Documente Academic
Documente Profesional
Documente Cultură
1980 2001
Company IPO New product line
focused on stored,
transportable
audio files
1986
Transition of
power – CEO
resigned in prior
year. New CEO
1976 takes over 1998 2010 U Can’t Touch This
First computer New product line Tablet debut
designed by launch focused on
founders….circuit substance and KEY MILESTONE:
board costs under aesthetics Becomes largest
$700 US Tech Company
(Market Value)
Copyright © 2017 Deloitte Development LLC. All rights reserved. Source: http://www.independent.co.uk/life-style/gadgets-and-tech/key-dates-in-apple-history- 2
2343641.html
Introduction
Source: Wikipedia
Copyright © 2017 Deloitte Development LLC. All rights reserved. 3
(https://en.wikipedia.org/wiki/Timeline_of_Apple_Inc._products#2010s)
Summary of Key Learning Points
Summary of Key Learning Points
− Summarize funding needs and forecast financial performance for the business
Financing
− A business needs capital in order to begin and maintain operations
Business structure
− Choosing an appropriate legal structure involves trade-offs
◦ Capital Structure
◦ Taxation
◦ Ease of Transfer
Market Analysis Target industry, market and product analysis Size, location and market share
Copyright © 2017 Deloitte Development LLC. All rights reserved. Sources: www.sba.gov, www.entrepreneur.com 8
Business Plan Financing Corporate Structure
Knowledge Check #1
Mission & Strategy Market Analysis Organization &
Mission statement: Deliver a game-day Management
atmosphere where customers can
experience the excitement of watching
their favorite sports teams and enjoy
the fresh taste of top quality white
meat nuggets with signature dipping
sauces
Strategy: Develop the brand locally;
broaden the brand’s regional footprint
by diversifying the product portfolio
and leveraging infrastructure; deliver
best-in-class audiovisual game-day
experience
Sources Uses
Copyright © 2017 Deloitte Development LLC. All rights reserved. Sources: www.sba.gov, www.entrepreneur.com 11
Business Plan Financing Corporate Structure
Start-up Start-up
Capital Capital Operating Cash
Raised Invested Flow
Time
Capital investments are leveraged to generate operational cash
flow
Working Capital
Working Capital Needs Nuggets’ Working Capital Needs
Working capital is the cash used to operate the business Continuous chicken purchases (raw materials)
continually
− Payment to suppliers
Converts sales to cash to reinvest in the business
− Increase inventory
Comprised of current assets and current liabilities
Replacement of tables, chairs, plates, glasses, etc.
− Accounts receivable (A/R)
A/R should convert to cash quickly
− Inventory
Alternative working capital sources if cash from operation
− Accounts payable (A/P) is not sufficient
Seasonal or cyclical businesses may require additional − Revolving and amortizing debt
working capital during the off / low season
− Money from family and friends
Payments
Inventory
A/P
Goods
Purchased
Copyright © 2017 Deloitte Development LLC. All rights reserved. Sources: www.sba.gov, www.entrepreneur.com 13
Business Plan Financing Corporate Structure
MEMBERS EQUITY
Interest Expense -
Members Equity 800,000
Income Tax Expense -
Retained Earnings (36,667)
Net Income (36,667)
Total Members Equity 763,333
Operating Budget
1990 1991
US$ Oct. 1 – Dec. 31 Jan. 1 – Mar. 31 Apr. 1 – June 30 July 1 – Sept. 30
G Taxes - - - -
No personal liability protection for the owner Personal liability and loss protection for limited
partners; no personal liability and loss protection for
Profits & losses flow to the owner’s tax return general partners
Allows mixing of business and personal funds, not Profits & losses flow to the partners’ tax returns
able to sell stock
Capital structure of a partnership comprised of
Lacks continuity of life upon dissolution event; no partnership interests
legal distinction between owner and business
Continuity and transferability determined by type of
partnership
Sole
Proprietorship
Partnership
Corporation
Limited Liability
Company
Legend
(1) Registration costs used as a proxy for capital structure More Less
favorable favorable
Copyright © 2017 Deloitte Development LLC. All rights reserved. 18
Business Plan Financing Corporate Structure
Knowledge Check #3
Tax Burden vs. Liability Registration Cost vs. Ease of Transfer
Higher
Higher
LLC
Registration
Tax Burden
Costs
S Corp Partnership
Sole-proprietorship
Lower
Lower
Copyright © 2017 Deloitte Development LLC. All rights reserved. Sources: www.sba.gov, www.entrepreneur.com 19
Questions and Answers
Appendix
Striking Gold with Nuggets
Mission & Strategy Market Analysis Organization & Management
Mission statement: Deliver a Industry and market analysis Organization
game-day atmosphere where − Size and demographics of the – Privately-held, family run business
customers can experience the local market – Wholly-owned with possible
excitement of watching their • Average income and age franchise opportunities
favorite sports teams and enjoy • Proximity to universities and – Legal structure set up to minimize
sports facilities
the fresh taste of top quality personal risks, maximize value &
• Sports culture
white meat chicken nuggets with personal tax attributes
signature dipping sauces
− Identify and analyze competitor Management
Strategy: Develop the brand companies in the market
– Day-to-day management by
locally; broaden footprint by ◦ Buffalo Wild Wings
Coulter siblings
diversifying the product portfolio ◦ Hooters
– Open to strategic guidance by
and leveraging infrastructure; ◦ T.G.I. Friday’s
◦ McDonalds owners / partners / members /
deliver best-in-class audiovisual shareholders
game-day experience
Note: Any definitions not sourced are from Financial Accounting/Kermit D. Larson, Paul B. Miller – 5th Edition.
Copyright © 2016 Deloitte Development LLC. All rights reserved. 2
Why is this important?
1. Know the key financial statements of a Company and what they show
2. Mind the GAAP
3. Understand how ratio analysis can help you analyze a business’ financial
standing
4. Understand the differences between book income, cash income and tax
income
5. How to read pro forma financial reporting skeptically
6. Don’t be fooled by non-GAAP Measures
7. Even the smallest transactions may be material
8. Understand the role of the Auditors
9. How to prepare budgets for your business
10. Understand the symptoms of financial statement fraud
Description
• Explains investments by
Statement of owners’ or and distributions to owners
stockholders’ equity during the period.
Public Private
Objectives Requirements
− SEC’s Roadmap:
◦ Decision to incorporate IFRS to U.S. issuers is still pending as of May 2016.
◦ Allow public companies a minimum of four years to adjust.
◦ Reported mixed results on a number of convergence projects undertaken by FASB and
the IASB.
◦ Concerned about the quality and enforceability of the standards and IASB independence.
Ability to make Generally allows for few outright • Historically have allowed more choices
choices choices. given the initial focus of codifying
acceptable practices around the world.
• Today fewer choices, although still more
than those allowed under US GAAP.
Level of specificity Tends to have more specificity, Has overarching concepts, with some
mainly due to the nature of the examples of how those concepts may be
standards. applied when places more weight on the
judgment of management.
Debits = Credits
Debit Credit
Assets Assets
Liabilities Liabilities
Equity Equity
• Cash Income – Based on the cash method of accounting (e.g. revenue or assets are
recorded when received)
• Book Income – Based on the accrual method (e.g. recorded when the underlying event
has occurred, title or right has transferred)
−The type of audit report the auditor issues depends on the quality of the
financial statements of the company:
◦ Clean or unqualified opinion
◦ Qualified opinion
◦ Disclaimer of opinion
◦ Adverse opinion
What it is...
−Expression of an opinion on the financial statements taken as a whole.
−GAAS requires auditors to plan and perform the audit to obtain reasonable
assurance as to whether the statements are free of material misstatement.
What it isn’t…
−Financial statements are responsibility of management, not the auditors. Auditors are
not responsible for reporting bad management practices in the audit report.
−Based on GAAS and PCAOB audit, not absolute and total knowledge of every
component, activity and transaction incurred.
−Not a direct examination for fraud (SAS 99), nor a guarantee that the financial
statements are free of fraud or intentional misrepresentations of management.
− A statement detailing what a company owns (assets) and how a company is capitalized (liabilities and shareholder’s
equity) on a particular date.
− Assets and liabilities are divided into “Current” and “Long Term”. “Current” assets are expected to be converted to cash
within one year. “Current” liabilities are due for payment within one year.
− Accounting treatment for each item can have a significant impact on the company’s financial position.
Assets
Tangible Intangible
Assets Assets
(physical) (not physical)
Probable future sacrifices of economic benefits arising from present obligations to transfer
assets or provide services in the future as a result of past transactions or events.
Liabilities
Known Estimated
Amounts Amounts
ASSETS LIABILITIES
Current Assets Current Liabilities
Cash And Equivalents $ 503,444
Accounts Payable $ 3,000
Accounts Receivable 5,556
Inventory 3,000
Total Current Assets Non-Current Liabilities
512,000
Long-Term Debt -
Non-Current Assets
Gross Property, Plant & Equipment 250,000 Total Liabilities 3,000
Accumulated Depreciation 10,417
Net Property, Plant & Equipment 239,583 MEMBERS’ EQUITY
Intangible Assets 15,000 Members' Equity 800,000
Accumulated Amortization 250 Retained Earnings (36,667)
Net Intangible Assets 14,750
Total Equity 763,333
Total Assets $ 766,333
Total Liabilities And Equity $ 766,333
* One type of intangible asset is goodwill which will be discussed in detail later in the module.
Copyright © 2016 Deloitte Development LLC. All rights reserved. 31
Key things to look for on the Balance Sheet
− Also referred to as the P&L, Profit and Loss Statement, or Statement of Operations.
− Presents detailed information about a company’s revenues and expenses and gains and losses for a
period of time.
− Amounts are measured over a period (e.g., quarter, year).
− Helps investors and creditors evaluate the past performance of a company and use it for forecasting.
Revenue
•Inflows or other enhancements of assets of an entity or settlements of its
liabilities from delivering or producing goods, rendering services, or other
activities that constitute the entity’s ongoing major or central operations.
Gains
•Gains are increases in equity (net assets) from peripheral or incidental
transactions of an entity and from all other transactions and other events and
circumstances affecting the entity, except those that result from revenues or
investments by owners.
Expenses
•Outflows or other “using up” of assets or “incurrence” of liabilities from delivering
or producing goods, rendering services, or other activities that constitute the
entity’s ongoing major or central operations.
