Monday, September 24, 2012

Investment Banking Blog Series – Buy Side M&A Process (Article 3 of 4) Valuing the Target Company


By: RKJ Partners, LLC (Cyril Jones & Gregory Ficklin) 

As investment bankers, RKJ Partners possesses a breadth of knowledge and experience in advising buyers on business acquisitions. In our latest blog installment, we define and outline the key elements involved in valuing a target company.

WHAT IS VALUATION?
 
Valuation can be simply defined as the process of assigning an estimated dollar amount or range to the worth of an item, good, or service. To be more specific, business valuation is a process involving a set of procedures and approaches used to gauge the economic value of an ownership interest in a business as a going concern. Valuing a company is not a precise exercise, and best described as an art not a science. Business valuations are both formal and informal and serve multiple purposes, major categories include: taxes (gift/estate taxes, charitable contributions), financial reporting requirements (tangible/intangible assets, goodwill), litigation (shareholder disputes, divorce), and transactions (mergers and acquisitions, financing, employee stock ownership plans). For the purposes of this article, we will focus on valuation from the perspective of a merger and acquisition transaction, and specifically from the viewpoint of a buyer evaluating a business for sale. 

As a part of the buy-side M&A process, once a buyer selects and decides to pursue an acquisition target, it is essential to reach a level of comfort that the business for sale has a reasonable chance of being successfully acquired. Confirmation that a buyer’s initial/preliminary view of what the target company is worth goes a long way towards establishing this level of comfort. It is important that the buyer’s deal team includes an experienced investment banking professional that can effectively and efficiently facilitate the appropriate business, financial, and valuation-related analyses during due diligence, and ultimately the completion of a business valuation. As a buy-side advisor, in addition to analytical support, the investment banker shields the buyer during the diligence and negotiation processes by working directly with seller to establish a framework and basis for assigning a value to the business. This valuation framework and basis is incorporated into the letter of intent (LOI) and purchase agreement, two legal documents signed by both the buyer and seller that layout the basic and detail terms of the business acquisitions.

HOW VALUING A TARGET WORKS
 
An integral part of valuing a target company involves crunching the numbers. During preliminary due diligence, the view of valuation is often heavily contingent on the financial information provided by the seller. Sellers are often hesitant to provide in-depth, detailed financial statements without first feeling comfortable that the buyer can successfully close a transaction. As a result, a buyer’s view of the valuation may need to be refined multiple times as additional seller information is provided. Upon reaching the formal due diligence phase of the buy-side M&A process, the buyer has the opportunity to investigate the target company in a detailed, in-depth manner and his/her team is given access to financial statements, operating reports, and other private and confidential company documents (financial and non-financial). This financial information is used in various forms to conduct and complete analyses recognized as fundamental methodologies to arriving at a value for a business. Some methodologies are inappropriate for early stage businesses or those engaged in certain enterprises such as software development or financial services, where fixed assets are not usually important enough to use for purposes of valuation. Below are the six recognized methodologies with short explanations of each:
  1. Discounted Cash Flow (DCF) Analysis: This analysis derives an ‘intrinsic’ value of a company. This means that the method evaluates the future cash flow of the company and then discounts those cash flows to the present day. The advantage of this method is that it takes into account the development of the company, rather than simply the historical financials.
  2. Comparable Company Analysis: This analysis provides “relative” valuation. Essentially, comparable company analysis looks at the value of publicly traded companies. For an effective comparable company analysis, one should look at as many possible comparable companies. Averaging the multiples of the companies will also provide beneficial information. This is an easy method for a buyer to gain a strong baseline for potential transaction multiples.
  1. Precedent Transaction Analysis: Similar to the comparable company methodology, it also provides “relative” valuation. This method evaluates executed deals of both private and public companies. For a smaller sized target, this method can be beneficial due to the inclusion of private companies.
  2. Break-Up Analysis: In some cases, there is no comparable company to arrive at a possible transaction multiple. An example of this is a conglomerate, which might be involved in consumer products, financial services, and manufacturing. The valuation process entails the company being broken down by breaking up each business separately, valuing each one accordingly, and then adding them together.
  3. Book Value of Assets: This approach is particularly useful for companies such as manufacturers and warehouses, where the business is heavily dependent on its assets. This method looks towards the value of the company, if its assets were to be put together from ‘the ground up’.
  4. Leverage Buyout (LBO) Analysis: LBO analysis focuses on a company’s ability to generate cash flow. The method assumes leveraging, whereby the cash flow of the company is used to pay-off the debt—ultimately building equity. As a result, the value of the company lies in its ability to repay the debt.
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RKJ PARTNERS, LLC (www.rkjpartners.com): Cyril Jones and Gregory Ficklin are Managing Partners with RKJ Partners, LLC. RKJ is a minority-owned, Atlanta, GA based investment banking firm formed to assist lower middle market growth companies in execute transactions between $2MM and $75MM. Specifically, RKJ provides buy-side and sell side M&A advisory services, capital raising services and strategic advisory services.

