buyout opportunities

Chapter 16 Copyright © 2010 by Nelson Education Ltd.

Buyout Buyout OpportunitiesOpportunities

1616

PowerPoint Presentation by PowerPoint Presentation by

Ian Anderson, Algonquin CollegeIan Anderson, Algonquin College


Looking AheadLooking Ahead

After studying this chapter, you should be able to:

1. List some reasons for buying an existing business.

2.Summarize four basic approaches for determining a fair value for a business.

16-2


Reasons for Buying an Reasons for Buying an Existing BusinessExisting Business

1. To reduce some of the uncertainties and unknowns that must be faced in starting a business from the ground up.

2. To acquire a business with ongoing operations and established relationships.

3. To obtain an established business at a price below what it would cost to start a new business.

16-3


• Relying on Professionals– Matchmakers– Accountants– Lawyers– Other experienced business owners

16-4

Finding an Existing Business to BuyFinding an Existing Business to Buy


Pros and Cons of Buying an Pros and Cons of Buying an Existing BusinessExisting Business

• Pros–High chance of success–Less planning–Existing customers/

suppliers–Necessary equipment–Bargain price–Experienced employees–Existing business records

• Cons–Existing problems–Poor quality of current

employees–Poor business image–Modernization required–Purchase price based on

inaccurate data–Poor business location


Finding Out Why the Business Finding Out Why the Business Is For SaleIs For Sale

• Owner’s reasons for selling the business–Old age or illness–Desire to relocate in a different section of the country–Opportunity to start another business–Decision to accept a position with another company–Unprofitability of the business–Discontinuance of an exclusive sales franchise–Maturation of the industry and lack of growth potential

16-6


Examining the Financial DataExamining the Financial Data

1. Review financial statements and tax returns for the past five years.

2. Recognize that financial data can be misleading.– Assets overvalued– Expenses overstated/understated– Income underreported– Unrecorded debts

16-7


Income Statement as Income Statement as Adjusted by Prospective BAdjusted by Prospective Buyer

Exhibit 16-1

16-8


Valuation of the BusinessValuation of the Business

• Asset-Based Valuation–Estimates the value of the firm’s assets; does not reflect

the value of the firm as a going concern.• Market-Based Valuation

–Considers the sale prices of comparable firms; difficulty is in finding comparable firms.

• Cash-Flow-Based Valuation–Compares the expected and required rates of return on

the amount of capital to be invested in the business.

16-9


Asset-Based ValuationAsset-Based Valuation

• Modified Book Value Technique–Historical value of firm’s assets is adjusted to reflect

current market values.• Replacement Value Technique

–Value of firm’s assets is adjusted to reflect current costs to replace the assets.

• Liquidation Value Technique–Value of firm’s assets is adjusted

to reflect their value if the firm ceased operations and disposed of the assets.

16-10


• Earnings Multiple (Value-to-Earnings) Ratio–Determine normalized earnings, and –Divide this amount by a capitalization rate.–Normalized earnings are earnings that have been

adjusted for any usual items such as fire damage.

Capitalization Rate

Normalized Earnings Firm’s Value =

16-11

Earnings-Based ValuationEarnings-Based Valuation


Cash Flow-Based ValuationCash Flow-Based Valuation

1. Estimate the future cash flows that can be expected by the investor.

2. Decide on the investor’s required rate of return.

16-12


Risk PremiumRisk Premium

• The difference between the required rate of return on a given investment and the risk-free rate of return

• Required rate of return = – Risk free rate of return + Risk Premium

• Table 13-1 lists suggested risk premium categories

16-13


• Competition• Market• Future Community

Development• Legal Commitments• Union Contracts• Buildings• Product Prices

16-14

Negotiating and Closing the DealNegotiating and Closing the Deal


Negotiating and Closing the DealNegotiating and Closing the Deal

• Terms of Purchase–Assets purchase or total entity–Indemnification clause–Payment in full or partial payments over time

• Closing the sale–Best handled by a third party

• Bill of sale• Tax certifications• Payment-to-seller agreements

and guarantees

16-15

buyout opportunities

Documents