Buyout Opportunities
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Transcript of Buyout Opportunities
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
Buyout Buyout OpportunitiesOpportunities
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PowerPoint Presentation by PowerPoint Presentation by
Ian Anderson, Algonquin CollegeIan Anderson, Algonquin College
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
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.
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
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.
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
• Relying on Professionals– Matchmakers– Accountants– Lawyers– Other experienced business owners
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Finding an Existing Business to BuyFinding an Existing Business to Buy
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
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
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
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
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
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
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
Income Statement as Income Statement as Adjusted by Prospective BAdjusted by Prospective Buyer
Exhibit 16-1
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
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.
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
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.
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
• 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 =
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Earnings-Based ValuationEarnings-Based Valuation
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
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.
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
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
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
• Competition• Market• Future Community
Development• Legal Commitments• Union Contracts• Buildings• Product Prices
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Negotiating and Closing the DealNegotiating and Closing the Deal
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Chapter 16 Copyright © 2010 by Nelson Education Ltd.
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
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