Thursday, September 13, 2012

MBE Magazine | Discover the Power of Social Media Marketing

By Alan Bryan

"Private self-contracted individuals, small businesses, and large corporations are benefiting beyond their wildest dreams in new social media marketing technologies of today. So why do some companies fail to make this profitable connection? There is a right way to market within the social media realm and then there is the "other way." Learn from the mistakes of the "other guys" and avoid those errors so you can be a successful social media marketing guru. 

If you want to see a good example of how to do social media marketing the "right way" access Lifelock on Facebook and discover all the important news about identity theft. Lifelock has done all the right things in regards to discovering the value of social media marketing and offering valuable consumer information.


First Things First


Social media marketing must first build up followers to send information to. Marketing agents can certainly set up severalsocial media sites, but who is going to read about the company when no one is there. It is of utmost importance to build your audience first. Build your company through friends, family and casual friends, this is your company's foundation, word of mouth on social media will spread like wildfire adding more clients every day for your business.


Learn and Implement a New Marketing Skill


One mistake in social media marketing is tying old worn out marketing techniques into social media marketing and it does not work. When a marketing department sends out outdated advertisements, pitches in sales and tells consumers what and when to do something it does not work. They cannot address their client base in this manner and expect it to be successful.


Allow Your Clients to Make Their Own Decisions


There is more information than ever across the internet. The information is presented and consumers will make an informed decision regarding products and services. A responsible company will develop a working relationship with clients, new and old. Create interesting news about your company. Update information with engaging posts, and your audience will grow and profits will be seen. Social media allows businesses to connect with their clients, and it enhances communication. When this happens repeatedly it helps to build the business, and the best thing is, that it costs nothing.


Are you a Bore?


Don't become a marketing bore, by sending updates too often. This can soon become known as spam and social media sites frown upon this technique. In the long run it hurts everyone. Send out information, every few days, but keep it at a minimum, or your client base will soon toss you in the trash. Sending out updates every two weeks is just as harmful. Make updates interesting enough that will engage people's curiosity. Some businesses will send a few updates and then not send any for a few weeks, or bombard clients with senseless updates. This will just increase drop-off rates of your audience. Stay committed and focused.


Stay Committed


Lack of commitment, which involves hard work and patience is a reason a lot of companies don’t see the real benefits of social media. Businesses start out right, but give up because they haven’t seen any immediate, monetary results. It takes time, effort and thought to build up a large, targeted audience. It takes a lot of commitment.


Don't Throw in the Towel too Soon on Social Media Marketing


Successful businesses have a goal that incorporates a clear business plan, and a mission statement. It appears as though more businesses have turned to the social media area to market their services and products due to the immense client base they can easily build globally. This will bring in untold profits if carried out in the right manner. It does take time to see the positive aspects of social media marketing. If some businesses do not see results overnight they just give up. Develop plan or strategy for social media marketing."


