tag:blogger.com,1999:blog-67483428718450085192024-03-05T01:40:12.004-05:00Private Company Mergers and AcquisitionsThis blog attempts to demystify the Mergers and Acquisitions process by explaining the many intricacies involved. It will focus primarily on private company divestitures, however the process of selling the entire company or a minority interest (as in raising equity capital) is very much the same. Many of the comments apply to acquisition searches, negotiations, valuation and commensurate financing as well.Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.comBlogger50125tag:blogger.com,1999:blog-6748342871845008519.post-23329803925683668662013-10-15T08:53:00.001-04:002013-10-15T08:54:40.291-04:00We Have Moved!!<h3>
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Private Company Mergers & Acquisitions has moved to http://www.mandainfo.com</h3>
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<br />Please <a href="http://www.mandainfo.com/" target="_blank">click here to go to the new site</a>.</h3>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-47095990304785862282013-09-07T08:30:00.002-04:002013-09-07T08:35:09.570-04:00How Do You Respond to an Unsolicited Offer?<div class="MsoNormal" style="margin: 0in 0in 6pt; text-indent: 0in;">
<span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">Unsolicited offers tend
to come at inopportune times. While some
are actually opportunistic, most come out of the blue when the potential seller
is not ready to receive them. Unsolicited
offers for private companies tend to come from immediate competitors, customers
or suppliers and, these days, private equity is also actively searching for new
<a href="http://derekvanderplaat.blogspot.ca/2012/11/it-is-all-about-platform.html" target="_blank">platform investments</a>.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">If unsolicited offers
are common in your sector, here are some considerations to keep in mind.<o:p></o:p></span></div>
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<b><span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">Be
prepared</span></b><span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">
- if you are in a position to bring other credible buyers into the process
quickly you will gain substantial negotiating power. To accomplish this you should already be on other
potential acquirers’ radar screens. Make
them aware of your capabilities, your value proposition and explore OEM /
distribution relationships. When
multiple buyers are brought into the process, the negotiating power shifts
significantly toward the seller, who can use a competitive process to maximize
valuation.<o:p></o:p></span></div>
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<b><span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">Keep
your options open</span></b><span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;"> <b>as
long as possible</b> - a <a href="http://derekvanderplaat.blogspot.ca/search?q=LOI" target="_blank">Letter of Intent</a> (“LOI”)
will almost always include an exclusivity clause. This is because a signed LOI is an agreement
in principle and expensive external resources (accountants and lawyers) will
now be engaged for <a href="http://derekvanderplaat.blogspot.ca/2012/12/what-is-due-diligence-and-what-does-it.html" target="_blank">due diligence</a> and closing the transaction.
Exclusivity means the seller cannot engage in terms discussions with any
other party for the agreed upon period. This
shifts the negotiating power to the buyer.
If the buyer finds material valuation issues during due diligence and
seeks a price adjustment, the seller has no recourse other than to compromise
on terms or walk away from the deal. <o:p></o:p></span></div>
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<b><span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">Focusing
on a single buyer does not necessarily save time –</span></b><span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;"> sellers sometimes
shy away from a formal process based on the amount of time and effort it will
take. However focusing on a single buyer
does not always result in reduced effort. A buyer in an open-ended,
uncompetitive situation will often continue to ask for more and more detailed
information exhausting the seller in the process.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11pt;"><b>Perform
buyer due diligence – </b>w</span><span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">hat is the buyer’s long term strategy? Is the buyer well capitalized or
over-leveraged? If the buyer is a private equity group, what is their typical
'hold time' until a company is resold? If
the offer includes a note or an earn-out, the seller assumes buyer and/or performance
risk. <o:p></o:p></span></div>
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<b><span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">Bring
an independent advisor into the process</span></b><span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;"> - unprepared
companies tend to assemble requested materials in a rushed manner and answer
questions ad hoc without a well formulated strategy. By bringing an independent M&A advisor into
the process you immediately formalize the process and create additional
options. Introducing actual or
threatened additional buyers into the process will likely result in the initial
buyer raising its offer. <o:p></o:p></span></div>
<div class="MsoNormal" style="margin: 0in 0in 0.0001pt; text-indent: 0in;">
<span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">When you accept an unsolicited offer, most of
the time you will leave money on the table compared to an offer arrived at
through an auction process (even a limited one). By acquainting yourself with the potential
buyer universe and working with an independent advisor, you can quickly bring
other interested parties into the process and improve your outcome
substantially.<o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">, CFA has
worked in private market M&A for more than 20 years and is a Managing
Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: "Arial","sans-serif"; font-size: 11.0pt;">Veracap M&AInternational</span></a></span><span lang="EN-CA" style="font-family: "Arial","sans-serif"; font-size: 11.0pt;"> in Toronto.<o:p></o:p></span></div>
<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-18518642084388280492013-06-06T15:07:00.002-04:002013-06-07T10:16:41.196-04:00Shares Versus Assets: It is Mostly About Minimizing Net Taxes<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Company acquisitions can be in the form of a share purchase or an asset purchase.<span style="mso-spacerun: yes;"> </span>Both can accommodate the full transfer of a going concern business.<span style="mso-spacerun: yes;"> </span>The fundamental difference is that in a share sale, the shareholders sell their shares and receive the proceeds personally (i.e. the legal entity that owns the assets changes hands) and, in an asset sale, the legal entity sells all of its assets including its name, IP, brand, customer contracts etc., and remains as a legal entity owned by the shareholders but now just has the sale proceeds as its main asset. <span style="mso-spacerun: yes;"> </span>A second taxable step of distributing the cash to the shareholders will have to take place for the shareholders to make use of the proceeds.<span style="mso-spacerun: yes;"> </span>Sellers that pursue this option may have plans for the company to re-invest the proceeds thereby deferring the tax impact. <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">So how are they different and which is better for a seller or a buyer?<span style="mso-spacerun: yes;"> </span>Ultimately, it is after-tax free cashflow or net cash in hand that drives the value, purchase price and optimal structure.<span style="mso-spacerun: yes;"> </span>The tax impact, whether it is reduced capital gains tax for the seller or lower go-forward income tax for the buyer, is usually the biggest driver in the decision between a share or asset sale.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Buyers will prefer an asset purchase when the purchase price is largely allocated to depreciable assets because they will benefit from higher CCA going forward. <span style="mso-spacerun: yes;"> </span>Sellers will prefer share sales when the $750,000 lifetime capital gains tax exemption has a material impact on the proceeds. <span style="mso-spacerun: yes;"> </span>In some cases additional family members can benefit from the lifetime capital gains tax exemption by enacting an estate freeze and creating trusts for the children.<span style="mso-spacerun: yes;"> </span>However, it must be noted that any shareholder will have to have owned their shares for at least two years for the lifetime capital gains tax exemption to apply so this can’t be done at the last minute. For a family with three children this can increase the exemption from $750,000 to $3,000,000; a big impact for transactions up to $5 million.<span style="mso-spacerun: yes;"> </span>For larger transactions it becomes more complex for sellers as depreciable tangible property may incur taxable recaptured depreciation or, where a significant amount of the sale price is allocated to goodwill, 50% of the profit on the sale of Goodwill is exempt from tax. <o:p></o:p></span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Beyond tax there are other factors to consider such as:<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Buyers prefer asset purchases because they avoid the issue of possible skeletons in the closet (undisclosed liabilities)<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Buyers will seek more reps and warranties in a share purchase agreement as they look to protect themselves from potentially undisclosed liabilities<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Sellers should consider the risks of possibly having to renegotiate key contracts with customers and employees in the case of an asset sale (where contracts include a change of control provision)<o:p></o:p></span></div>
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<br />When selling your business, weigh the answers to the following questions to choose your path:<o:p></o:p></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Will you benefit substantially from the lifetime capital gains exemption?<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Will the lion share of the purchase price be allocated to depreciable assets or goodwill?<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Will transferring contracts (customers/employees) be difficult?<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Do you have a compelling opportunity to use the funds in the company?<o:p></o:p></span></div>
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<br />The tax issue can be a complicated one, however, non-tax items such as obtaining customer consents, can sometimes trump it entirely and, if you are indifferent from a tax perspective, the flexibility to pursue either option may provide some helpful negotiating leverage.<span style="mso-spacerun: yes;"> </span>For a more detailed analysis of both the seller and buyer impacts see the Veracap M&A Value Strategies newsletter <a href="http://www.veracap.com/resources/newsletters" target="_blank"><span style="color: purple;">here</span></a>.<o:p></o:p></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="color: purple;">Derek van der Plaat</span></span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="color: purple;">Veracap M&A International</span></span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-42337442676398679202013-05-07T14:40:00.002-04:002013-05-09T10:56:23.566-04:00Working Capital is Always a Point of Negotiation in an M&A Transaction<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-indent: 0in;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-indent: 0in;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">The determination of the closing amount of working capital is always a point of negotiation in an M&A transaction.<span style="mso-spacerun: yes;"> </span>Simply put; working capital is current assets minus current liabilities and is the liquid part of the balance sheet, where revenues are collected and suppliers are paid.<span style="mso-spacerun: yes;"> </span>Working capital often includes a component of cash (or access to cash in the form of a bank operating line).<span style="mso-spacerun: yes;"> </span>Working capital items requiring judgement include:<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 11pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Collectability of accounts receivable; typically accounts receivable aged greater than 90 days are not recognized;<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 11pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Level of inventory; it must be current, sale-able and of an appropriate size;<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 11pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Any stretched account should be examined for its cause and the potential impact on the customer /supplier relationship.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">So what is the right level of working capital on closing?<span style="mso-spacerun: yes;"> </span>Buyers and sellers should seek to establish a “normal” level of working capital.<span style="mso-spacerun: yes;"> </span>This normal amount may not be the “right” amount on the day of closing but is the average level of working capital throughout an agreed period of time.<span style="mso-spacerun: yes;"> </span>A reasonable rule of thumb would be to assume the same time period that the valuation of the business is based on.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="mso-spacerun: yes;"> </span>The following business characteristics will affect the normal working capital amount:<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 11pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Generally speaking, a fast growing company will need more working capital to fund receivable and inventory growth than a no-growth business;<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 11pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">if the business is seasonal (for example, heavily dependent on Christmas sales) then, around Christmas working capital will be high, initially with inventory and then after Christmas receivables;<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 11pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">if payables are required to be paid quicker than receivables are collected (like staffing companies that typically have to pay contractors every two weeks while<span style="mso-spacerun: yes;"> </span>they get paid monthly) then working capital will need to be high;<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 11pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">if cash is collected quicker than it is paid (like an online referral business that collects cash, has no inventory and does not have to pay its suppliers for 30-60 days) then working capital can be low.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 11pt; mso-bidi-font-family: Symbol; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Private companies may not manage their working capital as efficiently as they can.<span style="mso-spacerun: yes;"> </span>They may leave cash in the business for tax reasons.<span style="mso-spacerun: yes;"> </span>This will inflate working capital, so it is important to determine the level required by the business. <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">To determine normal working capital, cash flows should be examined for cyclicality and fluctuations for a minimum of the last 12 months.<span style="mso-spacerun: yes;"> </span>Sometime before closing, a target closing balance sheet should be prepared reflecting a normal level of working capital.