounts owing under the advisory agreement can be paid by PPI Acquisition to PPI Management while a default or event of default under the related promissory note is continuing or the payment would cause a default under the related promissory note. Furthermore, PPI Acquisition is restricted from making certain payments relating to operations and capital expenditures, and must maintain a certain collateral coverage ratio.

Christals Management Advisory Agreement  

On December 31, 2012, Christals Management and CP IV SPV, LLC, or CP IV, entered into an advisory agreement with Peekay, pursuant to which each of Christals Management and CP IV, an entity that is not affiliated with Christals Management, our company or Mr. Roberts, were retained to provide advisory services to Peekay and its subsidiaries and affiliates. Peekay is a leading retailer of lingerie, women’s wellness and sexual health products. It was founded in 1981 in Auburn, WA by a mother and daughter team with a focus on creating a comfortable and inviting store environment catering to women and couples. Peekay is dedicated to creating both a place and attitude of acceptance and education for our customers. Today, Peekay is a leader in changing the perception of sexual wellness throughout the United States with 46 locations across 6 states.

Under the advisory agreement, Christals Management was retained as a consultant to render management and consulting services to Peekay and its subsidiaries and affiliates. The services to be performed by Christals Management include management, finance, marketing, operational and strategic planning, relationship access, corporate development and analysis of potential mergers and acquisitions. The advisory agreement has no specific term and either Peekay or Christals Management may terminate the advisory agreement upon notice to the other party at any time and for any reason or for no reason whatsoever. As compensation for the services provided by Christals, Peekay paid Christals Management a one-time payment of $250,000 at the time the advisory agreement was entered into and is required to pay Christals Management an additional $250,000 for each fiscal year during the term. This management fee is payable quarterly, in advance, on the first day of each quarter during the term of the advisory agreement. The advisory agreement also requires Peekay to reimburse Christals Management for all reasonable and documented out-of-pocket costs and expenses, including the fees and expenses of accountants, attorneys, third-party consultants and other advisors retained by Christals Management in connection with services rendered under the advisory agreement.

Peekay and certain of its affiliates are parties to a financing agreement, or loan agreement, with certain lenders that impose restrictions on Peekay’s ability to make payments to Christals Management under certain circumstances. Specifically, the agent for the lenders may suspend payment of the management fee by written notice to Christals Management and Peekay as a result of the agent’s exercise of remedies under the loan agreement, which suspension would be effective concurrently with the delivery of such written notice. However, if the breach or other default giving rise to the suspension is cured, Peekay would be permitted to pay Christals Management again within five days thereof, including accrued, but unpaid fees.

MANAGEMENT SERVICES AGREEMENT

Management Services

The management services agreement sets forth the services to be performed by our manager. Our manager will perform such services subject to the oversight and supervision of our board of directors.

In general, our manager will perform those services for our company that would be typically performed by the executive officers of a company. Specifically, our manager will perform the following services, which we refer to as the management services, pursuant to the management services agreement:

Our company and our manager have the right at any time during the term of the management services agreement to change the services provided by our manager. In performing management services, our manager will have all necessary power and authority to perform, or cause to be performed, such services on behalf of our company, and, in this respect, our manager will be the only provider of management services to our company. Nonetheless, our manager will be required to obtain authorization and approval of our board of directors in all circumstances where executive officers of a corporation typically would be required to obtain authorization and approval of a corporation's board of directors, including, for example, with respect to the consummation of an acquisition of a target business, the issuance of securities or the entry into credit arrangements.

While our Chief Executive Officer, President and Chief Financial Officer, Mr. Ellery W. Roberts, intends to devote approximately 90% of his time to the affairs of our company, neither Mr. Roberts, nor our manager, is expressly prohibited from investing in or managing other entities. In this regard, the management services agreement will not require our manager and its affiliates to provide management services to our company exclusively.

