mergers, acquisitions & divestitures how to expand your business in today’s environment
TRANSCRIPT
Mergers, Acquisitions & Mergers, Acquisitions & DivestituresDivestitures
How to Expand Your Business How to Expand Your Business in Today’s Environmentin Today’s Environment
Mergers, Acquisitions & Mergers, Acquisitions & DivestituresDivestitures
PRESENTED BY:PRESENTED BY:
Jim Griffing, Treasurer, Silver Fox Advisor.
A. “Butch” Madrazo, Silver Fox Advisor.
OverviewOverview
INGREDIENTS FOR SUCCESSINGREDIENTS FOR SUCCESS
Prepare, Prepare, Prepare Good Asset or Service Good Attorney, Accountant Good Business Advisor Preparation, Preparation, Preparation
PrioritiesPriorities
FROM SELLER’S PERSPECTIVEFROM SELLER’S PERSPECTIVE
Old Age Health, Divorce, Death Disenchantment Obsolescence Life Style Ego
PrioritiesPriorities
FROM BUYER’S PERSPECTIVEFROM BUYER’S PERSPECTIVE
Desire for Growth External Factors Fear Geographic Position Shareholder Demands Patents Ego
Process MethodologyProcess Methodology
MAJOR ACTIVITIESMAJOR ACTIVITIES
Developing the “Hunt” Negotiating the Transaction Integrating the Combined Cos. Operating the Combined Cos.
Elements of Company ProfileElements of Company Profile
COMPANY REVIEWCOMPANY REVIEW
Executive Summary Mission Statement Product or Service Lines Target Markets Competition
Elements of Company ProfileElements of Company Profile
COMPANY REVIEWCOMPANY REVIEW
Stage of Company Growth Management Financial Statements Action Desired Support and Verification
Methods, StructureMethods, Structure
THE PROCESSTHE PROCESS
Due Diligence Price Conflicts Tax Consequences
Methods, StructureMethods, Structure
THE PROCESSTHE PROCESS
Art Hunt Negotiations Plans
Methods, StructureMethods, Structure
THE PLANSTHE PLANS
Acquisition Plan Integration Plan Operation Plan
ValuationsValuations
THE VALUATION METHODOLOGYTHE VALUATION METHODOLOGY
Market Based Asset Based Income Based
ValuationsValuations
OTHER VALUATION METHODOLOGYOTHER VALUATION METHODOLOGY
Comparable Market Value Replacement Cost Liquidation Value Multiple of Earnings or EBITDA Discounted Future Earnings Formulas Based on Book Values
AnalysesAnalyses
THE ANALYSISTHE ANALYSIS
SWOT Analysis Issue Analysis PEST Analysis
AnalysesAnalyses
ISSUE ANALYSISISSUE ANALYSIS
The issue is:_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _
Decision Other Key Public Maker (s) Stakeholders Staff Stakeholder
Buyer: X Seller: X Both: X X
Acquisition, Divestiture AuditAcquisition, Divestiture Audit
EVALUATION OF TRANSACTIONEVALUATION OF TRANSACTION
What went wrong/right? What should have been different? Why did it fail/succeed? Were there uncontrollable outside forces? Was I the stumbling block: If so why?
Failure FactorsFailure Factors
PRINCIPLES FOR ENHANCING SUCCESSPRINCIPLES FOR ENHANCING SUCCESS
Due Diligence Employee Communication
Failure FactorsFailure Factors
FROM BUYER’S SIDEFROM BUYER’S SIDE
Key Employees Leave Productivity Drops Poor Communication Lack of Direction Poor Cultural Fit
Failure FactorsFailure Factors
FROM SELLER’S SIDEFROM SELLER’S SIDE
Inadequate Planning How Best to Invest Proceeds No Office/ No One Asks Question Too Much Idle Time How to Explain Sale to Friends
Major Lesson LearnedMajor Lesson Learned
MERGERS, ACQUISITIONS, DIVESTITURESMERGERS, ACQUISITIONS, DIVESTITURES
Culture Matters, Pick Partners Carefully Plan Thoroughly, Act Quickly Address Employees’ ME Issues Address When, Who, How Long Retention Communicate From Top of Organization Assure Communications Are Received, Understood Never Underestimate Hunger for Info.