<span style="mso-spacerun: yes;"> </span>Excess cash is typically distributed before closing and the actual level of working capital is not finalized until some time after closing.<span style="mso-spacerun: yes;"> </span>If it is higher than the normal level of working capital, the seller receives the excess or, if below the agreed upon amount, the buyer is due a credit.<span style="mso-spacerun: yes;"> </span>In some cases reserves are held in escrow for the purpose of funding a potential working capital deficiency.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">As every business and every seller is different, working capital will always be a point of negotiation in an M&A transaction.<span style="mso-spacerun: yes;"> </span>The working capital issue is more complex than one would think and the amount of capital that is required for working capital can affect the value of a business.<span style="mso-spacerun: yes;"> </span>Once you fully understand the cash flows in a business you can settle on a reasonable level of working capital.</span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="color: purple;">Veracap M&A International</span></span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-88287004265177645772013-04-04T08:08:00.004-04:002013-04-11T11:28:07.189-04:00The Purchase and Sale Agreement<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">The Purchase and Sale Agreement (PSA or SPA in the case of a Share Purchase Agreement) is one document in a set of final documents that completes a company divestiture transaction.<span style="mso-spacerun: yes;"> </span>Other documents typically include employment agreements, escrow agreements, non-competition agreements, releases, and more depending on the type of transaction being contemplated.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">The closing documents are most efficiently prepared after a detailed LOI (Letter of Intent) has been agreed upon.<span style="mso-spacerun: yes;"> </span>Remember that an LOI normally seeks exclusivity for the potential buyer as they will then commit to proceeding in the time-consuming and expensive due diligence and legal closing process.<span style="mso-spacerun: yes;"> </span>For the seller it is critical that all potential “deal-breaker” issues are addressed in the LOI because exclusivity requires them to no longer engage with other interested parties.<span style="mso-spacerun: yes;"> </span>It will be difficult to re-engage these parties should the exclusive closing process fail.<span style="mso-spacerun: yes;"> </span>I <a href="http://derekvanderplaat.blogspot.ca/2012/10/what-does-cim-include-and-how-do-you.html" target="_blank"><span style="color: purple;">noted before</span></a> that a CIM should be positioned to present a company in a most positive manner but <span style="color: #333333;">must not over-promise or leave less than flattering facts out because it forms the basis of an <a href="http://derekvanderplaat.blogspot.ca/2011/08/m-acronyms.html" target="_blank"><span style="color: purple;">LOI</span></a> and a PSA.<span style="mso-spacerun: yes;"> </span>Due diligence will verify the assertions made in the CIM and </span>the reps and warranties in the PSA will hold the seller to them.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">A PSA is a sizable (typically more than 50 pages) document and will contain many common sections such as definitions, purchase price, representations and warranties of the vendor(s), the company and the purchaser, covenants and closing arrangements. There are various <a href="http://apps.americanbar.org/dch/committee.cfm?com=CL560003&edit=1" target="_blank"><span style="color: purple;">studies</span></a> on common PSA parameters.<span style="mso-spacerun: yes;"> </span>Here are select Canadian parameters for 64 PSAs closed in 2010 and 2011.<span style="mso-spacerun: yes;"> </span>It should be noted that this is a small sample of reporting company acquisitions primarily in the resource and financial sectors.</span><br />
<span style="font-family: Arial, sans-serif; font-size: 11pt;"><br /></span>
<span style="font-family: Arial, sans-serif; font-size: 11pt;">54% of the deals were all cash purchases and 53% were share, as opposed to asset, purchases.</span><br />
<span style="font-family: Arial, sans-serif; font-size: 11pt;"><br /></span>
<span style="font-family: Arial, sans-serif; font-size: 11pt;">21% of the deals included an earn-out and 38% of these tied this earn-out to either revenues or EBITDA for a period of 1 to 3 years.</span></div>
<div>
<span style="font-family: Arial, sans-serif;"><span style="font-size: 15px;"><br /></span></span><span style="font-family: Arial, sans-serif; font-size: 11pt;">70% of the deals included post-closing adjustments and 70% of those included working capital as an adjustment metric.</span></div>
<div>
<span style="font-family: Arial, sans-serif;"><span style="font-size: 15px;"><br /></span></span><span style="font-family: Arial, sans-serif; font-size: 11pt;">47% of the deals included an escrow between 5% and 10% and 86% did not create a separate working capital escrow.</span></div>
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<span style="font-family: Arial, sans-serif;"><span style="font-size: 15px;"><br /></span></span><span style="font-family: Arial, sans-serif; font-size: 11pt;">83% of the deals included a Material Adverse Change (MAC) clause and 86% of those included general economic and financial market downturn carve outs.</span></div>
<div>
<span style="font-family: Arial, sans-serif;"><span style="font-size: 15px;"><br /></span></span><span style="font-family: Arial, sans-serif; font-size: 11pt;">40% of the deals included caps on claims equal to the purchase price.</span></div>
<div>
<span style="font-family: Arial, sans-serif;"><span style="font-size: 15px;"><br /></span></span><span style="font-family: Arial, sans-serif; font-size: 11pt;">78% of the deals included full disclosure reps such as a “no undisclosed liabilities” rep.</span></div>
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<span style="font-family: Arial, sans-serif;"><span style="font-size: 15px;"><br /></span></span><span style="font-family: Arial, sans-serif; font-size: 11pt;">47% of the deals included a survival time to assert claims of 2 years.</span></div>
<div>
<span style="font-family: Arial, sans-serif;"><span style="font-size: 15px;"><br /></span></span><span style="font-family: Arial, sans-serif; font-size: 11pt;">40% of the deals included breach of rep or covenants minimum basket amounts in the 0.5% to 1.0% range of the deal value.</span><br /><ul style="margin-top: 0in;" type="disc">
</ul>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">This sample provides a preview of the many legal issues to be tackled in negotiating a PSA.<span style="mso-spacerun: yes;"> </span>While the percentages are not absolute, they should guide expectations.<span style="mso-spacerun: yes;"> </span>If you want to achieve parameters substantially different from the ones noted above, it would be wise to bring these to the attention of the counter-party at the LOI stage rather than spending a lot of time and money on the PSA and, ultimately not closing a transaction.<br /><br /><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="color: purple;">Veracap M&A International</span></span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com0tag:blogger.com,1999:blog-6748342871845008519.post-67548478071422950882013-03-05T09:59:00.003-05:002013-03-06T09:17:16.280-05:00Valuation 301: The DCF and Forecasting<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">In my last post, I reviewed the various discounts and premiums to be applied in the market comparable approach to valuing a company.<span style="mso-spacerun: yes;"> </span>Other approaches that use company specific earnings and cashflow include the capitalized earnings and the Discounted Cashflow (DCF) method.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">A DCF requires a forecast of the company’s revenues and earnings and then a terminal value is established (to represent the value beyond the forecast period), all of this is then discounted to arrive at present values to be added up.<span style="mso-spacerun: yes;"> </span>The discount rate must reflect the inherent risk in generating the cashflows and the terminal value must reflect the growth rate beyond the forecast period.<span style="mso-spacerun: yes;"> </span>The cashflow used is “free cashflow” which requires adjustments for capital expenditures and working capital requirements and is net of taxes. Technically, the DCF is the more sophisticated valuation methodology but practically speaking the determination of the discount rate and the terminal value are highly subjective and small changes in assumptions can result in large changes in value. <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Irrespective of the discipline brought to the process, multi-year forecasting can be challenging for any company and is particularly hard for early stage, new product/service companies.<span style="mso-spacerun: yes;"> </span>I want to note three things about emerging company forecasts: (i) they should be bottom-up, (ii) they should be integrated, and (iii) they should sync with valuation expectations.<span style="mso-spacerun: yes;"> </span>Many investor presentations will say: “…look, I only need to capture 1% or 2% of the market and I will reach $100M in sales”.<span style="mso-spacerun: yes;"> </span>There are two problems with this statement, one you end up being a small market participant when VCs are looking for the sector winner and, two, you don’t say how you will get the 1%.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Forecasts should be bottom-up, meaning, they should reflect specific actions such as: (a), we will hire Joe and he is going to call 100 prospects and he will close 5 deals and generate $1M in sales in the first year; then, (b) in six months we will hire Mary and she will...etc.<span style="mso-spacerun: yes;"> </span>Forecasts should be integrated, meaning an income statement should feed a cashflow statement which should feed a balance sheet on a monthly basis for at least three years.<span style="mso-spacerun: yes;"> </span>Based on this investors can clearly determine the use of funds and impact on the cash position.<span style="mso-spacerun: yes;"> </span>Lastly forecasts should result in the expected valuation.<span style="mso-spacerun: yes;"> </span>For example, if you are looking to raise $5M for geographic expansion and you are willing to sell 33% equity for this, your forecast better illustrate an aligned use of proceeds and justify a pre-money value of $15M.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Once a sound forecast is prepared and the valuation math is solid, the question for the investor becomes; do I believe this team can, and will do a, b and c.<span style="mso-spacerun: yes;"> </span>If they are comfortable with this, then the due diligence moves on to other items such as management’s past accomplishments, credentials, relationships etc.<span style="mso-spacerun: yes;"> </span>While the value proposition and competitive differentiators are the primary attractions in a business plan, a sound, logical forecast is a core component needed to close a successful transaction.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">While there are complexities in all valuation methodologies, it is perhaps most important to remember that value is relative and of the moment.<span style="mso-spacerun: yes;"> </span>Whether that is relative to recent market information or relative in the context of an appropriate discount rate and terminal value.<span style="mso-spacerun: yes;"> </span>It is affected by macro-economic factors such as public sentiment and company specific factors such as patents.<span style="mso-spacerun: yes;"> </span>A valuation, like a balance sheet, is a representation at a moment in time but value changes on a daily basis.<span style="mso-spacerun: yes;"> </span>Value does not naturally accrete with time.<span style="mso-spacerun: yes;"> </span>When profit growth is accelerating there may be hubris but when it decelerates it will go away just as quickly.<span style="mso-spacerun: yes;"> </span>When the collective wisdom decided that Apple’s growth would slow, it lost over 30% of its value in just three months.<o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Veracap M&A International</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-80520460053024847202013-02-07T09:46:00.001-05:002013-02-07T09:54:43.327-05:00Valuation 201: Comparable Company Analysis<div style="text-align: justify;">
Ever since I wrote “<a href="http://derekvanderplaat.blogspot.ca/2011/10/basic-math-of-valuations-why-mid-market.html" target="_blank">TheBasic Math of Valuations</a>”, which explains the valuation differential
between different asset classes, I have been meaning to write a follow-up on specific
valuation techniques. There are market based
approaches such as public company trading multiples and comparable transaction analyses
and cashflow and earnings based methodologies such as the Discounted Cashflow (DCF)
analysis.</div>
<div style="text-align: justify;">
</div>
<div style="text-align: justify;">
In this post I’d like
to look at market based approaches. Let’s
start with the easier one to explain; comparable company transaction analysis. This is just like when your real estate agent
shows you what houses sold for in your neighbourhood. You compare your neighbour’s house in terms
of number of bed and bathrooms, lot size, etc. and then you figure, well, if
that one sold for $500K then, since mine is better, mine must be worth about
$600K. If you have a $200K mortgage you
end up with net $400K after the sale. The
logic is the same for companies however it is very rare that you find: (i) a truly
comparable company transaction, (ii) completed very recently (or else different
economic conditions will have to be considered), and (iii) there is full
information available on consideration components (i.e. cash, earn-out, amount
of debt assumed, working capital adjustments, deal exceptions, etc.). Public company trading analysis can provide
trending and current day valuation comparisons but the challenge of assembling
a good representative sample remains.</div>
<div style="text-align: justify;">
</div>
<div style="text-align: justify;">
Both market
approaches need subjective adjustments in order to derive at an attributable
value range. Comparable transaction data and public company shares are
typically available from larger public companies which means that, in order to
attribute this data to a smaller private company, two types of discounts need
to be applied, a small company discount and a private company marketability
discount and, in addition, public company shares trade at a minority discount
which raises the question of how much of a control premium to apply.</div>
<div style="text-align: justify;">
</div>
<div style="text-align: justify;">
How are these
discounts and premiums determined? Large public companies benefit from easier access
to capital, lower cost of capital, in many cases a strong brand and generally
scale, diversification of suppliers and customers and many more risk reducing
attributes. Small companies typically
have higher customer concentration, a less established brand, less access to
funding sources (be it banks or equity investors) and, private companies are illiquid;
it takes a lot of time and effort to find the right buyer. As such, small private companies are riskier
than large public companies. Every
comparison is unique but generally speaking, more risk means a higher required rate
of return.</div>
<div style="text-align: justify;">
</div>
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Minority Discounts
and Control Premiums are two sides of the same coin. Public company shares trade at a minority
discount because any individual shareholder does not have enough influence (i.e.
votes) to change the direction of the company.
