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Fundamentals of ValuationM&A for Entrepreneurs Elective

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Acquisition Process

Acquisition Strategy

Targeting, Analysis, and Valuation

Letter of Intent

Due Diligence

Negotiating an Agreement

Closing and Management Strategy

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Targeting and Analysis

Deliver a clear messageSize, 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

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Why is the company for sale?

Establishes credibility of deal

’Degree of Skepticism’

Frames ‘Adjustments’ & Pro Formas

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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

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Question to ask…

Is the company public? or a subsidiary of a public company?

Or, privately owned?

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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

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Where do Adjustments and Assumptions Impact?

Income Statement and Pro Forma Projections

Balance Sheet

Cash Flow Projections

Buyer Value-Added

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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%

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Valuation Methodologies

Primary

• DCF

• EBITDA/FCF Multiple

• Industry Benchmarks

Secondary

• Asset Value

• Replacement cost

• Payback

• ROI

• Market Value

• Net Worth/Book Value

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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%

4. EBITDA/FCF assumptions are KEY

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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

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Industry Benchmarks

Industry ‘Comps’

Revenue Multiple

Customer List Multiple

Installations Multiple

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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

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In a Leveraged Buyout or Management Buyout

What is the

MOST IMPORTANT

Guiding Principle?

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“Cash is King”

(Cash Flow/EBITDA/FCF)