Losses
Interest Expense -
Net Interest Expenses -
Income Tax Expense -
For the years ended December 26, 2014 and December 27, 2013 (in 0000s)
Revenue:
Restaurant sales $ 459,527 $ 355,623
Franc hise royalties and fees 42,970 37,198
Total revenue 502,497 392,821
Costs and Expenses:
Restaurant operating c osts 366,778 290,339
Deprec iation and amortization 31,972 25,113
General and administrative 46,561 34,587
Preopening 9,329 5,379
Loss on asset disposals and store c lo 1,236 1,314
Total c osts and expenses 455,876 356,732
Inc ome from operations 46,621 36,089
Investment inc ome 76 438
Earnings before inc ome taxes 46,697 36,527
Inc ome tax expense 14,397 11,930
Net earnings $ 32,300 $ 24,597
Pool of Cash
CASH FLOWS FROM OPERATING ACTIVITIES: CASH FLOWS FROM INVESTING ACTIVITIES:
Net Earnings $ 32,300 Purchase of property and equipment $ (83,353)
Adjustments to reconcile net earnings to cash provided by operations: Purchase of marketable securities (62,228)
Depreciation 31,389 Proceeds of marketable securities 73,239
Amortization 583 Acquisition of franchised restaurants (21,615)
Loss on asset disposals and store closures 1,076 Net cash used by investing activities (93,957)
Deferred lease credits 2,326
Deferred income taxes 8,209 CASH FLOWS FROM FINANCING ACTIVITIES:
Stock-based compensation 7,291 Issuance of Common Stock 1,095
Excess tax benefit from stock issuance (2,857) Excess tax benefit from stock issuance 2,858
C hanges in operating assets and liabilities, net effect of acquisition: Tax payments for restricted stock units (1,589)
Trading securities (203) Net cash provided by financing activities 2,364
Accounts receivable (783) Effect of exchange rate changes on cash and cash equiva (30)
Inventory (1,179) Net increase in cash and cash equivalents 3,344
Prepaid expenses 13 Cash and cash equivalents at beginning of year 9,806
Other assets Cash and cash equivalents at end of year $ 13,150
(1,633)
Unearned franchise fees (165)
Accounts payable 11,322
Income taxes 2,093
Accrused expenses 5,185
Net cash provided by operating activitie $ 94,967
1 Indirect method
Which of the following statements is/are true about notes to the Financial
Statements?
a) The notes can provide significant accounting policies or alternative measures for assets or
liabilities
b) The notes will tell you which accounting treatment a company has elected
c) The notes break out the details of amounts or transactions that are generally buried in
the balance sheet or income statement
d) All of the above
Definition
“a contingency is defined as an existing condition, situation, or set of circumstances
involving uncertainty as to possible gain or loss to an enterprise that will ultimately be
resolved when one or more future events occur or fail to occur. Resolution of the uncertainty
may confirm the acquisition of an asset or the reduction of a liability or the loss or
impairment of an asset or the incurrence of a liability.”
Can amount be
No Yes Is loss guarantee of
reasonably
indebtedness?
estimated?
Yes* No
*Includes estimation of range of loss, in which case the minimum amount is accrued and the amount of the
range is disclosed
Pro Forma — provides information about the continuing impact of a particular transaction by showing
how it might have affected historical financial statements if a transaction (acquisition or disposition) had
been consummated at an earlier time.
• Example:
• For a business combination, the financial statements shall include certain pro forma information,
such as the “results of operations for the current period as though the business combination(s) had
been completed at the beginning of the period”
• Source, ASC 805, Business Combinations
Historical — measures income or presents a financial position for past events. The information as
reported in historical financial statements is a summarized presentation of the operations of the business
during a specific period of time.
• GAAP are the rules that govern what, when, and how to record transactions and prescribe
what information should be disclosed and how it should be disclosed in the financial
statements.
• Non-GAAP amounts are amounts that are not defined in the GAAP accounting literature,
such as EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)
• Public companies are required to reconcile Non-GAAP measures to the corresponding GAAP
measure
• Area of manipulation on which regulators focus their attention
Scenario:
• On February 2, 2014 a class action lawsuit was filed against Nuggets, Inc. in the Superior court of the
State of California, County of Alameda, wherein it is alleged that Nuggets, Inc. violated certain
California wage and hour laws. The lawsuit purports to be brought on behalf of a class of all persons
who were employed full-time or on an hourly basis by Nuggets, Inc. in the State of California from
March 5, 2010 through the date of resolution of the lawsuit. The complaint alleges that Nuggets,
Inc., violated California law, by failing to: (1) pay overtime wages, and (2) provide meal periods,
among other claims. Nuggets, Inc. is sure the case will end in a settlement and is preparing a
response to the allegations.
• You are General Counsel. You and management guess the company’s liability may range from $2 to
$10 million.
• Example: when you hear someone say that revenues increased by 20% this past
year, that person is using horizontal analysis.
Horizontal
Analysis 2015 2014 % Variance
Revenue $ 60,000 $ 50,000 20%
Cost of Sales 34,000 32,000 6%
Gross Profit 26,000 18,000 44%
SG&A Expense 14,000 10,000 40%
Operating Income 12,000 8,000 50%
Interest Expense 4,000 2,000 100%
Taxes 3,000 2,000 50%
Net Income $ 5,000 $ 4,000 25%
Vertical
Analysis
Balance Sheet Vertical
Analysis
Assets
Cash $ 3,000 11%
Accounts Receivable 12,000 44%
Inventory 10,000 36%
Prepaid Expenses 2,400 9%
Total Assets $ 27,400 100%
Nuggets, Inc.
2014 Use of Ratio:
Total Revenue $502,497
− Measures how profitable a company sells it inventory or
Restaurant Operating Costs 366,778 merchandise.
Gross Profit 135,719 − In other words, the gross profit ratio is essentially the
percentage markup on merchandise from its cost.
Operating Expenses
Depreciation &
Amortization 31,972 Example:
General & Administrative 46,561
Preopening 9,329 ◦ Assume Nuggets, Inc. spent $150,000 on restaurant
Loss on Asset Disposal & operations, and they were able to generate revenue
Store Closures 1,236 of $500,000; Nuggets has a ratio of 70%:
Total operating expenses 89,098
$350,000
70% =
Investment Income 76 $500,000
Use of Ratio:
Nuggets, Inc.
2016 − Measures how effectively a company can convert sales
Revenue $ 500,000 into net income.
Cost of Goods Sold 150,000 − Investors want to make sure that profits are high
enough to distribute dividends and creditors want to
Gross Profit 350,000 make sure the company has enough profits to pay back
its loans.
Operating Expenses − Also known as return on sales.
SGA Expenses 120,000
Restructuring Charges 25,400 Example:
Depreciation &
◦ Last year Nuggets had the best year in sales, since
Amortization 14,500
they opened for business. Revenue was $600,000
Bad Debt Expense 1,000
and their net income was $150,000. Nuggets
Total operating expenses 161,000
converted 25% of their sales into profits.
Other Gains/(Losses) 1,900 ◦ Now, contrasting that with the current year’s numbers
of $500,000 revenue and $155,000 net income,
Income Taxes 32,100 results in a return of 31%.
ASSETS 2016 2015 − In other words, ROA shows how efficiently a company
Current Assets can convert the money used to purchase assets into net
Cash $ 3,000 $ 2,000 income or profits.
Accounts Receivable 12,000 13,000
Inventory 10,000 12,000 − The higher the ROA number, the better.
Prepaid Expenses 2,400 1,000
Total Current Assets 27,400 28,000
Nuggets, Inc.
Use of Ratio:
2016
Net Income $ 155,000 − Measures the ability of a company to generate profits
from its shareholders’ investments in the company.
LIABILITIES & STOCKHOLDERS'
EQUITY 2016 2015 − A return of 1 means that every dollar of common
Current Liabilities shareholders’ equity generates 1 dollar of net income.
Total Current Liabilities 32,000 28,000
Long-Term Liabilities
Notes Payable, less current Example:
portion 15,000 14,000
Capital Lease Obligations 12,000 14,500 ◦ Nuggets shows beginning shareholders’ equity of
Total Long-Term Liabilities 27,000 28,500 $121,500 and an ending balance of $126,000; with
Total Liabilities 59,000 56,500
net income of $155,000, for an ROE of 1.25:
$155,000
Stockholder's Equity 1.25 =
Common Stock 1,000 1,000
($121,500+$126,000)/2
Additional Paid-In Capital 55,000 53,000
Retained Earnings 50,000 49,500 ◦ This means that every dollar of shareholders’ equity
Noncontrolling Interest 20,000 18,000 earned about $1.25 this year.
Total Stockholders' Equity 126,000 121,500
◦ In other words, shareholders saw a 125 percent
return on their investment.
Total Liabilities & Stockholders'
Equity $ 185,000 $ 178,000
Net Income
Return on Equity = Average Shareholders’
Equity
Copyright © 2016 Deloitte Development LLC. All rights reserved. 77
Liquidity Ratios
− Measures a company’s ability to pay its short term obligations as they become due.
− In other words, these ratios show the cash levels of a company and the ability to turn
other assets into cash to pay off liabilities and other current obligations.
Use of Ratio:
◦ This means that Nuggets can only pay off 47% of their
current liabilities with quick assets and would need to
Cash + Marketable
Securities + Accounts
convert more assets into cash to pay off all their current
Quick Ratio = Receivable liabilities.
Current Liabilities ◦ Again, a higher ratio would be more favorable.
The entity’s
ability for long-
term solvency.
Use of Ratio:
Nuggets, Inc.
− Measures the amount of total assets that are financed
ASSETS 2016 by creditors instead of investors.
Total Current Assets 27,400
− It shows what percentage of assets is funded by
Noncurrent Assets borrowing compared with the percentage of resources
Property, Plant, and Equipment: 156,000 that are funded by investors.
Total Other Noncurrent Assets: 1,600 − Companies with a higher figure are considered more
risky to invest in and loan to because they are more
Total Noncurrent Assets 157,600 leveraged.
Total Assets $ 185,000
Example:
LIABILITIES & STOCKHOLDERS' ◦ Nuggets is once again applying for a loan from their
EQUITY 2016 bank.
Total Current Liabilities 32,000
◦ Nuggets currently has a debt to asset ratio of 0.32.
Long-Term Liabilities
Notes Payable, less current portion 15,000 $59,000
Capital Lease Obligations 12,000 0.32 =
$185,000
Total Long-Term Liabilities 27,000
◦ This shows that Nuggets has more assets than
Total Liabilities $ 59,000
liabilities and could pay off its obligations by selling its
assets if it needed to.
◦ A ratio of less than 1 is considered to be the least
Total Liabilities risk.
Debt to Asset Ratio =
Total Assets ◦ It would be helpful for Nuggets; bank to compare the
restaurant industry’s debt to asset ratio to determine
whether this is in line with other industry leaders.
Copyright © 2016 Deloitte Development LLC. All rights reserved. 82
Debt to Equity Ratio
Example:
Stockholder's Equity
◦ Nuggets has total liabilities of $59,000 and total
Common Stock 1,000
Additional Paid-In Capital 55,000
stockholders’ equity of $126,000, resulting in a debt
Retained Earnings 50,000 to equity ratio of 0.47:
Noncontrolling Interest 20,000
Total Stockholders' Equity 126,000 $59,000
0.47 =
$126,000
Total Liabilities & Stockholders'
Equity $ 185,000 ◦ This debt ratio means there are almost half as many
liabilities than there is equity.
Operating Expenses − The larger ratios are considered more favorable than
SGA Expenses 120,000 smaller ratios.