However as soon as a control block is in play, the minority discount disappears. Control premiums are tracked by <a href="http://www.bvmarketdata.com/pdf/CPS1q12Sample.pdf" target="_blank">Mergerstat</a> and
were on average 50% in the first quarter of 2012. So how do the various discounts and premiums
stack up? Generally speaking, small private
companies are valued below the trading values of public companies – even without
the control premium applied. In other words, public minority share valuations
are still higher than small private company control share valuations.</div>
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Both market
approaches need subjective adjustments in order to derive at an attributable
value range. The question of whether a
comparison of a $1 billion public company to a $50 million private company
deserves a 30% or a 50% discount requires consideration of many factors and is
best answered by an experienced, accredited professional valuator.</div>
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</div>
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<a href="mailto:dvanderplaat@veracap.com">Derek van der Plaat</a>, CFA has
worked in private market M&A for more than 20 years and is a Managing
Director with <a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank">Veracap M&A International</a> in Toronto.<o:p></o:p></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-57457199256935222212013-01-14T14:02:00.003-05:002013-01-14T14:02:39.494-05:00There is Plenty of Investment Capital Out There, Except For... <div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">I have spoken before about the variety and depth of venture capital (VC) and private equity (PE) funds (see: <a href="http://derekvanderplaat.blogspot.ca/2011/12/specialized-funds-for-unique-needs.html" target="_blank">Specialized Funds for Unique Needs</a>).<span style="mso-spacerun: yes;"> </span>To reiterate, <span style="color: #333333;">there are over 40,000 private equity funds in North America ranging from individuals to multi-billion dollar funds; from special purpose acquisition companies (SPACs), to Leveraged Buy-Out (LBO), Growth Capital, Mezzanine and Distressed funds.<o:p></o:p></span></span></div>
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<span lang="EN-CA" style="color: #333333; font-family: 'Arial','sans-serif'; font-size: 11pt;">Venture capital investors typically take a substantial minority equity position and look for investments that can return 5x to 10x (i.e. if they invest $1 million, they target a realization of $5M to $10M in a sale or IPO exit).<span style="mso-spacerun: yes;"> </span>VCs don’t typically look to achieve their goals by acquiring additional companies but rather by betting on, and working with, the expected winner in the space.<span style="mso-spacerun: yes;"> </span>Private equity on the other hand, quite often seeks 100% ownership and will then continue to look for add-on or tuck-in acquisitions to grow and increase the market position of its investments. <o:p></o:p></span></div>
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<span lang="EN-CA" style="color: #333333; font-family: 'Arial','sans-serif'; font-size: 11pt;">In Canada there are quite a few start-up or incubation venture capital funds which will invest from several hundred thousand to $1M in promising ideas but, as-of-yet unprofitable companies. Some notable ones include: Extreme Startups, FounderFuel, GrowLab, Hyperdrive, and Version One Ventures.<span style="mso-spacerun: yes;"> </span>There are also quite a few VCs and PEs that focus on profitable companies with investments of $5M and up such as Bedford Capital, Clairvest, Huron Capital, OnCap, Torquest and more.<span style="mso-spacerun: yes;"> </span>But, where is the capital for companies that are profitable generating EBITDA from $0 to $1M?<span style="mso-spacerun: yes;"> </span>This is the black hole of institutional investment.<span style="mso-spacerun: yes;"> </span>If you have two or more years at profits of less than $1M, it becomes very hard to attract investment capital.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">What motivates the incubation funds is the possibility of a home run; the $5M folks are looking for typical private equity returns of 25% to 30% and find this area one where they can put some carry, or yield, into the structure to pay the bills, and they can grow to a ready exit either through IPO or sale.<span style="mso-spacerun: yes;"> </span>The less than $1M profit, modest growth segment just doesn’t tick the boxes as well as the other segments.<span style="mso-spacerun: yes;"> </span><span style="color: #333333;">Anyone that starts in this segment tends to move on to bigger deals.<span style="mso-spacerun: yes;"> </span>One reason for this is (and </span>I have heard this one a thousand times so I hate to say it) it takes as much work to close a small deal as it does to close a big deal (but the bigger deals just earn way more money); but also because it is a transition phase between the conceptual incubation funding, that relies on vision, and the proven entities where the valuation looks to cashflow.<span style="mso-spacerun: yes;"> </span>Once cashflow is generated it tends to define the company.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Many good companies will have windows of equity financing opportunities.<span style="mso-spacerun: yes;"> </span>They may be presented when the company is pre-revenue and has technology or customer commitments that put it ahead of the crowd; or it may be presented when the company is in accelerating revenue growth mode and, at that moment, the stars align with respect to market position and owner and investor value perception.<span style="mso-spacerun: yes;"> </span>When the growth rate starts to decelerate and the owner’s value expectations continue to increase, that is when the window begins to close.<span style="mso-spacerun: yes;"> </span>Entrepreneurs may act or pass on these opportunities, that is their choice, but just know that when you pass on an equity financing opportunity it may be gone forever.<o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Veracap Corporate Finance</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com0tag:blogger.com,1999:blog-6748342871845008519.post-69436606762777263132012-12-17T13:55:00.002-05:002012-12-17T13:57:04.492-05:002012 Year-End Summary <div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-indent: 0in;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">As another year comes to an end, I thought I would organize a topic reference page around themes.<span style="mso-spacerun: yes;"> </span>The following are select blog posts from the last two years.<span style="mso-spacerun: yes;"> </span></span><span style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-ansi-language: EN-US;">Happy Holidays and if you have any thoughts for a topic in 2013, please let me know.<o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Terminology and Documentation</span></b><br />
<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/08/m-acronyms.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">M&A Acronyms</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/10/an-overview-of-ndas.html">An Overview of NDAs</a><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/10/what-does-cim-include-and-how-do-you.html">What Does a CIM Include and How Do You Position It?</a><o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">M&A Process<o:p></o:p></span></b></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/08/when-and-how-much-information-do-i.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">How Much Information (and when) Do I Share With Potential Buyers?</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/09/benefits-of-m-international.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Attracting Foreign Buyers: The Benefits of M&A International</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/01/milestones-in-m-process-how-long-does.html">Milestones in the M&A Process: How Long Does it Take?</a><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/12/what-is-due-diligence-and-what-does-it.html">What is Due Diligence and What Does it Consist Of?</a><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/08/winners-remorse-does-m-process-lead.html">Winner’s Remorse: Does the M&A Process Lead Buyers to Overpay?</a><o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-CA" style="color: #333333; font-family: 'Arial','sans-serif'; font-size: 11pt;">Preparing a Business For Sale<o:p></o:p></span></b></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/10/normalization-adjustments-for-private.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Normalization Adjustments for Private Companies</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/03/12-situations-to-avoid-when-selling.html">12 Situations to Avoid When Selling Your Business</a><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/10/how-do-i-attract-high-multiple-for-my.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">How Do I Attract a High Multiple for My Business: The Business Factors</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/10/how-do-i-attract-high-multiple-for-my_27.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">How Do I Attract a High Multiple for My Business: The Sale Process</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-CA" style="color: #333333; font-family: 'Arial','sans-serif'; font-size: 11pt;">Buyer Selection<o:p></o:p></span></b></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/08/constructing-buyer-list.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Constructing a Buyer List</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/08/what-makes-good-buyer.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">What Makes a Good Buyer?</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/09/finding-buyer-part-iii.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Finding a Buyer: It is Rarely the One You Expect</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/09/what-will-strategic-buyer-pay.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">What Will a Strategic Buyer Pay?</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/09/what-will-financial-buyer-pay.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">What Will a Financial Buyer Pay?</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/06/is-there-more-than-one-buyer-for-my.html">Is There More Than One Buyer For My Business?</a> <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/06/hi-there-i-have-buyer-for-your-business.html">I Have a Buyer For Your Business</a> <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/07/hi-there-buyers-are-currently-paying.html">Buyers are Currently Paying High Prices for Businesses Like Yours</a><o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-CA" style="color: #333333; font-family: 'Arial','sans-serif'; font-size: 11pt;">Valuation<o:p></o:p></span></b></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/11/why-is-tech-company-worth-three-times.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Why is a Tech Company Worth Three Times Revenue?</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> <o:p></o:p></span></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/10/basic-math-of-valuations-why-mid-market.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">The Basic Math of Valuations – Why Mid-Market Companies Are Valued Lower Than Their Public Company Peers?</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/04/why-is-instagram-worth-1-billion.html">Why is Instagram Worth 1 Billion?</a><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/05/is-instagram-worth-1-billion-only-to.html">Is Instagram Worth 1 Billion… only to Facebook</a><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/08/more-thoughts-on-price-expectations.html">More Thoughts on Price Expectations</a><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/09/a-multiple-of-what-and-when.html">A Multiple of What (and When)?</a> <o:p></o:p></span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-ansi-language: EN-US;"><a href="http://derekvanderplaat.blogspot.ca/2012/11/it-is-all-about-platform.html">It is all About the Platform</a><o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-CA" style="color: #333333; font-family: 'Arial','sans-serif'; font-size: 11pt;">Choosing an Advisor</span></b><b style="mso-bidi-font-weight: normal;"><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></b></div>
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<span lang="EN-CA" style="color: #333333; font-family: 'Arial','sans-serif'; font-size: 11pt;"><a href="http://derekvanderplaat.blogspot.ca/2012/11/what-exactly-does-m-advisor-do.html">What Exactly Does an M&A Advisor Do?</a><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/11/how-does-m-advisor-add-value-to_29.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">How Does an M&A Advisor Add Value to the Divesture Process?</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011_11_01_archive.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">How Does an M&A Advisor Add Value to the Divesture Process: the Intangibles</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-CA" style="color: #333333; font-family: 'Arial','sans-serif'; font-size: 11pt;">M&A/Corporate Finance Options<o:p></o:p></span></b></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/12/when-is-mbo-good-idea.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">When is an MBO a Good Idea?</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="http://derekvanderplaat.blogspot.com/2011/12/specialized-funds-for-unique-needs.html"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Specialised Funds for Unique Needs</span></a></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Veracap Corporate Finance</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com0tag:blogger.com,1999:blog-6748342871845008519.post-58142074644446533502012-12-05T10:05:00.000-05:002012-12-05T10:05:12.357-05:00What is Due Diligence and What Does it Consist Of?<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span lang="EN" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-ansi-language: EN;">Due diligence is an investigation of a business or person prior to signing a contract.<span style="mso-spacerun: yes;"> </span>More specific to a divestiture, it </span><span style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-ansi-language: EN-US;">is the process of verifying the representations made in the <a href="http://derekvanderplaat.blogspot.ca/2012/10/what-does-cim-include-and-how-do-you.html" target="_blank"><span style="color: purple;">CIM</span></a> and other marketing materials provided to the potential acquirer by the seller.<span style="mso-spacerun: yes;"> </span>For example, in a CIM we may state that the seller’s customer contracts have an average life of three years and that no single customer accounts for more than 5% of revenues.<span style="mso-spacerun: yes;"> </span>The potential acquirer will extend an expression of interest based, in part, on this information (remember, while the CIM highlights all the facts that drive sustainable value – it still holds back competitively sensitive information).<span style="mso-spacerun: yes;"> </span>Business due diligence is the act of examining all of the signed and valid customer contracts and, in this example, confirming that customer contracts do, in fact, have an average life of three years and that no single customer does account for more than 5% of revenues.<o:p></o:p></span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-ansi-language: EN-US;">A seller should always keep due diligence in mind when thinking about the sale of their business. <span style="mso-spacerun: yes;"> </span>We typically provide sellers with a due diligence checklist early on in the process so that they can take the first several months of the process to get organized and assemble the documents. <span style="mso-spacerun: yes;"> </span>I would be happy to share a due diligence checklist with anyone interested (just email me).<span style="mso-spacerun: yes;"> </span>The <span style="mso-spacerun: yes;"> </span>documents required for due diligence include all material signed contracts such as customer contracts, banking agreements, funding contracts, shareholder agreements, employment contracts, as well as resumes, benefit commitments, internal financial statements, receivables/payables aging schedules, capital acquisition and depreciation schedules, tax records, asset listings, articles of incorporation, the minute book, and perhaps software architecture documents, product roadmaps, environmental assessments, historical board presentations, and ultimately customer and bank reference calls.<span style="mso-spacerun: yes;"> </span>These are just a few of the items typically included but, generally speaking, it consists of everything material to the well being of the company.<span style="mso-spacerun: yes;"> </span>Clients provide us with these documents and we scan them and selectively, and in stages, make them available in a virtual data room to be shared with relevant parties.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-ansi-language: EN-US;">Due diligence generally happens in phases. Some due diligence is performed before exclusivity (i.e. a signed LOI) and most after.<span style="mso-spacerun: yes;"> </span>The first phase of due diligence is business due diligence; this is where the acquirer’s executive and accounting teams figure out exactly how the revenue streams and products of the acquirer and target complement each other in order to determine how much they can pay for the target while meeting their own ROI targets.<span style="mso-spacerun: yes;"> </span>Legal due diligence occurs during the exclusivity period and will include title searches and other searches to ascertain the target company is a valid company, owning the assets that it purports to own and operating within the regulations of the jurisdiction and that no lawsuits or claims are outstanding.<span style="mso-spacerun: yes;"> </span>Once a certain amount of due diligence is completed parties typically initiate work on the purchase and sale agreement.<span style="mso-spacerun: yes;"> </span>Sixty to ninety days is a typical timeframe from signing an LOI to closing the acquisition of a straight forward private company.<o:p></o:p></span></div>
