Professional Documents
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BASIC ACCOUNTING
Balance Sheet Income Statement Statement of Cash Flows GAAP and Consistency Consolidation & Combination Notes to Financial Statements
BASIC ACCOUNTING
BALANCE SHEET FORMULA
Assets - Liabilities = Net Worth or Assets = Liabilities + Net Worth Net Worth = Shareholders Equity
CONSOLIDATED BALANCE SHEET ACME WIDGET COMPANY DECEMBER 31, 2000 (In Thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents Accounts Receivable, less allowances of $420 Inventories Prepaid Expenses Total Current Assets PROPERTY AND EQUIPMENT: Land and land improvements Buildings Leasehold Improvements Fixtures and equipment Less-accumulated depreciation OTHER ASSETS Cash surrender value of life insurance Goodwill, net of amortization of $3,560 Total Other Assets $
5,393 12,345 10,645 1,272 29,665 5,340 23,948 2,327 22,375 12,983 41,007 575 14,240 14,815 85,487
LIABILITIES AND SHAREHOLDERS INVESTMENT CURRENT LIABILITIES Accounts payable Accrued expenses Revolving credit facility Current Maturities of long term debt Total current liabilities LONG TERM DEBT SHAREHOLDERS INVESTMENT Common stock Capital in excess of par value Retained Earnings Total shareholders' investment
CONSOLIDATED STATEMENTS OF OPERATIONS ACME WIDGET CORPORATION For the Fiscal Year Ending December 31, 2000 Gross Sales Allowances and Rebates Net Sales Cost of sales Gross Profit Operating expenses Product research and development Selling and marketing General and administrative Total operating expenses Income from Operations Other income (expense): Interest expense Interest income Other, net Other expense, net Income before income taxes Provision for income taxes Net income $ 223,256 5,211 218,045 165,714 52,331 5,235 10,876 18,723 34,834 17,497 (2,491) 213 11 (2,267) 15,230 5,787 9,443
ACME WIDGET CORPORATION COMBINED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided (used) BY operations Depreciation and Amortization Changes in operating assets and liabilities: Accounts receivable Payables Inventory Accrued expenses Net cash provided (used) in operations Cash flows from investing activities Purchases of property and equipment Acquisition of business, net of cash acquired Net cash used in investment activities Cash flows from financing activities: Increase in revolving credit facility Proceeds from term loans Payments on notes and term loans Dividends paid Net cash provided by financing activities Net Increase in Cash Cash and equivalents at beginning of year Cash and equivalents at end of year
9,443
2,583
(1,320) 576 (1,236) 598 10,644 (3,123) (8,261) (11,384) 1,898 5,000 (2,327) (1,222) 3,349 2,609 2,784 5,393
CONCEPT OF EBITDA
Earnings before Interest, Taxes, Depreciation, & Amortization
a/k/a Operating Income + Depreciation and Amortization
Net Income Interest expense (net) Taxes Depreciation and amortization EBITDA
TRADITIONAL VALUATION
WHAT A WILLING BUYER WILL PAY AND WHAT A WILLING SELLER WILL ACCEPT, UNDER NO COMPULSION AND BOTH BEING AWARE OF THE RELEVANT FACTS Revenue Ruling 59-60
Asset Value
Comparable Companies
Prior Sales Stock Market Valuation Standard Multiples of Cash Flow or EBITDA
Earnings Approach
Multiple of Earnings Discounted Cash Flow Analysis
USE OF COMPARABLES
Based upon Comparisons to Publicly Traded Companies Based upon Comparisons to Publicly Reported Sales of Businesses Values Target based upon Comparable:
Market Value/Book Value Market Value/Sales Market Value/Earnings Market Value/EBITDA
ADJUSTED EBITDA
For purposes of presentation to a prospective Buyer, EBITDA is normally adjusted to indicate the add back of expenses that will be saved by the prospective Buyer Examples are
Excess owner compensation Travel and entertainment expenses Money saved through synergies
V0 = CF1/(1+i)1 + CF2/(1+i)2 + CF3 (1+i)3 + ... +CFn/(1+i)n V0 = CFn / (1+i)n V0 = CFt = i= n= value of asset at time zero cash flow expected at the end of year t discount rate time period
ISSUES TO RESOLVE
Prediction of the Future Cash Flows Determining the Correct Discount Rate to Use, Based Upon
Cost of Borrowings Unsystematic Risk (What Should be Expected from a Stock Investment) Systemic Risk (The Particular Risk Attendant with the Target)
HISTORICAL AND PROJECTED FINANCIAL RESULTS 1999 $174,436 2000 $218,045 2001 $235,489 178,971 56,517 2002 2003 $254,328 $274,674 193,289 61,039 208,752 65,922
Net Sales
COGS 132,571 165,714 Total Gross Profit 41,865 52,331 Operating Expenses: Research & Development 4,876 5,235 Selling & Marketing 8,921 10,876 General & Administrative 15,256 18,723 Total Operating Expense 29,053 34,834 Operating Income $12,812 $17,497 Depreciation & Amortization 1,956 2,583 EBITDA $ 14,768 $ 20,080
5,887 6,358 6,867 11,774 12,716 13,734 19,659 20,642 21,674 37,321 39,717 42,275 $19,196 $21,322 $23,647 2,583 2,583 2,583 $ 21,779 $ 23,905 $ 26,230
EBITDA N/P/V 2001 2002 2003 2004 Terminal Present Value @ 15% $166,076 $21,779 $23,905 $26,230 $28,772 $191,813 Present Value @ 10% $257,565 $287,720 Present Value @ 20% $120,777 $143,860
Use the Capital Asset Pricing Model (CAPM) to Determine the Discount Rate
But Some Companies use a Standard Hurdle Rate as their Discount Rate
EXAMPLE
Treasury Bills = 4% Expected Additional Equity Return = 7% Beta (Additional Risk Associated with Target Company) = 1.3 Ke=Rf+( X Rp) Discount Rate = 4% + (7% x 1.3) = 13.1%
USING THE DISCOUNTED CASH FLOW METHOD AND BASED UPON ASSUMPTIONS OF CASH FLOW AND DISCOUNT RATE The Enterprise Value Using NPV @ 15% is $166,076,000. With Debt of $28,126,000 (and assuming that there is no cash in excess of needs) the Value of the Business (i.e., Shareholder Value) is $137,950,000.
SYNERGIES
The Acquired Business may be Synergistic with the Purchasers Business This may cause either additional profits or lower expenses, thereby increasing EBITDA. This may make the business more valuable to the Purchaser Therefore, a Synergistic Purchaser Usually has an Advantage over a Financial Purchaser (i.e., a Purchaser with no Synergies)
$13.79 0 5 10 15
$18.00 20
THESE VALUATION ISSUES COULD AFFECT THE STRUCTURE OF THE PURCHASE PRICE
Provide for a portion of the price to be contingent on future performance Provide for a portion of the consideration otherwise paid to the shareholders to be paid to key employees based upon continued employment and performance.
INSTALLMENT SALE
Interest Rate Security for Payment Relationship to Buyers Bank Debt What Happens on Default? Is the Note Security for Buyer to Protect Against Sellers Representations and Warranties?
EARN OUT
Based Upon:
Levels of Net Income Levels of Operating Income Levels of Gross Margin Levels of Sales
Accounting Issues Keeping Acquired Business Separate The Seller Has No Control