Secondment of Our Executive Officers

In accordance with the terms of the management services agreement, our manager will second to our company our executive officers, which means that these individuals will be assigned by our manager to work for us during the term of the management services agreement. Our board of directors has appointed Mr. Roberts as an executive officer of our company. Although Mr. Roberts is an employee of our manager, he will report directly, and be subject, to our board of directors. In this respect, our board of directors may, after due consultation with our manager, at any time request that our manager replace any individual seconded to our company and our manager will, as promptly as practicable, replace any such individual; however, our Chief Executive Officer, Mr. Roberts, controls our manager, which may make it difficult for our board of directors to completely sever ties with Mr. Roberts. Our manager and our board of directors may agree from time to time that our manager will second to our company one or more additional individuals to serve on behalf of our company, upon such terms as our manager and our board of directors may mutually agree.

Acquisition and Disposition Opportunities

Our manager has exclusive responsibility for reviewing and making recommendations to our board of directors with respect to acquisition and disposition opportunities. If our manager does not originate an opportunity, our board of directors will seek a recommendation from our manager prior to making a decision concerning such opportunity. In the case of any acquisition or disposition opportunity that involves an affiliate of our manager or us, our nominating and corporate governance committee, or, if we do not have such a committee, the independent members of our board of directors, will be required to authorize and approve such transaction.

Our manager will review each acquisition or disposition opportunity presented to our manager to determine if such opportunity satisfies the acquisition and disposition criteria established by our board of directors. The acquisition and disposition criteria provide that our manager will review each acquisition opportunity presented to it to determine if such opportunity satisfies our company's acquisition and disposition criteria, and if it is determined, in our manager's sole discretion, that an opportunity satisfies the criteria, our manager will refer the opportunity to our board of directors for its authorization and approval prior to the consummation of any such opportunity.

Our investment criteria include the following:

With respect to investment opportunities that do not fall within the criteria set forth above our manager must first present such opportunities to our board of directors. Our board of directors and our manager will review these criteria from time to time and our board of directors may make changes and modifications to such criteria as our company makes additional acquisitions and dispositions.

If an acquisition opportunity is referred to our board of directors by our manager and our board of directors determines not to timely pursue such opportunity in whole or in part, any part of such opportunity that our company does not promptly pursue may be pursued by our manager or may be referred by our manager to any person, including affiliates of our manager. In this case, our manager is likely to devote a portion of its time to the oversight of this opportunity, including the management of a business that we do not own.

If there is a disposition, our manager must use its commercially reasonable efforts to manage a process through which the value of such disposition can be maximized, taking into consideration non-financial factors such as those relating to competition, strategic partnerships, potential favorable or adverse effects on us, our businesses, or our investments or any similar factors that may reasonably perceived as having a short- or long-term impact on our business, results of operations and financial condition.

Indemnification by our Company

Our company has agreed to indemnify and hold harmless our manager and its employees and representatives, including any individuals seconded to our company, from and against all losses, claims and liabilities incurred by our manager in connection with, relating to or arising out of the performance of any management services. However, our company will not be obligated to indemnify or hold harmless our manager for any losses, claims and liabilities incurred by our manager in connection with, relating to or arising out of (i) a breach by our manager or its employees or its representatives of the management services agreement, (ii) the gross negligence, willful misconduct, bad faith or reckless disregard of our manager or its employees or representatives in the performance of any of its obligations under the management services agreement, or (iii) fraudulent or dishonest acts of our manager or its employees or representatives with respect to our company or any of its businesses.

We expect that our directors and officers insurance policy for our directors and officers will be expanded, or supplemental insurance will be obtained, to cover this indemnification obligation.

Termination of Management Services Agreement

Our board of directors may terminate the management services agreement and our manager’s appointment if, at any time:

In addition, our manager may resign and terminate the management services agreement at any time upon 120 days prior written notice to our company, and this right is not contingent upon the finding of a replacement manager. However, if our manager resigns, until the date on which the resignation becomes effective, it will, upon request of our board of directors, use reasonable efforts to assist our board of directors to find a replacement manager at no cost and expense to our company.