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<span style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-ansi-language: EN-US;">Finally, after exhaustive due diligence the seller will still be asked to represent that they did not withhold any information such as knowledge of potential lawsuits in a purchase and sale agreement.<span style="mso-spacerun: yes;"> </span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">In “<a href="http://derekvanderplaat.blogspot.ca/2012_10_01_archive.html" target="_blank"><span style="color: purple;">What Does a CIM Include and How Do You Position It?</span></a>”, I said: “ CIM must not over-promise or leave less than flattering facts out because it forms the basis of an expression of interest that may turn into an LOI and, ultimately a purchase and sale agreement.<span style="mso-spacerun: yes;"> </span>Due diligence verification throughout this process will uncover all of the facts.” From the outline above I trust you will agree with me.<o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="color: purple;">Veracap Corporate Finance</span></span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-78779355037793679762012-11-29T14:51:00.003-05:002012-11-29T14:53:00.130-05:00What Exactly Does an M&A Advisor Do?<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">In “<a href="http://derekvanderplaat.blogspot.ca/2011/11/how-does-m-advisor-add-value-to.html" target="_blank"><span style="color: purple;">How Does an M&A Advisor Add Value to the Divesture Process?</span></a>”, I noted that M&A advisors typically charge between 3% and 7% as a success fee for managing the sale process for a company.<span style="mso-spacerun: yes;"> </span>The question I addressed then was, will engaging an M&A advisor improve your expected sale value by at least 5%?<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Here I would like to outline exactly what an advisor does in the process of a sale mandate.<span style="mso-spacerun: yes;"> </span>At this point I am assuming that pre-mandate matters such as preparing a business for sale, value expectations and timing from a business and market perspective have been discussed and it is agreed that it makes sense to proceed.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">The advisor side of the deal team typically includes a senior lead such as a Director or Managing Director plus at least one Associate or Analyst as support.<span style="mso-spacerun: yes;"> </span>In addition, in our case, there are usually international resources involved through our <a href="http://mergers.net/" target="_blank">M&A international</a> alliance.<span style="mso-spacerun: yes;"> </span>Our M&A partners can do as little as buyer introductions to as much as negotiating and structuring deal terms. <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">An M&A advisor will: (i) position the selling company as a strategic fit for target buyers; (ii) present the opportunity to numerous logical and capable buyers; and (iii) manage the process along a defined and orderly timeline, in order to generate the highest premium possible.<span style="mso-spacerun: yes;"> </span>We typically identify what we are responsible for in our engagement letters as follows:<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 12pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Conduct a review of the company in order to better understand the nature of its operations and value proposition to prospective partners including:<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Courier New'; font-size: 11pt; line-height: 125%; mso-fareast-font-family: 'Courier New';"><span style="mso-list: Ignore;">o<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; line-height: 125%;">a review and analysis of the historical and prospective financial results of the company;<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Courier New'; font-size: 11pt; line-height: 125%; mso-fareast-font-family: 'Courier New';"><span style="mso-list: Ignore;">o<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; line-height: 125%;">a review and analysis of operational, marketing, technical and other information regarding the factors that influence the cash flow prospects and risk dynamics of the company;<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Courier New'; font-size: 11pt; line-height: 125%; mso-fareast-font-family: 'Courier New';"><span style="mso-list: Ignore;">o<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; line-height: 125%;">discussions with management regarding the operations of the company; <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Courier New'; font-size: 11pt; line-height: 125%; mso-fareast-font-family: 'Courier New';"><span style="mso-list: Ignore;">o<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; line-height: 125%;">a review and analysis of public information and other available information pertaining to the company and the industry in which it competes, and<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Courier New'; font-size: 11pt; line-height: 125%; mso-fareast-font-family: 'Courier New';"><span style="mso-list: Ignore;">o<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; line-height: 125%;">a review and analysis of transactions that have taken place in recent years among businesses whose operations are similar to those of the company. <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 12pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Prepare company overview materials in consultation with the company, which will provide prospective partners with an understanding of the nature of the company and allow them to assess value;</span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 12pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Conduct a search to identify suitable potential partners, guided by any criteria provided by the company;</span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 12pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Contact and screen potential partners;<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 12pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Assist the company in the preparation of due diligence documentation, a management presentation and related materials for review by possible partners;<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 12pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Negotiate with possible partners;<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 12pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Work with the company’s legal counsel, tax advisors and other advisors to assist the company in structuring the transaction so as to meet its financial objectives;<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 12pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Review the documentation in respect of the transaction; and<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: Symbol; font-size: 12pt; mso-bidi-font-family: Symbol; mso-bidi-font-size: 11.0pt; mso-fareast-font-family: Symbol;"><span style="mso-list: Ignore;">·<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Other functions as required in support of the transaction, and as agreed to from time to time.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">The whole process may take six to eight months and the M&A team will spend somewhere between 300 and 500 hours on a file.<span style="mso-spacerun: yes;"> </span>M&A advisors will have a lot of familiarity with legal documents and tax issues, but ultimately lawyers and accountants are required in the areas of due diligence, purchase and sale contracts, and tax planning.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">M&A advisors often highlight how competitive bidding between several eager buyers resulted in an extraordinary price for their clients but, like the over-night success story ten years in the making, a completed divestiture relies on a foundation of thorough planning and process.<o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="color: purple;">Veracap Corporate Finance</span></span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-14096726335950922182012-11-14T10:06:00.002-05:002012-11-14T10:07:44.256-05:00It is all About the Platform <div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">I have mentioned the word platform several times in my posts, however, the word actually means different things in different circumstances, so I thought I should clarify.<span style="mso-spacerun: yes;"> </span>Private Equity (PE) looks for platform investments and sellers look for platform buyers but they are not necessarily the same thing.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">A platform investment for a PE is an investment/acquisition in a new space that it intends to grow in.<span style="mso-spacerun: yes;"> </span>For example, when Vector Capital bought 20-20 Technologies in July of this year, they announced it as a platform investment. <span style="mso-spacerun: yes;"> </span>Before the acquisition Vector had holdings in consumer software (Corel) and digital media (RealNetworks) but nothing in </span><span style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-ansi-language: EN-US;">computer-aided design software for the interior design and furniture industries.<span style="mso-spacerun: yes;"> </span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">In a platform investment, the buyer is looking for a market leader that it can use as a platform for growth.<span style="mso-spacerun: yes;"> </span>Subsequent acquisitions or “add-on” investments will be one way to achieve this growth.<span style="mso-spacerun: yes;"> </span>The investment criteria differ between platform and add-on investments in that they are typically stricter for a platform investment. A platform investment would ideally be on the larger end of a PE’s size range and be bought at a good price. <span style="mso-spacerun: yes;"> </span>There is more risk in a platform investment because it comes with the challenges of learning a new sector landscape and the target company’s competitive position in it.<span style="mso-spacerun: yes;"> </span>When considering add-on investments the PE is effectively acting as a strategic buyer and looks to exploit potential synergies between the buyer and the target.<span style="mso-spacerun: yes;"> </span>Add-on investments are also called “tuck-in” or “tuck-under” investments because they tend to be smaller than the platform investment.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">The other way the word platform is used is to describe a type of buyer.<span style="mso-spacerun: yes;"> </span>A platform buyer is a strategic buyer looking for a platform to grow its revenues by adding complementary products, personnel, technology, etc.<span style="mso-spacerun: yes;"> </span>Platform buyers are good buyers because, (i) they can pay a good price because they bring a growth opportunity to the target, and (ii) they will leave the existing assets (brands, people and legacy) in tact.<span style="mso-spacerun: yes;"> </span>As an example, we were engaged to sell a pattern recognition company in the field of product quality control.<span style="mso-spacerun: yes;"> </span>The technology would scan a production line and identify products that did not meet certain quality parameters.<span style="mso-spacerun: yes;"> </span>In this case, the ultimate buyer was the US Department of Defense, who paid a strong premium and who then used the technology for facial recognition for national security purposes.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">I spoke earlier of a PE acting as a strategic buyer and looking to exploit synergies.<span style="mso-spacerun: yes;"> </span>Synergies can come about in constructive or destructive ways.<span style="mso-spacerun: yes;"> </span>A destructive way would occur when a direct competitor buys a company for its customer base.<span style="mso-spacerun: yes;"> </span>In this case, if the buyer has excess capacity, it could shut down the acquired company and service the customers using its existing product and plant, thereby growing revenues and improving margins (synergies) but leaving the target decimated.<span style="mso-spacerun: yes;"> </span>On the other hand, a platform buyer will consider the target company’s customers, personnel, or technology as complementary rather than redundant. In this case the target retains the existing customer base and also adds the acquirers’ customers thereby growing revenues by a higher factor than in the previous example and creating more value.<span style="mso-spacerun: yes;"> </span>As a result, a platform buyer is a good buyer.<span style="mso-spacerun: yes;"> </span>They can pay more because they can create more value and they retain the brand, team and legacy of the seller.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">In the first instance the word platform refers to the vehicle that will form the basis of a sector growth strategy and in the second case it refers to the assets that generate complementary growth.<span style="mso-spacerun: yes;"> </span>Either way, it is all about the platform.<o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Veracap Corporate Finance</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-6146780186777710282012-10-18T16:04:00.002-04:002012-10-18T16:11:08.912-04:00What Does a CIM Include and How Do You Position It?<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">C.I.M. stands for Confidential Information Memorandum and it is the main overview document provided in the private company divestiture or private placement financing process.<span style="mso-spacerun: yes;"> </span>A CIM is made available subsequent to signing an <a href="http://derekvanderplaat.blogspot.ca/2012/10/an-overview-of-ndas.html" target="_blank"><span style="color: purple;">NDA</span></a> and presents detailed company information as a basis for an indicative value discussion.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">The CIM is typically prepared by the adviser and ranges from 40 to 100 pages.<span style="mso-spacerun: yes;"> </span>CIMs describe the nature of the business (i.e. products/services, strategy, differentiation, revenue model, etc.), its history, ownership, legal structure, suppliers, customers, competitors, market opportunities, management, growth prospects, and high level financial information such as historical revenues, EBITDA and a balance sheet.<span style="mso-spacerun: yes;"> </span>Customers, key suppliers and key management do not have to be identified by name.<span style="mso-spacerun: yes;"> </span>It is still important to protect competitive intelligence at this point as there will be only one successful buyer and the company should not be put in a position where its competitors have access to sensitive information about the company.