As billionaire Warren Buffet once noted, "Price is what you pay. Value is what you get." Interested buyers, investors and bankers looking at new initiatives with companies often share similar objectives in 'kicking the tires' to be sure a target company has properly documented its business activities. On the other side of the transaction, the subject company's Founder, Board of Directors, CEO, Chief Financial Officer, Chief Operating Officer, Accounting and/or other departments can find themselves overwhelmed by the volume of documentation requests. Third parties can test the bounds of both courtesy and reasonableness before committing to and funding a new transaction.
Usually the outside party and target company will communicate well in advance of a discussed transaction to establish agreed ground rules for both confidentiality and venue regarding the exchange of background information. It is normally easier to request detailed information than it is to provide it, and so the playing field is not always even. Target companies which are already busy in managing their day-to-day businesses can face the added schedule burdens of re-examining past activities, as well as documenting them in new user-friendly or custom formats.
A prudent target company therefore should make preparations long before the data is even requested to assemble its core financial data and relevant operating histories and projections in readily available form, and as error-free as possible. Whether the data is assembled for a specific transaction or is otherwise prepared to accommodate a major exit strategy or similar 'liquidity event' for its owners, the goal is often the same. Communication is the key for both sides, and high-quality communication is essential. Advance preparation can make the difference in a successful transaction, especially in the accounting and legal departments where lead times define the critical path for document production. The merger & acquisition world has developed a useful warning for helping focus the parties at the table in many financial transactions: "Time kills all deals." In a busy world with many distractions, it is better to be prepared.
While broad-based historical data from the departments builds the necessary foundation, the ultimate success of the transaction is often based on the adequacy of future financial projections. Outside parties are typically skeptical of a company's internal projections. This is usually because of perceived bias, and because small changes in growth rates produce wide swings in present value. Very often, agreed growth rates can end up determining the final price or deal value. For the target company, fully defensible and detailed written assumptions about its growth prospects can help it survive withering questions and doubts from outside parties. Accordingly, the target company's management, corporate finance, and operations teams may choose to speak carefully on growth and related issues. In the end, a good historical foundation plus agreed growth can produce a successful close. There can be elements of math, science, sales and persuasion in the overall negotiation, because the future is important to both parties.
Douglas E. Johnston, Jr., is a C-Level executive with national experience in the core development of five 'best in class' companies in five different industries including Mergers & Acquisitions, Commercial Banking, Nationwide Commercial Real Estate, Consumer Products Manufacturing, and Media / Entertainment.
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