Tweet

Risk Assessment Techniques for Valuation and Due Diligence of Operating Companies

Guest post by: Jack Greene

Article Overview: Disciplines such as legal, financial, treasury, and accounting always participate in valuation, but equipment, processes and facilities should as well be considered because they affect not only the balance sheet but also future P&L results of the entity. This article describes due diligence tasks for an operating, manufacturing or processing entity, to quantify physical characteristics, validate claims, identify serious problems and suggest improvement opportunity.

Risk Assessment Techniques for Valuation and Due Diligence of Operating Companies

Disciplines such as legal, financial, treasury, and accounting always participate in valuation, but equipment, processes and facilities should as well be considered because they affect not only the balance sheet but also future P&L results of the entity. This article describes due diligence tasks for an operating, manufacturing or processing entity, to quantify physical characteristics, validate claims, identify serious problems and suggest improvement opportunity.

A basic corporate strategy is to merge or consolidate to concentrate resources for successful operations; economies of scale can minimize cost in any economy, especially this one.

But don't overlook facilities and operations, where all the plans and expectations must come together or the new entity won't function.

Factors to Assess

Often there are several interdependent factors that have a very significant impact on the suitability of the acquisition or merger candidate. It is wise to visit the sites, to scrutinize and quantify such topics as:

1. Work done: Output, capacity, present cost, potential improvement.

2. Facilities: Capability for the task, condition, exposures. Lease, own.

3. Productivity: What it is, how to make it better.

4. Technology: How current and how effective. New product introduction process.

5. Systems: Existence and effectiveness of manual or electronic systems.

6. Constraints: Identify and quantify them, suggest how to relieve them.

7. Priorities: Quantify the relatively few factors which cost the most and offer the biggest potential for improvement.

8. Logistics: Materials, flow. Inventories and obsolescence.

9. Organization: Status now and possible improvement from synergies and critical mass available within the proposed organizations.

10. Manufacturing documentation: List and evaluate the documentation that supports specifications, products, processes, quality control, customer support, shop floor control, materials, maintenance, government regulation. Does the entity actually possess the intellectual property and government approvals it claims?

11. Vendors for major components. Strength of, dependence on, vendors.

12. Location strategy: What should be where if the merger proceeds; potential benefit of relocation.



Post-Merger transition Facility planning and industrial engineering actions can also be very useful in the transition after an investment, especially to reach the expected levels of growth, modernization, new product introduction, technology, integration, or interaction for which the investment is targeted.



Application While this approach is designed for industry, it is also effective in situations where the output is paper, or ideas, or customer service, or container loads. It works well in military Base Realignment and Closure. Most activities involve the same factors; work, a process flow, output, constraints, manning, task assignment, equipment, progress reporting, and organizations.

Most mergers and consolidations involve the same factors; work, a process flow, organizational structure, missions, material, output, constraints, manning, task management, equipment, schedules, and progress reporting. The lawyers and accountants may not judge the impact of these factors, many of which are show stoppers, as well as an operating consultant.

If the merger is successful, a relocation may well be necessary in order to gain some of the advantages of critical mass. At the time of valuation, an outline of the scope and cost of a relocation should be completed, with an analysis of problems and location options.

Yes, you can try to do it yourself; just be sure the ones you delegate have the time and the ability. But your reaction time may be short and, as with most complex issues experience is valuable. A consultant can operate more confidentially in potential merger, at the time when confidentiality is most useful, before an acquirer takes a public stand. A consultant can objectively help to zero in on the most appropriate solutions for the unique circumstances, timetable and budget.





Logistics

The facility / equipment / process evaluation would generally include the following elements.

1. Understand the acquirer's strategy and objectives, and the scope of the project. Understand the strategy for integration of facilities, and of manufacturing and support groups as it affects the prospect.

2. Visit facilities of the acquirer which are similar to those to be acquired. Understand any unique factors to look for, and possible synergies.

3. Visit the facilities to be acquired. Quantify the actual facility, equipment, and process situations.

4. Evaluate the information gathered.

5. Report physical conditions particularly as they affect the intended use of the facility and process. Determine options available and make recommendations accordingly.

6. At the end of the assignment formal records of observations, calculations, assumptions, and conclusions should be turned over to the investors. In the case of a successful acquisition, these notes will be quite useful to the investors to document the assumptions, starting points and objectives, and to the acquiring entity to implement an effective transition and integration.

