Financial Due Diligence
Strategies to Maximize Value of New Opportunities
Luyan Li
New Business Opportunities
• Transactional structures
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Going concerns
Fire sales
Debt financing
New & emerging markets
Licensing, collaboration and co-development joint ventures
• Pre-LOI engagement
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Core capabilities: patent, marketing and distribution channels
Potential synergies: economy of scale, product portfolio (bundling)
Market segment
Preliminary financial performance assessment
Culture
2
Due Diligence
• Competitive advantages of target business
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Alternative strategies
• Potential returns
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Future earnings and cash flow
Seller representations (offering memorandum, financial statements, emails, verbal)
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Accuracy and reliability
Realistic projections
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Sustainability and long term strategies
Working capital requirement
• Risk factors
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Capex
Market position
Stakeholder relationship
• Performance improvement
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Time frame
3
Due Diligence
• Engagement preparation
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Data and information
Field visit
Interviews
Analysis (Financial, SWOT)
Tax implications
Follow up discussions
4
Maximizing Value
• Normalized earnings
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Identify non-recurring events: discontinued operations, one-time event will not continue after closing
Shareholder compensation
Best/worst scenarios
Cost savings
Allowed addbacks: nonrecurring and extraordinary events
Inappropriate addbacks: best case adjustment, higher costs expected in ordinary course of business
• Trends and margins
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Product mix
Customers
Margins
SG&A analysis
5
Maximizing Value
• Conditions of assets and liabilities
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AR quality
Fixed assets quality
Inventory quality
Accruals
Business systems
Debt/stock structures
• Working capital requirement
• Benchmark
• Target working capital at closing
• Dollar for dollar working capital adjustment – ensure business operated as normal before closing
• Market comparisons
• Fair value and price allocation
6
7
Maximizing Value
• Economic income example
Discounted Economic Income
=
(1 + 20.00% )
Company Value
+
$1,500,000
0.5
+
$2,500,000
(1 + 20.00% )
1.5
+
$5,000,000
(1 + 20.00% )
2.5
3.5
+
$10,000,000
+
$7,500,000
(1 + 20.00% )
Terminal Period
Year 5
Year 4
Year 3
Year 2
Year 1
(1
+ 20.00% )
4.5
(1
$10,000,000
20.00%
(
(
1 +
=
$1,500,000
1.095
+
$2,500,000
1.315
+
$5,000,000
1.577
+
$7,500,000
1.893
+
$10,000,000
2.272
+
$11,283,085
0.170
2.488
=
$1,369,306
+
$1,901,814
+
$3,169,691
+
$3,962,113
+
$4,402,348
+
$26,673,051
=
$41,478,324
Considerations: Lack of Controll, Lack of Marketability
+ 3% )( + 20.00% )
- 3% )
20.00% )
5
0.5
Maximizing Value
• Contingencies
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Net sales realization
Resolution of litigations/settlement of disputes
Receipt of FDA approval/commercialization
Governance/significant influence
Credit covenant/leverage ratio
Product supply chains
8
Post-Acquisition Management
• Customer relationships maintenance and maximization
• Prioritization and communication
• Focus on customer connections
• Competitive edge
• Training and support
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Leadership and employee engagement
Organizational restructuring, interim and exit planning
Company purpose and policies
Value clarification
Unity and dedication
• Technology disruptions
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Integration and upgrade
Compliance costs
Real time data – information flow
Business support
Process efficiency
9
Post-Acquisition Management
• Key performance metrics
• Account mapping and reporting
• Internal control and financial transparency
• Measure and monitor productivity and financial
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Market expansion
COGS
Revenue per employee
SG&A per employee
Inventory Turnover
Cash to cash cycle: Days of Inventory + Days of AR – Days of AP
Fixed Asset Turnover
Return on Assets
• Goal achievement
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Re-assess assumptions and capabilities
Operational adjustments
Combined strength
Continuous improvement
10
11
Questions?