Business Valuation, Acquistion and Divestitures

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Veracap M&A International Inc. is a leading investment bank advising on acquisitions, divestitures, financing and shareholder value initiatives. This presentation provides a overview of basic concepts and principles of business valuation and walks you through valuation methodologies, rates of return and valuation multiples, acquisitions and divestitures.

Transcript of Business Valuation, Acquistion and Divestitures

  • M&A International the world's leading M&A alliance Business Valuation, Acquisitions & Divestitures March 2014 Howard E. Johnson MBA, FCPA, FCA, FCMA, CBV, CPA, CFA, ASA, CF, C.DIR
  • M&A International the world's leading M&A alliance About Veracap M&A International Veracap M&A International Inc. is a leading investment bank advising on acquisitions, divestitures, financing and shareholder value initiatives. As a member of M&A International, Veracap forms part of the worlds leading affiliation of M&A advisors, with over 600 professionals in 41 countries. Veracap is a sister company of Campbell Valuation Partners, Canadas longest established independent business valuation firm. www. veracap.com 2
  • M&A International the world's leading M&A alliance Speaker Howard E. Johnson MBA, FCPA, FCA, FCMA, CBV, CPA, CFA, ASA, C.Dir Managing Director, Veracap M&A International Inc. (416) 597-4500; hjohnson@veracap.com Howard is a Managing Director of Veracap M&A International and its sister firm, Campbell Valuation Partners Limited. Howard has been involved in business valuation, acquisition, divestiture, and shareholder value advisory assignments for corporations throughout North America. He is the author of several books on the subjects of business valuation and corporate finance, and has acted as an expert witness on valuation matters before the courts. 3
  • M&A International the world's leading M&A alliance Disclaimer This material is for educational purposes only. It deals with technical matters which have broad application and may not be applicable to a particular set of circumstances and facts. As well, the course material and references contained therein reflect laws and practices which are subject to change. For these reasons, the course material should not be relied upon as a substitute for specialized advice in connection with any particular matter. Although the course material has been carefully prepared, the author does not accept any legal responsibility for its contents or for any consequences arising from its use. Howard E. Johnson, 2014 4
  • M&A International the world's leading M&A alliance Overview I. Concepts & Principles II. Valuation Methodologies III. Rates of Return and Valuation Multiples IV. Acquisitions V. Divestitures VI. Private Equity and MBOs VII. Wrap-up 5
  • M&A International the world's leading M&A alliance PART I CONCEPTS AND PRINCIPLES 6
  • M&A International the world's leading M&A alliance Principles Enterprise value vs. equity value En bloc value vs. minority interest Business valuation vs. stock prices Cash flow and rates of return / multiples Liquidity 7
  • M&A International the world's leading M&A alliance Fair Market Value vs. Price Fair Market Value Open & unrestricted market Buyer and seller have equal knowledge & negotiating strength Parties are prudent and under no compulsion to transact Cash transaction Price Market restrictions Buyer and seller have different knowledge and negotiating skills Parties imprudent or compelled to act Non-cash consideration Other factors 8
  • M&A International the world's leading M&A alliance Components of Value & Price Post- Acquisition Synergies Intangible Assets & Goodwill Tangible Net Worth Fairmarke range(stan Investmen 9
  • M&A International the world's leading M&A alliance Goodwill Value of Shares $5,000,000 Underlying net tangible assets $3,000,000 Goodwill $2,000,000 Commercial Goodwill Transferable Individual Goodwill Transferable w/non-compete Personal Goodwill Non- Transferable Fair Market Value & Price Value to Owner 10
  • M&A International the world's leading M&A alliance Part II VALUATION METHODOLOGIES 11
