Chapter_16

Chapter_16 - ACQUIRING A FIRM TECHNICAL ASPECTS ACQUIRING A...

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ACQUIRING A  FIRM:  ACQUIRING A  FIRM:  TECHNICAL ASPECTS TECHNICAL ASPECTS     
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ACQUIRING A CLOSELY ACQUIRING A CLOSELY  HELD FIRM  HELD FIRM VALUING A CLOSELY HELD FIRM VALUING A CLOSELY HELD FIRM Need to calculate two values: The “ floor ” value The “ ceiling ” value
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ACQUIRING A CLOSELY ACQUIRING A CLOSELY  HELD FIRM  HELD FIRM Establishing the  Establishing the  “FLOOR”  “FLOOR”  valuation. Factors to think  about: Book value  - Does this say anything about the value of  the firm? Market value of assets   - Hard to ignore this. Replacement value  -Talked about by sellers but of no  practical importance. Liquidation Value  - Can be highly important; by itself  this is the “Real Bottom Price” if seller knows it.
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ACQUIRING A CLOSELY ACQUIRING A CLOSELY  HELD FIRM  HELD FIRM For the  FLOOR  value I recommend what I call  ADJUSTED BOOK VALUE” . Adjusted book value  is where you take an individual look at  each of the assets and liabilities and place “realistic” values on  these items. For example, A/R’s - delete slow pays and other questionable items. Inventory  - delete obsolete or very slow turnover items. Equipment - Give equipment liquidation value (or market  value if you really feel good about the equipment and you  really want to do the deal.)
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ACQUIRING A CLOSELY ACQUIRING A CLOSELY  HELD FIRM  HELD FIRM Adjusted Book Value - Continued Liabilities  - Delete such items as “Reserve  for Deferred Federal Income Taxes”;  may never have to be paid. Loan From Stockholder  - Usually delete  this as it represents “ de Facto ” equity of  the stockholder.
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ACQUIRING A CLOSELY ACQUIRING A CLOSELY  HELD FIRM  HELD FIRM THE     CEILING ” FOR THE PRICE IS: 1)  Either the present value of Earnings (or, Cash Flow)  or , 2) A multiple of   ADJUSTED EBIT  (or EBIT+  Depreciation), this multiple being somewhere between 2  and 9, with the range between 5 and 8 being modal in  today’s market. For middle market firms, the most common way to  value is the multiple of  ADJUSTED EBIT. 
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ACQUIRING A CLOSELY ACQUIRING A CLOSELY  HELD FIRM  HELD FIRM The importance of  ADJUSTING  EBITDA  - Closely held firms usually have a  number of expenses  that would be eliminated with the purchase of the  company by an outsider. Examples might be: relatives  on the payroll, perquisites that are redundant  ( airplanes, expensive cars, club memberships, etc. .),  inflated salaries and the like.
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This note was uploaded on 02/11/2012 for the course BUAD 497 taught by Professor Degravel during the Spring '07 term at USC.

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Chapter_16 - ACQUIRING A FIRM TECHNICAL ASPECTS ACQUIRING A...

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