Upon the termination of the management services agreement, seconded officers, employees, representatives and delegates of our manager and its affiliates who are performing the services that are the subject of the management services agreement will resign their respective position with our company and cease to work at the date of such termination or at any other time as determined by our manager. Any appointed director may continue serving on our board of directors subject to the terms of the operating agreement.

If we terminate the management services agreement, our company and its businesses have agreed to cease using the term “1847”, including any trademarks based on the name of our company that may be licensed to them by our manager, under the licensing provisions of the management services agreement, entirely in their businesses and operations within 180 days of such termination. Such licensing provisions of the management services agreement would require our company and its businesses to change their names to remove any reference to the term “1847” or any reference to trademarks licensed to them by our manager. In this respect, our right to use the term “1847” and related intellectual property is subject to licensing provisions between our manager, on the one hand, and our company and our businesses, on the other hand.

Except with respect to the termination fee payable to our manager due to a termination of the management services agreement based solely on a vote of our board of directors and our shareholders, no other termination fee is payable upon termination of the management services agreement for any other reason. See the section entitled “Our Manager—Our Manager as a Service Provider—Termination Fee” for more information about the termination fee payable upon termination of the management services agreement.

While termination of the management services agreement will not affect any terms and conditions, including those relating to any payment obligations, that exist under any offsetting management services agreements or transaction services agreements, such agreements will be terminable by future businesses that we acquire upon 60 days prior written notice and there will be no termination or other similar fees due upon such termination. Notwithstanding termination of the management services agreement, our manager will maintain its rights with respect to the allocation shares it then owns, including its rights under the supplemental put provision of our operating agreement. See the section entitled “Our Manager—Our Manager as an Equity Holder—Supplemental Put Provision” for more information on our manager's put right with respect to the allocation shares.

Management Fee and Expenses

See the section entitled “Our Manager—Our Manager as a Service Provider—Management Fee” for a description of the management fee to be paid to our manager and an example of a calculation of the management fee. In addition to the management fee to be paid to our manager, our company generally will be responsible for paying costs and expenses relating to its business and operations. See the section entitled “Our Manager—Our Manager as a Service Provider—Reimbursement of Expenses” for more information about the reimbursement of expenses by our company to our manager. Our manager may enter into offsetting management services agreements with our businesses pursuant to which our manager may perform services for our businesses. Any fees paid to our manager by our businesses pursuant to such agreements will offset the fees payable by our company to our manager. See “Our Manager—Our Manager as a Service Provider—Offsetting Management Services Agreements” for more information about offsetting management services agreements and the treatment of offsetting management fees.

OUR MANAGER

Overview of Our Manager

Our manager, 1847 Partners LLC, a Delaware limited liability company, is a newly created entity. It has two classes of limited liability interests known as Class A interests and Class B interests. The Class A interests, which give the holder the right to the profit allocation received by our manager as a result of holding our allocation shares, are owned in their entirety by 1847 Partners Class A Member LLC; and the Class B interests, which give the holder the right to all other profits or losses of our manager, including the management fee payable to our manager by us, are owned in their entirety by 1847 Partners Class B Member LLC. 1847 Partners Class A Member LLC is owned approximately 55% by its sole managing member, our Chief Executive Officer, Ellery W. Roberts and 1847 Partners Class B Member LLC is owned, 60%, by its sole managing member, our Chief Executive Officer, Ellery W. Roberts. In the future, Mr. Roberts may cause 1847 Partners Class A Member or 1847 Partners Class B Member to issue units to employees of the manager to incentivize those employees by providing them with the ability to participate in our manager’s incentive allocation and management fee.

Our Chief Executive Officer has more than 20 years of experience in acquiring and managing small and lower middle market businesses and has overseen the acquisitions and financing of three businesses with an aggregate purchase price of approximately $64.5 million.

Key Personnel of Our Manager

Our Chief Executive Officer’s business experiences are described in the section entitled “Management.” He is the only key employee of our manager. He will be compensated entirely by our manager from the management fees it receives. As employees of our manager, it is anticipated that Mr. Roberts will devote at least 90% of his time to the affairs of our company.