Restructuring Charges 25,400
Depreciation & Amortization 14,500 − Also known as the interest coverage ratio.
Bad Debt Expense 1,100
Example:
Total operating expenses 161,000
◦ Upon applying for a loan, Nuggets provided their
Other Gains/(Losses): bank with their income statement; which shows that
Income from Equity
they made $165,000 before interest and taxes, and
Investments 100
paid $2,000 in interest expenses for the year.
Interest Expense (2,000)
Income from continuing ◦ Nuggets has a ratio of 80.5 times:
operations before taxes 187,100
$161,000
Income Taxes 32,100 80.5 =
$2,000
Net Income $ 155,000 ◦ This means that Nugget’s income is 80.5 times
greater than their annual interest expense.
The entity’s
ability to convert
assets to sales
and cash.
Use of Ratio:
Nuggets, Inc.
2016 − Measures how many times a business can turn its
Net Credit Sales $ 100,000 accounts receivable into cash during a period.
Nuggets, Inc.
2016
Use of Ratio:
Cost of Goods Sold $ 150,000 − Measures how many times a company sold its total
average inventory dollar amount during the year.
ASSETS 2016 2015
Current Assets − It is also a measure of how efficiently a company can
Cash $ 3,000 $ 2,000
Accounts Receivable 12,000 13,000
control its merchandise, and is important to have a
Inventory 10,000 12,000 high turnover. This shows that the company does not
Prepaid Expenses 2,400 1,000 overspend by buying too much inventory and wasting
Total Current Assets 27,400 28,000 resources on storing non-saleable inventory. It also
measures how effectively a company can sell the
Noncurrent Assets
Property, Plant, and
inventory that they buy.
Equipment: 188,000 183,000
Less: Accum Example:
Depreciation (32,000) (35,000)
Total PPE 156,000 148,000 ◦ Nuggets’ total cost of goods sold on its income
statement is $150,000 and their average inventory
Other Noncurrent Assets:
Equity Investments 1,000 1,200
for the year is $11,000; which results in a turnover of
Goodwill 500 500 13.6 times:
Patents 100 300
$150,000
Total Other Noncurrent 13.6 =
Assets: 1,600 2,000 ($10,000+$12,000)/2
Total Noncurrent Assets 157,600 150,000
Total Assets $ 185,000 $ 178,000 ◦ This means that Nuggets turned over their inventory
13.6 times during the year, or once every 27 days.
Nuggets, Inc.
Use of Ratio:
2016 − Measures how efficiently a company uses its assets to
Net Sales $ 500,000 generate sales.
Total Noncurrent Assets 157,600 150,000 ◦ This would appear that Nuggets is fairly efficient with
Total Assets $ 185,000 $ 178,000 its use of assets, but would need to compare this
ratio to industry standards.
Net Sales
Asset Turnover =
Average Total Assets
a) Profitability ratios
b) Liquidity ratios
c) Leverage ratios
d) Activity ratios
1. Used with permission from The Wall Street Journal, WSJ.com. Copyright 2016 Dow Jones & Company, Inc. All rights reserved.
Source: 2016 ACFE Report to the Nation on Occupational Fraud & Abuse
The fraud risk symptoms (or “red flags”) alert us to the potential existence
of fraud.
In its December 31, 2013 financial statements, Nuggets, Inc. allegedly records a transaction that actually
occurred in January 2014. This transactions relates to inventory sold at a value of $1,250 with a cost of
$650. Nuggets allegedly conceals the fraud by shipping the inventory to an offsite storage facility.
Assets Assets
Cash $ 500 Cash $ 500
Accounts Receivable 2,000 Accounts Receivable 3,250
Inventory 1,250 Inventory 600
Fixed Assets 5,000 Fixed Assets 5,000
Other Assets 3,000 Other Assets 3,000
Total Assets $ 11,750 Total Assets $ 12,350
Liabilities Liabilities
Accounts Payable $ 1,000 Accounts Payable $ 1,000
Total Liabilities & Stockholder's $ 11,750 Total Liabilities & Stockholder's $ 12,350
Equity Equity
It is important to understand (1) how to read them, (2) how they relate to each other and
(3) how to pull insights from them all.
• Terms such as: materiality, conservatism, and contingency are often used to
describe accounting matters.
Organizations innovate
The things that organizations do to innovate and
grow are the very things that create cyber risk
For these reasons, a “secure everything” approach is usually not feasible. Therefore, we
advise our clients to focus not only on being secure, but on being
Secure.Vigilant.Resilient.™
Copyright © 2017 Deloitte Development LLC. All rights reserved. 2
Companies like yours (video)
of actors
92% Known External Actors 95% use
Of breaches are Phishing
perpetrated by
outsiders
55%
Organized Crime Who found the incident
14%
Of breaches are by
21%
insiders (plus some Outside party
State affiliated
outsiders) and are
rising 2%
Customer Business
Activist partners
76%
of incidents are caused by
weak or stolen credentials.
1%
Former employee Multiple
Rogue hardware and malware
parties
are also frequent causes.
Source: 2013 Verizon Data Breach Investigations Report with the U.S. Secret Service, FBI, Deloitte, DHS and others
http://www.verizonenterprise.com/resources/reports/rp_data-breach-investigations-report-2013_en_xg.pdf
Intrusion detection
Copyright © 2017 Deloitte Development LLC. All rights reserved. 4
systems
Privacy regulation is driving new compliance initiatives
The GDPR ushers in vast changes to the privacy landscape
After four years of negotiations, the EU General Data Protection (GDPR) is upon us and due to be
enforceable on 25 May 2018. The new law will introduce a range of requirements which will have
significant impacts on organizations. Combined with increasing demands from consumers, privacy has
suddenly shot to the top of the corporate agenda. Below are just of the some key statistics from the
GDPR – the main headline being a maximum monetary penalty of 4% of annual global turnover
that can be imposed in cases of serious non-compliance.
75,000
$20m
4%
Estimated number
of new Data
21
Protection Officers Cost of a 4% fine
required to a company
72
Potential fines as a worldwide1 with $500m
percentage of turnover Years in the
global turnover making
11Source: Study: GDPR’s global reach to require at least 75,000 DPOs worldwide https://iapp.org/news/a/study-gdprs-global-reach-to-require-
at-least-75000-dpos-worldwide/
Technology
New GDPR requirements will mean changes to the ways in which technologies are Chief Information
designed and managed—CIOs beware! Documented privacy risk assessments will be Officer
required to deploy major new systems and technologies. Security breaches will have Chief Information
to be notified to regulators within 72 hours, meaning implementation of new or Security Officer
escalated incident response procedures. The concept of 'Privacy By Design’ has now
become enshrined in law, with the Privacy Impact Assessment (PIA) expected to
become commonplace across organizations over the next few years.
Data
Individuals and teams tasked with information management will be challenged to Chief Data Officer
provide clearer oversight on data storage, journeys, and lineage. Having a better
Chief Operating
grasp of what data is collected and where it is stored will make it easier to comply with
Officer
new data subject rights—rights to have data deleted and to have it ported to other
organizations.
Copyright © 2017 Deloitte Development LLC. All rights reserved. 6
Deloitte’s View on Cyber Security
Reduce the impact of cyber incidents and develop a holistic privacy program that enables
holistic cooperation across the organization by becoming: Secure. Vigilant. Resilient.TM
Deloitte’s Cyber Security
Inputs principles
Regulations
and standards SECURE
Global privacy and data
protection laws Establish risk-
ISO1 27001/2 prioritized
NIST2 cybersecurity controls to VIGILANT
framework protect against
ITIL3 known and Gaining detective
… emerging threats, visibility and
and comply with preemptive RESILIENT
standards and threat insight to
Preferred practices regulations detect both Establish the ability
Project / known and to handle critical
engagement unknown incidents, quickly
experience adversarial return to normal
Published industry Identify activity
research
operations, and
Protect across the repair damage to the
environment business
Threat Landscape
Detect
Who might attack? Respond
What are they after?
What tactics will they Recover
use?
Rather than being a necessary burden, the Cyber Risk program is a positive aspect of managing business
performance.
1International Organization for Standardization As used in this document, “Deloitte” means Deloitte & Touche LLP and Deloitte Consulting LLP, which are separate subsidiaries of
2 National Institute for Standards and Technology
Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.
3 Formerly known as the Information Technology Infrastructure
Library Certain services may not be available to attest clients under the rules and regulations of public accounting.
Copyright © 2017 Deloitte Development LLC. All rights reserved. 7
Deconstructing Cyber
Attacks
Data is
Attack Stage
Compromised
Maintaining
the Back • Data theft
Weapon/ Door • Data destruction
Malware • Unmonitored ports • Espionage
Opening Delivery
• Misconfigured data • Denial of service
• Spyware
the Door loss prevention • Unauthorized
Intelligence • Ransomware
Collection • Spear phishing tools system and
• Rootkit
• Peer to peer • Drive by download • Bot • Stolen access network access
networks • Software/hardware credentials
• Search engines vulnerabilities Time to Exploit: Minutes
• Social • Third-party Time to Discovery: Months or
engineering compromise Longer
Time
Potential impact
Fraud or Reputation Threat to life Operational
Data loss IP theft
revenue loss damage or safety disruption
Not only have criminals and criminal organizations conducted sophisticated cyber attacks, but we also
witnessed the first “known” cyber attack by a nation state against a private corporation.
Copyright © 2017 Deloitte Development LLC. All rights reserved. 10
Cyber Security
Cyber Security Evolved
evolved (video)
Vigilance to understand new threats, Understanding the need to define ‘crown jewels’
anticipate and thwart future attacks and associated value chain, high risk
Resilience to minimize impact and/or recover individuals/events – proportionate risk decisions
gracefully and fast Use of models such as Value at Risk (VaR) and
Risk Adjusted Rate of Return On Capital (RAROC)
for planning, budgeting, tracking and reporting
While the average cost is known, the long Preventative security measures are no longer
term effects on reputation, brand, morale, sufficient - New technologies and
trust are significant and take their toll on approaches are required
organizations Human error/lapses continue to be one of the
Consideration for Cyber Insurance key reasons for breaches
Determine your risk tolerance and the cost Security and privacy rules, guidelines, and
of protection consumer protection are increasing
outsourced IT operations
and intricate in-license and Nation
out-license agreements with states
competitors.
Insiders
• Decentralized governance
and geographic dispersion of
physical supply chain Competitor
weaken cyber command and s
control.