Part II: Accounting Aspects of Part II: Accounting Aspects of Mergers, Acquisitions and DivestituresMergers, Acquisitions and Divestitures
OBJECTIVESOBJECTIVES
Times a Merger or An Acquisition Could Be Beneficial. Ways to Asses a Target Business. The Letter of Intent. A Stock Sale vs. an Asset Sale. Due Diligence. Purchase and Sale Agreement.
Times a Merger or Acquisition Can Be Times a Merger or Acquisition Can Be BeneficialBeneficial
When a Firm Wants to Enter a New Market When a Firm Wants to Expand Through
Research & Development When a Firm is Looking to Expand Its Portfolio
How Your Business Could Benefit
Obtaining Quality Employees and New Skills Expanding PP&E Increasing Sales Through an Increase in
Market Share Generate Cost Efficiencies
Upon Considering a Merger or Upon Considering a Merger or AcquisitionAcquisition
Companies should pursue a merger or acquisition that would further its corporate organization by strengthening weaknesses, filling gaps, and developing new growth opportunities.
Consider the Possible Opportunities to Consider the Possible Opportunities to Grow Through a Merger or AcquisitionGrow Through a Merger or Acquisition
Is the Target Business Undervalued? Is There a Weak Management System Within
the Company? Will the Target Business Benefit from
Relocation? Will Combining Products or Services Enhance
Their Offering to Customers?
Asses the Target BusinessAsses the Target Business
Talk to Their Customers and Suppliers. Obtain Recent Financial Statements. Evaluate Trends in Sales and Profit Margins. Know Who the Key Employees are.
Consider the Culture of Both Consider the Culture of Both CompaniesCompanies
High vs. Low Context Culture Look at the Values, Missions, and Goals of
Management. A Firm Must Manage Its Own Culture
Effectively before Engaging in Merger Activity.
Synergy Needs To Be CreatedSynergy Needs To Be Created
Explanation on why the merger between eBay and Skype failed:Explanation on why the merger between eBay and Skype failed:
"Skype is a great stand-alone business with strong fundamentals and "Skype is a great stand-alone business with strong fundamentals and accelerating momentum. But it's clear that Skype has accelerating momentum. But it's clear that Skype has limited synergieslimited synergies with eBay and PayPal. We believe operating Skype as a stand-alone with eBay and PayPal. We believe operating Skype as a stand-alone publicly traded company is the best path for maximizing its potential. publicly traded company is the best path for maximizing its potential. This will give Skype the focus and resources required to continue its This will give Skype the focus and resources required to continue its growth and effectively compete in online voice and video growth and effectively compete in online voice and video communications. In addition, separating Skype will allow eBay to focus communications. In addition, separating Skype will allow eBay to focus entirely on our two core growth engine - e-commerce and online entirely on our two core growth engine - e-commerce and online payments - and deliver long-term values to our stockholders." payments - and deliver long-term values to our stockholders."
~John Donahoe~John Donahoe eBay Inc.’s President and CEOeBay Inc.’s President and CEO
What Can Go Wrong With a Merger or What Can Go Wrong With a Merger or Acquisition?Acquisition?
There could be other interested parties involved. A merger can become expensive if certain terms such as
who will continue running the business cannot be agreed on.
The business might simply not live up to its expectations.
NOTE:Attempt to seek expert advice from professionals such as lawyers, accountants, or business advisors to help forecast potential downfalls associated with a merger or acquisition.
