Financial Factors: Profitability, liqudity, sales, market value. Show
Customer Factors: customer satisfaction, dealer and distrubitor, marketing and selling, timeliness of delivery, quality. Internal Business Processes: Quality, producitivity, felxibility, equipment readiness, safety. Learning and Growth: product innovation, timeliness of new product, skill development, employee morale, competence. During an M&A event it is vital that the buyer knows as much as possible about the likelihood of consistent future earnings of the target (seller’s) company. Typically, the parties start these discussions by using the target company’s EBITDA (earnings before interest, (income) taxes, depreciation, and amortization). Yet knowing a company’s EBITDA is not enough to ensure that future earnings potential of the target company will reach the buyer’s desired goals.EBITDA is used as the definition of earnings because it allows the seller’s performance to be measured and understood more easily, relative to other earnings measures. It also allows a company’s value to be considered separately from the influence of capital structure and certain accounting policies, which reflect management decisions that may vary greatly between the seller’s history and the buyer’s plans. Buyers, however, need to know much more about the sellers’ earnings than can be obtained by taking the reported information at face value. The buyer of a corporation expects to get a much clearer picture of the seller’s earnings by exploring the story behind those earnings. A prudent buyer performs a “quality of earnings analysis” of the seller to answer the question, “What makes this company’s earnings ‘quality?’” Among the characteristics to consider are these:
Free Cash Flow as an Indicator of Future Earnings EBITDA may be the driver of value, but it is important to understand fully the net working capital (NWC) requirements for the company to generate its earnings. The buyer needs a crystal clear picture of the reconciliation of the EBITDA to the free cash flow (FCF). The NWC requirements are the change in current assets minus the change in current liabilities. Current assets such as inventory and accounts receivable will typically increase as the company’s revenue grows, as will various current liabilities. The buyer must also gain an understanding of the cash flow levels that will be needed in order to fund its growth plans. For instance, will the buyer get the same trade terms and pricing from key suppliers that were available to the seller, or were special agreements in place that will not be continued? Will the buyer wish to modify any terms that the seller offered to its customers? What were the seller’s inventory policies, and will the buyer need to make substantial changes (positive or negative) to the inventory levels on hand? Furthermore, the buyer must factor in the capital expenditures required to sustain earnings in the future. For example, oil and gas production companies have significant capital spending budgets in order to sustain their earnings in the future. The cash spend for oil production is a major part of understanding the FCF for an oil and gas company. It will be important to understand the age, efficiency, and quality of the seller’s capital assets in order to confirm that those assets will continue to produce earnings for the company on an ongoing basis. The impact of revenue recognition could also cause issues with the buyer’s attempt to reconcile earnings to FCF. It is critical to have a clear understanding of the revenue recognition issues that might be present in the seller’s financials. Hidden Issues with a Seller’s Earnings Sustainability and Repeatability Earnings sustainability refers to the buyer’s ability to generate revenue consistently at the same level the seller has historically achieved, within the same cost structure. The following questions must be addressed to determine sustainability:
The buyer also need to evaluate the seller’s ability to repeat its earnings performance. The buyer should expect the seller to produce a forecast for at least the upcoming 12 months—a three-year forecast would also be a realistic expectation. This will be a good measure of the seller’s management’s ability to articulate its vision for the future and to recognize future events that could affect the company. During the process of evaluating the forecast, the buyer will have a good opportunity to assess the quality of the management team it will be inheriting. The seller’s earnings also typically have economic factors or other outside influences that impact the company’s performance. If the company is in an industry that relies heavily on commodity pricing, such as the oil services industry, the success of the company may be closely tied to the price of the related commodity. In summary, the quality of earnings analysis is a way to dig into each of the reported aspects of the seller’s operations and to understand in-depth the balance sheet accounts and the impact on the earnings and cash flows of the business. onec aliquet. Lorem ipsum dolor sit amet, consectetur adipiscing elit.
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molestie consequat, ultrices ac magna. Fusce dui Which of the following best describes the type of information that cost management must provide that is most important for the success of the organization quizlet?Which of the following best describes the type of information that cost management must provide that is most important for the success of the organization? Information that addresses the strategic objectives of the organization.
What is the goal of value chain analysis quizlet?The goal of value chain analysis is to find areas where a company can either add value or reduce cost. The value chain focuses on the entire production process, as well as the sale of the product and service after the sale.
Which of the following is the first step in managing the value chain?Research and Development. The first step in value chain management is researching the products your customers want. Through careful market analysis, including the measurement of consumer trends, companies can anticipate what people want and have those products available.
What does it mean for the balanced scorecard to reflect strategy quizlet?Terms in this set (12)
What does it mean for the balanced scorecard to "reflect strategy"? One should be able to infer an organization's strategy from the balanced scorecard.
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Which of the following financial critical success factors is measured by earnings from operations quizlet?
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