Skilled
individual
• General lack of overall hackers
maturity of life sciences
companies in cyber domains
KEY
“94% of healthcare organizations in this study have had at least one data breach in the past two years. 45% reported that they had 5 or more.” Very high Moderate
Risk Appetite
Investment Banks
Senior
Management IT Leadership IT Risk Leadership Legal/Compliance Line of Business
(CFO, COO, CAO, (CIO) (CISO / CITRO) Leadership Leaders
CRO)
Operational Sustainability
Further developing the maturity of
basic Cyber Security capabilities, with a
greater focus on standardization,
integration & consistency
Positioned to evolve towards the next
level of maturity & business partnership
Pilot
Privacy by Design
Copyright © 2017 Deloitte Development LLC. All rights reserved. 19
Achieving Cyber Threat Management Capabilities
What it means to be…
Implement controls to protect sensitive data Establish cross-domain, correlation-based Establish appropriate levels of data recovery
and critical business activity, with monitoring to detect control and policy and system redundancy capabilities for all
investments prioritized in line with business violations, with a focus on detection of events network-dependent services and functions.
criticality. impacting the most risk-sensitive areas.
Ensure well-defined processes for technical
Hone processes to update, modify and Develop the ability to detect anomalies to handling of incident analysis and remediation.
expand controls as risk guidance, technology “normal” user and application behavior.
utilization, and threat vectors change. Build cross-functional teams to manage longer-
Leverage technology to centrally integrate term recovery issues, including internal and
Shore up asset management capabilities to threat data for correlation with IT and business external communications.
help operations teams focus on business- data.
critical components and services. Acquire skills and implement policies necessary
Provide upstream reporting on KRIs. for effective post-incident forensics.
Institutionalize mature vulnerability
management and identity and access Establish change management processes for Establish guidelines to ensure resilience issues
management capabilities. continual improvement of detection capabilities are thoroughly addressed in all new IT projects.
as new knowledge is uncovered.
Institutionalize Secure SDLC practices. Conduct periodic simulations and rehearsals to
Conduct period testing and assessment of test and hone crisis management processes.
Implement organization-wide training and foundational controls.
education programs.
Leverage new generations of detection and
Define and oversee vendor/partner analytic tools to migrate toward improved.
compliance with appropriate security
standards.
GOVERNANCE
Set overall Secure-Vigilant-Resilient Establish KPIs and accountability Ensure business/IT collaboration for Communicate with vendors, partners,
program priorities and ensure proper mechanisms, and track current ongoing re-engineering of processes and customers, law enforcement and peer
allocation of resources. state against key program goals. infrastructure to support ongoing organizations to share awareness of
business innovation. threats and best practices.
5. Are we adapting to
3. Are we proactive or change?
reactive? Policy reviews,
Retrofitting for security assessments, and
is very expensive. rehearsals of crisis
Build it upfront in your response processes
management processes, must be regularized to
applications and establish a culture of
infrastructure. perpetual adaptation to
the threat and risk
landscape.
Copyright © 2017 Deloitte Development LLC. All rights reserved. 21
Top Actions for Executives
The actions that leaders take help balance risks and business needs
1. Assign a senior executive to lead
Executive must be able to lead the program across diverse functions, drive
collaboration & play a key role in a crisis
2. Establish purpose and direction
Clearly articulate your cyber risk appetite and strategy. Support it by requisite
action through funding and resourcing
Establish priorities, and ensure funding and resourcing
3. Adopt a framework & map threats to business assets
Gather top leaders and threat intelligence specialists
Identify crown jewels and un-addressed cyber risks
4. Accelerate behavior change among people
Create a corporate wide cyber mindset
Create active learning scenarios that instill awareness of the impact of daily activity
on cyber risk
Embed cyber risk management goals into evaluation of Top 100 executives
5. Provide regular updates to executives and the board
Provide ongoing communication to avoid surprises and gain assurance that security
controls are in line with the risk tolerance of the organization
Conduct monthly or quarterly reviews about key risks and risk metrics, and address
roadblocks
Copyright © 2017 Deloitte Development LLC. All rights reserved. 22
Cyber Security Questions – Client Stakeholders
Executives should be prepared to answer questions that stakeholders have
1. Does the C-Suite demonstrate due diligence, ownership and effective management
of cyber risk?
2. Do we have the right leader and organizational talent?
3. Have we established an appropriate cyber risk escalation framework that includes
our risk appetite and reporting thresholds?
4. Are we focused on, and investing in, the right things?
5. How do our cyber security program and capabilities align to industry standards
and peer organizations?
6. Do we have an organization-wide cyber focused mindset and cyber conscious culture?
7. What has management done to protect the organization against third-party cyber
risks?
8. Can we rapidly contain damages and mobilize diverse response resources should a
cyber-incident occur?
9. How do we evaluate the effectiveness of our organization’s cyber program?
10. Are we helping to protect our industry, and the nation against cyber risks by taking a
broad approach to knowledge and information sharing?
Deloitte shall not be responsible for any loss sustained by any person who
relies on this presentation.
• Capital Structure
− The capital structure of a firm is the mix of different securities issued by the firm to finance its operations
• Cost of Capital and Time Value of Money
− A dollar received today is worth more than a dollar received tomorrow
− The FUTURE cash flows are discounted at the cost of capital to arrive at their PRESENT VALUE
− The risk inherent in the future cash flows is reflected in the discount rate
− A firm’s cost of debt is always less than its cost of equity
• Equity Capital and Investors
− The different types of equity capital are:
◦ Common equity, preferred equity, limited and general partnership shares
− There are many different sources of equity capital that differ based on how developed the company is and
the need for the capital.
• Required Rates of Return
− Companies have different capital needs at each stage of growth and may approach different capital
providers at each stage of the process.
− Each stage has very different risk profiles and each investor pool has different tolerances for those risks
• Capital Budgeting
− Capital budgeting and planning is the process by which a firm sets capital allocation targets and builds
towards an optimized portfolio of projects
− Capital can be invested to create shareholder value in several different ways
Time
The capital structure of a firm is the mix of different sources of capital issued by
the firm to finance its operations.
Sources of Capital:
– Debt: Bonds, bank loans
– Equity: Ordinary shares (common stock), Preference shares (preferred stock)
– Hybrids: warrants, convertible bonds
Operating Liabilities
Debt
Operating Assets
Capital
Preference Shares
Structure
Ordinary Shares
ASSETS
Inventory 3,000
LIABILITIES
MEMBERS EQUITY
Capital
Members Equity 800,000 Structure
Retained Earnings (36,667)
Operating Liabilities
Debt
Operating Assets
Capital
Preference Shares
Structure
Ordinary Shares
Secured Bank
Loans
2nd Lien
Institutional
Loans/
B/C
Notes
Debt Tranches
Unsecured
Mezzanine
Note
Unsecured Note
Payment-in-Kind
Loans / Notes
Hybrid Preferred
• Money has a time value because money can be invested with the expectation
of earning a positive rate of return
− In other words, a dollar received today is worth more than a dollar received tomorrow
− TIME allows you the opportunity to postpone consumption and earn INTEREST
− That is because today’s dollar can be invested so that we have more than one dollar
tomorrow
10%
0 1 2 3 4 5
interest
$10,000
Present Value
= $6,210
Copyright © 2017 Deloitte Development LLC. All rights reserved. 13
Knowledge Check #2
Time Value of Money Exercise
Nuggets wants to buy a new software system that will revolutionize the way
customers order their food. The new software system will not be ready for six
years but Nuggets has put its name on the list to buy the system. The new
software system will cost the company $1 million dollars. Company
management wants to reserve some cash and put it away in a bank account
until they actually make the purchase. How much money should they put in the
bank account now in order to have $1 million in six years assuming the bank
account earns an interest rate of 3.5%?
0 1 2 3 4 5 6
3.5%
interest
$1,000,000
Deposit now (closest answer)?
A. $1,200,000
B. $200,000
C. $900,000
• Theoretical approaches to optimal capital structure result in a cash rich and debt light company.
• The optimal allocation of capital is sourced from various instruments and the choice of
instruments is based on the prevailing capital market conditions.
• There are a number of interactive and key practical considerations that drive this decision,
including the specific objectives of the company, the requirement for a stable financing structure
to support the business, the asset security package available to support the debt and financial
flexibility within the company’s cash flows.
Supporting business
objectives
Financing requirements
• New transactions
• Existing business
requirements
Costs
• Interest Stability
margin • Tenor
• Other Capital • Financial/
Financial flexibility fees Strategy other Stability of debt
covenants
Security considerations
• Assets
• Guarantees
• Unencumbered assets
Properly structured
Copyright © 2017 Deloitte Development LLC. All rights reserved.
security 16
Equity Capital and Investors
Basics of Equity Capital
Acitivist
8%
Hedge
Fund
5%
•Common stock
− A voting interest and ownership in an entity. Stock ownership typically does not entitle
owners to scheduled dividends and returns can be highly variable
•Preferred stock
− Characterized by a “preferred returns” usually in the form of scheduled or guaranteed
dividend payments. Typically a non-controlling interest
•Partnership shares
− Structure in which multiple partners, or general partners together control the business.
Partnerships are not taxed at the entity level and profits are passed to the partners and
taxed at the individual level
Source: investopedia.com
Copyright © 2017 Deloitte Development LLC. All rights reserved. 19
Equity Capital for Start-Ups
• Founders Contributions
− 84% of start-ups are funded through various types of founder
contributions
− 2.6% of start ups are funded through money contributed by friends and
family
•Crowdfunding
− Collective effort of individuals who pool their resources, usually via the
internet, to support the development of a business in exchange for equity
Source: 2016 Preqin Global Private Equity & Venture Capital Report NYX Data; Nasdaq
Seed/Start Up:
• Typically $200,00 to $1 million
• Provided by friends & families, nonprofit venture development groups, and grants
• Crowdsourcing: Online matching of investors on a micro loan (equity) basis
• Alpha and Beta stage products – early testing phase
Early Stage:
• $1-5 million
• Angel investors, regional venture capital firms, high net worth individuals
• Beta stage product or early adoption period
Growth Stage:
• $5 million+
• Variety of sources including venture capital, strategic investors, debt capital and
hybrids
• Scaling products and services up to full capacity
• Venture capital investors may start to think about how to exit down the road and look
for ways to pull out capital
Companies have different capital needs at each stage of growth and may approach
different capital providers at each stage of the process. Each stage has very different risk
profiles and each investor pool has different tolerances for those risks.
Copyright © 2017 Deloitte Development LLC. All rights reserved. 23
Required Rates of Return
Time
Stage
# of % $ Share
Common Stock
Shares Ownership Investment Price
1
John Coulter 2,000,000 25% $200,000 $0.10
1
Jen Coulter 2,000,000 25% $200,000 $0.10
2 Friends & Family 4,000,000 50% $400,000 $0.10
Total Common
8,000,000 100% $800,000
Stock
1.The Coulter siblings each invested $200,000 of personal savings in 1990, which gave
them each 25 percent ownership of Nuggets
2.At the same time, friends and family collectively provided $400,000 of additional capital
to help start the business. The investment provided friends and family with a 50 percent
ownership stake in Nuggets
ASSETS ASSETS
Net Plant, Property & Equipment 239,583 Net Plant, Property & Equipment 1,566,048
Net Intangible Assets (Liquor License) 14,750 Net Intangible Assets (Liquor License) 99,891
LIABILITIES LIABILITIES
Total Liabilities & Members Equity $766,333 Total Liabilities & Shareholders Equity $5,019,651
• In order to expand the business regionally, the coulter siblings estimated that they need
an additional $2,000,000 of capital
• Two separate venture capital firms agreed to provide Nuggets with $1,000,000 each at
a price of $0.38 per share
Original New /
Common Original # Original % New # of New % Inc / (Dec)
Investmen Current
Stock of Shares Ownership Shares Ownership in Value
t Value
Friends &
4,000,000 50% $400,000 4,000,000 30% $1,500,000 $1,100,000
Family
Capital budgeting is perhaps the most important functions financial managers perform
Debt Repayment
0 -$1,000,000 -$1,400,000
1 100,000 600,000
2 500,000 600,000
3 800,000 600,000
Weakness of this approach: Time value of money is ignored as well as the cash flows
that occur after the payback period
Project A includes a new fryer that enhances the range of flavor possibilities. Project B is a new
technology that reduces amount of oil needed which reduces operating costs.
