Posts Tagged ‘M&A’

Due Diligence: Sometimes Even The Best Miss….

February 10th, 2010 Comments off

            One of the things that I love about what I do is the opportunity to continue learning, whether that’s during the course of my day:day activities, or through the actions of others….good or bad. One area I have a real interest in is that of acquisitions and the manner in which they structure and strike their deals. What’s even more interesting is how those same folks approach the due diligence process. For some, it’s about speed, trying to capture 90% of the key data, and hedging the other 10% in one form or another. For others, it’s about a slow and methodical approach, turning over every rock, and scrutizing every report, employee, past employee, vendor, and service provider. I’ve seen both approaches….and I’ve seen them both fail as well.

            In a recent dinner conversation with someone in my network, we were discussing a recent acquisition and the manner in which the due diligence was conducted. The entire due diligence process lasted all but a handful of weeks before the investors came rushing in. What was unfortunate about the situation is that the corporation had a real estate loan that was not reflected on the balance sheet, and the mortgage payment that was being made was reflected as a lease payment. A further unfortunate discovery was that the building was purchased only in the last handful of years when real estate was approaching a fully valued scenario and is now valued significantly less.

            Unfortunately, in the haste to conduct the due diligence, it appears the reviews went no farther than system generated financial statements, banking records, and reconciliations of vendor payables.  Yes, there was a review of stated assests, but only those reflected on the balance sheet. Although it was likely that there was not any ill intent in the actions of the incumbent owner, it was an unfortunate discovery. The omission on the balance sheet was, in further review, likely attributed to the fact the during the 10+ history of the company, there was never a CFO or other key financial figure. Keep in mind that the investor group leading this effort were seasoned professionals and had generated significant wealth in their execution of prior transactions.

            So how do you avoid such a predicament in your own future transactions? It goes without saying that the itemization below is not an exhaustive view of approaching an acquisition, but merely a start to analyzing every element of the situation…

·         Who are you really dealing with…have you conducted background checks on key stakehoulders?

·         Have you run a full credit review / D&B on the corporation to identify all loans, liens, and other considerations?

·         Are there reconciliations available for all material balance sheet items? Reviewed?

·         Has the existence of all material assets on the balance sheet been confirmed?

·         Have a review of banking statements, vendor purchases, A/P balances, and A/R balances confirmed figures reflected within the income statement?

·         Have all tax returns been submitted on time & correspond to the income statement?

·         Are there contingencies built into the agreement to hedge against any unforeseen risks, unknown off-balance sheet liabilities, or any other non-reported liens?

            Like I said, this isn’t even close to an exhaustive list, which should ultimately be an extensive punch list of data to review, forecasts to be developed and riddled with considerations, and ultimately, considerations given to the respective cultures and other intangibles. Truly a complex jigsaw puzzle to consider….


Thanks for reading . . . .


Jeffrey Ishmael

Private Equity panel: Definitive info or Hypothesizing?

October 29th, 2008 Comments off

Tonight I had the opportunity to sit in on a panel discussion on Private Equity and their views on the 2009 Outlook. The panel was hosted by the Pepperdine Graziadio School of Business. While not a Top-25 school, they’ve been doing some good work locally in expanding their alumni base and putting on some worthwhile events. The panel was comprised of three MD’s/VP’s with a variety of industry participation between them. The panel was moderated by a Thompson/Reuters contributing editor.

While I typically look forward to these events, I have to say that I was a bit disappointed in that tonights panel lacked some of the definitive information I always look forward to taking away from the event. While the group said they are still pursuing deals, the discussion centered around the common knowledge of lack of credit, lower multiples, lower debt requirements, and the emergence of more seller financing in deals. Thanks, but isn’t this the same information I’ve been reading about in The Deal magazine, hearing on CNBC, and seeing in the WSJ every day? Isn’t this the same information that’s been a topic of discussion at FEI events over the last 6-8 months?

For a Finance professional who is always looking to deliver additional value for shareholders, whether I’m looking to sell the business or not, it would have been more insightful for the panel to discuss how Buyers and Sellers can come to the table at such a difficult time in the market and structure a deal that is advantageous for both sides. If you’re a company that has no near-term pressure to sell or raise capital, how do you explore strategic alliances or structure minority deals in this market without leaving shareholder value on the table? The event would have been a better success if there was more definitive discussion and less hypothesizing about where the market might be headed.

Thanks for reading . . . .

Jeffrey Ishmael

Corporate valuations – Premiums start w/ the foundation

September 18th, 2008 Comments off

Some recent conversations and emails have prompted discussions regarding the valuations placed on a company and how to move towards achieving a premium. While there are some PE / VC firms that seem to have their “formula”, the process of applying a valuation is a very fluid process that is affected by an unlimited number of elements. The most obvious are trends within an industry, the company’s market share within that industry, as well as the market’s view of the company in question. There dozens of data points to start with. One thing is for certain….securing a premium valuation does not happen over night. It starts with methodical planning that begins with a solid internal foundation and extends to the external efforts directed at satisfying the customer base. It’s a journey and not the result of impatience.

This is not rocket science but it does take the formulation of a specific goal and a disciplined approach. Whether your company is working on a succession plan or working towards an acquisition, discipline is the key. And it’s not going to be just a discipline focused on financial results. The discipline has to start at the operational foundations of a company. The potential buyer of your company does not want to inherit a myriad of headaches or a company that needs a complete facelift. They want a company that will be a complement to their bottom line, their operations, and will be accretive in a very short amount of time. Any areas that are viewed as a “fix” are going to bring down your valuation.

