CLASS THREE: •Idea Generation and Opportunity Analysis•Build or Buy

Elikem Nutifafa KuenyhiaManagement Consultant & Corporate Lawyer

Recap of Class Two The Process of Purchasing a Business Cost-Conscious Marketing Research Spend a Day in the Life of Your

Customer Speaker: Kekeli Gadzekpo Questions

Starting from scratch Acquiring an existing business Operating a franchise Inheriting a business

Self-AssessmentBe clear on why you want to make a

purchaseExpectationsRisk profilePersonal Values

PreparationThoroughly research the opportunityPatience? Wait for the right dealSeek advice. Early!Are you ready to acquire a company?

Deal Criteria To be efficient, must have a screening criteria

Consistent - comparing apples to apples?Size of deal (purchase price)Type of company – technology focused,

marketing etcType of customer – industrial v. Consumer,

international etcGeographic focus – Accra/Tema vs. Kumasi?

Ghana? West Africa?Profile of current ownership

Thorough – all relevant aspects of the acquisition Future?

Potential for improving earnings and cashflow?Predictable cash flowExisting debt? - refinancing? Or servicing?Asset base to support new borrowings?

Deal Sources Personal contacts Creativity – keeping your eyes open Board members Consultants – lawyers, accountants Venture Firms Brokerage Houses Stock Exchange Divestiture Implementation Committee Press Trade Associations/Industry Groups Trade Fairs Banks

ResourcesEnergy, Patience, Common senseCreativethinking/WitsCash – self vs. Leverage

Your own skin in the game?Personal cash/ Personal Collateral

Assets to support bank financing? Cashflow to service debt?

CredibilityTalent – Management Team/Advisors/

Financial Consultants, Lawyers, Industry advisors

The Evaluation Process Initial research evaluation & Detailed

research Industry Company Competition Financials – profitability v. Potential; asset base,

balance sheet Valuation

3 main approaches Market approach: Price is multiples of

cashflow, earnings, comparables Asset approach: book value, liquidation value Earnings approach: Discounted EBIT, cashflow

etc

Other factors for valuation Growth: Company vs. Industry Bankability (asset composition, seasonality) Gap financing – cash flow financing

Expected ROI/Assumptions: Competition Organisational stability Management General desirability Market share Concentration of customers, suppliers,

technology, channels etc

Negotiating the Deal Structuring the deal Asset Purchase vs. Share purchase Price Seller Financing – deferred consideration Bank Financing Owner involvement post-acquisition Contract negotiations (reps, warranties, indemnifications)

Further due diligence Legal DD Financial DD Operations DD Environmental, Real estate etc

Adding Value Plan post acquisition Operational changes? Changing financial structures Savings?

Price = what a buyer is willing to pay in return for business/assets

– Exactly what is included?Cash, inventory, real estates, goodwill,

order book, consulting? Transition support?

Acqusition skillsUnderstanding the acquisition process, deal

structure, taxes, risks, legal issues etc.Focus & resources to build credibility Entrepreneurial drive to add value

CapitalOwn equityFinancing Skills

Technical skillsManagement skillsMarketing, production, finance, legal etc

Pros:Faster route to entrepreneurship Experience of the previous owner  Easier to find finance

Cons:Cultural/Employee related issues:Customer and supplier relationships may

not be inherited:  Business may be overpriced

Seller self assessment Objectives, Needs & Motivation

Operations Review Products & Services Production Distribution Organisation Customers Support System Legal etc

Markets, competition & growth opportunities Financial analysis Value Assessment Target buyer profile Offering memorandum

The ‘Big Decision’ Myth The ‘Survey Myopia’ Myth The ‘Big Bucks’ Myth The ‘Sophisticated Researcher’ Myth The ‘Most Research is not Read’ Myth

Wrong Approaches Limited contact with customers Information vs. Knowledge Preconceived ideas about customers’

situation

Right Approaches Pay attention to customers Gain information from customers Be market-focused

Becoming Market-Focused: Recognise that ‘customer’ means more

than the next step in distribution chain Count on customers for information not

insight Don’t expect brilliant insights each time

you study a customer Involve all levels of the organization in

the drive to become market focused