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Work Plan

The following are issues that management and the acquisition team should consider when trying to price, structure and implement a successful acquisition.

Market Analysis

The acquisition team should evaluate both the short- and long-term market potential for the combined company, including competitive pricing issues. This entails an analysis of the industry and competition, the forecasted demand for the combined company's services and a review of its potential customers. This analysis should be integrated into the revenue section of the financial model that is included in the information memorandum.

Suppliers

If the target manufactures different products than the acquirer, it will be necessary to assess the future availability of supplies required for those products and pricing trends. If a substantial amount of leverage is being used to make the acquisition, it is important to assess the probability of suppliers extending credit to the new leveraged company. The conclusions from this research should be integrated into the income statement as well as the balance sheet ratios of the financial model.

Facilities and Equipment

The acquisition team should evaluate the facilities and equipment of the target in order to determine what capital expenditures will be required following the acquisition. The conclusions from this research should be reflected in the capital expenditure section of the financial model.

Financial Modeling

In order to determine the amount and types of capital required for the acquisition, it is necessary to create a detailed financial model. This model will project the revenues, earnings and cash flows of the combined company and will account for any savings that are expected from combining the two businesses. The model should include a detailed income statement, balance sheet, cash flow statement, valuation and set of assumptions. Also, any changes to the cost structure resulting from head count reductions, increased purchasing power, access to new markets, etc. should be included and explained. The financial model will assist in evaluating the following issues:

Acquisition Viability

The model will help analyze the new company's prospects for raising and/or generating enough capital to properly invest in plants and equipment, service any debt and provide a market rate of return to any equity that may be needed to finance the acquisition.

Fair Market Value

While valuation analysis will guide you in determining a fair price for the target, the financial model will show if the acquisition makes financial sense. The model will show the effects of different capital structures, how much debt is prudent to finance the transaction and whether the acquisition is accretive under different operating scenarios.

Productivity Improvements and Cost Reductions

The acquisition team should evaluate whether productivity improvements and/or cost reductions will be required to successfully operate the new company. If these changes are necessary, the acquisition team should evaluate the potential areas where they can be attained, as well as their impact on the new company.

Acquisition Financing

The acquisition team should determine the structure of financing that will be required to support an acquisition at any given price, as well as the ability of the new company to meet these financial obligations in the future. Having a solid financial model will be imperative to accomplishing this. This analysis should evaluate what types of financing will be available to the acquirer and the price and terms of each type of capital.

Preliminary Valuation of the Target

The foremost question in the minds of all parties involved will be how much should be paid for the acquisition. Before presenting a letter of intent to acquire the target, valuation analysis must be done. There are many ways to value a company, and a number of methods should be used to determine the purchase price, including:

  • Public company comparable valuation
  • Comparable transaction valuation.
  • Discounted cash flow valuation.
  • Financial buyer valuation.

As mentioned above, an important tool in valuing the target is the financial model. The value of a company depends greatly on its future prospects, which will be illustrated by the model.

Submission of an Indication of Interest

If the acquirer chooses to proceed, the acquisition team should prepare and submit an indication of interest to the board of directors or the owner of the target. If the target is a private company, the owner will evaluate and negotiate the terms of the acquisition. If the target is a public company, the bid will go to the board of director's, whose fiduciary responsibility to the shareholders is to receive the best deal possible. Upon receipt of an unsolicited bid, the owner or the board has the option of soliciting competing bids.

Negotiation of the Letter of Intent

If an indication of interest has been submitted and the parties wish to enter into a letter of intent, the acquisition team should assist in negotiating the letter of intent. Major elements of the LOI include the proposed purchase price, the percent of the target being acquired, environmental indemnities if appropriate and the terms and dates of the exclusivity period. Following a signed LOI, the due diligence process will begin.

Raising Financing

The acquisition team should assist management in raising financing for the acquisition, including presentations to sources of senior debt, subordinated debt and equity, and assist in negotiating with financial institutions over the terms of the financing. This will occur simultaneously with the due diligence process.

Due Diligence

All parties interested in providing capital to the acquisition transaction will perform due diligence. The scope of the diligence will involve many aspects of the target's operations, including:

  • A financial audit.
  • Validating clients and markets for the target's products.
  • Legal diligence, such as contracts, bylaws, incorporation documents, etc.
  • Environmental liabilities.

Definitive Purchase Agreement

The acquisition team should assist management in negotiating the various contracts that establish the terms of the acquisition. These include:

  • The definitive purchase agreement.
  • Employment agreements with key managers at the target who are desired.

Coordination

As we have made clear, there are many players in an acquisition transaction. Designate the leader of the acquisition team to orchestrate the efforts of the financial institutions, partners or investors, valuation firms, accountants, legal counsels to the lenders, partners and investors and any other professional advisers who may be required for the transaction. This is often the investment banker. Management's focus should not be diverted from running its business and the strategic considerations of the acquisition effort.