1. What is the state & accuracy of your budgeting, forecasting, and planning process?
2. What is the quality of your working capital elements? Inventory, A/R, etc….
3. What is the quality of your employee base and their skill sets? Tenure, degrees, etc.
4. What is the extent of processes documented within the company?
5. What is the quality of the information systems that are in place? Quality of data….?
6. What is the state of the customer base? Strong relationships, reliance on one customer….
7. What is the state of the vendor base? Is there any single source risk……

This is far from any type of an exhaustive list and the typical due diligence checklist will make most managers heads spin. When these elements are not in place and they need to be addressed last minute before any type of a potential deal, it will typically result in mistakes or the identification of weaknesses in the business. It also means that the efforts of management will be pulled away from the day-to-day operations, which might result in decreased short-term performance. The few issues listed above cannot be remedied in a month or two. They need a much longer planning window to address. When these elements, and many more, are dialed in it will result in a much higher premium in placed on the entity. Strong foundations result in premium valuations.

Thanks for reading . . . .

Jeffrey Ishmael

Brand longevity & the Hertz history…

July 24th, 2008 Comments off

     I received the latest edition of one of my favorite magazines yesterday, The Deal, and found an interesting article on Hertz rental cars and the history the brand had gone through relative to the different suitors that had acquired the company.  What jumped out at me immediately was how old the brand actually was, and what a great fun fact this info is.  The brand was started in 1918 by a Walter Jacobs who founded the company in Chicago with a dozen Model T’s!  Within 5 years the company was already doing $1 million in revenue.  Adjusted for a modest 3% annual inflation figures it’s almost $15 million in todays figures. The company then went through a number of acquisitions over the next 5 decades.  One of the more notable though was it’s acquistion by United Airlines in 1967 for a price of $567 million from RCA Corp. Now we don’t usually equate corporate M&A performance with that of the folks specializing in it, especially airline M&A, but United ended up divesting Hertz in one of the largest LBO’s (that is until the $25 billion purchase of Nabisco). That’s a multiple most would be envious of. 

     The article went into more detail on the current financial sitution of the company, their strategic direction, and some further changes. What’s always fun though is to learn of the history behind a brand, especially those that aren’t as recent as the iPod, Prius cars, or even IBM. 

Thanks for reading . . . .

Categories: CorpFin Cafe, M&A Tags: , , ,

Small business succession planning…

July 21st, 2008 Comments off

     As a member of FEI, I received their monthly magazine and hopefully, if I’ve been doing my homework, most of the topics are a reinforcement to reading that I am already doing or provide a different point of view. However, I just received the July/August issue and came across 2 new statistics that left me speechless.  First, 85% of small business owners have no succession plan in place. This doesn’t necessarily mean identifying the next family member to hand it off to, but the liquidity plans for the business and who will lead the company through the next “management generation.  Second statistic – 65% of small business owners don’t know what the value of their business is. WOW!

     As documented in Financial Executives magazine, there are 12 million baby boomers who own and operate U.S.-based companies.  Considering the onslaught of retiring that will be going on in the coming years and the need for those retirees to lock in on the equity of their business, the planning should have already started. These are two statistics that will definitely come into play in the interview I’ll be conducting next month with an O.C.-based baby boomer who recently sold his business to secure his retirement. We are going to be speaking on exactly this topic – the psychology of the transaction and what the trigger points were. While I see tremendous risk in these stats for the baby boomer population, I also see tremendous opportunity for those that can bring their financial expertise to the table for this group.

     Some of the same psychology came into play with the company I worked with (advisory) in Florida and our plan to make an acquisition of that same company. We formulated an 18-month plan that would take the company from break-even to an EBIT level in the low-teens and a specified acquisition price. While we were not able to make the acquisition due to our own merger, that same company sold itself to a publicly held entity in the Northeast for almost 50% more than our original target. This same longer term planning is what needs to be applied by the same 12 million businesses listed above.  It’s going to be an interesting time in M&A at the small business level….

Thanks for reading. . . .

High growth start-ups & Working Capital

July 17th, 2008 Comments off

     Just finished meeting with a friend who has what would still be considered a start-up business that specializes in the nutrition & supplement sector.  Keep in mind that he’s not a rookie entrepreneur and that he has a background in investment banking, specifically mergers & acquisitions. However, he struggles with all of the same issues that any start-up entrepreneur does, which is the management of insufficient working capital and the need to support high-growth.  Although it might be relatively easy for him to let a piece of the business go for an infusion of cash, he’s well aware of the cost for the additional capital.

     Like the company I worked with in Florida, which was subsequently sold for 50% more than the target price we set, we’re going to start looking at the details of his forecasts, current capital levels, and begin connecting him with some of the folks in my network.  We’re going to schedule a number of meetings with some of my contacts that will help him better manage vendor relationships, will hopefully introduce some new banking contacts, as well as evaluate the analytics of how he is measuring his business.

     Fortunately, in this case, he is not a turnaround and is not bleeding capital, but at the same time he finds himself in a challenging situation.  Putting the proper management and reporting techniques into play, this early in the game, will help him through a tough economic environment and position him very well for the continued growth once we emerge into greener revenue pastures.

Thanks for reading . . .