Connect to BlueFire PR

Tuesday, September 11, 2012

MBE Magazine | Strategies to Collect on Overdue Invoices When Clients Don't Pay

One of the wisest nuggets of business acumen I have ever heard was that a sale is not complete until the money is in your hands. If you are the owner of a small to mid-sized business, you are probably nodding your head in agreement.

We all know that cash flow is the fuel that powers a business and keeps it running smoothly. Common sense dictates that an increase in revenues should also increase the flow of cash into your business. But if your business handles invoices, billing cycles, and customer credit, then this bit of common sense gets thrown out the window. The reality is that customers do not always pay on time, nor pay in full, if they even pay at all. Dealing with these overdue invoices is not just a consumer problem; it is happening on a business-to-business level as well.

Still nodding your head?

Chasing all this tied-up cash flow can end up costing your company a tremendous amount of time, money, and other resources. For this reason, it is essential that your business establish solid billing and debt collection processes. Here are a few tips to consider:

Create a clear and thorough credit policy: Make sure that you clearly outline the terms and conditions customers must fulfill to establish credit with your company as well as the actions that will be taken when accounts are overdue. This policy should be made available to all your customers and can be submitted alongside an overdue invoice. But this credit policy is not just for them, it is for your business as well. Make sure you and your employees review this document so that everyone can remain focused on the key payment collection policies.

Work on your record-keeping: Along with a credit policy, you should make an effort to maintain clear, accurate, and up-to-date credit files and payment histories on each of your customers. There are numerous accounting software suites out there that can help you stay on top of your accounts receivables. You should also make a strong effort to save and organize records of your attempts to collect unpaid invoices.

Send out invoices electronically. Sending out your invoices by email will streamline your billing process and reduce the wait time for customers to be notified about their outstanding accounts. It is also easier to keep records of customer communications since all files will be in a digital format.

Stop servicing a customer who has too much outstanding debt. This is pretty simple to understand. If certain customers are continually failing to pay their outstanding debts with your company, then you have to let them go. Though it may make sense logically, in practice it may be hard to turn down a customer- especially if sales have not been the greatest lately. Nevertheless, you should establish an overdue credit limit beyond which no further credit will be extended until payment has been received.

Be assertive, yet sensible with collection efforts. Trying to collect on overdue accounts is a delicate balance. On one hand, you often cannot afford to be lenient with collection calls and demand for payment letters. On the other hand, there may be instances where you should consider some external circumstances, such as economic conditions, that may affect a customer's short-term ability to pay and make adjustments to the credit policy where it is feasible. Moreover, when deciding how to collect on an overdue account, you should weigh the cost of any collection efforts versus the actual amount that can be recovered.

Don't stop the communication. Once the communication stops between you and your non-paying customer, the likelihood that you will receive even some of your money decreases significantly. All communication should be firm, yet clear and respectful.

Know what action to take and when: Finally, you should be familiar with the different options available for collecting on outstanding invoices or reducing the loss, such as using the services of a collections agency, sending your unpaid invoices to a factoring company, and taking any legal action against the nonpaying customer. You also may be able to claim the loss on an unpaid account for a tax deduction under Tax Code IRC 166, Reg. 1.166.

In short, with a little effort, know-how, and sensibility, you can significantly improve the chances of collecting on your overdue invoices and keep your cash flow flowing.

Rachel Walker is a FastUpFront Blog contributor and business consultant. FastUpFront.com offers an alternative to a small business loan based on future sales.

Monday, September 3, 2012

Investment Banking Blog Series – Buy Side M&A Process (Article 2 of 4) Due Diligence

By: RKJ Partners, LLC (Cyril Jones & Gregory Ficklin)

As investment bankers, RKJ Partners possesses a breadth of knowledge and experience in advising buyers on business acquisitions.  In our latest blog installment, we define and outline the key elements involved in the due diligence process from a buyer’s perspective.