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">The reader of a CIM will be looking to better understand the value proposition of the company and to identify attributes that drive sustainable value. Some examples of questions to be addressed include:<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Has the seller transferred his/her relationships and know-how to ongoing management?<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Are the revenues of a recurring nature or project based?<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">What are the key sustainable differentiators of the product or business model?<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-fareast-font-family: Arial;"><span style="mso-list: Ignore;">-<span style="font: 7pt 'Times New Roman';"> </span></span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Is the customer base diversified / is the business reliant on key suppliers?<br style="mso-special-character: line-break;" /><br style="mso-special-character: line-break;" /><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">A CIM must not over-promise or leave less than flattering facts out because it forms the basis of an expression of interest that may turn in to an <a href="http://derekvanderplaat.blogspot.ca/2011/08/m-acronyms.html" target="_blank"><span style="color: purple;">LOI</span></a> and, ultimately a purchase and sale agreement.<span style="mso-spacerun: yes;"> </span>Due diligence verification throughout this process will uncover all of the facts.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">CIMs are different for early stage financings versus divestitures.<span style="mso-spacerun: yes;"> </span>In the former case, it is more like a business plan outlining intentions and how to achieve them whereas for a divestiture it is more of a description of the business and the market the company competes in.<span style="mso-spacerun: yes;"> </span>In the case of raising capital you need a detailed and logical use of funds explanation and this use of funds needs to generate a positive incremental return on investment.<span style="mso-spacerun: yes;"> </span>In the case of a divestiture it is not so black and white because, in my view you would only include a forecast if you expect it to be substantially different from past trends. If you have a strong historical growth record and you expect this to continue then it may be best to just provide an estimate to the end of the current fiscal year.<span style="mso-spacerun: yes;"> </span>This is because you don’t know what the buyer may be thinking and he/she may actually envision a future that includes leveraging its assets to construct a forecast that is much higher than what you would have prepared.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Should a CIM be written for the best buyer/investor? What I mean by this is, if there is a well capitalized large company acquiring businesses in your space, should the CIM be written to appeal directly to this potential buyer?<span style="mso-spacerun: yes;"> </span>My view is yes and no.<span style="mso-spacerun: yes;"> </span>Yes in that, you should exploit every angle to best position the company and no in the sense that you would do 90% of that anyway as you write the CIM to highlight sustainable value drivers.<span style="mso-spacerun: yes;"> </span>A CIM undoubtedly raises further questions, and this is a good thing because it allows advisors to engage potential buyers on the opportunity, add color, clarify any misunderstandings and strengthen the main selling points specific to that potential buyer.<span style="mso-spacerun: yes;"> </span>In short, create a two-way exchange of information and gain a better understanding of a buyer’s strategy which can be leveraged during negotiations.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">In the end, a CIM is a marketing document and should present the business in its best light.<span style="mso-spacerun: yes;"> </span>There is an art to writing a good CIM.<span style="mso-spacerun: yes;"> </span>A good CIM provides all of the basic information plus it paints a rich picture of opportunities. </span><span style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-ansi-language: EN-US;"><o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="color: purple;">Veracap Corporate Finance</span></span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com2tag:blogger.com,1999:blog-6748342871845008519.post-32584229038209870792012-10-09T10:33:00.002-04:002012-10-10T10:44:07.544-04:00An Overview of NDAs<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Non Disclosure Agreements (NDAs, also called CAs for Confidentiality Agreements) are contracts that stipulate that information received from a counterparty will only to be used for the purpose as defined in the NDA and that it will not be used as a basis for competitive tactics or shared freely with others.<span style="mso-spacerun: yes;"> </span>NDAs are signed in cases of divestitures but also for joint ventures and other collaborative and strategic relationships.<b style="mso-bidi-font-weight: normal;"><span style="mso-spacerun: yes;"> </span></b>The term of an NDA is typically 1 to 3 years and the appropriateness of the term depends very much on the rate of change in the company and the industry in which it operates.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">NDAs may include non solicitation and/or non circumvention clauses.<span style="mso-spacerun: yes;"> </span>Non-solicitation clauses can apply to customers and/or employees.<span style="mso-spacerun: yes;"> </span>Non circumvention clauses protect entrepreneurs with great ideas from well capitalized parties acting on the idea without acknowledging or compensating the entrepreneur. <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Every NDA will include clauses that describe when the agreement does not apply; such as (i) if the information falls into the public domain, other than as a result of a disclosure in violation of the agreement; or (ii) if the information is already known to the recipient at the time of its disclosure; or (iii) if it is independently obtained or developed by the recipient.<span style="mso-spacerun: yes;"> </span>The reasons for these are fairly self evident. <span style="mso-spacerun: yes;"> </span>You can’t stop a person from acting on information that they already know or is publicly available (that everyone else can act on).<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">NDAs may need to be adjusted for different jurisdictions and for certain counterparties.<span style="mso-spacerun: yes;"> </span>For example, NDAs usually address what the recipient should do with the information once one party determines the process is over.<span style="mso-spacerun: yes;"> </span>This may include returning or destroying the information; however, in certain jurisdictions companies will want to retain a copy of the information in case it is required </span><span lang="EN-GB" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-ansi-language: EN-GB;">to be disclosed pursuant to applicable law, regulation or legal process. <span style="mso-spacerun: yes;"> </span></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Private equity and venture capital groups typically add a clause to protect their ability to invest in, or operate companies in the same or related fields of business as that engaged in by the company.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Certain companies will not sign NDAs at all (at least not in the initial stages).<span style="mso-spacerun: yes;"> </span>IBM will not review blind teasers (i.e. a summary without disclosing the company name) and requires all introductory information to be marked "non-confidential".<span style="mso-spacerun: yes;"> </span>Microsoft’s policy is that NDAs are executed on the condition of aligned business group(s) willing to sponsor an engagement.<span style="mso-spacerun: yes;"> </span>These companies see so many proposals and are in so many businesses that they have simply decided that it is not worth the expense of processing NDAs at an early stage.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">So, do NDAs really protect you from counterparties using the provided information against you? And if someone contravenes an NDA, can you prove it?<span style="mso-spacerun: yes;"> </span>Can you sue them.. yes, will it be worth it?<span style="mso-spacerun: yes;"> </span>Rarely.<span style="mso-spacerun: yes;"> </span>My view is you should always put an NDA in place before you share information but then use caution and share only select information that will not potentially harm your business.<span style="mso-spacerun: yes;"> </span>Don’t view an NDA as a bullet proof vest.<span style="mso-spacerun: yes;"> </span>Continue to be guarded particularly in the areas of new business partners, potential new customers and key employees.<o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="color: purple;">Veracap Corporate Finance</span></span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com0tag:blogger.com,1999:blog-6748342871845008519.post-26118791568526094102012-09-28T09:38:00.000-04:002012-10-03T09:39:15.879-04:00What About the Form of Payment? <div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Public company take-over bids typically consist of all cash or a combination of cash and shares.<span style="mso-spacerun: yes;"> </span>This is largely because the board of directors of a public company agreeing to an earn-out will be subject to serious questions (read lawsuits) if things turn out other than expected.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Consideration in private company acquisitions will usually include a sizable portion in cash (50 to 100%) but will often include an unsecured note and/or an earn-out as well.<span style="mso-spacerun: yes;"> </span>This is typically because: (i) the buyer does not have (or have access to), the amount of cash required to complete the acquisition (particularly in the case of an MBO), (ii) the greater risk surrounding private companies (risks such as customer concentration, dependence on key suppliers, etc.) and (iii), buyers can usually stretch to a higher price if the purchase price is not all cash.<span style="mso-spacerun: yes;"> </span>For example, $25 million all cash vs. $30 million two-thirds cash and one-third note ...which one would you pick?<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">There are a number of issues to consider when assessing the likelihood of realizing deferred consideration.<span style="mso-spacerun: yes;"> </span>A dollar not received at closing is a dollar at risk.<span style="mso-spacerun: yes;"> </span>In the case of a vendor note, the first question is, can it be fully secured by hard saleable assets (such as land, a building or other fixed salable assets owned by the acquirer).<span style="mso-spacerun: yes;"> </span>This is not often the case.<span style="mso-spacerun: yes;"> </span>If the amount is under-secured (i.e. 50% asset coverage) or unsecured, the terms have to reflect increased risk and due diligence should be performed on the buyer to get comfortable with its risk profile and prospects.<span style="mso-spacerun: yes;"> </span>The higher the risk the higher the interest rate, and the more covenants and timely reporting are required.<span style="mso-spacerun: yes;"> </span>Perhaps the most important item is timely reporting allowing for quick remediation.<span style="mso-spacerun: yes;"> </span>Issues such as lawsuits, product defects/recalls, loss of customers can turn the fortunes of a company very quickly.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Earn-outs are tricky as well.<span style="mso-spacerun: yes;"> </span>Earn-outs are more prevalent when the seller presents a strong growth forecast (for which he/she wants value).<span style="mso-spacerun: yes;"> </span>If the seller will not entertain an earn-out, does that mean he/she does not believe in the forecast? They are not usually ironclad. <span style="mso-spacerun: yes;"> </span>Many earn-out proposals begin with a premise along the following lines.<span style="mso-spacerun: yes;"> </span>If you achieve $5 million in EBITDA you will earn another $x amount in purchase price.<span style="mso-spacerun: yes;"> </span>Does this mean that if the company generates $4.9 million you get nothing? … and how is EBITDA calculated? <span style="mso-spacerun: yes;"> </span>The acquiring company could incur discretionary expenses that you would not incur, or layer on additional overhead or, most drastic, a fundamental change of business direction could be required? <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">There are many possible situations to consider and many creative mechanisms and approaches to making vendor notes and earn-outs work.<span style="mso-spacerun: yes;"> </span>For example, if the seller agrees that 75% of the earn-out will be paid if 75% of the target revenues are reached then he/she should also seek 125% of the earn-out when 125% of the revenues are reached.<span style="mso-spacerun: yes;"> </span>Earn-outs can be tied to achieving development milestones, securing customer contracts but if earn-outs are based on the financial statements, then the higher up the income statement (i.e. sales vs. profit) the better… less room for manipulation. From a legal perspective it is important that purchase and sale contracts are clear, account for all possible scenarios, and that security is properly perfected in all relevant jurisdictions.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Un(der)secured notes and earn-outs can get very complex and this is where experienced advisors and lawyers really earn their stripes.<o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="color: purple;">Derek van der Plaat</span></span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="color: purple;">Veracap Corporate Finance</span></span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com0tag:blogger.com,1999:blog-6748342871845008519.post-28844559208117885202012-09-13T18:02:00.002-04:002012-09-13T18:04:02.280-04:00A Multiple of What (and When)? <div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">I discussed the pitfalls of relying on publicly available value comparisons in a <a href="http://derekvanderplaat.blogspot.ca/2012/07/hi-there-buyers-are-currently-paying.html">recent post</a> but what if an owner of a similar business to yours says “I sold my business at a 10 times multiple!”? or you hear, the tech sector is trading at a 25 multiple.<span style="mso-spacerun: yes;"> </span>Early stage companies trade at 2 to 3 times.<span style="mso-spacerun: yes;"> </span>The question is a multiple of what?<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">For public companies the most noted multiple is that of after tax net income.<span style="mso-spacerun: yes;"> </span>For early stage companies it is quite often a multiple of revenues because, either they are not profitable or, they are in high growth mode, where profit levels are depressed as a result of higher than long-term average spending on R&D and product/service marketing.<span style="mso-spacerun: yes;"> </span>For established private companies, the most commonly cited valuation metric is a multiple of EBITDA.<span style="mso-spacerun: yes;"> </span><o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">EBITDA stands for Earnings Before Interest, Taxes and Depreciation and it allows for </span><span lang="EN" style="font-family: 'Arial','sans-serif'; font-size: 11pt; mso-ansi-language: EN;">comparison of profitability by canceling the effects of different asset bases (by cancelling depreciation), different takeover histories (by cancelling amortization often stemming from goodwill), effects due to different tax structures as well as the </span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">effects of different capital structures (by cancelling interest payments).<span style="mso-spacerun: yes;"> </span>The drawbacks of using EBITDA are that it doesn’t account for maintenance/required capital expenditures (CAPEX) to sustain the business and, because it is a non-GAAP metric, it is often presented on an adjusted basis excluding (sometimes questionable) one-time items thereby boosting profitability. <o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">The relationship of an EBITDA multiple to other multiples can vary widely across industries.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span>For consulting or software companies, that typically don’t or can’t carry long term debt and have little investment in fixed assets, EBITDA is often the same as earnings before tax.<span style="mso-spacerun: yes;"> </span>For capital intensive companies, an EBITDA multiple of five might be the equivalent to an EBIT multiple of seven.<span style="mso-spacerun: yes;"> </span>When we speak of a five times EBITDA multiple for a private company, the value may actually be the same as 15 or 20 times net income after tax for a profitable public company.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">The period the multiple applies to is also important. While valuation is conceptually a forward looking principle, the standard is to use a historical multiple as a result of the difficulty of predicting what the next 12 months of earnings might be.<span style="mso-spacerun: yes;"> </span>Some variants of timeframes used are “run-rate” (annualizing the last month or quarter), “latest twelve months” (LTM, typically calculated on a rolling four quarters basis), or last calendar or fiscal year.<span style="mso-spacerun: yes;"> </span>Why does the timeframe matter?<span style="mso-spacerun: yes;"> </span>Let’s look at a fast growing public company such as Apple.<span style="mso-spacerun: yes;"> </span>On August 20<sup>th</sup>, its market cap was approximately $620 billion.<span style="mso-spacerun: yes;"> </span>Its latest fiscal year ending (EBITDA was $35.5 billion and its 12 month consensus forecast EBTIDA was $55.8 billion.<span style="mso-spacerun: yes;"> </span>People will say Apple is trading at 17.5 times EBITDA but the more proper metric is that it is trading at 10.7 times forecast EBITDA, a difference of 70%.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Finally, in addition to the specifics around the multiple, there are many bigger picture questions such as: did the buyer assume the debt; were there working capital adjustments; was the amount paid in cash on closing or will it be paid over time? Different answers to such questions will also measurably impact the net multiple paid.<span style="mso-spacerun: yes;"> </span>So the next time someone tells you they sold their business for a great multiple, think about a multiple of what and when.<o:p></o:p></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Veracap Corporate Finance</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com0tag:blogger.com,1999:blog-6748342871845008519.post-9080152263967162762012-08-20T07:55:00.002-04:002012-08-22T11:34:47.014-04:00Winner’s Remorse: Does the M&A Process Lead Buyers to Overpay?<div style="text-align: left;">