While Project B has a faster payback period (2.25 years) than Project A (2.5 years), the NPV (assuming a
10% discount rate) of Project A is higher than Project B, which suggests that Project A would be the
preferable project if only one project could be pursued.
Project A Project B
Cash Flow (1,000,000) 100,000 500,000 800,000 Cash Flow (1,400,000) 600,000 600,000 600,000
[1] Standard deviation is defined as how much variation or "dispersion" exists from the average
[1] Standard deviation is defined as how much variation or "dispersion" exists from the average
[1] Standard deviation is defined as how much variation or "dispersion" exists from the average
[1] Standard deviation is defined as how much variation or "dispersion" exists from the average
[1] Standard deviation is defined as how much variation or "dispersion" exists from the average
[1] Standard deviation is defined as how much variation or "dispersion" exists from the average
2
Copyright © 2017 Deloitte Development LLC. All rights reserved.
Summary of Key Learning Points
Summary of Key Learning Points
• Debt is a critical part of most capital structures and is raised for a wide
variety of reasons
• Debt capital comes in many forms and from many different types of providers
• Appropriate debt capital for a company is often determined by the company’s
stage of development
• Primary debt considerations include: pricing, term, security, repayment
terms, availability, and financial covenants / structural flexibility
• Financial covenants are common – be familiar with the calculation of
leverage, interest coverage, fixed charge coverage
• Debt documents, such as credit agreements, are written contracts containing
definitive terms between lenders and borrowers
• Hybrid capital, which has certain advantages, can sometimes replace equity
capital
• Companies can hire advisors to help them raise debt or equity capital, usually
a 3-6 month process
4
Copyright © 2017 Deloitte Development LLC. All rights reserved.
Ways to Source Capital and the
Capital Raising Process
Capital Sources
Raising capital
Borrowers seeking capital Investment bankers and advisors local and international investors
Typically triggers include: Why companies use intermediaries: Debt providers include:
- Access to investors - Commercial banks
- Need for growth capital - Market and structuring - Debt funds
- Refinancing maturities knowledge - Mezzanine funds
- Acquisitions /M&A - Ability to run a broad process - Insurance
- Shareholder liquidity - Access to senior decision makers companies
- More flexibility required - Execution resource - CLO’s
- Advises on structuring and - Finance companies
negotiations - BDCs
- Regulatory requirements - Family offices
- Hedge funds
- Asset managers
Equity providers:
- Friends and Family
- Venture Capital
- Angel Investors
- Private Equity
Investors
- Public Equity 6
Copyright © 2017 Deloitte Development LLC. All rights reserved.
Typical Capital Raise Process Through an Investment Bank
Investment banker capitalizes on deal execution experience to create a
competitive, effective, and efficient transaction process.
Execute
Market Lender Lender Final Lender
Preparation Pre-Marketing Legal Funding
Transaction Meetings Due Diligence Commitments
Documentation
9
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Types of Debt Capital
What are the basic reasons for raising Debt Capital?
Opportunistically
Funding Growth Refinance
-Working capital
- Capex
/Extend
Maturities
Acquisitions /
Restructuring
M&A
Create
shareholder
liquidity
12
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Elements of Capital Structure
Capital structures can range from simple to complex
Enterprise Value Coverage
2nd Lien
Institutional
Loans/
B/C Tranches
Notes
Debt
Unsecured
Mezzanine
Note
Unsecured Note
Payment-in-Kind Loans /
Notes
Hybrid Preferred
13
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Indicative
Types of Debt Pricing
An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts
Commercial Paper receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range L + 100
longer than 270 days
Asset Based Loan (“ABL”) Revolving Credit Facility secured by the Company’s working capital assets with availability subject to a
Borrowing Base (formula based, periodic (usually monthly) calculation of the maximum amount of L + 200
Revolver borrowing the assets support)
Revolving Line of Credit that is usually pari passu with other senior secured debt (specifically the Term
Revolver Loans) and is not subject to a Borrowing Base L + 300
Senior secured Term Loan, often referred to as “Bank Debt”, as banks typically invest in this tranche;
Term Loan A (“TLA”) banks often invest in what is referred to as the “Pro Rata Facility” which is a strip of the Revolver and the L + 350
Term Loan A
Senior secured Term Loan, often referred to as the “Institutional” tranche, as institutional investors
Term Loan B (“TLB”) typically invest in the TLB, which most often has lower scheduled amortization than the Term Loan A L + 450
(often 1% per year)
Senior secured term debt that is subordinated in right to the collateral to the first lien debt (Revolver,
Second Lien Loan TLA, and TLB), but typically not subordinated in right to ongoing cash interest payment L + 850
A type of facility that combines senior and subordinated debt into one debt instrument where a single
Unitranche Loan blended interest rate is paid to a single lender. Unitranche loans are designed to simplify debt structure L + 750
and accelerate the closing process. Eliminates intercreditor issues
Subordinated, usually unsecured debt investment typically seen in middle market (where middle market is 12% Cash +
Mezzanine Debt defined as companies with annual revenues ranging from $50 million to $1 billion) transactions and often 2% PIK + 3%
has equity like characteristics (equity co-invest, warrants, options) Warrants
We will touch on various subordinated debt investments including mezzanine, subordinated, high-yield
Subordinated Debt debt, holdco, and seller notes 10%-20%
14
Copyright © 2017 Deloitte Development LLC. All rights reserved.
How an ABL Works - The Borrowing Base Formula
Definition Sample borrowing base calculation
($ in millions) Nuggets Pro Forma
• Comprised of 5 components 2017 2017
• Assets (+) Accounts Receivables
− Trade Accounts Receivable (AR) Gross AR $9.2 $21.6
− Inventory Less: Ineligibles (10%)(1) (0.9) (2.2)
Net AR $8.3 $19.4
− Fixed Assets (Machinery &
Advance rate 85.0% 85.0%
Equipment, Real Estate, etc)
Availaibility from AR $7.1 $16.5
− Other
• Ineligibles (-) Inventory(2)
− Audit trail, hard number, formulaic Gross Inventory $3.9 $6.7
Less: Ineligibles (17.5%) (0.7) (1.2)
• Advance Rates (x)
$3.2 $5.5
− Additional discounting against the Advance rate 65.0% 65.0%
net of the above elements Availability from Inventory $2.1 $3.6
• Reserves (-)
− Soft numbers, estimates Total Availability $9.2 $20.1
• Borrowings are limited to the lower of Less: Estimated Reserves(3) (0.0) (0.0)
the commitment amount or availability Less: Outstandings (0.0) (0.0)
as calculated under the borrowing base Less: Estimated LCs (0.0) (0.0)
Estimated excess availability $9.2 $20.1
• Borrowers typically submit borrowing
base calculations on a monthly basis (1) A/R ineligibles based upon bank estimates, to be
confirmed by bank field examination
(2) Inventory ineligibles and advance rates estimated. Actual
ineligible and advance rates often subject to appraisal
results
(3) Estimated reserves may include rent reserves, and other
relevant reserves. Actual reserves determined following
collateral diligence
15
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Examples of Hybrid Capital
Examples of Hybrid Capital
17
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Debt and Equity Documentation
Overview
Major Types of Capital Documentation
• Credit Agreements
−Typically for senior/secured/second-lien debt
• Inter-creditor Agreements
−An agreement between two lenders with the same borrower
19
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Key Sections of a Credit Agreement
The Loans • Description of the loans including: amount, interest and repayment rate
The Guarantee • Details the terms of any guarantees being provided by the borrower
Affirmative • Actions that the Borrower must take on a go forward basis, including
Covenants financial covenants
Events of Default • Events that will cause the Borrower to be in default of the agreement
and remedies available to lenders after default
Lender Voting • Details what % of Lenders may approve Amendments, Waivers and
Rights Consents
20
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Sections of a Credit Agreement
• Although the sections and terms will vary by type of debt facility, the
following is intended to give a general outline of the sections of an agreement
and the terms captured within each section
21
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Sections of a Credit Agreement
The Guarantee • Details of any guarantees being provided by the Borrower or its
affiliates including:
− Borrower(s)
− Guarantors
− The Guarantee, continuation of the Guarantee, and limitations of
the Guarantee
22
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Sections of a Credit Agreement
Affirmative • Actions that the Borrower must take on a go forward basis including:
Covenants − Reporting requirements
− Payment of obligations
− Compliance with laws
− Maintaining properties (collateral of lenders)
23
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Sections of a Credit Agreement
Negative • Actions the Borrower may not take on a go forward basis including:
Covenants − Limitations on additional debt and liens
− Restricted payments (to subordinated lenders or shareholders)
− Limitations on changes to the fundamental business
• Section also includes financial, or “maintenance” covenants
24
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Sections of a Credit Agreement
25
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Sections of a Credit Agreement
26
Copyright © 2017 Deloitte Development LLC. All rights reserved.
Credit Metrics Overview
Key Metrics in Credit Analysis
Ratio of Debt to TTM EBITDA – commonly tested leverage ratios include senior
Leverage leverage, total leverage, and net leverage; quick test of the level of debt on the
Company; helpful in assessing financial condition and in comp analysis
Ratio of EBITDA less CAPEX to Fixed Charges (interest, taxes, and scheduled debt
Fixed Charge Coverage amortization) – measurement of the Company’s ability to produce sufficient cash
flow to cover all of its fixed obligations including debt service
Liquidity is availability under the Revolver plus the cash on the balance sheet –
Liquidity / Availability measurement of ability to continue to support operations and service debt in the
event cash flow from operations is insufficient in a given period
Current Yield, Yield to Maturity, Yield to Call, and Effective Spread – various return
Return Analyses analyses to assess whether or not an investment meets investment criteria and/or
the relative attractiveness of one investment vs. another
Credit metrics can be defined in many ways, the definitions on this page are examples.