Our Relationship With Our Manager, Manager Fees, and Manager Profit Allocation

Our relationship with our manager is based on our manager having two distinct roles: first, as a service provider to us and, second, as an equity holder of the allocation shares.

As a service provider, our manager performs a variety of services for us, which entitles it to receive a management fee. As holder of our company’s allocation shares, our manager has the right to a preferred distribution in the form of a profit allocation upon the occurrence of certain events. Our manager paid $1,000 for the allocation shares. In addition, our manager will have the right to cause our company to purchase the allocation interests then owned by our manager upon termination of the management services agreement.

These relationships with our manager will be governed principally by the following agreements:

We also expect that our manager will enter into offsetting management services agreements and transaction services agreements with our businesses directly. These agreements, and some of the material terms relating thereto, are discussed in more detail below. The management fee, profit allocation and put price under the supplemental put provision will be payment obligations of our company and, as a result, will be paid, along with other company obligations, prior to the payment of distributions to shareholders.

Our Manager as a Service Provider

Our company’s board of directors has engaged our manager to manage the day-to-day operations and affairs of our company, oversee the management and operations of our businesses and perform certain other services for us. Our company has entered into a management services agreement that sets forth the services to be performed by our manager and the fees to be paid to our manager for providing such services. Our company will pay our manager a quarterly management fee equal to 0.5% (2.0% annualized) of its adjusted net assets, as discussed in more detail below. By amendment to our management services agreement, we agreed that in lieu of paying a quarterly management fee under the management services agreement based upon the adjusted net assets of our management consulting business, we will pay our manager a flat quarterly fee equal to $43,750. We expect to generate sufficient revenues from our management consulting business to pay our manager a flat quarterly fee of $43,750. Although we expect that our management consulting business will generate sufficient fees to cover the manager’s quarterly flat fee, if for any reason it does not, our manager has agreed verbally that such fee will accrue until sufficient revenues are generated. We also expect that until we begin making acquisitions, all revenues generated from our management consulting business will be used to cover operating expenses, including management fees. We will not use the proceeds of our initial public offering to pay our manager the quarterly management-consulting fee. This amendment only applies to our management consulting business and will not apply to any businesses that we acquire in the future. See the section entitled “Management Services Agreement” for more information about the material terms of the management services agreement.

Management Fee

Subject to any adjustments discussed below, for performing management services under the management services agreement during any fiscal quarter, our company will pay our manager a management fee with respect to such fiscal quarter. The management fee to be paid with respect to any fiscal quarter will be calculated as of the last day of such fiscal quarter, which we refer to as the calculation date. The management fee will be calculated by an administrator, which will be our manager so long as the management services agreement is in effect. The amount of any management fee payable by our company as of any calculation date with respect to any fiscal quarter will be (i) reduced by the aggregate amount of any offsetting management fees, if any, received by our manager from any of our businesses with respect to such fiscal quarter, (ii) reduced (or increased) by the amount of any over-paid (or under-paid) management fees received by (or owed to) our manager as of such calculation date, and (iii) increased by the amount of any outstanding accrued and unpaid management fees.

As an obligation of our company, the management fee will be paid prior to the payment of distributions to our shareholders. If we do not have sufficient liquid assets to pay the management fee when due, we may be required to liquidate assets or incur debt in order to pay the management fee.

Offsetting Management Services Agreements

Pursuant to the management services agreement, we have agreed that our manager may, at any time, enter into offsetting management services agreements with our businesses pursuant to which our manager may perform services that may or may not be similar to management services. Any fees to be paid by one of our businesses pursuant to such agreements are referred to as offsetting management fees and will offset, on a dollar-for-dollar basis, the management fee otherwise due and payable by our company under the management services agreement with respect to a fiscal quarter. The management services agreement provides that the aggregate amount of offsetting management fees to be paid to our manager with respect to any fiscal quarter shall not exceed the management fee to be paid to our manager with respect to such fiscal quarter. See the section entitled “— Management Fee” above for more information about the treatment of offsetting management fees.

Our manager may enter into offsetting management services agreements with our future subsidiaries, which agreements would be in the form prescribed by our management services agreement.

