Acquisition. Training. Council for the Advancement of Native Development Officers

Transcription

1 Acquisition Due Diligence Training Council for the Advancement of Native Development Officers 2010

2 Objectives Understand the benefits to Due Diligence Identify common reasons why new ventures or acquisitions are made Learn the components of a standard Due Diligence Review Process Complete an initial assessment and understand what should be considered Common Warning signs

3 About MNP MNP has 8 offices in Ontario We have 2600 team members across Canada We work with over 125 Aboriginal communities We have been involved with Aboriginal business for over 20 years

4 Due Diligence Road Map Potential Acquisition/ New Business Venture Partnership/Joint Venture Initial Assessment Research Transaction Evaluation S.W.O.T. Review & Disclosure Analysis GO Verification Confirmation of the assets and liabilities that are being purchased Negotiations Get the best combination of price and structure Consider use of Professional Advisor

5 Completing Due Diligence Allows you to: Make an informed decision Avoid investing in the wrong business Avoid paying too much for the right business Evaluate risks associated with the business Confirm or deny representations made by the vendor Gain knowledge of the entire business operation Determine the value of the business Identify Pros and Cons, benefits and disadvantages

6 Due Diligence findings are used to: Verify financial and operational health Allows you to negotiate from a position of strength Determine bid prices Assess risk

7 Initial Assessment Quick Look Before putting time and effort into a lengthy due diligence process the initial assessment answers some basic questions to determine if it is worth further investigation. An exploratory meeting with decision makers of your community is important to get an idea of what is involved with the investment What is the public saying?

8 Initial Assessment Quick Look Do a quick search to see what the going rate is for a similar business in your region For example, if it is a restaurant do a quick web search for other restaurants on sale in the area. Is the price comparable at a glance? How much?

9 Initial Assessment Questions Is this too good to be true? Is there a conflict of interest? What are the vendor s needs and reasons for selling? Does the business fit with the band s Vision, Mission, Goals? Does the acquisition fit into the band s long-term objectives; How will the band compliment or strengthen th the operations; Does the band have an integration plan including: management, personnel, information systems, and communications? Price versus available funds? Would this business add value to the community? Likelihood of Success?

10 Due Diligence Road Map Potential Acquisition/ New Business Venture Partnership/Joint Venture Initial Assessment Research Transaction Evaluation S.W.O.T. Review & Disclosure Analysis GO Verification Confirmation of the assets and liabilities that are being purchased Negotiations Get the best combination of price and structure Consider use of Professional Advisor

11 Types of Information for Research Consider the following regarding an acquisition or new business venture: Laws that may affect the business External perceptions of the business Financial reports released from public companies Status of business within the competitive realm Demographics, statistics, population, Geographical location Economic welfare Market and industry information, etc.

12 Review and Disclosure Review an inspection or examination by viewing something. Disclosure the act of uncovering, divulging i and revealing any information pertinent to a transaction to an organization outside of their entity. The process of Due Diligence Review and Disclosure is to examine e p ocess o ue ge ce e e a d sc osu e s to e a e and uncover all aspects of the business in review of the documents and information provided and collected.

13 Operational Reviews What to Look For Human Resource Reviews Management/Administration Reviews Facilities Reviews Business Reviews Financial Reviews Marketing Reviews Accounting Reviews Logical Reviews Insurance Reviews Any past studies that may contain useful info

14 Operational Review Management & Administrative operations Facilities Business processes; i.e. Production, manufacturing, business strategies, purchasing, sales and marketing

15 Human Resources Review Staffing contractors, employees, turnovers, recruitment, retention, etc. policies and procedures, salary expense, compensation structures benefit expense, insurance, pension plans, etc.. Compliance to government regulations, such as: Workers Compensation, employment standards, CRA, Payroll, etc.

16 Management/Administration Review Roles and Responsibilities How management reviews, evaluates and rewards employees, and How management sets performance expectations background checks on employees, contractors, business partners

17 Facilities Review Facilitates that are Owned, leased or rented. Review current and existing title documents or leasing/rental contracts Overhead costs Number of facilities Geographic location Workplace description and details

18 Business Review Vision, Mission and Values Business methodologies & approaches Business strategies t Business plan Type of business is it a manufacturing company? A production company?