  • M&A International the world's leading M&A alliance 70% 32% 22% 2% 12% 0% 10% 20% 30% 40% 50% 60% 70% %ofRespondents Discounted Cash Flow Multiple of Earnings Multiple of EBIT-DA Multiple of EBIT Other/industry -specificMethodology (Note: many respondents indicated more than one method. Therefore, the percentages do not total 100% ) Valuation Methodologies
  • M&A International the world's leading M&A alliance Cash Flow Terms Used in M&A Income before taxes + Interest expense = earnings before interest and taxes (EBIT) +/- Normalization adjustments = Normalized EBIT + Depreciation and amortization = Norm. earnings before interest, taxes, depn, amort. (EBITDA) - Capital expenditures - Cash income taxes - Incremental working capital requirements = Normalized discretionary cash flow (or free cash flow) 13
  • M&A International the world's leading M&A alliance Normalization Adjustments Non-active family members Excess or deficient salaries to owners Personal expenses Rents above/below market Non-recurring items Unusual items Etc. Separate return on effort and return on capital 14
  • M&A International the world's leading M&A alliance Multiple of EBITDA Approach to Valuation Normalized EBITDA Multiplied by EBITDA multiple Equals enterprise value Deduct interest bearing debt Equals equity value 15
  • M&A International the world's leading M&A alliance Multiple of EBITDA Example Normalized EBITDA $ 5 million Multiplied by EBITDA multiple 5x Equals enterprise value $25 million Deduct interest bearing debt ($5 million) Equals equity value $20 million 16
  • M&A International the world's leading M&A alliance Issues with the Multiple of EBITDA Approach EBITDA vs. discretionary cash flow Capex considerations Tax considerations Working capital requirements Normalization adjustments Distorted EBITDA base Growth assumptions embedded in the selected multiple 17
  • M&A International the world's leading M&A alliance Capitalized Cash Flow Approach Prospective discretionary cash flow Divided by rate of return Equals enterprise value Add redundant assets Deduct interest bearing debt Equals equity value 18
  • M&A International the world's leading M&A alliance Prospective Discretionary Cash Flow Cash that can be withdrawn from the business each year in the future without impairing ongoing operations Normally determined as: Earnings before interest expense & taxes (EBIT) of most recent years normalized for non-recurring items and related party remuneration Less income taxes Add back depreciation Less sustaining capital investment 19
  • M&A International the world's leading M&A alliance Rate of Return Capitalization rate (inverse of multiple) After-tax rate of return applied to after-tax cash flows Function of risk factors and opportunities Risk - reward trade-off Range of 10% to 15% for mid-sized, stable business is not unusual Higher rates for small companies, start-ups & high risk businesses 20
  • M&A International the world's leading M&A alliance Redundant Assets Non-operating assets not required in the operations of the business Example: marketable securities, excess land Must be permanently redundant (i.e. not a seasonal surplus) Remove any related income in estimating maintainable cash flow Normally withdrawn (on a tax-deferred basis) rather than sold 21
  • M&A International the world's leading M&A alliance Interest Bearing Debt Financing vs. operations Includes short term & long term interest bearing debt (lines of credit, mortgages, capital leases, etc.) Includes interest bearing debt equivalents (advances from shareholders, bonuses payable to shareholders, etc.) Excludes trade debt (accounts payable) Usually net of cash 22
  • M&A International the world's leading M&A alliance Case Example Joe Smith is the sole owner of a small product manufacturing company His business has been relatively stable in recent years and is expected to remain so Joes remuneration consists entirely of a bonus declared at year-end 23
  • M&A International the world's leading M&A alliance Current Balance Sheet $000 Assets Liabilities Cash 200 Bank loan 1,000 Accounts Receivable 1,200 Accounts Payable 700 Inventory 800 Bonus Payable 500 Due from Shareholder 300 Total liabilities 2,200 Total current assets 2,500 Equity Share Capital 1 Fixed assets (net) 1,000 Retained earnings 1,299 Total Equity 1,300 Total Assets $3,500 Total Liabilities & Equity $3,500 DECEMBER 31, 2013 24