The services that our manager will provide to future subsidiaries under the offsetting management services agreements will include: conduct general and administrative supervision and oversight of the subsidiary’s day-to-day business and operations, including, but not limited to, recruiting and hiring of personnel, administration of personnel and personnel benefits, development of administrative policies and procedures, establishment and management of banking services, managing and arranging for the maintaining of liability insurance, arranging for equipment rental, maintenance of all necessary permits and licenses, acquisition of any additional licenses and permits that become necessary, participation in risk management policies and procedures; and (ii) oversee and consult with respect to the Company’s business and operational strategies, the implementation of such strategies and the evaluation of such strategies, including, but not limited to, strategies with respect to capital expenditure and expansion programs, acquisitions or dispositions and product or service lines. If our manager and the subsidiary do not enter into an offsetting management services agreement, our manager will provide these services for our subsidiaries under our management services agreement.

The offsetting management fee paid to our manager for providing management services to a future subsidiary will vary. However, the management services agreement provides that the aggregate amount of offsetting management fees to be paid to our manager with respect to any fiscal quarter shall not exceed the management fee to be paid to our manager with respect to such fiscal quarter.

Example of Calculation of Management Fee with Adjustment for Offsetting Management Fees

In order to better understand how the management fee is calculated, we are providing the following example:

The foregoing example provides hypothetical information only and does not intend to reflect actual or expected management fee amounts.

For purposes of the calculation of the management fee:

Transaction Services Agreements

Pursuant to the management services agreement, we have agreed that our manager may, at any time, enter into transaction services agreements with any of our businesses relating to the performance by our manager of certain transaction-related services in connection with the acquisitions of target businesses by our company or its businesses or dispositions of our company’s or its businesses’ property or assets. These services may include those customarily performed by a third-party investment banking firm or similar financial advisor, which may or may not be similar to management services, in connection with the acquisition of target businesses by us or our subsidiaries or disposition of subsidiaries or any of our property or assets or those of our subsidiaries. In connection with providing transaction services, our manager will generally receive a fee equal to the sum of (i) 2.0% of the aggregate purchase price of the target business up to and equal to $50.0 million, plus (ii) 1.5% of the aggregate purchase price of the target business in excess of $50.0 million and up to and equal to $100 million, plus (iii) 1.0% of the aggregate purchase price over $100 million, subject to annual review by our board of directors. The purchase price of a target business shall be defined as the aggregate amount of consideration, including cash and the value of any shares issued by us on the date of acquisition, paid for the equity interests of such target business plus the aggregate principal amount of any debt assumed by us of the target business on the date of acquisition or any similar formulation. The other terms and conditions relating to the performance of transaction services will be established in accordance with market practice.

Our manager may enter into transaction services agreements with our future subsidiaries, which agreements would be in the form prescribed by our management services agreement.

The services that our manager will provide to future subsidiaries under the transaction services agreements will include the following services that would be provided in connection with a specific transaction identified at the time that the transaction services agreement is entered into: reviewing, evaluating and otherwise familiarizing itself and its affiliates with the business, operations, properties, financial condition and prospects of the future subsidiary and its target acquisition and preparing documentation describing the future subsidiary’s operations, management, historical financial results, projected financial results and any other relevant matters and presenting such documentation and making recommendations with respect thereto to certain of 1847 Partners’ affiliates.

In connection with providing transaction services, our manager will generally receive a fee equal to the sum of (i) 2.0% of the aggregate purchase price of the target business up to and equal to $50.0 million, plus (ii) 1.5% of the aggregate purchase price of the target business in excess of $50.0 million and up to and equal to $100 million, plus (iii) 1.0% of the aggregate purchase price over $100 million, subject to annual review by our board of directors. The purchase price of a target business shall be defined as the aggregate amount of consideration, including cash and the value of any shares issued by us on the date of acquisition, paid for the equity interests of such target business plus the aggregate principal amount of any debt assumed by us of the target business on the date of acquisition or any similar formulation. The other terms and conditions relating to the performance of transaction services will be established in accordance with market practice.