19 Financial Review Items to review include, but not limited to: Historic review of financial statements: balance sheets, income statements, cash flow statements Accounting and information systems Accounting policies and procedures, internal controls, risk management strategies Financing strategies Debt and/or Equity? Forecasts and budgets Asset lists

20 Financial Review Cont d The Four C s Cs of Credit: 1. Character Credit record, earnings, net worth. Does the company pay on time and treat suppliers fairly? 2. Capacity Ability to pay, and to get paid. 3. Capital Financial resources to deal with debt. 4. Conditions Refers to external conditions surrounding the business. Is the company profitable and growing?

21 Financial Review Cont d Indicators of business in distress Liquidity or cash-flow problems: Stretching accounts payable Aging accounts receivable, significant uncollectible accounts and bad debts Long-term debts coming due Exceeded authorized line of credit, breach of loan covenants Recurring losses Shrinking gross profit, Loss of key customers, declining sales Build-up of unpaid statutory creditors

22 Financial Review Cont d Loss of key employees Ethical issues Ineffective/Absentee management Mismanagement of assets Deferred maintenance on capital assets Depletion of inventories Sale of income-producing assets Lack of management tools and infrastructure g Lack of financial oversight Poor financial reporting / forecasts and projections Indecision and poor communication

23 Accounting and Finance Traps Poor internal controls Undisclosed liabilities Misrepresented or inaccurate reports Income tax issues Loans are not transferable No transparency

24 Legal Review Legal (includes environmental): Corporate/business structure contractual t obligations, compliances, Governing rules and regulations claims, ongoing litigation potential claims, Intellectual property

25 Legal Traps Missed litigation, claims Unclear title of assets Issues and concerns with intellectual property Types and quantity of guarantees provided

26 Marketing Review Includes reviewing the following: List of top customers Strategies Production, sales and distribution Target customers Geographic target Economic factors Market analysis, industry analysis Marketing materials Approach and methodology Manufacturing operations Services

27 Marketing Traps Wrong business sector Size of the market is too small Poor position compared to competition Environmental issues

28 Claims Coverage: Insurance review Life Insurance Health and Dental & Disability Insurance Critical Illness Insurance Partnership Insurance Key Person Insurance Business Property and Liability Insurance Vehicle Insurance Product or Service Liability Insurance General Liability Business Premises and Contents Insurance

29 When researching and reviewing Throughout the review and disclosure process, identify and evaluate risks that may affect the value and/or the success of the opportunity and/or its operations. Also consider synergy and the value and importance of it in a partnership or joint venture arrangement. How will the two parties cooperate and interact with one another so that the combined effort creates an enhanced effect?

30 Due Diligence Road Map Potential Acquisition/ New Business Venture Partnership/Joint Venture Initial Assessment Research Transaction Evaluation S.W.O.T. Review & Disclosure Analysis GO Verification Confirmation of the assets and liabilities that are being purchased Negotiations Get the best combination of price and structure Consider use of Professional Advisor

31 S.W.O.T Analysis Strengths internal advantages the organization has that the competitors do not (i.e. exclusive agreements) Weaknesses internal disadvantages the organization has compared to the market place (i.e. small company without buying power) Opportunities external occurrences in the marketplace that the organization can potentially capitalize on (i.e. nicotine gum may capitalize on the no smoking by law) Threats external events that may create hurdles for success (i.e. zoning restrictions for a proposed building)

32 Due Diligence Road Map Potential Acquisition/ New Business Venture Partnership/Joint Venture Initial Assessment Research Transaction Evaluation S.W.O.T. Review & Disclosure Analysis GO Verification Confirmation of the assets and liabilities that are being purchased Negotiations Get the best combination of price and structure Consider use of Professional Advisor

33 Transaction Evaluation Determine the Value: Is the business/asset worth the asking price? The value of a business is a reflection of four key elements: 1. Assets 2. Technology 3. Cash flow 4. Synergy (Synergy needs to be calculated by the buyer) A typical simplified valuation approach to estimating value for a business is a multiple of EBITDA (Earnings before income taxes depreciation and amortization) EBITDA is used as a basis for recurring cash flows The multiple applied is different for all industries, companies, and different buyers (financial versus strategic)

34 Transaction Evaluation Cont d Other factors must be considered when completing the transaction evaluation: Cost Benefit Analysis - weighing the benefits to the costs and any other disadvantages. The question to answer is Does the total benefits outweigh the total cost? Goodwill an intangible asset which provides a competitive nature such as a strong brand name or reputation. It is difficult to put a value to good will and often advice is seek from a professional. Market Analysis - Is the market saturated? Is there a demand for the product/service? How big is the competitor market? What makes my product/service unique or competitive?

