Tag Archives: M&A

VALUING AND PRICING THE COMPANY (Reposted)

Dr. John Psarouthakis, Founder and former CEO, JPIndusries,Inc., a Fortune 500 industrial corporation. Publisher of www.BusinessThinker.com

Before you can begin final negotiations on price, you need to determine the value of the company. You can use several techniques to value a company.  We recommend the discounted cash flow value approach as the most accurate method although other approaches are useful in preliminary stages of your search to give you a sense of the range of the estimated price.

Timing and Scope of the Valuation Process

An initial calculation of valuation can be done on a fairly mechanical basis, based on information provided to you by the seller using established formulae and guidelines.  However, determining the accuracy of the financial data that the seller provides you is an on-going part of the evaluation process that should take place throughout preliminary and formal due diligence up to the closing.  Thus valuation takes place along with negotiations throughout the deal-making process.  One of the key objectives of due diligence is to surface any information that might affect the accurate valuation of the company. If your team does not have a financial auditor you should hire one to verify the accuracy of the historical data.

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VCFS-4DC: VALUATION AND CORPORATE FINANCIAL STRATEGY FOR DIVERSIFIED COMPANIES

George A. Haloulakos, CFA, is a university instructor, author and entrepreneur [DBA Spartan Research and Consulting]. His published works utilize aviation as a teaching tool for Finance, Game Theory, History and Strategy.

Abstract

Value is the key performance measure in a market economy because it encompasses the long-term interests of all stakeholders in a company. In highly competitive global businesses – especially with diversified companies — it is essential for a firm to be effective in all three phases of managing cash flow — operations, investing and financing – to generate cash at a return exceeding its cost of capital. The concept of stakeholder management has broadened the responsibility of management to include financial stakeholders (i.e., equity owners and creditors) and non-financial stakeholders such as customers, employees and suppliers. This task is magnified for diversified companies whose corporate structure is based on a mix of different types of product or business groups having a variety of financial requirements. Corporate financial strategy for diversified companies based on a portfolio management style may benefit from a stakeholder approach in order to cope with a myriad of challenges including, but not limited to, achieving economy of scale, diversification and growth in difficult or less predictable environments. Two different eras – the “stagflation” period from the mid-1970s to the very early 1980s and the “globalization” decade of the 2000s – provided extremely competitive market conditions where diversified companies achieved mixed results with divergent stock price performance. The case studies reviewed here offer a study in contrast in how the stock market values diversified firms with different corporate financial strategies.

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Actions Immediately after Closing the Acquisition Deal

drjohn11aBy Dr. John Psarouthakis, Executive Editor of www.BusinessThinker.com,  Founder and former CEO, JP Industries, Inc., a Fortune 500 industrial corporation

This is the 16th and last of a Series of  short articles on “HOW TO BUY THE RIGHT COMPANY”  that have been posted herein.

Once you close the deal, you need to be prepared to go in the very next morning to meet with your management team as well as your entire staff.

What you do in the first days and weeks will set the tone for your relationship with your employees for some time to come, possibly even the duration of your ownership.

Remember that the chief concerns of your employees and managers may be somewhat different than your own agenda. Employees will be concerned, first and foremost about their own job security and future with the company now that it is under new ownership.

Management shares this concern, and may also have more narrow issues facing them in their own departments, that nevertheless they may feel requires immediate attention.

An easy model to follow includes a short initial introductory meeting with management, an all-employee meeting to include all management and non-management staff, and then a third more formal meeting with management.

These meetings will set in motion the planning to carry out the three objectives of the transition: addressing your key constituencies (employees, customers, suppliers and bankers), revision of the action plan, and implementation of significant changes outlined in the plan.

Other meetings will follow in the first days and weeks, but it is essential to try to fit these first three meetings into the first day if at all possible.

As a new owner, you must be careful to listen carefully, building trust and goodwill with your new employees.

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