Any fees received by our manager pursuant to such a transaction services agreement will be in addition to the management fee payable by our company pursuant to the management services agreement and will not offset the payment of such management fee. A transaction services agreement with any of our businesses may provide for the reimbursement of costs and expenses incurred by our manager in connection with the acquisition of such businesses.

Transaction services agreements will be reviewed, authorized and approved by our company’s board of directors on an annual basis.

Our Manager as an Equity Holder

Our manager owns 100% of the allocation shares of our company, which generally will entitle our manager to receive a 20% profit allocation as a form of preferred distribution, subject to our company’s profit with respect to a business exceeding on an annualized hurdle rate of 8%, which hurdle is tied to such business’ growth relative to our consolidated net equity. The calculation of the profit allocation and the rights of our manager, as the holder of the allocation shares, are governed by the operating agreement. See the section entitled “Description of Shares” of our registration statement on Form S-1, as amended, filed with the SEC on May 6, 2014 for more information about the operating agreement.

Manager’s Profit Allocation

The profit allocation to be paid to our manager is intended to reflect our ability to generate ongoing cash flows and capital gains in excess of a hurdle rate. In general, such profit allocation is designed to pay our manager 20% of the company’s profits upon clearance of the 8% annualized hurdle rate. The company’s audit committee, which is comprised solely of independent directors, will have the opportunity to review and approve the calculation of manager’s profit allocation when it becomes due and payable. Our manager will not receive a profit allocation on an annual basis. Instead, our manager will be paid a profit allocation only upon the occurrence of one of the following events, which we refer to collectively as the trigger events:

We believe this allocation timing, rather than a method that provides for annual allocations, more accurately reflects the long-term performance of each of our businesses and is consistent with our intent to hold, manage and grow our businesses over the long term. We refer generally to the obligation to make this payment to our manager as the “profit allocation” and, specifically, to the amount of any particular profit allocation as the “manager’s profit allocation”.

Definitions used in, and an example of the calculation of profit allocation, are set forth in more detail below.

The amount of the manager’s profit allocation will be based on the extent to which the total profit allocation amount with respect to any business, as of the last day of any fiscal quarter in which a trigger event occurs, which date we refer to as the calculation date, exceeds the relevant hurdle amounts with respect to such business, as of such calculation date. Manager’s profit allocation will be calculated by an administrator, which will be our manager so long as the management services agreement is in effect, and such calculation will be subject to a review and approval process by our company’s board of directors. For this purpose, “total profit allocation amount” will be equal to, with respect to any business as of any calculation date, the sum of:

Specifically, manager’s profit allocation will be calculated and paid as follows:

The administrator will calculate manager’s profit allocation on or promptly following the relevant calculation date, subject to a “true-up” calculation upon availability of audited or unaudited consolidated financial statements, as the case may be, of our company to the extent not available on such calculation date. Any adjustment necessitated by the true-up calculation will be made in connection with the next calculation of manager’s profit allocation. Because of the length of time that may pass between trigger events, there may be a significant delay in our company’s ability to realize the benefit, if any, of a true-up of manager’s profit allocation.

Once calculated, the administrator will submit the calculation of manager’s profit allocation, as adjusted pursuant to any true-up, to our company’s board of directors for its review and approval. The board of directors will have ten business days to review and approve the calculation, which approval shall be automatic absent disapproval by the board of directors. Manager’s profit allocation will be paid ten business days after such approval.

If the board of directors disapproves of the administrator’s calculation of manager’s profit allocation, the calculation and payment of manager’s profit allocation will be subject to a dispute resolution process, which may result in manager’s profit allocation being determined, at our company’s cost and expense, by two independent accounting firms. Any determination by such independent accounting firms will be conclusive and binding on our company and our manager.

We will also pay a tax distribution to our manager if our manager is allocated taxable income by our company but does not realize distributions from our company at least equal to the taxes payable by our manager resulting from allocations of taxable income. Any such tax distributions will be paid in a similar manner as profit allocations are paid.