<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">When managing a company divestiture, there comes a point when interested parties are requested to provide non-binding expressions of interest (this is the first indication of value based on reviewing the <a href="http://derekvanderplaat.blogspot.ca/2011/08/m-acronyms.html" target="_blank">CIM</a> and answering select questions, see: <a href="http://derekvanderplaat.blogspot.ca/2011/08/when-and-how-much-information-do-i.html" target="_blank">How Much Information (and when) Do I Share With Potential Buyers?</a> ).<span style="mso-spacerun: yes;"> </span>An expression of interest outlines a value range, structure and other criteria, on which potential buyers are prepared to move forward.<span style="mso-spacerun: yes;"> </span>It is requested so as not to waste the seller’s time with potential offers that will not meet the needs of the seller.<span style="mso-spacerun: yes;"> </span>When there are multiple expressions of interest for a company, they typically form a normal curve around the company’s <a href="http://derekvanderplaat.blogspot.ca/2011/09/what-will-strategic-buyer-pay.html" target="_blank">notional value</a>.<span style="mso-spacerun: yes;"> </span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCKsnZd8AUuF25ser2jddXyyY40hv0wrKGiH7k5dmkTztimaowFXE8Zk-bcdePhOxPFCrtwi5WQtgW9_m1hikyqF4oFwxHYtfzQTHv-xM0hmwFS8jSHEpQIW_GPGhYMdr5vjCku19McEoc/s1600/EI+Normal+curve.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="258" mda="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCKsnZd8AUuF25ser2jddXyyY40hv0wrKGiH7k5dmkTztimaowFXE8Zk-bcdePhOxPFCrtwi5WQtgW9_m1hikyqF4oFwxHYtfzQTHv-xM0hmwFS8jSHEpQIW_GPGhYMdr5vjCku19McEoc/s400/EI+Normal+curve.jpg" width="400" /></a></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Non strategic/financial buyers are typically at or below notional value (E1..E4) and strategic buyers are typically at or above the notional value (E4..E7).<span style="mso-spacerun: yes;"> </span>The parties engaged to go forward in the process will be the ones above notional value (E6..E7) suggesting that they may be ready to pay a higher price than fair value, however, fair value is very much in the eye of the beholder.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">A strategic buyer may pay more than the notional value for a business for reasons of competitive strategy (i.e. prevent your competitor from strengthening its footprint) or when the seller has certain assets that complement the buyer’s assets thereby allowing for the potential to create value through synergies. The value of a business is different to every potential buyer.<span style="mso-spacerun: yes;"> </span>To a financial buyer (one that does not have the potential for synergies, but may nevertheless be able to bring special expertise to the table) a business may be worth the notional value which maybe six times EBITDA, generating a 17% non-levered ROI (maybe more<span style="mso-spacerun: yes;"> </span>than 30% with 50% debt); but a strategic buyer could pay seven times EBITDA and expect to generate even more based on synergies.<o:p></o:p></span></div>
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<span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">So does the M&A process lead buyers to overpay?<span style="mso-spacerun: yes;"> </span>Not necessarily; the process extracts the highest price for the seller by appealing to potential buyers that will benefit most from the purchase.<span style="mso-spacerun: yes;"> </span>The buyer has to weigh the risks and benefits of the price they will pay versus not getting the business. Overpayment has been in the news lately with HP writing off $8 billion of goodwill from its $13 billion acquisition of EDS and Microsoft writing off $6.2 billion of goodwill in its Online Services Division where it houses the acquisition of aQuantive (which it acquired for <span style="mso-spacerun: yes;"> </span>just over $6.3 billion).<span style="mso-spacerun: yes;"> </span>The onus is on the buyer to correctly estimate the realisable cashflow from a purchase and then to execute on its plan.<span style="mso-spacerun: yes;"> </span>Many things can go wrong in execution but the fact remains that if there is more than one buyer at the table it is highly likely that the winner will have paid more than notional value.<br /><o:p></o:p></span></div>
</span><span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;"><span style="color: purple;">Derek van der Plaat</span></span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: 'Arial','sans-serif'; font-size: 11pt;">Veracap Corporate Finance</span></a></span><span lang="EN-CA" style="font-family: 'Arial','sans-serif'; font-size: 11pt;"> in Toronto.<o:p></o:p></span>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-79258071070892490262012-08-12T13:08:00.004-04:002012-08-12T16:05:47.700-04:00More Thoughts on Price Expectations<div style="text-align: justify;">
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<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">I <a href="http://derekvanderplaat.blogspot.ca/2012/07/hi-there-buyers-are-currently-paying.html" target="_blank">noted recently</a> that it is very difficult to predict exactly
what a business’s selling price might be as a result of a well managed auction
between two or more highly motivated strategic acquirers.<span style="mso-spacerun: yes;"> </span>Outside of a competitive environment, a buyer
will pay based on historical performance and not the incremental value they believe
they can create.<span style="mso-spacerun: yes;"> </span>Competitive tension is the
situation M&A advisors seek to achieve and, personally, I have seen many competitive
situations result in very good prices for sellers of mid-market private
companies.<o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">Because it is hard to predict what
price might result, a discussion about price expectations should start with the
notional value (the price a proper valuation will assign a business independent
of what a particular strategic buyer might benefit from; see: <a href="http://derekvanderplaat.blogspot.ca/2011/09/what-will-strategic-buyer-pay.html" target="_blank"><span style="color: blue;">What Will a Strategic Buyer Pay?</span></a>) and then estimate the potential price increase
based on the selling company’s attributes (i.e. complementary customers,
products, brands, patents, etc.) and market attributes (no. of possible buyers,
their financial strength, growth rate of the sector, etc.).<span style="mso-spacerun: yes;"> </span>This typically results in an indicative
range.<o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">Discussing price expectations is a
delicate dance between being realistic and optimistic, between the likely and
the possible.<span style="mso-spacerun: yes;"> </span>Some sellers want to hear
a high number even if it is not likely achievable.<span style="mso-spacerun: yes;"> </span>Others will worry that if you don’t pitch a
higher sale price than the next advisor, you won’t fight for the best price on
their behalf. <span style="mso-spacerun: yes;"> </span>Sellers are often guided
by publicly announced data points. Headlines where one market leader buys
another for a tremendous amount (i.e. Facebook buys Instagram for $1 billion or
HP buys 3PAR for 11 times revenues).<span style="mso-spacerun: yes;">
</span>Such metrics don’t typically translate to smaller competitors yet, if
you don’t account for the leading transactions in a business development
presentation, you can be perceived as either not being in touch or not being
the aggressive marketer the seller is looking for.<span style="mso-spacerun: yes;"> </span>While I see the point, and I have lost
mandates where other advisors led selling companies to believe they would
achieve a higher sale price with them, I prefer to establish a reasonable
expectation and over-deliver rather than over-promise and under-deliver.<span style="mso-spacerun: yes;"> </span>The point I want to underscore here is that, regardless
of whether one advisor promises to deliver a higher price than the other, if
they both follow a thorough process and manage the auction as per the seller’s
guidelines then both should end up pretty much at the same price.<span style="mso-spacerun: yes;"> </span>Note, I say “as per the seller’s guidelines”
because often the seller will guide the M&A advisor in the direction of a
preferred buyer (and away from a potentially stronger but more hostile bid) for
various reasons.<span style="mso-spacerun: yes;"> </span>The point is, look to
the material differentiators between advisors such as integrity, sector
experience and international reach rather than promises of high prices.<o:p></o:p></span></div>
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<span style="font-family: "Arial","sans-serif"; font-size: 11pt;">I have talked before about aligning
seller and advisor interest through compensation based on a successful transaction.<span style="mso-spacerun: yes;"> </span>One mechanism that really awards over achievement
is setting a base compensation rate up to an agreed level and then providing a substantially
higher commission above that number.<span style="mso-spacerun: yes;"> </span>For
example, 3% up to $20M and 10% above that.<span style="mso-spacerun: yes;">
</span>If the company sells for $24 million the seller would have generated $4M
more than expected and the advisor would secure a healthy fee.<span style="mso-spacerun: yes;"> </span>I am happy to subscribe to such models but
the issue I have with them is that it is implicit in the arrangement that the
advisor would not push for $24M otherwise.<span style="mso-spacerun: yes;">
</span>The ideal situation is one where the seller has confidence in the
advisor to do everything he can and the advisor in fact does everything he
can.<span style="mso-spacerun: yes;"> </span>If you are more cynical than that
or need the additional assurance, then the extra incentive structure is
something that can work for you.<o:p></o:p></span></div>
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<a href="mailto:dvanderplaat@veracap.com"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="color: blue;">Derek van der Plaat</span></span></a><span style="font-family: "Arial","sans-serif"; font-size: 11pt;">, CFA has worked in
private market M&A for more than 20 years and is a Managing Director with </span><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: "Arial","sans-serif"; font-size: 11pt;"><span style="color: blue;">Veracap CorporateFinance</span></span></a><span style="font-family: "Arial","sans-serif"; font-size: 11pt;">
in Toronto.<o:p></o:p></span></div>
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</div><div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com0tag:blogger.com,1999:blog-6748342871845008519.post-63339700724192570522012-07-25T14:10:00.001-04:002012-07-30T09:58:48.671-04:00Veracap Technology Index Update<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">At Veracap we track Canadian mid-market public technology companies in an index called the Veracap Technology Index (the “VTI”, see <span lang="EN-CA"><a href="http://veracap.com/resources/newsletters" target="_blank">http://veracap.com/resources/newsletters</a></span>). The VTI includes all technology sector companies trading on the TSX and TSX-V with a market capitalization between $10 million and $500 million.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Recently we examined whether VTI companies generating strong margins were also the highest valued companies in the index and we concluded that largely they were. In the current issue we focus on growth; are faster growing companies trading at higher LTM EBITDA multiples than average growth companies. A number of initial observations should be noted as follows: (i) within the VTI more higher growth companies are trading on the TSX-V than the TSX, (ii) many high growth companies are not profitable and, (iii) very few companies have Analyst coverage providing earnings forecasts. As a result the best valuation comparison metric will be a multiple of LTM revenues. We looked at average two year historical revenue growth and the following summarizes our findings:</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Average 2 year revenue growth</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Median LTM revenue multiple</span></div>
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<tr style="mso-yfti-irow: 1;"><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 95.4pt;" valign="top" width="127"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: left; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">Bottom Quartile</span></div>
</td><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #ece9d8; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 88.1pt;" valign="top" width="117"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: center; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">-9.6%</span></div>
</td><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #ece9d8; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 95pt;" valign="top" width="127"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: center; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">0.9x</span></div>
</td></tr>
<tr style="mso-yfti-irow: 2;"><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 95.4pt;" valign="top" width="127"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: left; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">Second Quartile</span></div>
</td><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #ece9d8; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 88.1pt;" valign="top" width="117"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: center; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">5.0%</span></div>
</td><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #ece9d8; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 95pt;" valign="top" width="127"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: center; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">1.1x</span></div>
</td></tr>
<tr style="mso-yfti-irow: 3;"><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 95.4pt;" valign="top" width="127"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: left; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">Third Quartile</span></div>