28
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Leverage and Loan to Enterprise Value Calculations
Example Capital Structure #1
Commitment Amount % of EV EBITDA Multiple
Revolver ($5MM Commit) 0.0 0.0% 0.00
Term Loan B 12.5 28.6% 2.50
Senior Debt 12.5 28.6% 2.50
Note: In all examples, EBITDA Multiples based an assumed Adjusted EBITDA of $5.0MM
29
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Key Metrics in Credit Analysis
Covenant Key Considerations
The FCCR is one of the most important financial covenants. It enables lenders and
company executives to better understand how the cash flow profile of the business
Fixed Charge
can service mandatory payments.
Coverage Ratio
FCCR is typically defined as: (Adjusted EBITDA less Capital Expenditures less Taxes)
(“FCCR”) / (Mandatory Principal Amortization plus Cash Interest)
Lenders typically mandate that a company’s FCCR remain above 1.25x.
A maximum net leverage ratio will be set to ensure that a company is sufficiently
paying down the principal balance on its debt facility.
Net Leverage Ratio
The net leverage ratio is defined as: (Total Outstanding Debt less Cash) / Adjusted
EBITDA.
Depending on the specifics of the company receiving debt capital, as well as the
type of debt facility in place, lenders may require additional covenants. Some
examples include:
− Minimum EBITDA – Threshold set based on downside or lender
projections.
− If a company’s EBITDA drops below the set level, then the lender
may increase the interest rate on the loan (or charge a default rate)
Other Covenants
in order to compensate for the elevated level of risk assumed.
− Minimum Liquidity – Test how much liquidity a company can access, if
needed.
− This is generally defined as: (Cash on Hand plus revolver
availability).
− Others – May include maximum allowable capital expenditures, minimum
solvency or debt to equity levels, and minimum cash, among others.
• Nuggets has just agreed to acquire Best Brew Pubs (“BBP”) for 8x TTM
EBITDA of $34 million, or $272 million
• Nuggets currently has $40 million in cash earmarked for the acquisition, so it
is considering several debt capital options to finance the remaining cash need
32
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Nuggets Transaction Assumptions
(Dollar amounts in millions)
33
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Nuggets Transaction Assumptions
(Dollar amounts in millions)
34
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Pro Forma Income Statement
35
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Pro Forma Balance Sheet
Purchase
(in $millions) Target Nuggets Adjustments Pro Forma
Year 2012 2012 2013
ASSETS
Cash And Equivalents $ 15.0 $ 14.9 $ 29.9
Short-Term Investments - 34.1 (40.0) (5.9)
Total Cash & Short-Term Investments 15.0 49.0 24.0
Accounts Receivable 12.4 9.2 21.6
Other Receivables - 1.0 1.0
Total Receivables 12.4 10.3 22.7
Inventory 2.9 3.9 6.7
Prepaid Expense - 1.7 1.7
Deferred Tax Assets, Current - 4.5 4.5
Other Current Assets - 19.8 19.8
Total Current Assets 30.3 89.1 79.3
Gross Property, Plant & Equipment 100.0 330.6 430.6
Accumulated Depreciation 20.0 124.0 144.0
Net Property, Plant & Equipment 80.0 206.6 286.6
Goodwill - 11.4 179.1 190.5
Other Intangibles - - -
Other Long-Term Assets - 17.9 17.9
Total Assets $ 110.3 $ 325.0 $ 574.3
LIABILITIES
Accounts Payable $ 12.3 $ 18.2 $ 30.5
Accrued Expenses 3.0 20.5 23.5
Other Current Liabilities 2.0 21.0 23.0
Total Current Liabilities 17.3 59.7 77.0
Long-Term Debt 40.0 - 200.0 240.0
Capital Leases - - -
Deferred Tax Liability, Non-Current - 23.7 23.7
Other Non-Current Liabilities - 16.4 16.5
Total Liabilities 57.3 99.8 357.2
Preferred Stock, Convertible - - -
Total Preferred Equity - - -
Common Stock 10.0 74.4 (10.0) 74.4
Additional Paid In Capital - - -
Retained Earnings 42.9 150.8 (50.9) 142.9
Total Common Equity 52.9 225.2 217.3
Total Equity 52.9 225.2 217.1
Total Liabilities And Equity $ 110.3 $ 325.0 $ 574.3
36
Copyright © 2017 Deloitte Development LLC. All rights reserved.
Summary of Debt Capital Options
ABL Term Loan A Second Lien Unitranche High Yield
Term Loan
Commitment $30 Million $160 Million (1.52 $40 Million (0.3 $200 Million $200 Million
Amount LTM pro forma LTM EBITDA)
EBITDA)
Funded Determined by $160 Million $40 Million $200 Million $200 Million
Availability at Borrowing Base
Close
Pricing Libor + 250 bps Libor + 500 bps Libor + 1,100 bps Libor + 800 bps 10% Fixed
Assume
LIBOR=50bps
Security First lien on ABL First lien on all Second lien on all First lien on all Unsecured
assets assets, subject to assets, subject to assets, subject to
ABL priority on ABL intercreditor ABL liens
assets
Covenants Fixed Charge Interest Coverage; Same as Term A, Same as Term A Negative covenants
Coverage; Total Leverage; but “set back a only
Minimum Net Fixed Charge half-turn”
Worth Coverage
37
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Nuggets Possible Paths
38
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Pros and Cons Highlights
39
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The Correct Answer Is?
• The Answer Is …
− Option #1 provides $6-7 million in interest savings per year vs Option #3, but Option
#1 will allow less operating flexibility because $16 million per year will be used for
amortization payments on the term loan and Nuggets will have to comply with
financial covenants tied to projected performance.
− Option #3 is higher cost, but provides more operating flexibility in future years due to
the lack of amortization payments, longer maturity, and lack of financial covenants. If
Nuggets wants to retain more of its cash flow to invest into growth initiatives in the
future, Option #3 might be the right fit.
40
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Questions and Answers
Disclaimer
This presentation contains general information only and Deloitte is not, by means of this presentation,
rendering accounting, business, financial, investment, legal, tax, or other professional advice or
services. This presentation is not a substitute for such professional advice or services, nor should it be
used as a basis for any decision or action that may affect your business. Before making any decision
or taking any action that may affect your business, you should consult a qualified professional advisor.
Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.
42
Copyright © 2017 Deloitte Development LLC. All rights reserved.
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee
(“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally
separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to
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www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.
Certain services may not be available to attest clients under the rules and regulations of public accounting.
The sell side analysts and key shareholders of Nuggets had been largely happy with the company’s operational performance and
growth in the U.S. markets. The company’s stock price had largely followed suit and was trading at a 52 week high recently.
Shareholders were content with the company’s high rate of growth as Nuggets expanded its concept across the United States,
but the high stock price implied that they were also demanding continued growth in earnings and cash flow.
Change in Strategy
Nugget’s Management was aware of the high expectations being priced into the company’s stock and as they evaluated their
growth opportunities in the United States they arrived at the conclusion that they were running out of high growth opportunities
in the United States for their core concept. The Management team had proven that they were adept restaurant operators and
felt that they should be able to leverage the Company’s experience to expand quite easily into foreign markets. The Board,
however, demanded that Management proceed in very deliberate and cautious way with their first acquisition, and wanted to
focus on markets that were more similar to the U.S. The Board also asked Management to consider concepts near their core
business but also consider unique foreign concepts that could potentially be leveraged back into the U.S. market one day.
Management was also attuned to the fact that shareholders were beginning to question the Company’s reliance on one key
brand and concept and wanted additional diversification in the restaurant sector. Therefore, Management made the decision to
reassess its corporate strategy and consider M&A since the company had a very strong balance sheet and Management had
some experience, albeit very limited, in executing acquisitions at previous companies.
M&A Advisory
Management engaged an advisor to assist the company in outlining a comprehensive strategy as this was going to be a big
change in direction for the Company. After months of market analysis and careful thought Nuggets decided to engage the
advisor and legal counsel, both with deep experience in the industry and in international M&A, to begin a targeting process to
identify potential acquisition targets in the UK. Through their research, the CEO and CFO concluded that there was a good
opportunity to take advantage of their skillsets in the restaurant and Public House (Pub) sector in the UK.
The M&A Life Cycle is a challenging and complex process that requires involvement from all
of the company stakeholders and external advisors
Benefits Risks
• Challenges associated with post-
• Provides access to new products, markets acquisition integration
and revenues
• Inability to capture synergies
• Transfers know-how and intellectual
property • Buyer: overpayment for the asset; Seller:
failure to receive full value
• Gives complete control of capabilities
• Incompatible strategic fit of the
• Creates an opportunity to leverage organization and culture
synergies
• Absence of a strategic end state in mind
• Diversifies the product portfolio and reduce
risk • Retention of key personnel and intellectual
capital
Growth
Due Diligence
Board of General CEO and CFO Corporate Accounting Finance and IT and HR
Directors Counsel COO Development and Tax Treasury
Advisors / Specialists
Legal
Counsel Other
(inside or
outside) Advisors
Provide insight into current M&A market
conditions
Add structure to the process — conveys
serious intent to potential buyers
Pre-screen targets to help minimize time
spent with those just “kicking the tires”
Add analytical rigor through financial
modeling and valuation
Help identify transaction exposures and
contractual mitigation strategies
Help identify most advantageous
transaction structures
Assist with purchase agreement
negotiations leveraging understanding of
current market terms
Due Diligence
Implementation
Planning Closing and
Merger Target Negotiation Implementation
Preliminary Deal Modeling Execution of
Strategy Screening and of Letter Definitive Negotiation and Transaction
Due Diligence and Valuation Implementation
Development Identification of Intent Due of Final Closing Preparation
Plan
Diligence Transaction
Directions: You are the CEO presenting to your board of directors. What is
the investment thesis behind an acquisition of Best Brew Pubs?
Investment Thesis:
1.
2.
3.
Due Diligence
Implementation
Planning Implementation Closing and
Merger Target Negotiation
Preliminary Deal Modeling and Transaction Execution of
Strategy Screening and of Letter Definitive Negotiation
Due Diligence and Valuation Closing Implementation
Development Identification of Intent Due of Final
Preparation Plan
Diligence Transaction
Roles of Advisors
• Assess targets using strategic filters based on management criteria
• Assist management in finalizing list of potential targets
• Assist with target approach and development of Business Case
• Contact targets and identify interested parties
• Assist in negotiating confidentiality agreement and perform initial diligence
• Assist with internal approval process and present Business Case to the Board
Universe of Companies
Preliminary Search:
Search using industry key words, company 500 Companies
databases, and general internet searches
Coarse screen:
Conduct high-level review to remove low 100 Companies
quality results based on compatibility
Medium screen:
Conduct in-depth review of each company’s 50 Companies
service and product offerings to assess
strategic alignment
Fine screen:
Final filter to select companies with greatest 10
alignment with M&A strategy (e.g. product Targets
and geographic fit, growth profile)
Yields a Manageable
Target Universe
Due Diligence
Implementation
Planning Implementation Closing and
Merger Target Negotiation
Preliminary Deal Modeling and Transaction Execution of
Strategy Screening and of Letter Definitive Negotiation
Due Diligence and Valuation Closing Implementation
Development Identification of Intent Due of Final
Diligence Transaction Preparation Plan
Roles of Advisors
• Assist with pro forma financial statements, detailed assumptions, value drivers and quality of earnings
• Construct detailed financial model and valuations, analyzing potential scenarios (value, IRR, earnings)
• Assist Management to summarize and present analyses for Board presentations
• Advise during negotiations and execute LOI (including exclusivity); Facilitate transaction closing
• Manage final due diligence, structuring payment terms (coordinate with legal counsel), and post closing
• Assist in negotiation of definitive purchase and sale and other ancillary agreements
Legal
• Products and pricing technology, organization,
Commercial • Vendor and supply chain operations IT
• Operational effectiveness • Intellectual Property
• Culture • Integration
• Corruption
• Economic and trade
Compliance sanctions • Environmental
and • Money laundering • OSHA Other
integrity • Reputation and business • Contracts
practices of stakeholders
• Regulatory
Why is it important?
