5 due dilligence
Post on 30-Jun-2015
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PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
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PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
DUE DILIGENCE
Important part of the transaction process Letter of Intent should be contingent upon due
diligence Due diligence activities are typically completed
prior to drafting of the purchase agreement and ancillary documents
Two way street – an opportunity for both buyer and seller due diligence
Due diligence service includes a thorough vetting financial, operation, cultural and other assumptions
Procedures may vary based upon nature of the transaction (i.e. asset or stock, earnout, etc.)
PRESENTED BY:
w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
Planning the Due Diligence Process Provide the Seller a comprehensive and
organized list of data requests, Be specific on the format that the data request
should be provided (i.e. Excel, Word, or PDF document),
Involve all functions in developing the data request and try to limit the amount of “additional” requests after the initial request,
Provide a sufficient amount of time for the seller to complete the list and populate a Data Room,
Typically onsite procedures would follow 2 to 3 weeks after initial data request is delivered
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
Due Diligence Logistics Discuss with Seller if employees are
aware of transaction & make sure this is communicated to all participants• Every situation is unique• No “right” answer
Onsite vs. offsite
Use of electronic Data Rooms to promote sharing of information
Use of internal and external parties
Timely turnaround to facilitate closing
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
Areas of Buyer Due Diligence on SellerShould be requested and procedures performed on most recent Trailing Twelve Months (“TTM”) data
1) Corporate Records & Organization,2) Securities,3) Regulatory Matters,4) Financial Data5) Book of Business & Operations,6) Real Property,7) Personal Property8) Debt Arrangements,9) Human Resources, 10) Insurance,11) Information Technology,12) Tax Matters,13) Litigation
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
Pro Forma Income Statement Revenue
Commission Revenue Revenue recognition
• Direct Bill – Cash‐basis• Agency Bill – Accrual‐basis
Reconciliation of revenue to production report Analyze new, lost, significantly changed accounts Discuss risk of loss of any significant accounts Review concentration risk of top accounts Inquire as to relationship with key clients Fee income and agreements Identify individual life commissions
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Pro Forma Income Statement (continued) Revenue
Contingent revenue Cash‐basis method of recording Volatility among carriers, Growth, volume and loss data Changes in carrier agreements Analyze based upon a percentage of prior year
commission revenue Consider significant events (hurricanes, etc.) Seller not provided credit for buyers agreements
Premium Finance Income Elimination of non‐core investment and
miscellaneous income items
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Pro Forma Income Statement (continued) Expenses
Personnel Costs Current employee list including current
salary, overtime, bonus information Calculate producer compensation based
upon build‐up of new/renewal accounts from production report
Compare to prior year W‐2, and current payroll report
Discuss any comp adj’s or terminations
Other Expense Categories Facility Costs – determine go‐forward cost
based upon review/assignment of lease Detailed review of all expense categories
to determine go‐forward costs to sustain the business
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
Pro Forma Balance Sheet Assets
Trust Ratio – Cash + A/R Trade > Carrier Payables Determine what assets will be included in the
transaction (Agency Bill Accounts Receivable) Typically fixed assets are not included in the value Employee, shareholder, tax‐related, prepaid
insurance, and other assets are typically excluded
Liabilities Determine what liabilities will be included
(Company Payables) Evaluate PTO, Payroll (based upon timing of
payroll dates, etc.), bonus and other accruals or required payments to employees at close
Evaluate outstanding notes payable and other debt obligations and schedule for payoff and release of UCC’s
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Non‐Financial Due Diligence Areas Corporate Records & Organization &
Securities May be tailored for stock vs asset deals
Regulatory Matters Correspondence with DOI or IRS Licensing of employees
Book of Business & Operations Retain detailed listing of expirations
from agency management system Real Property
Facility lease agreement Personal Property
Detailed list of fixed assets and equipment (typically available from tax accountant if not retained internally)
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Non‐Financial Due Diligence Areas Debt Arrangements
Retain payoff information Discuss any obligations on earnout
payments from prior acquisitions Human Resources
Current employee list Go‐forward employee list Benefit plan and election comparison Retirement plan Vacation/PTO
Insurance Summary of insurance E&O claims history
Information Technology Tax Matters Litigation
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
Pulling Together Due Diligence Findings Several participants (operations,
accounting, legal, human resources), Communication and sharing of
findings internally, Determine impact on transaction
price and structure, Communication and work through
critical issues with Seller Bridges on compensation Employee terminations/severance
Successful resolution or terminate discussion
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
Sellers Due Diligence
Critical step ‐ often not performed Due diligence is an opportunity for
the Seller to do their own due diligence
Visit to corporate headquarters Meet with key leadership Discuss how transaction will be
funded (cash, debt, equity)
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
Areas of Seller Due Diligence on Buyer
1) Financial Data,2) Financing of Purchase,3) Operations,4) Culture,5) Human Resources,6) Automation,7) Litigation
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w w w . M e r g e r s A n d A c q u i s i t i o n s S e m i n a r . c o m
Due Diligence – A Time to Plan for Integration Discuss operations, processes and
procedures, Introduce key people (management,
producers, etc.) Discuss plan to communicate
commission or compensation changes Plan for automation integration Discuss employee benefits (health and
welfare, retirement, PTO, etc.) Plan for announcement to employees Determine method of communication to
customers and carriers (large customers should be in‐person)
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