</td><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #ece9d8; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 88.1pt;" valign="top" width="117"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: center; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">16.4%</span></div>
</td><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #ece9d8; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 95pt;" valign="top" width="127"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: center; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">1.1x</span></div>
</td></tr>
<tr style="mso-yfti-irow: 4; mso-yfti-lastrow: yes;"><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 95.4pt;" valign="top" width="127"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">Top Quartile</span></div>
</td><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #ece9d8; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 88.1pt;" valign="top" width="117"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: center; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">67.4%</span></div>
</td><td style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #ece9d8; border-right: windowtext 1pt solid; border-top: #ece9d8; mso-border-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 95pt;" valign="top" width="127"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: center; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">3.0x</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif; font-size: xx-small;">Note: due to the small sample size these findings are not statistically significant.</span><span style="font-family: Arial, Helvetica, sans-serif;"><br /></span></div>
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<br />
<span style="font-family: Arial, Helvetica, sans-serif;">The average two-year revenue growth rate in the top quartile is an impressive 67.4% per annum which is quite extraordinary and, as expected, this group trades at a substantially higher LTM revenue multiple. It is interesting to see that the middle quartiles are being valued the same and that even declining revenue companies are still trading close to 1x revenues.</span></div>
<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">Some of the stars in the top quartile <span style="font-family: inherit;">include</span> Bluedrop Performance Learning Inc., iSign Media Solutions Inc., Avigilon Corporation, Poynt Corporation, Amaya Gaming Group Inc., and ePals Corporation. Fifty-three percent of the top quartile companies were also profitable and the highest profit margins were generated by C-Com Satellite Systems Inc., Norsat International Inc. and Zedi, Inc.</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">As expected, high-growth VTI companies are trading at stronger revenue multiples than their moderate growth peers. While there is insufficient data to draw statistically significant conclusions, the following summarizes some of the parameters we have observed in the VTI as at July 1, 2012:</span></div>
<div style="text-align: center;">
<table border="1" cellpadding="0" cellspacing="0" class="MsoTableGrid" style="border-bottom: medium none; border-collapse: collapse; border-left: medium none; border-right: medium none; border-top: medium none; mso-border-alt: solid black .5pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; mso-yfti-tbllook: 1184;"><tbody>
<tr style="mso-yfti-firstrow: yes; mso-yfti-irow: 0;"><td style="background-color: transparent; border-bottom: black 1pt solid; border-left: black 1pt solid; border-right: black 1pt solid; border-top: black 1pt solid; mso-border-alt: solid black .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 147.8pt;" valign="top" width="197"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: left; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">No. of companies</span></div>
</td><td style="background-color: transparent; border-bottom: black 1pt solid; border-left: #ece9d8; border-right: black 1pt solid; border-top: black 1pt solid; mso-border-alt: solid black .5pt; mso-border-left-alt: solid black .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 79.8pt;" valign="top" width="106"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: left; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">70</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">Avg. Market Cap</span></div>
</td><td style="background-color: transparent; border-bottom: black 1pt solid; border-left: #ece9d8; border-right: black 1pt solid; border-top: #ece9d8; mso-border-alt: solid black .5pt; mso-border-left-alt: solid black .5pt; mso-border-top-alt: solid black .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 79.8pt;" valign="top" width="106"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: left; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">$82.3 Million</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">% profitable</span></div>
</td><td style="background-color: transparent; border-bottom: black 1pt solid; border-left: #ece9d8; border-right: black 1pt solid; border-top: #ece9d8; mso-border-alt: solid black .5pt; mso-border-left-alt: solid black .5pt; mso-border-top-alt: solid black .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 79.8pt;" valign="top" width="106"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: left; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">50%</span></div>
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<span style="font-family: Arial, Helvetica, sans-serif;">% Growing > 10%</span></div>
</td><td style="background-color: transparent; border-bottom: black 1pt solid; border-left: #ece9d8; border-right: black 1pt solid; border-top: #ece9d8; mso-border-alt: solid black .5pt; mso-border-left-alt: solid black .5pt; mso-border-top-alt: solid black .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 79.8pt;" valign="top" width="106"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: left; text-indent: 0in;">
<span style="font-family: Arial, Helvetica, sans-serif;">47%</span></div>
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<span lang="EN-CA" style="font-family: Arial, Helvetica, sans-serif;"><a href="mailto:dvanderplaat@veracap.com">Derek van der Plaat</a></span><span style="font-family: Arial, Helvetica, sans-serif;"><span lang="EN-CA">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://veracap.com/our-firm/people/derek-van-der-plaat" target="_blank">Veracap Corporate Finance</a></span><span lang="EN-CA"> in Toronto.</span></span></div>
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<br /></div><div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com0tag:blogger.com,1999:blog-6748342871845008519.post-4114358269013212572012-07-06T09:49:00.003-04:002012-08-12T12:14:23.547-04:00Buyers are Currently Paying High Prices for Businesses Like Yours<div style="text-align: justify;">
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">My previous post was about M&A advisors saying they personally know buyers in a sector.<span style="mso-spacerun: yes;"> </span>Another tactic that gets potential sellers’ attention is to say buyers are currently paying high prices in a particular sector.<span style="mso-spacerun: yes;"> </span>For example, after Facebook offered $1 billion for Instagram, advisors might approach other photo sharing application companies and say, because Facebook offered $1 billion, there will be other buyers also interested in paying a high price for your company.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">When presenting their credentials, M&A advisors will often include market stats such as recent publicly available acquisition terms of similar businesses and a sample of comparable publicly traded valuation multiples (comp tables) to provide a potential seller with a basis for value expectations and engage the potential seller in a value discussion. </span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">While recent transactions and comp tables can be helpful to show broad trends, interpreting them to determine expected sale price is fraught with pitfalls.<span style="mso-spacerun: yes;"> </span>When comparing your company to recent sale transactions you need to examine many possible differences in company risk and future prospects.<span style="mso-spacerun: yes;"> </span>The following are just some of the questions that should be considered: is the company in question of the same size, does it have more or less customers, does it have patents, a defensible product/service differentiator, are the margins the same, historical growth rate, is there debt or redundant assets, was the debt included in the sale, etc.<span style="mso-spacerun: yes;"> </span>In the case of publicly traded company valuation multiples, it must be recognized that these represent shares trading at a minority discount (a minority discount applies because, as a single shareholder of a public company, you have little influence over its corporate decisions), control blocks typically sell for 30% to 50% more.<span style="mso-spacerun: yes;"> </span>There is an old statistics joke that goes as follows:<span style="mso-spacerun: yes;"> </span>“he uses statistics like a drunken man uses a light post, for support rather than illumination.”<span style="mso-spacerun: yes;"> </span>Recent transactions and comp tables can be used in the same way.<span style="mso-spacerun: yes;"> </span></span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">Keeping in mind that recent/current market activity can only be a rough guideline and that no one can predict what the results of a well managed auction between two or more motivated strategic acquirers will be, it is nevertheless imperative that the seller and the M&A advisor agree on the expected sale price range before the divestiture process begins.<span style="mso-spacerun: yes;"> </span>The best way to align the seller’s and advisor’s interests is to agree that the bulk of the advisor’s compensation be tied to achieving the mutually agreed sale price range (having said that, I also think it is fair that the advisor receive some level of work fees in order for him/her to get comfort that the seller is taking the process seriously - however this work fee should be credited towards the success fee).</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">To put it kindly, M&A advisors will put their best foot forward in their presentations to convince sellers to use their services and, as usual, it is a case of buyer beware.<span style="mso-spacerun: yes;"> </span>Don’t believe all that you hear and see and look beyond the pitch to the firm’s history, reputation and particularly the lead banker’s character.<span style="mso-spacerun: yes;"> </span>At the risk of sounding like a broken record, only by going to market with an experienced advisor who (i) understands the business and has presented the opportunity strategically, (ii) conducts a thorough process and, (iii) has the time and interest to put your company first, can you secure the best price for your company.</span><span style="font-family: "Arial", "sans-serif"; font-size: 11pt; mso-ansi-language: EN-US;"></span></div>
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<span lang="EN-CA"><a href="mailto:dvanderplaat@veracap.com"><span style="font-family: "Arial", "sans-serif"; font-size: 11pt;">Derek van der Plaat</span></a></span><span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">, CFA has worked in private market M&A for more than 20 years and is a Managing Director with </span><span lang="EN-CA"><a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="font-family: "Arial", "sans-serif"; font-size: 11pt;"><span style="color: purple;">Veracap Corporate Finance</span></span></a></span><span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;"> in Toronto.</span></div>
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</div><div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-6678407091726915702012-06-28T09:09:00.000-04:002013-04-18T09:31:42.992-04:00I Have a Buyer for your Business<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">My previous post was about niche businesses and those owner-entrepreneurs wondering if there could be more than one buyer for their business.<span style="mso-spacerun: yes;"> </span>There are other sectors that include many competitors.<span style="mso-spacerun: yes;"> </span>Just within the IT sector I am thinking of Cisco resellers, Microsoft SharePoint or Dynamics shops, IT solutions companies focused on virtualization and cloud strategies.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">Some M&A advisors will approach companies in these sectors and say “I have several buyers for your business. <span style="mso-spacerun: yes;"> </span>In fact I know the CEO of ABC Co. and the CEO of XYZ Co., they are good friends of mine and they are keen to buy your business”. <span style="mso-spacerun: yes;"> </span>Some business brokers will say they have 100’s of buyers ready to go BUT the likelihood that these are really strategic and actually able to acquire is very small.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">So, how do you separate fact from fiction and secondly, how important are buyer relationships?<span style="mso-spacerun: yes;"> </span></span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">Recently closed transactions in the space and client references from those deals (see <a href="http://veracap.com/experience/transactions" target="_blank">veracap.com/experience/transactions</a> and <a href="http://veracap.com/experience/testimonials" target="_blank">veracap.com/experience/testimonials</a>) are verifiable evidence of capability and up-to-date market knowledge.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">However, they should not be the only factor in choosing an investment banker to advise in the sale of a business.<span style="mso-spacerun: yes;"> </span>Having done deals in a sector renders the mandate more efficient for the advisor by: (i) knowing up-to-date acquisition terms and pricing and (ii) the appetite and ability of potential buyers, but securing a number of desirable offers is ultimately what the seller is looking for.<span style="mso-spacerun: yes;"> </span>To achieve that you need an advisor who will work tirelessly on your behalf, not just forward the first offer received and pressure the seller to take it.<span style="mso-spacerun: yes;"> </span>You need a company champion who will spend the time, leave no stone unturned and who will fight for your best interest.<span style="mso-spacerun: yes;"> </span>Having done deals in the sector may lead to short-cutting the process believing that certain companies are active buyers and others are not buyers at all. Such assumptions will limit the potential that could otherwise be achieved.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">As I have noted several times, the best buyer is not likely to be a direct competitor (who could not pay a strong price if they were just interested in acquiring the customer base) but a “platform buyer”.<span style="mso-spacerun: yes;"> </span>A platform buyer will be interested in the business for one of three reasons, its customers, its personnel, or its technology. Platform buyers are good buyers because they typically leave the existing assets in tact (brands, people) and usually bring a growth opportunity that allows them to pay a good price and provides the company sold with new opportunities.</span></div>
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<span style="font-family: "Arial", "sans-serif"; font-size: 11pt; mso-ansi-language: EN-US;">So should buyer relationships drive your choice in investment bankers?<span style="mso-spacerun: yes;"> </span></span><span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">An advisor knowing a CEO who wants to buy your business (even if for argument’s sake that company is Cisco or Oracle – pick any leader in its space) does not guarantee a good price or even a good offer.<span style="mso-spacerun: yes;"> </span>Only by going to market with an experienced advisor who (i) understands the business and has presented the opportunity strategically, (ii) conducts a thorough process and, (iii) has the time and interest to put your company first, can you secure the best price for your company.</span><span style="font-family: "Arial", "sans-serif"; font-size: 11pt; mso-ansi-language: EN-US;"></span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;"><a href="mailto:dvanderplaat@veracap.com">Derek van der Plaat</a>, CFA has worked in private market M&A for more than 20 years and is a Managing Director with <a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat"><span style="color: purple;">Veracap Corporate Finance</span></a> in Toronto. </span></div>