35 Transaction Evaluation Cont d Financial Historical performance and future forecasts. How have they performed in the past? Past and future profits? Short term and long term employee benefits. (operating costs) Non-financial factors; ie. Cultural, environmental, economical impacts

36 Fair Market Value & Price Fair Market Value The highest price available in an open and unrestricted market between informed and prudent parties under no compulsion to act and acting at arm s length expressed in terms of money or money s worth. Price The consideration paid in a negotiated open market transaction involving the purchase and sale of an asset.

37 Fair Market Value & Price Fair Market Value is Not (Necessarily) Equal to Price Different motivations, negotiating g abilities and financial means between vendor and purchaser; Legal and contractual restrictions on share sale; Imprudent decisions by vendor and/or purchaser; Unequal access to relevant information; Parties not acting at arm s length; Compulsive acts by vendor, purchaser or both; An inability on the part of vendors to identify possible open market purchasers; Inability on the part of vendors to quantify post acquisition synergies; Price negotiated generally include non-cash consideration such as shares, notes and earn-outs, etc.

38 Due Diligence Road Map Potential Acquisition/ New Business Venture Partnership/Joint Venture Initial Assessment Research Transaction Evaluation S.W.O.T. Review & Disclosure Analysis GO Verification Confirmation of the assets and liabilities that are being purchased Negotiations Get the best combination of price and structure Consider use of Professional Advisor

39 Analysis - What To Look For information that jumps out at you when you analyze the results 15% of respondents have used your product 76% of male respondents prefer sweaters to dress shirts Look for confusing or contradictory results Talk to various personnel

40 Decide if you want to proceed

41 WARNING Signs Common indicators include: Bargain Deals - asking price is exceptionally lower than the market value Is the business at risk of insolvency, receivership or bankruptcy? E.g. recurring losses, shrinking profits, loss of key customers, etc. Heightened internal politics management issues? Window dressing

42 Common Due Diligence Errors Include: Over-confidence in the company's future revenue growth and profitability, and Misunderstanding the business you intend to acquire. Losing perspective passing off negative findings Underestimating human resources can we actually do this? Can we work with them?

43 Consider Professional Advisors Professionals may include accountants, lawyers, management consultants, bankers, business valuators, environmentalists, engineers, etc. Benefits to using a professional advisor: Level of expertise and experience Specialize in specific areas Identify and reduce risks Availability and objectivity

44 Why use a Business Valuator? Business Valuators have specialized knowledge Required Always Required Sometimes Knowledge of: Knowledge of: Market business operates Indian Act; in; Goodwill; Corporate structure; Industry specific matters; Income tax; Real estate valuation; Commercial law; Equipment valuation GAAP Engineering i surveys; Actuarial, pension matters Bankruptcy

45 Why use a Corporate Finance Specialist? Assistance with negotiation, deal structuring, due diligence, financing and post-deal transitional management support. A specialist would provide strategic advice at various stages, from identifying appropriate targets for the transaction to advising on the best way to finance a transaction or receive payment. Provide forecast cash flow requirements for projects Provide internal rate of return estimates Complete a sensitivity analysis to external environment factors such as industry economic outlook and interest rates

46 Why use an Accountant? Assist in review of all the financial statements and analyze historic audit reviews Assist in review of tax issues. Assist in assessing the value of the transaction and the considerations being exchanged. Assist in review of financial procedures and policies.

47 Why get a legal opinion? Assist review of intellectual property or other confidential information Assess whether the business has complied with all pertinent rules and regulations including environmental, employment standards, safety, etc. Are there any outstanding commitments, charges, debts, etc. Assist with completion of the transfer by completing the necessary formal documentation

48 Why Obtain Training? Becoming more aware of all aspects to the venture is imperative when purchasing a business. Failing to complete due diligence can be considered negligent. Due diligence is viewed by many as a performance obligation to identify and assess business risks to avoid negative effects.

49 MNP Due Diligence Training 1-2 day courses Customized to fit your needs Assessment of participants learning using Resolver Ballot Delivered in your community

50 Questions?

51 For more Information, or to book a customized workshop based on your community s needs, please contact John Caggianiello, Partner, Suzanne Ebelher, MNP Training Lead, Clayton Norris, Director of Aboriginal Services, MNP at