• QoE analysis drives understanding of normalized EBITDA, which can directly affect price, financing and
other value considerations
• Other quality of earnings analyses: organic vs. acquisition growth, significant lost customers, customer
concentration, FX impact
QOE drives EBITDA which directly affects deal value and transaction
terms
Cumulative probability
0.9
Low case
DCF
0.8
0.7 Strategy 1
0.6
0.5
0.4 Strategy 2
0.3
0.2
0.1
Time 0
EV EV
Risk Factor 1
Risk Factor 2
Risk Factor 3
Risk Factor 4
Risk Factor 5
• Only specific assets and liabilities of the target acquired and assumed, respectively, so may
be able to limit focus of diligence to the specific relevant accounts for which Buyer will
possess the risks and rewards of ownership
Stock deals
• All rewards and risks of ownership (all assets, liabilities and exposures) transfer to Buyer
upon closing, subject to indemnifications
• Financial and income tax diligence often more rigorous, especially with respect to exposures
and contingencies
• Potentially less flexibility re: certain operating decisions (head count, severance, benefits)
Asset Deal
(Including 338 Stock Deal
Election)
Double Tax
Y (Except
N
S-Corp)
Capital Gains
vs. Ordinary CG and Ordinary CG
Step-up in
Asset Basis Y N
NOL Carryover
N Y
Parent SH SH
Target Co.
• No seller remaining following closing • Sellers can commit outright to sell the
to which the Purchaser may have company
legal recourse for claims, such as
claims for breaches of reps and • Small shareholder base may make
warranties certain transaction structures feasible
(assets)
• Public transactions require additional
disclosure to shareholders under • Generally no need for the target
federal securities laws company’s board to have a “fiduciary
out” that would allow them to consider
• Additional time between signing and higher offers after signing
closing for shareholder approval
Due Diligence
Implementation
Planning Implementation Closing and
Merger Target Negotiation
Preliminary Deal Modeling and Transaction Execution of
Strategy Screening and of Letter Definitive Negotiation
Due Diligence and Valuation Closing Implementation
Development Identification of Intent Due of Final
Diligence Transaction Preparation Plan
Roles of Advisors
Integration is a detailed process which seeks to create a “Day 1” organization that can
deliver the transaction’s investment theses
The investment thesis will drive the integration approach:
High
Need for operational linkages
Partial Absorb
Holding
Partial
company
Low
Low High
Need for strategic linkages
Integration Program
Governance Keep integration teams
focused and aligned on the
Steering end-state vision
Committee
Integration Facilitate cross-functional
Leadership Coordination Integration Management
dependencies, issue resolution
Deal Team Office (IMO) and decisions
Drive cadence and
coordination
Work cross-functionally to
deliver value to key
Cross- Change stakeholders
Synergy Operating Workforce & Tax & Legal
Functional Mgmt & Regions
Teams
Capture Model / BP Organization
Comms
Entity Translate the Day 1 priorities
and vision into functional
execution plans
Integration Blueprint
Deloitte shall not be responsible for any loss sustained by any person who
relies on this presentation.
• Introduction
• Top 10 Themes/Takeaways
• Purchase Price Adjustment
• Purchase Price Considerations in the Merger & Acquisition Cycle
• Balance Sheet Considerations
• Earn-Out Considerations
• Strategic Considerations
• Questions and Answers
3. The purchase price adjustment cycle consists of the due diligence period,
performance period, and in some cases, the negotiation / settlement period
and submission period
4. Most commonly disputed items after the closing date are purchase price
adjustment mechanism, representations and warranties, and
indemnifications
• A purchase price adjustment modifies the price paid for a company (up or
down)
• Basic Information:
• Names of Parties
involved • Definitions –
• Purchase price • Seller/Purchaser
• What is being purchased • Purchased Entity
• Key dates for • Assumed
Purpose of transaction Assets/Liabilities
the • Inclusions and • Purchase Price
exclusions related to the Key parts
agreement purchase of the
• Closing Financial
is to set the Statements
• Negotiated Terms: agreement • Purchase Price
terms of the • Purchase Price Adjustment
negotiations Adjustment Mechanism
• Other relevant • Arbitration Clause
provisions, for example
succession planning • Representations and
Warranties
• Indemnifications
Key Phases I.Strategy Development II. Transaction Development III. Transaction Execution IV. Integration
These
Board or Steering Completed Term Executed stages
Transfer of
Committee letter of sheet purchase ownership/ are
approval intent agreement closing optional
documentation
• Declarations from Parties about facts that exist when the agreement is signed
• For example:
o Seller may need to represent that all applicable taxes have been paid
o Both Parties may need to confirm that no other obligations exist at the time
the agreement is signed that would cause a conflict such as environmental
issues
• Typically based on net assets but can be any type of metric previously
negotiated by the Parties as long as it is explicitly stated in the contract.
Examples of common balance sheet metrics include:
Accounts Receivable 10
Accounts Receivable 12.4
Other Receivables -
Other Receivables -
Working Capital Working
Total Receivables Capital 10.0
Total Receivables 12.4
as of 12/31/16 as of 6/30/17
Inventory 30.3 – 17.3 = Inventory 28.3 – 20.0 = 3.8
13.0 2.9 Prepaid Exp. 8.3 -
Prepaid Exp. - Deferred Tax Assets, Curr. -
Deferred Tax Assets, Curr. - Other Current Assets -
Other Current Assets - Total Current Assets 28.3
Total Current Assets 30.3
LIABILITIES
LIABILITIES
Accounts Payable 12.3 Accounts Payable 13.2
Accrued Exp. 3.0 Accrued Exp. 4.1
Other Current Liabilities 2.0 Other Current Liabilities 2.7
Total Current Liabilities 17.3 Total Current Liabilities 20.0
Copyright © 2017 Deloitte Development LLC. All rights reserved. 17
Purchase Price Adjustment – Balance Sheet
Changes in:
• Cash -$0.5 million
BBP • A/R -$2.4 million BBP Working
Working Capital • Inventory +$0.9 million Capital $8.3 Difference between
$13.0 million • A/P +$0.9 million million the Benchmark WC
• Accrued Exp +$1.1 and Closing Date WC
million is -$4.7 million
• Other Current Liab +$0.7
million
Copyright © 2017 Deloitte Development LLC. All rights reserved. 18
Typical Purchase Price Adjustment Provision – Balance Sheet
• Not more than 60 days after the closing date, the Buyer shall prepare a
Closing Date Working Capital Statement in accordance with US generally
accepted accounting principles consistently applied.
• If the working capital as shown in the Closing Date Working Capital Statement
is greater than the Working Capital as shown in the Company’s December 31,
2016 Working Capital Statement included as Exhibit A to this Agreement, then
the purchase price shall be increased by the amount of such excess.
• If the Working Capital as shown in the Closing Date Working Capital Statement
is less than the Working Capital as shown in the Company’s December 31,
2016 Working Capital Statement, then the purchase price shall be decreased
by the amount of such deficiency.
• If the working capital as shown in the Closing Date Working Capital Statement
are greater than the working capital as shown in the company’s December 31,
2016 Working Capital Statement included as Exhibit A to this agreement, then
the purchase price shall be increased by the amount of such excess
• If the working capital as shown in the Closing Date Working Capital Statement
are less than the working capital as shown in the company’s December 31,
2016 Working Capital Statement, then the purchase price shall be decreased
by the amount of such deficiency
• Contractual provision in the purchase and sale of a business that requires the
buyer to pay additional money subsequent to the close of the purchase if the
target meets certain, pre-determined (usually sales) goals.
• Generally Earn-out provisions are used in the sale of businesses that are
newer, smaller and more volatile in their growth prospects.
Key Phases I.Strategy Development II. Transaction Development III. Transaction Execution IV. Integration
• The Seller shall be entitled to receive from Buyer additional amounts based on
the Company’s performance during the twelve month period ending on the
one-year anniversary of the Closing Date (often called the performance period
or anniversary period).
• The Earn-out payment shall be an amount equal to (a) the product of three
times (b) the Company’s EBITDA during the one-year anniversary period
minus (b) $100,000,000.
• “EBITDA” means with respect to the anniversary period, the net income for
such period, determined using the US generally accepted accounting principles
consistently applied, prior to the provision of interest expense, income taxes,
depreciation and amortization.
• The Seller shall be entitled to receive from Buyer additional amounts based on
the Company’s performance during the twelve month period ending on the
one-year anniversary of the Closing Date.
• The Earn-out payment shall be an amount equal to (a) the product of three
times (b) the Company’s EBITDA during the one-year anniversary period
minus (b) $100,000,000.
• “EBITDA” means with respect to the anniversary period, the net income for
such period, determined using the US generally accepted accounting principles
consistently applied, prior to the provision of interest expense, income taxes,
depreciation and amortization.
8/31/17 6/30/18
Closing Date Balance Sheet Earn-Out Anniversary
Prepared as of 6/30/17 Period
Due Diligence Period
12/31/16 6/30/17
3/31/17
Benchmark Closing Date
Agreement
Date/ Base
Signing Date
Date
Changes in:
• Cash -$0.5 million
BBP Working BBP Purchase Price $272
• A/R -$2.4 million Nuggets and BBP agree on additional payment
Capital Working million plus/ minus
• Inventory +$0.9 million of 6/30/18 EBITDA times 3 less $100 million
$13.0 million Capital changes in WC, plus
• A/P +$0.9 million
$8.3 6/30/18 EBITDA times
• Accrued Exp +$1.1 million
million 3 less $100 million
• Other Current Liab +$0.7
million
Copyright © 2017 Deloitte Development LLC. All rights reserved. 25
Other Provisions Included in the Purchase Agreement:
Succession Planning
o After the Closing, the Buyer takes over the company but in some situations
the Seller may stay for an agreed period of time to train new personnel,
help with transition and run parts of the company.
o The agreement should have language that specifies the time period, tasks
and responsibilities as well as an explanation whether that will have any
effect on the performance period related to the earn-out calculation.