Thanks for your time; perhaps this will help your valuation.

Jack Greene Jackson Productivity Research Inc.

Related Articles
  FIVE GREAT LESSONS FOR ENTREPRENEURS for Standout Pitches TO ACCESS ANGEL INVESTORS
  Risk Assessment & Analysis Techniques
  Business Value
  How To Valuate Your Business
  Importance of a business valuation when selling your business
  Sound Acquisition Financing Ideas – Commercial Business Loans For Purchase & Merger
  Why you need an appraisal to get an SBA loan
  Buying damaged goods How to evaluate a distressed companys potential
  Some Facts About Buying an Established Small Business
  Buying An Existing Business Part IX of IX
  Everything About Buying A Website
  Sleeping Around
  Cash Flow and Business Valuation
  Why Small Business Owners Are Valuing Their Own Business and Avoiding Business Brokers
  Sales Training for the Entrepreneur Struggling to Succeed
  5 tips for a buyer to qualify for an SBA loan
  Thinking about Selling Your Business? - Some Quick Tips
  Ways on Pricing a Business
  What is the best Franchise?
  Diligence

Article Tags: facility due diligence, manufacturing dur diligencerisk assessment techniques, process due diligence, valuation of facility, valuation of process



Related Forum Posts
Re: looking for partner - Partnerships in business can be tricky. Most partnerships fail. Here are a few points to ponder before starting a partnership: - Should have common goal and vision - Level of commitment in business - Expectations from business and each other. - Good sense of self-worth - Financial Position – Have a good experience in related business with strong financial standing I suggest you to go on Google type “Partnership Assessment form” and Partnership Assessment Tool” You find some good results. Further apart from this forum look into on social media and business sites.
Re: HOW TO: Upload Your Picture in 4 Easy Steps - With Ububtu Operating System how can i apply this procedure?? I hope you would give me clarity ... Thanks in advance...
Re: Bad SEO techniques? - There are few more techniques which also known as the Bad SEO Techniques or Black Hat SEO Techniques. Such as: - Relying on keyword metatags - Purchase Links (From Spamming or blacklisted sites or doing purchase links on high level for site marketing) - Horde Page Rank: This is one of my favorites, because it's one that most webmasters don't understand yet. This is because it changed over the past year or two. The concept people have in their mind is that page rank is a key part of site rankings and linking to other sites "leaks page rank" from your site. However, the world has changed. - Swap Links: Another oldie, but not goodie. Search engines want links to represent endorsements. Swapped links represent barter, and they are trivial to detect. Don't swap links for the purpose of building page rank. It's a waste of your time - Implement duplicate content - Use Session IDs on your URLs - Use lots of Javascript - Implement your site in Flash
Profiling Famous Women Entrepreneurs - Great suggestion Leanne! The PROFIT Companies are always great sources!
How to valuate a business - Hi Garth - here is how we did it at Northern Crown Capital when I was helping them raise venture capital for Toronto-based entrepreneurs. Assume the start date is 2003 so 2008 projections are 5 years out: How Northern Crown Capital Valuates a Business 2008 Financial Projections Earnings Before Tax $5,865,000 Tax Rate 42% Taxes $2,463,300 Net Earnings $3,401,700 Amount Seeking to Raise Today $3,500,000 Discounted Value of Future Opportunity, 5 Years Out 2008 P/E Ratio 15 Value of Company in 2008 $51,025,500 Discount Rate Applied 30% Year 2008 $51,025,500 Year 2007 $35,717,850 Year 2006 $25,002,495 Year 2005 $17,501,747 Year 2004 $12,251,223 Value of Company at Investment in 2003 $12,251,223 Less: Investment Amount $3,500,000 Present Value $8,751,223 Discount for Risk & Private Company 40% Less: Discount for Risk & Private Company $3,500,489 Private Company Value $5,250,734 Present Value (What the Owner Keeps) $5,250,734 60.00% Financing (What the Investor Gets) $3,500,000 40.00% Total $8,750,734 100.00% I hope this helps!


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

WHAT IS MANAGEMENT CONSULTING

Starting a Business with Bad Personal Credit

3 Health Insurance Misconceptions

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.