For any fiscal quarter in which a trigger event occurs with respect to more than one business, the calculation of the manager’s profit allocation, including the components thereof, will be made with respect to each business in the order in which controlling interests in such businesses were acquired or obtained by our company and the resulting amounts shall be aggregated to determine the total amount of manager’s profit allocation. If controlling interests in two or more businesses were acquired at the same time and such businesses give rise to a calculation of manager’s profit allocation during the same fiscal quarter, then manager’s profit allocation will be further calculated separately for each such business in the order in which such businesses were sold.

As obligations of our company, profit allocations and tax distributions will be paid prior to the payment of distributions to our shareholders. If we do not have sufficient liquid assets to pay the profit allocations or tax distributions when due, we may be required to liquidate assets or incur debt in order to pay such profit allocation. Our manager will have the right to elect to defer the payment of the manager’s profit allocation due on any payment date. Once deferred, our manager may demand payment thereof upon 20 business days’ prior written notice.

Termination of the management services agreement, by any means, will not affect our manager’s rights with respect to the allocation shares that it owns, including its right to receive profit allocations.

Example of Calculation of Manager’s Profit Allocation

The manager will receive a profit allocation at the end of the fiscal quarter in which a trigger event occurs, as follows (all dollar amounts are in millions):

  Assumptions

Year 1:

Acquisition of Company A (“Company A”)

Acquisition of Company B (“Company B”)

Year 4

Company A (or assets thereof) sold for $25 capital gain over book value of assets at time of sale, which is a qualifying trigger event

Company A’s average allocated share of our consolidated net equity over its ownership is $50

Company A’s holding period in quarters is 12

Company A’s contribution-based profit since acquisition is $5

Year 6:

Company B’s contribution-based profit since acquisition is $7

Company B’s average allocated share of our consolidated net equity over its ownership is $25

Company B’s holding period in quarters is $20

Company B’s cumulative gains and losses are $20

Manager elects to have holding period measured for purposes of profit allocation for Company B 

Definitions

For purposes of calculating profit allocation:

Reimbursement of Expenses

Our company will be responsible for paying costs and expenses relating to its business and operations. Our company agreed to reimburse our manager during the term of the management services agreement for all costs and expenses of our company that are incurred by our manager or its affiliates on behalf of our company, including any out-of-pocket costs and expenses incurred in connection with the performance of services under the management services agreement, and all costs and expenses the reimbursement of which are specifically approved by our company’s board of directors.

Our company will not be obligated or responsible for reimbursing or otherwise paying for any costs or expenses relating to our manager’s overhead or any other costs and expenses relating to our manager’s conduct of its business and operations. Also, our company will not be obligated or responsible for reimbursing our manager for costs and expenses incurred by our manager in the identification, evaluation, management, performance of due diligence on, negotiation and oversight of potential acquisitions of new businesses for which our company (or our manager on behalf of our company) fails to submit an indication of interest or letter of intent to pursue such acquisition, including costs and expenses relating to travel, marketing and attendance of industry events and retention of outside service providers relating thereto. In addition, our company will not be obligated or responsible for reimbursing our manager for costs and expenses incurred by our manager in connection with the identification, evaluation, management, performance of due diligence on, negotiating and oversight of an acquisition by our company if such acquisition is actually consummated and the business so acquired entered into a transaction services agreement with our manager providing for the reimbursement of such costs and expenses by such business. In this respect, the costs and expenses associated with the pursuit of add-on acquisitions for our company may be reimbursed by any businesses so acquired pursuant to a transaction services agreement.

All reimbursements will be reviewed and, in certain circumstances, approved by our company’s board of directors on an annual basis in connection with the preparation of year-end financial statements.

Supplemental Put Provision

In addition to the provisions discussed above, in consideration of our manager’s acquisition of the allocation shares, our operating agreement contains a supplemental put provision pursuant to which our manager will have the right to cause our company to purchase the allocation shares then owned by our manager upon termination of the management services agreement.

