Steady, if slow, economic expansion. GDP growth for 2011 projected to be 2.9% Bank, bond and equity markets posted solid results in 2010

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Stewart Chambers
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1 Mergers and Acquisitions Due Diligence James E. Kaiser, CPA Clifford M. Bishop Economic Environment Steady, if slow, economic expansion GDP growth for 2011 projected to be 2.9% Bank, bond and equity markets posted solid results in 2010 Loan activity increased 20% over 2009 DJIA rose 11.0% in

M&A Market Environment M&A activity has increased modestly Shortage of quality deals, numerous buyers Low supply of deals has driven valuations up Large surplus of excess Private Equity Capital

2 M&A Market Environment M&A activity has increased modestly Shortage of quality deals, numerous buyers Low supply of deals has driven valuations up Large surplus of excess Private Equity Capital following 2008 M&A Deals 1Q11 results show positive signs for this year Announced deals increased 3.7% in 2010 Middle market M&A volume up 38.9% Deal value increased 60% in 1Q11 year over year Middle market deal count increased 16% in 1Q11 and deal value increased 29.4% 2

Strategic Buyer Trends 1Q11 strategic M&A declined slightly, but deal value increased 45.5% 2010 strategic M&A activity increased 5.3% with aggregate deal value increasing i 17.

3 Strategic Buyer Trends 1Q11 strategic M&A declined slightly, but deal value increased 45.5% 2010 strategic M&A activity increased 5.3% with aggregate deal value increasing i 17.1% 1% M&A Loan Volume Total loan volume rose to 3-year high in 4 th quarter 2010 to $70 billion 4 th quarter total loan volume for 2009 was $27 billion M&A loan volume increased in 2010 but still lags historical averages 3

4 Credit Statistics Senior debt to EBITDA now in the 3.0x range, with total leverage averaging 4.0x for middle market borrowers Bank credit spreads decreased during 2010, still high by historical standards Average equity required for a Leveraged Buyout remained around 46% for both 2009 and 2010 Private Equity Slowing fund raising: $311 billion raised in 2008, $148 billion in 2009, $84 billion raised in 2010 Private equity firms currently hold an estimated $485 billion in uninvested private equity capital 4

5 Importance of Due Diligence Help Clients: Avoid making a bad investment Close successful transaction Structure Legal Documents Identify Strengths and Weaknesses Provide Basis for Obtaining Financing Background Information Sequence of Events Meetings between potential buyer and seller Transaction broker may or may not be involved Legal counsel for buyer usually drafts non binding letter of intent Due diligence and drafting of a formal purchase agreement occur concurrently Drafting of purchase agreement can be by legal counsel from either side 5

6 Background Information Sequence of Events Contract negotiations - due diligence and letter of intent Transaction financing & development of pro forma information Signing of agreement and closing Post closing purchase price adjustments Most cases based upon specified working capital levels Assistance with recording of opening balance sheet Due Diligence Team Usually Comprised of: Members of management Legal counsel Outside accountant 6

7 Due Diligence This team custom designs a due diligence approach based upon the following: o Identified risks and transaction structure (asset verses stock deal) Management familiarity with Industry and Company Drivers of transaction value Multiple of earnings/cash flow Balance sheet value Other factors (i.e. distribution channels, technology know how, etc.) Hiring and Role of Outside Accountant Engagement can be structured as either Agreed upon procedures engagement Consulting engagement - most popular as it provides most flexibility Standard engagement process (i.e. engagement letters, representation letters, work programs, etc.) Usually done on an hourly basis with a fee range presented 7

8 Hiring and Role of Outside Accountant Scope of procedures is a joint effort of acquisition team, but first pass usually made by outside accountant based upon their assessment Communication is constant throughout engagement process Usually involves tax advice relative to all aspects of the transaction Hiring and Role of Outside Accountant In most cases a formal written report is not generated, but written feedback provided. Common items communicated include the following: Quality of financial records, including financial statements Assessment of capabilities i of internal accounting staff Highlights of results of procedures performed Valuation issues associated with key assets and liabilities 8

9 Hiring and Role of Outside Accountant Observations regarding purchase agreement relative to financial matters Suggestions regarding purchase transaction Assistance with recording transaction Structure of Transaction Asset purchase Stock purchase Due diligence much more complicated from both a legal and financial perspective Assume all liabilities, both recorded and unrecorded Assume all contractual obligations, including litigation Assume all employee liabilities Seller Financing 9

10 Common Due Diligence Procedures Review of letter of intent and purchase agreement Interview of Buyer representatives Review of Seller year end and interim financial statements Review of work papers of external accountant on audited or reviewed statements Documentation of key accounting policies and verification on a test basis Common Due Diligence Procedures Review of Seller tax returns Interview of Seller management, usually upper management and accounting personnel Limited testing of key account balances Accounts receivable Revenue recognition tests Review for customer concentrations Review of pricing policies Review of credit policies and past due accounts 10

11 Common Due Diligence Procedures Inventory Test counts to verify existence Cost tests Raw materials Finished goods o Labor and overhead capitalization o Gross margin testing Review for slow moving and obsolescence Common Due Diligence Procedures Property and Equipment Review capitalization and depreciation policies Review of insurance policies Review of recent appraisals Accounts payable Search for unrecorded liabilities Review for vendor concentrations Accrued liabilities Review for completeness and reasonableness 11

12 Key Issues to be prepared for from a Seller s Perspective How are Profits Generated Gross Profit Analysis By: Customer Product Line Location Recording of Acquisition All business combinations recorded using the purchase method All acquired assets and liabilities recorded at FMV Significant changes effective for 2009 Acquisition costs now expensed Bargain purchase option -may have a gain on the transaction Contingent consideration - recorded at FMV at acquisition Step acquisitions - revalue previous holdings to FMV Measurement period - period up to one year from transaction date in which amounts are retrospectively restated 12

13 Common Areas of Complexity Adjustments to purchase price for specified levels of working capital Determination of GAAP applied on a consistent basis Utilization of "baskets" to avoid immaterial changes to purchase price Earn out payments Seller financing and subordination Mergers and Acquisitions Due Diligence James E. Kaiser, CPA Clifford M. Bishop 13

Consolidated Financial Statements. Mace Security International, Inc. September 30, 2018 and 2017

Consolidated Financial Statements Mace Security International, Inc. Contents Page Consolidated Balance Sheets 2-3 Consolidated Statements of Operations 4-5 Consolidated Statements of Comprehensive Income