What is due diligence?
Simply stated, due diligence, in the context of a business acquisition, is the process undertaken by a buyer to confirm the consistency and material accuracy of representations made by the seller.  Buyers seek to satisfy themselves and their stakeholders as to the current state and condition of the business for sale, thus reducing the chance of any post closing surprises.  Due diligence plays a pivotal role in the buy side M&A process as it is critical in helping to uncover potential risks and items deemed to be “deal-breakers”.  The due diligence process can also assist in finding hidden values and synergies via a thorough review of all pertinent data including assets and financials to customers and products/service offerings. The emphasis of due diligence can vary depending on the industry/market sector, company type (publicly or privately-held), business phase (start-up, growth, expansion, mature) and transaction size.

What are the phases of due diligence?
Due diligence occurs in two distinct phases: preliminary due diligence and formal due diligence.  Preliminary due diligence is defined as the first phase of the due diligence process and is focused on the buyer identifying “deal-breaking” issues before an excessive commitment of time, resources and expenses are incurred. Examples of issues that can immediately cause abandonment of a potential business acquisition are: material misstatements of financial statements, employee/personnel issues, customer retention concerns, and pending legal litigation/potential lawsuits. A buyer should have a reasonable level of comfort that the business for sale fits its acquisition criteria and the deal has a favorable chance of closing.  During the preliminary phase of the due diligence process, it is important to note that sellers are often hesitant to provide in-depth, detailed financial statements and operational information early on in the process without first feeling comfortable that the buyer can successfully close a transaction.  A buyer may be forced to settle for information and data in summary form at this stage in the process. 

Formal due diligence is the second phase of the due diligence process and occurs after the signing of a letter of intent (LOI) between the buyer and seller.  The timing of formal due diligence is designed to ensure that the seller can avoid disclosing private and confidential company information to unqualified buyers and wasting resources on unnecessary preparation.  Upon delivery of an executed LOI, the buyer has  the opportunity to investigate the business for sale in a detailed, in-depth manner and given access to financial statements, operating reports, and other private and confidential company documents (financial and non-financial).  It is critical that the buyer retains experienced professionals on the deal team to assist in facilitation of the formal due-diligence process, including a trusted, experienced investment banker, attorney and accountant.

What are the key elements of due diligence?
The due diligence process is designed to ultimately position the buyer and his deal team to be able to answer five key questions: Should buyer make this acquisition? How much should buyer pay for the business? How should the acquisition be structured? How should buyer deal with any post-acquisition operating, accounting, and legal issues?  To arrive at answers to these key questions, the buyer’s due diligence efforts are typically divided into functional areas and disciplines.  The following are examples of key categories of focus along with some corresponding questions teams are typically tasked with answering:
Business/Operations: What are the products/services offered? What types of customers are there? Is the customer list diversified? Is the post-acquisition strategy in-line with the current customer base?
Finance / Accounting: How accurate are the financials? What are the major internal and external factors impacting financial results?  Has anything not been accounted for? Is everything current?
Legal/Regulatory: Will there be any legal issues in the post closing process? Will employment contracts be impacted? What potential legal threats are in the business? What governance/regulatory issues exist?
Organizational: Will there be a “culture clash”?  Should certain/all management remain in their current positions? What is the plan for retaining key employees? What is the plan for a successful integration after the closing?
From the buyer’s perspective, it is important to be strategic and thoughtful in outlining goals of the due diligence process as it is a very involved undertaking.  A common mistake for first-time buyers pursuing acquisitions is rushing into the due diligence process without the proper assistance and support of trusted professionals (investment bankers, attorneys, accountants).  A buyer supported by an experienced and skilled due diligence team goes a long way in making a seller feel comfortable that the buyer can successfully close the transaction, especially in a competitive situation with multiple buyers pursuing the business for sale.

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