Transparency Can Pad a Business's Price Tag
CRAIN'S CLEVELAND BUSINESS - Best Practices in M&A
Issued the week of January 16, 2017
By Mark B. Bober
Most studies suggest that 70% to 90% of acquisitions fail to generate the investment returns targeted by the acquirer. M&A has always been tricky business, but what can executives do to increase their odds of success?
The success rate is highly dependent upon a number of key components, including thorough up-front due diligence, the quality of the management team, culture assessment, in-depth understanding of the industry, and a comprehensive post-acquisition execution plan to generate whatever target returns are needed to pay for the acquisition.
That’s a lot of ground to cover, so let’s focus just on understanding the quality of earnings. During the pre-acquisition period, here are areas to assess:
- Commercial due diligence, including analysis of historical as well as projected revenue and margins by customer, channel, and originator;
- Analysis of fixed cost structure verses variable cost structure of business;
- Net working capital requirements historically as well as forecasted;
- Pro forma financial projections and the reasonableness of the underlying assumptions behind such projections;
- The appropriateness of revenue recognition and expense cut-off to assess its impact on income as reported;
- Adequacy of reserves for items such as doubtful accounts receivable, excess / obsolete inventory, warranty obligations, litigation exposures, etc.;
- The quality and adequacy of property, plant and equipment to assess the extent to which equipment requires replacement, deferred maintenance, or incremental capital expenditures to support growth;
- The quality and adequacy of the accounting and finance systems as well as the financial management team;
- Tax compliance and exposures in such regards.
Of course, workforce culture issues, legal and tax structure of the transaction, and other acquisition nuances are critical to understand before the deal is completed. Looking at any deal objectively, with these facts in hand, will go a long way to boost the odds that any deal is a win-win for both parties.
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