Intro Video Transcript

Hello and welcome to M&A valuation concepts and tools to exceed your strategic objectives. Today we're going to talk about how we associate business plans and valuation, what are the impacts business planning and evaluation, how can you use your skills as a CFO and you team skills his business planners and forecasters to create a solid business plan that results in an equally solid valuation. We gonna talk about how we can use all the tools at Wall Street in using for years on main street with your company and how and how those tools link back to the new to the business plan. Will distinguish between the purposes of each technique there are several tips techniques and models use to evaluate business and we'll talk about their differences and strengths and weaknesses. Will show how the different models and techniques complement each other, so that each model reaffirms the valuation of the other. and finally we show how some common metric say you've all heard of compliments the valuation and further confirm the valuation. A moment about me. I'm Patrick Garvey, President, Emerald Strategic Advisors. We help small and midsize business owners sell raise capital or grow through acquisition. We provide buy and sell-side expertise to companies big enough to buy or divest who lack the expertise or manpower to do acquisitions, to integrate acquisitions and things to do for strategic planning. I'm over 25 years in finance, strategy and M&A with my last ten being an M&A working for a company called Wolters Kluwer primarily, buying and selling software companies in that served tax accountants in accounts. I looked closed over 20 deals and looked at hundreds. so what I bring to the table for my client is basically the knowledge of what not to do and what to do to make a business call them more attractive. I'm a certified merger and acquisition advisor and I have an MBA in finance and BA in accounting from Michigan State University. So, let's get back to business and that's the business plan. The business plan is one of the foundations of valuation. It all starts with the business plan. Therefore valuation models gonna talk to two of those the tap on the discounted cash flow model and the bottom on leveraged buyout model all receives data from the business plan, it all starts with the business plan for those models. will also look at comparable company analysis and incomparable transaction analysis to confirm what we've learned or what we came up with in our valuation using the discounted cash flow model and leveraged buyout, you'll see how these work shortly. On top of that we're going to add three metrics to the mix to help us confirming our valuation further and also to help us manage the process of attaining the returns we projected in in the future for the new business. The result will be a sound valuation that is supported by a solid business plan that increases the chance of success of the acquisition, that meets or exceeds return and profit goals, is mark fully market validated and above all realistic and attainable. As I said it all starts with the business plan and you've seen these factors in all your budgets forecasts and new product plans a you've built over the years and you and your team at work down over the years. Sales, wrecked expenses, overhead, synergies, capex, working capital and capital structure. Your work and your team's assumptions supporting these elements of the business plan by the linchpin of value creation, without solid assumptions behind the business plan and a calm and a sound reasoning and complex modeling the business valuation doesn't stand on its own. And you heard measures different measures like IRR and multiples, even multiples, revenue multiples, none of that matters as much as a business plan that you and your team will develop because it's the underpinning of the valuation. These other measures are outcome of the process, not creators of the value. To your skills and budgeting and forecasting directly impact evaluation and working with your team of experts both in finance and out you'll create a solid business plan that supports evaluation makes it home and as CFO you're the owner of the online business plan sporting acquisition. There are two aspects that we can take in terms of in terms of a perspective. You can be a seller or buyer for. Most of this presentation went to talk about buyers who let's talk about sellers and for a moment and you'll get a perspective of how this process starts. As a seller you gonna want to build the book is called “The Book” or a customer information memorandum. This is a fairly lengthy document anywhere from 20 to 80 pages sometimes more really less of details about the business, everything from financials to manage biographies, to marketing strategy, to sales strategy, to overall business strategy, legal, tax and detailed financial projections including key performance indicators a lot goes into a good him in a CIM. CIM is therefore only provided to serious investors that is those who have met with the management team, who expresses serious interest, who have the wherewithal to do the deal and those who sign an NDA and are therefore acceptable to a seller, only serious investors need apply to get a CIM. Investors rely heavily on a CIM. I had an adviser actually asked me if it was actually useful and why we went to the eye of the exercise of producing a CIM as an advisor and I was absolutely flabbergasted because in my 10 years of experience that is the starting point for all of our evaluation as a buyer of a company is the CIM. A poorly designed CIM or isn't