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<div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com1tag:blogger.com,1999:blog-6748342871845008519.post-55832504674063529852012-06-01T10:45:00.000-04:002012-06-04T11:12:28.272-04:00Is There More Than One Buyer For My Business?<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span lang="EN-CA" style="font-family: Arial, sans-serif; font-size: 11pt;">I have come across several niche businesses lately where they have received unsolicited interests from potential buyers and this leaves the owners wondering, are there any other buyers for my business? Should I bother with hiring an agent and engaging in a process that could take many months to complete or take the bird in the hand?</span></div>
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<span lang="EN-CA" style="font-family: Arial, sans-serif; font-size: 11pt;">If these companies were publicly traded there would be no question. The board of directors of a public company would undoubtedly reject the first unsolicited offer and engage an investment bank to explore alternatives. Assuming normal operating circumstances, a board would not fulfill its fiduciary duty if it accepted the first bid. Due process would require at least an independent fairness opinion, but even this would not assure the shareholders that they will realize the highest share price in a transaction; only a thorough and diligent auction process can do that.</span></div>
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<span lang="EN-CA" style="font-family: Arial, sans-serif; font-size: 11pt;">Back to the question at hand; could there be other buyers? When a potential seller operates in a very specialized vertical with only several competitors - that may spread unfounded rumours of the company’s demise as soon as they hear of a possible transaction - it is tempting to go with the bird in the hand. But, as I have noted several times, the best buyer is not likely to be a direct competitor.</span></div>
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<span lang="EN-CA" style="font-family: Arial, sans-serif; font-size: 11pt;">The best buyer is likely to be a “platform buyer”. A platform buyer will be interested in the business for one of three reasons, its customers, its personnel, or its technology. As an example, we were engaged to sell a pattern recognition technology company in the field of product quality control. This technology would scan a production line and “kick-out” products that did not meet certain criteria. In this case, the ultimate buyer was the US defence department, who paid a strong premium for the business and then used the technology for facial recognition for national security purposes. Who would have predicted that? ... but having approached large technology companies that also served defence contractors ultimately led to this outcome.</span></div>
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<span lang="EN-CA" style="font-family: Arial, sans-serif; font-size: 11pt;">The point is, even if you feel that there are only one or two competitors that could potentially be interested in acquiring your company, we can likely find additional buyers that you have never thought of as per the example above. It is extremely rare that we have not been able to source at least several expressions of interest for a company for sale. In the end you only need two interested parties to create that competitive tension.</span></div>
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<span lang="EN-CA" style="font-family: Arial, sans-serif; font-size: 11pt;">So what is a company to do? Private companies, where owner-entrepreneurs own majority control can do as they please. This is the luxury of owning a private company. Company owners may not want the hassle of preparing a business for sale or they may feel the value being discussed is fair but, in the end, going to market with an experienced advisor is the only way to secure the best price for your company.</span></div>
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<span lang="EN-CA" style="font-family: Arial, sans-serif; font-size: 11pt;"><a href="mailto:dvanderplaat@veracap.com">Derek van der Plaat</a>, CFA has worked in private market M&A for more than 20 years and is a Managing Director with <a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat"><span style="color: purple;">Veracap Corporate Finance</span></a> in Toronto.</span></div>
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</div><div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com2tag:blogger.com,1999:blog-6748342871845008519.post-52058193044149669422012-05-24T08:51:00.001-04:002012-05-24T09:29:56.116-04:00Is the IPO Window Open... and Why Does it Matter?<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span style="font-family: "Arial", "sans-serif"; font-size: 11pt; mso-ansi-language: EN-US;">I have spoken before about IPO windows; when they are open, an IPO is possible and when they are closed it is not.<span style="mso-spacerun: yes;"> </span>We have seen a number of high-profile digital media IPOs over the last year including LinkedIn, Groupon, Zynga and Facebook.<span style="mso-spacerun: yes;"> </span>While most of these issues “popped” on their opening day, Facebook notably did not.<span style="mso-spacerun: yes;"> </span>LinkedIn was up 109% on its first day; Facebook closed pretty much even.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgonZ8WSxJpHkaT5TSuNKpHhDb7R6scj7nsu331zJUUdFo0UbnxUT622WUdf7EwSuox0YbhhPuTgl3i0RgY8OxQ-_klwlrPYupi_1FJGwE9CzxEG2YQY_Bz5vZPQhSL5BxUqrMrXDpBUdtd/s1600/IPO.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="111" qba="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgonZ8WSxJpHkaT5TSuNKpHhDb7R6scj7nsu331zJUUdFo0UbnxUT622WUdf7EwSuox0YbhhPuTgl3i0RgY8OxQ-_klwlrPYupi_1FJGwE9CzxEG2YQY_Bz5vZPQhSL5BxUqrMrXDpBUdtd/s400/IPO.jpg" width="400" /></a></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">Of the seven well publicised IPOs listed above, only two were trading above their IPO price as of May 22, 2012.<span style="mso-spacerun: yes;"> </span>It is interesting to note that the richest IPO (as measured by the highest multiple of LTM revenues), actually performed the best and more than 100% revenue growth has now pushed this multiple down from over 30 at the IPO to 17 as at May 22 (still very high).</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">An open IPO window is a symbol of general health in the financing markets.<span style="mso-spacerun: yes;"> </span>IPO’s return cash to VCs who then continue to invest in private companies, and they provide the now public companies with cash and a currency for acquisitions.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">It should be pointed out though that the window is not open for all companies.<span style="mso-spacerun: yes;"> </span>There are many sectors that have a tough time raising capital right now including base metal companies, solar companies and smaller companies in general.<span style="mso-spacerun: yes;"> </span>The IPO window often shuts quickly as a result of a disastrous event or as bubbles collapse (mortgage crisis in 2008, twin tower attacks and Greece leaving the EU may do it this time).</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">With Facebook not outperforming on its opening day, the S&P500 down over 8% since early April and the EU not taking any concrete action on its Greece and Spain challenges, is the IPO window still open?<span style="mso-spacerun: yes;"> </span>I would have to yes, but not very far.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;"><a href="mailto:dvanderplaat@veracap.com">Derek van der Plaat</a>, CFA has worked in private market M&A for more than 20 years and is a Managing Director with <a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat"><span style="color: purple;">Veracap Corporate Finance</span></a> in Toronto.</span></div>
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<br /></div><div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com0tag:blogger.com,1999:blog-6748342871845008519.post-75931641053737253492012-05-03T15:44:00.003-04:002012-05-04T09:24:41.205-04:00Is Instagram Worth 1 Billion… only to Facebook<div class="MsoNormal" style="line-height: normal; margin: 0in 0in 6pt; text-align: justify; text-indent: 0in;">
<span style="font-family: "Arial", "sans-serif"; font-size: 11pt; mso-ansi-language: EN-US;">I ended my last post with the comment “at Facebook's estimated $100 billion valuation, </span><span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">there is a lot of room to pay a lot of money.”<span style="mso-spacerun: yes;"> </span>What this speaks to is the notion of accretive acquisitions.<span style="mso-spacerun: yes;"> </span>Companies want their acquisitions to be accretive because of a somewhat flawed notion that if you buy a company at a lower multiple of earnings than your own, then the valuation of the acquirer will get a lift as the combined earnings continue to benefit from the acquirer’s multiple (it is flawed because this ignores the impact of the target’s risk profile).</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">As a quick example: if the acquirer trades at 20 times net income of $10M (i.e. an enterprise value of $200M) and the target is purchased at 10 times net income of $1M (a price of $10M), then the combined enterprise generates $11 million (excluding possible cost savings from the combination) and, with the same multiple of 20, the enterprise value is now $220M.<span style="mso-spacerun: yes;"> </span></span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">Most acquisitions are accretive, however in the case of Instagram, whether it was profitable or not probably wouldn’t have had much impact.<span style="mso-spacerun: yes;"> </span>The metric that is driving Facebook’s valuation right now is not net income but user base and user growth, and on this front, Instagram generated over 30 million users in its first two years of operations.<span style="mso-spacerun: yes;"> </span></span><span style="font-family: "Arial", "sans-serif"; font-size: 11pt; mso-ansi-language: EN-US;">Facebook has more than 800 million daily active users and it is worth approximately $100 billion, so approximately $125 per user. When you apply this metric to Instagram (30M times $125), then Instagram would be worth $3.75 billion.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">I noted in my last post that reasons for Facebook wanting to acquire Instagram could include: to improve its mobile revenues (of which it had none), to eat Twitter’s lunch, to eliminate a potential future competitor, and basically to maintain its growth and market value momentum.<span style="mso-spacerun: yes;"> </span>Now you can see the last point is well validated.</span><span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt; mso-ansi-language: EN-US;"> </span><span style="font-family: "Arial", "sans-serif"; font-size: 11pt; mso-ansi-language: EN-US;">This example illustrates the “value-to-the-buyer” which is not the amount buyers want to pay unless they are forced to in a competitive bidding environment.<span style="mso-spacerun: yes;"> </span>In the end no other company had the room in the value-to-the-buyer to compete with Facebook.</span></div>
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<span style="font-family: "Arial", "sans-serif"; font-size: 11pt; mso-ansi-language: EN-US;">To conclude, the typical valuation metric is a multiple of net income or free cashflow but in some cases it can be revenues or market penetration or subscriber growth.<span style="mso-spacerun: yes;"> </span>In any case, most acquisitions are accretive with respect to the relevant valuation metric and in all cases the price is less than the value to the buyer.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;"><a href="mailto:dvanderplaat@veracap.com"><span style="color: purple;">Derek van der Plaat</span></a>, CFA has worked in private market M&A for more than 20 years and is a Managing Director with <a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="color: purple;">Veracap Corporate Finance</span></a> in Toronto.</span></div><div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com0tag:blogger.com,1999:blog-6748342871845008519.post-86190394503419359372012-04-12T10:43:00.002-04:002012-05-04T09:20:30.156-04:00Why is Instagram Worth 1 Billion?<div style="text-align: justify;">
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">There are many reasons why Facebook would pay a lot of money for Instagram.<span style="mso-spacerun: yes;"> </span>Reasons such as: to improve its mobile revenues (of which it had none), to eat Twitter’s lunch, to eliminate a potential future competitor, and basically to maintain its growth and market value momentum.<span style="mso-spacerun: yes;"> </span>Remember, Facebook is the internet's largest photo sharing site and it knows the power of photos very well but what I really want to tackle here is why 1 billion as opposed $500 million?</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">The simple answer is it was a privately negotiated transaction and </span><span style="font-family: "Arial", "sans-serif"; font-size: 11pt; mso-ansi-language: EN-US;">Instagram had just recently raised money from Sequoia Capital at a reported $500 million valuation, so they weren’t going to sell for less.<span style="mso-spacerun: yes;"> </span>Well done to get to 1 billion.<span style="mso-spacerun: yes;"> </span>This means that Sequoia Capital and other firms that contributed money were essentially able to double their money in a very short timeframe.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">Prior financing round valuations and existing investors’ requirements are value pegs but here is some theory around what price is possible.<span style="mso-spacerun: yes;"> </span>In cases like this companies are paying a scarcity premium.<span style="mso-spacerun: yes;"> </span>The argument being that, either by way of market position (i.e. if all your friends are on Facebook there is no point being on Orkut) or by way of proprietary technology, these targets have something the acquirer can only attain by buying them.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">At this point a buyer is paying a price beyond the notional value of the target and encroaching on the value to the buyer.<span style="mso-spacerun: yes;"> </span>The notional value is a company’s value independent of the potential strategic benefits to a particular buyer.<span style="mso-spacerun: yes;"> </span>The value to the buyer is that amount of value the acquirer can produce with the target.<span style="mso-spacerun: yes;"> </span>Not something they typically pay for unless forced to in a competitive situation.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">To consider this by way of a generic example, let’s assume a billion dollar revenue company is paying 10 times revenue for an early stage company generating $1 million in revenues.<span style="mso-spacerun: yes;"> </span>The target company’s technology will allow the billion dollar revenue company to increase its market share by 10%; a value of $100 million in revenues.<span style="mso-spacerun: yes;"> </span>You can understand why the acquirer might pay $10 million for this company.</span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;">The conclusion is that a buyer paying a price below the value to the buyer is something that makes economic sense, even though the price may sound astronomical…. and if you are being approached by Facebook (estimated value of $100 billion) then there is a lot of room to pay a lot of money.<span style="mso-spacerun: yes;"> </span>In my next post I will examine what Facebook could have paid.</span><span style="font-family: "Arial", "sans-serif"; font-size: 11pt; mso-ansi-language: EN-US;"></span></div>
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<span lang="EN-CA" style="font-family: "Arial", "sans-serif"; font-size: 11pt;"><a href="mailto:dvanderplaat@veracap.com"><span style="color: purple;">Derek van der Plaat</span></a>, CFA has worked in private market M&A for more than 20 years and is a Managing Director with <a href="http://www.veracap.com/our-firm/people/derek-van-der-plaat" target="_blank"><span style="color: purple;">Veracap Corporate Finance</span></a> in Toronto.</span></div>
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</div><div class="blogger-post-footer">Copyright 2011 Derek van der Plaat. All rights reserved.</div>Derek van der Plaat, CFAhttp://www.blogger.com/profile/15231527673771815663noreply@blogger.com0