Record retention
• Prior stand-alone financial statements may not have been prepared
• No basis for consistency in terms of GAAP
Timing
• Misappropriation or draining of assets from the business
Delta View:
• Measures a change from the Benchmark Date
to the Closing Date
• Seller insists on calculating the Closing Date
Financial Statements on a historical basis, i.e.
the consistency view
Absolute View:
• A Buyer does not
care how the
Financial Statements
were prepared in the
past, insists on using
GAAP as of the
Closing Date
Company A
• Financial Statements prepared in
accordance with US GAAP
• Spare Parts Inventory shared
between plants and were not
Delta View: written off historically.
• Seller argues that none of the inventory was
written off historically. Therefore, according to Plant 1
the Seller the spare parts should be included as Plant 2
part of the Closing Statement and the Buyer
Plant 3
should pay $1 million for the spare parts.
Plant 4
Absolute View:
• Buyer argues that $500,000
of spare parts are not going
to be used, ever, and are
obsolete. The Buyer argues
according to GAAP the spare
parts should be written off
and should not be included
as part of the assets
acquired.
• Describes the principles that will be used to prepare the financial statements
as of and for the Base/ Benchmark Period and Closing Period.
• Contractual modifications
• In buy-sell disputes there are only two users of the closing date balance sheet
– the Buyer and the Seller.
• Since the amount in dispute may mean a dollar for dollar adjustment for one
of the parties, materiality becomes much lower than in normal circumstances
• Allows “cherry picking” – objection to amounts that benefit one party while
ignoring those that go the other way
• Confirm this issue is discussed with your client and include explicit language in
the agreement
Total Equity 53
• Subsequent events
o Reserves and accrued liabilities must be based on information known or
knowable when the financial statements are issued.
• The agreement should state the "date" of the Closing Financial Statements in
order for the financial statements to reflect the correct amounts of assets and
liabilities.
Copyright © 2017 Deloitte Development LLC. All rights reserved. 38
Purchase Price Adjustment – Balance Sheet
Changes in:
• Cash -$0.5 million
• A/R -$2.4 million Difference between
BBP BBP
• Inventory +$0.9 million the Benchmark WC
Working Capital Working
• A/P +$0.9 million and Closing Date WC
$13.0 million Capital $8.3
• Accrued Exp +$1.1 is -$4.7 million
million
million
• Other Current Liab +$0.7
million
Copyright © 2017 Deloitte Development LLC. All rights reserved. 39
GAAP vs. Consistency
• Buyer will have control of the books and records after the sale
• Financial statement preparers may change loyalties from the seller to the
buyer
Module 11 – Valuation
Agenda
Definitions Considerations
House
Income Approach Market Approach Cost Approach
Business
Income Approach Market Approach Cost Approach
Cash Inflows
• Sales from
goods/services
Business
• Rental income
• Licensing income Cash in
• Subscription income Cash Outflows
• Salaries/wages
• Raw materials
Cash out
• Rental expense
• Machinery/equipment
• Sales & marketing
• Utilities & insurance
Historical Forecasted
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Revenue 100 120 130 135 150 145 145 145 145 145 145
COGS 30 36 39 40 45 43 43 43 43 43 43
SG&A 15 18 20 20 23 22 22 22 22 22 22
Taxes 17 20 21 22 25 24 24 24 24 24 24
NOPAT 39 46 50 52 58 56 56 56 56 56 56
CF Adjustments 10 (5) 5 15 (10) 2 2 2 2 2 2
Free Cash Flows 49 41 55 67 48 58 58 58 58 58 58
Present Value of FCFs 46 35 41 45 29 31 28 25 22 20 18
The income approach estimates the value of a business as the sum of the present value of cash flows
generated over time by the business.
$460k $600k
?
$550k
$425k
Summary Metrics
Transaction Date May ‘15 June ‘15 Aug ‘15 Aug ‘15 May ‘15 N/A Aug ‘15
Sq. Ft. 3,500 4,000 2,500 6,000 3,500 2,500 4,000 6,000
Yr. Built 1992 2001 2010 1948 1995 1948 N/A 2010
Price / Sq. Ft. $125 $137.5 $170 $100 $131 $100 $134 $170
The market approach estimates the value by looking at publicly available information regarding the value
of similar assets. Data points may include publicly traded stock prices and value of recent mergers &
acquisitions
The cost approach estimates the value by estimating the cost that would be incurred to independently
recreate the same asset
ABC, Inc.
Income Statement as of December 31, 2013
• Food sales
Sales • Beverage sales
• Possible licensing income
• Cost of food and beverage ingredients
Costs of good sold • Cost of tables, chairs, cutlery, flatware, glasses, etc.
• Cost of entertainment (e.g. A/V)
= Gross profit • Money earned on sales after accounting for direct costs
= Net operating profit after • Money earned on sales after accounting for operating
tax expenses and taxes
= Free cash flow • Cash flow available to investors (debt and equity holders)
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Terminal
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Year
Food Sales 75 76 78 77 79 80 84 86 85 86 86 88
Drink Sales 185 187 192 191 194 197 207 213 209 211 213 216
Total Revenue 260 263 270 268 273 277 291 300 294 297 300 304
% growth 1.0% 3.0% -1.0% 2.0% 1.5% 5.0% 3.0% -2.0% 1.0% 1.0% 1.5%
Food & Beverage Costs 47 46 49 50 52 49 48 54 53 56 52 52
Salary & Wages 37 35 36 35 33 33 35 36 35 36 36 37
Sales, General & Administrative 115 116 120 118 121 123 129 133 130 131 133 135
Depreciation 20 22 22 24 23 23 30 40 38 35 35 25
Operating Profit 41 43 44 41 45 50 49 37 38 39 44 56
Margin % 15.9% 16.4% 16.3% 15.3% 16.3% 18.0% 17.0% 12.4% 12.8% 13.0% 14.8% 18.3%
Income Taxes 35% 14 15 15 14 16 17 17 13 13 13 16 19
NOPAT 27 28 29 27 29 32 32 24 25 25 29 36
Corporate bond 5%
Risk-free rate 2%
LTM 2016Multiples
2015 Multiples
Business Enterprise
Company BEV / BEV /
Value (BEV) Revenue EBITDA
Revenue EBITDA
The Cheesecake Factory Incorporated 2,375 2,073 252 1.1x 9.4x
Ruby Tuesday, Inc. 502 1,125 78 0.4x 6.4x
Texas Roadhouse, Inc. 2,381 1,757 205 1.4x 11.6x
DineEquity, Inc. 2,885 674 255 4.3x 11.3x
Red Robin Gourmet Burgers, Inc. 1,079 1,253 144 0.9x 7.5x
Best Brew Pubs 255 34
Average 1,376 187 1.6x 9.3x
Median 1,253 205 1.1x 9.4x
Maximum 2,073 255 4.3x 11.6x
Minimum 674 78 0.4x 6.4x
Implied Multiples
Close Date Target Buyer BEV BEV / LTM BEV / LTM
Revenue EBITDA
12/16/2011 Morton's Restaurant Group, Inc. Landry's Restaurants, Inc. 184.3 0.6x 7.6x
7/25/2011 Bojangles Restaurants Advent Int'l 360.8 1.1x 6.9x
6/13/2011 Cracker Barrel Old Country Store, Inc. Biglari Capital Corp. 1,558.0 0.6x 6.6x
5/25/2011 California Pizza Kitchen, Inc. Golden Gate Capital 451.5 0.7x 7.9x
11/8/2010 Bubba Gump Shrimp Co., Inc. Landry's Restaurants, Inc. 112.5 0.6x 6.5x
10/29/2010 Claim Jumper Restaurants, LLC Landry's Restaurants, Inc. 76.6 0.3x n/a
5/10/2010 Rubio's Restaurants, Inc. Mill Road Capital 80.9 0.4x 6.7x
Source: Capital IQ
Copyright © 2017 Deloitte Development LLC. All rights reserved. 19
Value Reconciliation
How much should we pay?
Based on the relative value indications from each approach, as well as our selected weighting based on
our analysis of the relatives strengths and weaknesses of each, we have decided to offer $272 million
for Best Brew Pubs.
Calculation Known?
Share price Market data
x Shares outstanding Market data
= Market Cap (i.e. equity value) Calculation
on a minority basis
+ Control premium Transaction
data
= Equity value (control) Calculation
+ Debt Balance sheet
- Excess cash Balance sheet
= Business Enterprise Value Calculation
Module 12 – Bitcoin/Blockchain
Contents
Introduction 5
Conclusion 10
Trustless environment
Blockchain technology is based on cryptographic proof, allowing any two
parties to transact directly with each other without the need for a trusted
third-party.
Distributed ledger
The peer-to-peer distributed network records a public history of
transactions. The blockchain is distributed and highly available. The
blockchain retains a secure source of proof that the transaction occurred.
Irreversibility
The blockchain contains a certain and verifiable record of every single
transaction ever made. This mitigates the risk of double-spending, fraud,
abuse, and manipulation of transactions.
Censorship resistant
The crypto-economics built into the blockchain model provide incentives
for the participants to continue validating blocks, reducing the possibility
of external influencers to modify previously recorded transaction records.
1 2 3
Peer-to-peer network Public key cryptography Proof-of-work
In a peer-to-peer model, every peer Public key cryptography is a method Proof-of-work is a piece of code
in the network is a server and client, for verifying digital identity with a appended to data that validates that
both supplying and consuming high degree of confidence, enabled data’s authenticity and controls when
resources by the use of private and public keys it can be written into the system
Enables the facilitation of a Allows for individual ownership Prevents double spend by
currency without a central, and exchange of bitcoin among ensuring data is recorded
privileged third party users chronologically
Blockchain
Description Examples
Low
Digital certificate of
Create an immutable record without
ownership for physical
Record reliance on a trusted third party (e.g., assets
Keeping financial clearing house, government) while Transaction validation of digital
Degree of Sophistication
High
Blockchain can efficiently Blockchain can transfer Blockchain can create an Blockchain shows promise
facilitate transfers on peer- payment across currencies auditable source of to drive efficiency in the
to-peer, business-to- almost instantly for a information shared and clearing and settlement
business, and computer-to- fraction of today’s cost and verified across a network of process of digital assets
computer transactions for provide access to the organizations (e.g., KYC through the use of colored
minimal cost unbanked in remote areas compliance) coins
Multi Party
Provenance Aggregation Record Keeping Smart Contracts
Blockchain offers an Blockchain can be used as a Blockchain provide a Contractual terms and
immutable and irreversible shared master data method for collectively obligations can be
source of information that repository for common recording and notarizing programmed directly into
can track the true industry information any type of data, whose the blockchain, maximizing
ownership of a product allowing members to query meaning can be financial or adherence (e.g., syndicated
across the supply chain the data otherwise loans, derivatives)
Legal and Legal recognition of programmable contracts and Involving legal stakeholders
digitally transferred assets in the court of law; lack of and identifying and working
regulatory
regulatory bodies approving applications of blockchain with appropriate regualtory
constraints
technology for specific use cases bodies from early stages
Copyright © 2017 Deloitte Development LLC. All rights reserved. 13
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