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M and A for Entrepreneurs - lecture 2
 

M and A for Entrepreneurs - lecture 2

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    M and A for Entrepreneurs - lecture 2 M and A for Entrepreneurs - lecture 2 Presentation Transcript

    • Fundamentals of Valuation M&A for Entrepreneurs Elective© 2008 Babson College
    • Acquisition Process  Acquisition Strategy  Targeting, Analysis, and Valuation  Letter of Intent  Due Diligence  Negotiating an Agreement  Closing and Management Strategy© 2008 Babson College
    • Targeting and Analysis  Deliver a clear message Size, Industry, Geography, Expertise  Delineate a contact list and communications plan  Arms length analysis and pro forma valuation  Debt/equity pro forma  Buyer’s value added  Negotiating strategy  Exit strategy© 2008 Babson College
    • Why is the company for sale?  Establishes credibility of deal  ’Degree of Skepticism’  Frames ‘Adjustments’ & Pro Formas© 2008 Babson College
    • Public vs Privately-Owned Companies  Decisiveness  Quality of Information Provided  Assumptions in Pro Formas  Degree of Sophistication  Supplier Relationships  Customer Relationships  “Hockey Stick”  Quality of Management  Tax Impact© 2008 Babson College
    • Question to ask… Is the company public? or a subsidiary of a public company? Or, privately owned?© 2008 Babson College
    • The Analysis Process is LINKED Assumptions are linked to analysis Analysis is linked with adjustments Adjustments impact valuation and structure Valuation and structure yields price© 2008 Babson College
    • Where do Adjustments and Assumptions Impact?  Income Statement and Pro Forma Projections  Balance Sheet  Cash Flow Projections  Buyer Value-Added© 2008 Babson College
    • Cost of Capital Cost of Capital = Discount Rate/Factor Simple Cost of Capital Calculator: Category Cost Weight Cost Weight Bank Debt 50% 10% 5.0% Mezzanine 30% 20% 6.0% Equity 20% 40% 8.0% Cost of Capital 19%© 2008 Babson College
    • Valuation Methodologies Primary Secondary • DCF • Asset Value • EBITDA/FCF • Replacement cost Multiple • Payback • Industry • ROI Benchmarks • Market Value • Net Worth/ Book Value© 2008 Babson College
    • Discounted Cash Flow (DCF) 1. Discount rate generally is cost of capital 2. Discount rate is higher with uncertain, cyclical, vulnerable companies 3. Target yields:  Banks: Prime + 2-4%  Sub Debt/Mezzanine: 15-20% (plus Kicker)  Equity: 20-40% 1. EBITDA/FCF assumptions are KEY© 2008 Babson College
    • EBITDA/FCF Multiple  4-8 Times EBITDA  Pro Forma Adjustments and Financial Integrity are KEY  Used by Debt & Equity Providers  Most Common Valuation Technique Used© 2008 Babson College
    • Industry Benchmarks  Industry ‘Comps’  Revenue Multiple  Customer List Multiple  Installations Multiple© 2008 Babson College
    • Appraisal Methodologies  Liquidation or ‘Knockdown’ Appraisal  Replacement Value Appraisal  Fair Market Value Appraisal  Balance Sheet: A/R= Aging/Dilution/Allows./Bd.Dbt  Inv.= Aging/Inventory Turn© 2008 Babson College
    • In a Leveraged Buyout or Management Buyout What is the MOST IMPORTANT Guiding Principle?© 2008 Babson College
    • “Cash is King” (Cash Flow/EBITDA/FCF)© 2008 Babson College