If (i) the management services agreement is terminated at any time other than as a result of our manager’s resignation or (ii) our manager resigns on any date that is at least three years after the closing of our initial public offering, then our manager will have the right, but not the obligation, for one year from the date of such termination or resignation, as the case may be, to elect to cause our company to purchase all of allocation shares then owned by our manager for the put price as of the put exercise date.

For purposes of this provision, the “put price” is be equal to, as of any exercise date, (i) if we terminate the management services agreement, the sum of two separate, independently made calculations of the aggregate amount of manager’s profit allocation as of such exercise date or (ii) if our manager resigns, the average of two separate, independently made calculations of the aggregate amount of manager’s profit allocation as of such exercise date, in each case, calculated assuming that (x) all of the businesses are sold in an orderly fashion for fair market value as of such exercise date in the order in which the controlling interest in each business was acquired or otherwise obtained by our company, (y) the last day of the fiscal quarter ending immediately prior to such exercise date is the relevant calculation date for purposes of calculating manager’s profit allocation as of such exercise date. Each of the two separate, independently made calculations of the manager’s profit allocation for purposes of calculating the put price will be performed by a different investment bank that is engaged by our company at its cost and expense. The put price will be adjusted to account for a final “true-up” of the manager’s profit allocation.

Our manager and our company can mutually agree to permit our company to issue a note in lieu of payment of the put price when due; provided, that if our manager resigns and terminates the management services agreement, then our company will have the right, in its sole discretion, to issue a note in lieu of payment of the put price when due. In either case the note would have an aggregate principal amount equal to the put price, would bear interest at a rate of LIBOR plus 4.0% per annum, would mature on the first anniversary of the date upon which the put price was initially due, and would be secured by the then-highest priority lien available to be placed on our equity interests in each of our businesses.

Our company’s obligations under the put provision of our operating agreement are absolute and unconditional. In addition, our company will be subject to certain obligations and restrictions upon exercise of our manager’s put right until such time as our company’s obligations under the put provision of our operating agreement, including any related note, have been satisfied in full, including:

Our company also has agreed to indemnify our manager for any losses or liabilities it incurs or suffers in connection with, arising out of or relating to its exercise of its put right or any enforcement of terms and conditions of the supplemental put provision of our operating agreement.

As an obligation of our company, the put price will be paid prior to the payment of distributions to our shareholders. If we do not have sufficient liquid assets to pay the put price when due, we may be required to liquidate assets or incur debt in order to pay the put price.

Termination of the management services agreement, by any means, will not affect our manager’s rights with respect to the allocation shares that it owns. In this regard, our manager will retain its put right and its allocation shares after ceasing to serve as our manager, except that it will effectively lose the put right if it resigns before the third anniversary after the close of our initial public offering. As a result, if we terminate our manager, regardless of the reason for such termination, it would retain the right to exercise the put right and demand payment of the put price.

Termination Fee

We will pay our manager a termination fee upon termination of the management services agreement if such termination is based solely on a vote of our company’s board of directors and our shareholders; no other termination fee will be payable to our manager in connection with the termination of the management services agreement for any other reason. The termination fee that is payable to our manager will be equal to the product of (i) two (2) multiplied by (ii) the sum of the amount of the four management fees calculated with respect to the four fiscal quarters immediately preceding the termination date of the management services agreement. The termination fee will be payable in eight equal quarterly installments, with the first such installment being paid on or within five business days of the last day of the fiscal quarter in which the management services agreement was terminated and each subsequent installment being paid on or within five business days of the last day of each subsequent fiscal quarter, until such time as the termination fee is paid in full to our manager.

Government Regulation

We do not believe that government regulation materially impacts our management consulting business directly with the exception of payroll taxes on the state and federal levels.

Intellectual Property

We do not own or license any material intellectual property in connection with the operation of our management consulting business.

Employees

As of March 2015, the only full time employee involved in our management consulting business is Ellery W. Roberts. Mr. Roberts spends approximately 90% of his business time on the business and affairs of our company. The balance of his business time is mostly spent on the business and affairs of our company generally (other than the business and affairs of our management consulting business).