Business Analysis Skills
Sealing the offer is the simple part. But comes homework first. Here’s how to calculate your target’s stand-alone value. Deal making is attractive; due diligence is not. That easy statement goes quite a distance toward explaining why so many companies have made so many acquisitions that have produced so little value.
What can companies do to boost their homework? To answer that question, we’ve taken a detailed take a look at twenty companies-both public and private-whose transactions have shown high-quality due diligence. We calibrated our results against our experiences in 2,000-odd offers we’ve screened over the past a decade. We’ve discovered that successful acquirers view due diligence as a lot more than a fitness in verifying data. While each goes through the numbers and thoroughly deeply, they alsoput the broader, strategic rationale for his or her acquisitions under the microscope. They go through the business case in its entirety, probing for strengths and weaknesses and searching for unreliable assumptions and other defects in the reasoning.
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The successful acquirers, we examined were all constant in their method of due diligence. What exactly are we buying really? What’s the target’s stand-alone value? Where will be the synergies-and the skeletons? What’s our walk-away price? What is the target’s stand-alone value? The wheels of the acquisition are turning Once, it becomes difficult for mature managers to step on the brakes; they become too invested in the deal’s success.
Here, again, homework should play a critical role by imposing objective discipline on the financial aspect of the procedure. What you find in your bottom-up evaluation of the mark and its industry must translate into concrete benefits in revenue, earnings, and cost, and, ultimately, cash flow. At the same time, the target’s books should be rigorously examined not merely to verify reported amounts and assumptions but also to look for the business’s true value as a stand-alone concern.
The vast majority of the purchase price you pay displays the business as is, much less it could be once you’ve won it. Too often the reverse is true: The basics of the business for sale are unattractive in accordance with its price, so the search begins for synergies to justify the offer.
Of course, identifying a company’s true value is simpler said than done. Stuffing distribution stations to inflate sales projections. For example, an organization may treat as market sales many of the products it sells to distributors-which may not represent repeating sales. Using overoptimistic projections to inflate the expected results from purchases in new systems and other capital expenses.