The Letter of IntentThe Letter of Intent
Defines The Players and Lays Out General Assumptions:
1. Legal Entities of the Buyer and Seller
2. Deal Structure: Stock vs. Assets
3. Formula for Determining Price
4. Payment Terms
5. Bailout Clauses
6. Lists Conditions and Anticipates Changes in Plans
7. Sets Boundaries
The Letter of Intent, ContinuedThe Letter of Intent, Continued
Forecasts the entire procedure:– Allocation of fees,
e.g. broker commissions– Major Warranties and Representations– Mutual Nondisclosure Agreements– Public Announcements– Conduct of Interim Operations
Such as constraints on expansions, borrowings and employee matters
Example of Stock vs. Asset Sale: Example of Stock vs. Asset Sale: Joe’s Widget Factory – Balance SheetJoe’s Widget Factory – Balance Sheet
ASSETS LIABILITIES
Cash $100,000 Accounts payable $100,000
Accounts receivable $200,000 Current liabilities $75,000
Inventory $150,000 Long term liabilities $125,000
Furniture & fixtures* $300,000 Total liabilities $300,000 Building* $200,000 EQUITYLand $100,000 Common stock $1,000 Other $50,000 Retained earnings $749,000 Total Assets $1,100,000 Current year earnings $50,000
Total equity $800,000
*net of depreciationTotal Liabilities & Equity $1,100,000
Example of Stock vs. Asset Sale: Example of Stock vs. Asset Sale: Joe’s Widget FactoryJoe’s Widget Factory
Asset Sale Stock SaleSales price* $3,200,000 $3,000,000Inside cost basis -$1,000,000 Stock basis -$1,000Inside gain $2,200,000 Gain $2,999,000Corporate income tax @ 34% -$748,000 Capital gain tax @ 15% -$449,850Texas franchise tax @ 1% -$22,400
Cash from asset sale $3,200,000 Total Cash received $3,000,000Cash on hand $100,000Less: liabilities -$300,000Corp. tax paid -$770,400 Total taxes paid -$449,850Liquidating distribution from the corp. $2,229,600 Net cash recived $2,550,150Less: stock basis -$1,000Gain on liquidation $2,228,600Capital gain tax @ 15% -$334,290Net cash received $1,894,310 Advantage, stock sale $655,840
*With stock, purchaser assumes all liabilities
Due DiligenceDue Diligence
Secrecy is Overrated—May Keep You from Being Referred to The Best Buyer
The Best Buyers Ask the Most Questions
Present the Firm’s Weaknesses as Something the Buyer Could Improve On
More about Due DiligenceMore about Due Diligence
Due Diligence is a Methodical Investigation D esigned to Protect you from “skeletons in the closet”—which Always Exist!
First, Check Out the Buyer or Seller:
- Authority to do the deal?- Verify their funding with bankers or other proposed financial participants
Next, Review ALL Financial Documents Then, Verify ALL the Assets, Including Intellectual Property—for instance, Make Sure Patents Are In The Company Name!
Purchase and Sale AgreementPurchase and Sale Agreement
The Purchase and Sale Agreement is Prepared After The Due Diligence is Concluded.
Major items included are:- Employment Contracts
- Non-Compete Agreements
- Representations
- Warranties
Manage the RiskManage the Risk
Challenge the Estimates and Learn What The Assumptions were
Know the Typical Risks Faced by the Industry Ask Every Participant Where They See
the Major Risks Plan for Handling Bad Outcomes
About the PresenterAbout the Presenter
Jim Griffing is both a CPA and CFE. Jim's experience includes work with a broad range of clients in the service, finance, technology and manufacturing sectors. Jim received a Master of Science in Taxation degree from Drexel University and holds a BS degree in Accounting from West Chester University of Pennsylvania.
About the PresenterAbout the Presenter
Jim has practiced accounting for more than 30 years. After years of experience as a Regional Tax Partner with another firm, he founded Griffing & Company, P.C., a full service certified public accounting firm in 1987. During the same year he joined the Silver Fox Advisors where he continues to be an officer and board member.
GRIFFING & COMPANY, P.C.One Sugar Creek Center Blvd., Suite 450
Sugar Land, Texas 77478(281) 491-8866
About the PresenterAbout the Presenter
Aurelio “Butch” Madrazo is a diversified Chairman CEO, President, and Entrepreneur with domestic/international experience in public/private companies. He is skilled in Company organizations, strategies, turnarounds, acquisitions, divestitures and profile planning. As a Silver Fox Advisor,
“He guides and assists Clients through the minefields of personal life and business.”
About the PresenterAbout the Presenter
Butch received a Master of Science in Management degree from the MIT Sloan School of Management where he participated in the Sloan Fellows Program. He also holds BS and MS degrees in Petroleum Engineering as well as an Honoris Petroleum Engineer degree from Montana Tech. He is on the board of several companies, is a member of numerous engineering associations and other industry groups. His charitable and pro bono activities include work with academic institutions, CEO Roundtable Programs, and other industry and civic organizations.
SILVER FOX ADVISORMentor, Advisor, Coach, Consultant
(713) [email protected]
Questions?Questions?