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M and A for Entrepreneurs - lecture 2
1.
Fundamentals of Valuation
M&A for Entrepreneurs Elective © 2008 Babson College
2.
Acquisition Process
Acquisition Strategy Targeting, Analysis, and Valuation Letter of Intent Due Diligence Negotiating an Agreement Closing and Management Strategy © 2008 Babson College
3.
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
4.
Why is the
company for sale? Establishes credibility of deal ’Degree of Skepticism’ Frames ‘Adjustments’ & Pro Formas © 2008 Babson College
5.
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
6.
Question to ask…
Is the company public? or a subsidiary of a public company? Or, privately owned? © 2008 Babson College
7.
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
8.
Where do Adjustments
and Assumptions Impact? Income Statement and Pro Forma Projections Balance Sheet Cash Flow Projections Buyer Value-Added © 2008 Babson College
9.
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
10.
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
11.
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
12.
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
13.
Industry Benchmarks
Industry ‘Comps’ Revenue Multiple Customer List Multiple Installations Multiple © 2008 Babson College
14.
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
15.
In a Leveraged
Buyout or Management Buyout What is the MOST IMPORTANT Guiding Principle? © 2008 Babson College
16.
“Cash is King”
(Cash Flow/EBITDA/FCF) © 2008 Babson College
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