treated seriously will cause a lot of problems not the least of which would be prolonged due diligence period that becomes more expensive by the day for both sides which would create animosity and really just jeopardizes sellers credibility and the deal. So what you really want to do is take a serious approach to the CIM and treated as if you were treating an SEC report or any kind of other reports that needs to be seriously and thoughtfully and accurately prepared. From a buyer's perspective and again we're gonna talk from the buyersn prospective for the balance of this presentation but the flip side to the conversation really applies the seller's as well so keep that in mind. The buyer start so not with the symbol with their own strategic plan and then it will look to the similar potential targets to see it, to understand how the potential targets fit into the plan. So as a as a business owner, as a CFO, you need to understand what your strategic plan is and what those targets should look like even before you identify the target specifically. once you get to the point where you've chosen a target, have a CIM, you going to go and make adjustments to the financial contained within the CIM, you're gonna make financial adjustments for you know what happened post deal and one of those mean adjustments and most important ones are synergies. Synergies primarily arise from the strategic advantage of one company buying another. The easy ones that think about our cost synergies, Big Foot for example a large company bang a small company tends to have a larger companies tend to have better purchasing power and get better rates for a cost of goods or even paper clips. So there are kind of obvious synergies like that, less obvious but more important synergies are revenue synergies where acquire could gain an upper hand in the marketplace in terms of price control, market penetration, improved sales force, better integrated product lines, a whole host of reasons why you could look at revenue and say well we have a real advantage now in revenue we could protect more revenue than would be the sum of these two parts, it really gets its energies are about two plus two equals five and more. Another adjustment you make to the financial that you see in the CIM are the findings of duty in due diligence. So that is pre- due diligence, most should be free NDA signing, most will be post NDA when you do the detailed due diligence. You’re going to find things it either where mistakes by the seller or one-time items it will not apply to you and other things that just weren't divulged in the CIM and this is where a good CIM comes into play. a bad SEM results in surprises during due diligence which creates animosity which prolongs due diligence so getting back to that quality soon if you're a seller you need to put together your best effort on the same because this is where it comes out in the wash. Mention not nonrecurring items many businesses have hidden nonrecurring items that won't apply under the under the buyers watch many times it's something as simple as financing costs which if they incur a lot of debt running the business and that debt will not be applicable going forward then interest cost goes away that be a good example. Most critically you and your team need to use business judgment as you examine the company pre diligence and post diligence and take a deep dive and doing a number of different activities that a deep dive financial statement analysis right down to the account the department. You need to deconstruct GAAP to get the cash flow. I know many FPNA managed to even and kinda take GAAP for kind of for granted and without doing a lot of work with cash flow. There’s a lot of work deconstructing GAAP to get to cash flow. I happened to specialize in software and technology weather's good deal and deferred revenue so there's a lot of revenue it does not get recognized in a growing business impacts cash greatly and in my situation. So deconstructing GAAP to get the cash flow is and it's a comparative knowledge and something that has to be treated extraordinary seriously. You also need to be aware of changes in policies that may impact financial historical financial statements and get going forward financial statements. Many times companies that go up for sale or thinking of going up for sale in the year two prior to the actual process of going to sell with change pricing policies for example to be more aggressive or to acquire customers at a greater rate but you know basically though creating two pricing models over this historical year which could impact the way you look at trends. So it's important that you have an understanding of what the old policy is, what the new policy is, what the impact is so you don't either double count or just missed project or historical because there is a major pricing changed in the past year or two. And then you and your team you know as you go through and look at the historical you'll need to basically create a complex financial model that comes up with concise conclusions and put another way you’re gonna be big picture planning with the rigorous attention to detail. There’s no way about it, there's no high-level way of doing is that will make you comfortable as a CFO in the detail has to roll up into conclusions that can be simply understood by c-level executives and shareholders. So there's no getting away that you need to understand the big picture but you also need to understand the D and build around the detail. Bottom line is your business plan is the backbone of valuation and that's what we're gonna talk about next.