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Preparation and Growth are Keys in New Corporate Finance Deals

Companies seeking to close new transactions with commercial banks, private equity firms, hedge funds, or investment banks will do well to consider advance preparation in a few key areas.

Preparation and Growth are Keys in New Corporate Finance Deals

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 past business activities. On the other side, the subject company’s Founder, Board of Directors, CEO, Chief Financial Officer, Chief Operating Officer, accounting, legal and other departments alike can be overwhelmed by the volume of documentation requests. Third parties often 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.

Corporate Finance and Growth Projections Are at the Heart of the Give-and-Take

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 because small changes in growth rates produce wide swings in present value. Very often, agreed growth rates can end up determining the final price. 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 both science and persuasion in the overall negotiation, because the future is the concern of both parties.

By Doug Johnston, Managing Director, Five Management, LLC
Banking, Lending and Due Diligence Finance Expert Witness
ABOUT THE AUTHOR: Douglas E. Johnston, Jr.
Doug Johnston is an expert witness specializing in Commercial Banking & Lending, Private Equity, and Mergers & Acquisitions. He has served as both a successful bank President in Texas and as EVP-Finance & Adminstration of the largest private company in Los Angeles. Doug has direct underwriting, due diligence and documentation experience as a banker, borrower, manager and/or co-investor in hundreds of transactions totaling well over $2 Billion in the service, technology, real estate, entertainment and manufacturing sectors across the U.S.

Copyright Doug Johnston, Managing Director, Five Management, LLC

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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