Information on Loughborough

Acquisition Analysis - Understanding the Terms

Accountants

Acquisition Analysis - Understanding the TermsBy Scott Mashuda

When analyzing a company for potential acquisition you may run into terms that are not familiar to you such as: Net Income, EBIT, EBITDA and SDCF. Having a thorough understanding of these terms and the relationship between them may be the difference between a good financial decision and a bad one.

Net Income - Net income is an accounting term used to define the bottom line of the income statement. It is an accounting concept calculated as follows: Revenue - Cost of Goods Sold - Operating Expenses = Net Income. Net Income is not the greatest indicator of a company's true financial performance. Why? Because non-cash expenses such as depreciation and amortization are included in the operating expenses that are subtracted from revenue. Depreciation and amortization are theoretical expenses that represent the "using up" of a company's fixed assets (those held on the balance sheet at cost). Since depreciation and amortization are non-cash expenses, including them in operating expenses and subtracting them from revenue will help reduce a company's tax obligation however it will also understate the amount of cash available to a potential acquirer.

Net income is influenced not only by cost of goods sold, operating expenses and non-cash expenses however also expenses specific to current ownership such as interest expense. Since the current ownership may maintain a level of debt that is not optimal, however specific to their personal situations, interest expense must be stripped out of net income before a company's financial performance can be properly evaluated. For example, consider a company that is "over-levered" (they have more debt on the books than the company can support and manage). This may have occurred simply because the owner has no additional cash or equity to contribute to the business. The company's interest expense under this scenario will exceed that of an owner maintaining a lower level of debt. In order to evaluate the financial performance of the business, sans the financial situation of the current owner, a potential acquirer must strip out interest expenses and concentrate on expenses specific to the business.

Another expense which must be excluded from your acquisition analysis is taxes. If we were to evaluate a company's net income, we would not only be incorrectly evaluating the effects of non-cash expenses on the business (depreciation and amortization) and the impact of the current ownership's financial situation (interest expense) however also a tax effect that is based on a percentage of taxable income number that is already skewed by these expenses (depreciation, amortization and interest). Since we do not want to evaluate the company to include the current ownerships capital structure in our analysis (interest expense) and their discretionary expenses (to be discussed later) we must move above the tax effect on the income statement in order to completely strip out their effect (and the effect they have on the company's income tax expense).

EBIT - is an abbreviation for Earnings Before Interest and Taxes. EBIT provides a better indication into the true financial performance of a company than net income for all thereasons specified above. EBIT is not skewed by the company's tax calculation and the current owner's capital structure. It is one of the greatest indications of actual operating profit. Unlike EBITDA (discussed in the next paragraph), EBIT incorporates in its calculation an annual expense allotment for the obsolescence of the company's fixed assets used for revenue producing purposes. This expense takes the form of depreciation for fixed assets and amortization for intangible assets. EBIT is calculated as follows: Net Income + Interest Expense + Income Taxes = EBIT.

EBITDA - is an abbreviation for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is the greatest indicator of a company's actual cash performance. It strips out the company's tax effect, current ownership's capital structure and eliminates the effect of non-cash expenses such as depreciation and amortization. Rarely does a better metric exist to evaluate the actual cash available to ownership at the end of an operating period to pay down debt, pay taxes and offer a return to investors than EBITDA. EBITDA is calculated as follows: EBIT + Depreciation + Amortization = EBITDA.

When evaluating small business acquisitions you will often encounter another acronym SDCF. SDCF is an abbreviation for Seller's Discretionary Cash Flow. Seller's Discretionary Cash Flow assumes that the owner of the business also works for the business and requires a salary for services performed. SDCF is calculated as follows: EBITDA + one owner's salary = SDCF. It is important to recognize that SDCF is not the return you will realize for the risk you are taking as an owner or acquirer however rather the combined return for the duties you perform on a day to day basis (your salary or wages) and the return you require for the risk of being the owner. If SDCF is less than or equal to the salary you (or an employee) will require to perform the day-to-day job duties left vacant by the current owner, then you will not be receiving a return for your financial investment. Your return will be simply a salary to compensate you for the duties performed as an employee of the business.

We'll talk more about these metrics and how they should be used and analyzed in our next post. But for now, get comfortable with the terms. You will see them often when evaluating businesses for potential acquisition. You must learn to speak the language before you can make a reasonably informed and educated buying decision.

Scott MashudaManaging DirectorRiver's Edge Alliance Group, LLCPhone: (440) 915-3082E-mail: smashuda@riversedgealliance.comWebsite: http://www.riversedgealliance.comBlog: http://www.riversedgealliance.com/blog1

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Computing Business Profitability

Accountants

Computing Business ProfitabilityBy Michael Reid

The basic foundation and ultimate goal of most businesses is to create profits from which business growth can be realized. Profit generally is the making of gain in business activity for the benefit of the owners of the business. Just like the blood that circulates throughout the body, profit is vital to the existence and expansion of a profit-seeking organization. Computing this profit is significant because it is from the result of the computation that one is able to make important decisions in the business.

Economic Profit is different from Accounting Profit. Economic profit is the increase in wealth that is made from an investment, taking into consideration all costs that are linked with that investment including the opportunity cost of capital. Accounting profit is the difference between retail sales price and the costs of acquisition (whether by harvest, extraction, manufacture, or purchase).

Computing Business Profitability affects many decisions made inside the business and externally also. How does business profit affect a business?

a. Taxation - your profit will determine the amount that is paid or not paid for taxes. b. Business Growth - this is normally determined by how profitable a business is or its potential for profitability. c. Share Price - if it's a publicly traded company then the price of the share is affected by the profit of the company. d. Financing - your profitability will help to determine the level of finance you can get for your company.

The Profit and Loss Statement This is a financial statement that shows the revenues, costs and expenses generated during a specific period of time - usually a fiscal quarter or year. These records provide information that shows the ability of a company to create profit by increasing revenue and reducing costs. The profit and loss statement is also called "statement of profit and loss", an "income statement", or an "income and expense statement".

The format of the profit and loss statement is basically your revenues less your cost of business operations. That is Sales - (Cost of Goods + operating expenses+ tax expense + interest expense) = Profit

Here's an example of an income statement:

Sales $250,000.00 Cost of goods sold $100,000.00 Revenues:

GROSS PROFIT $150,000.00

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Expenses:

ADVERTISING £ 22,967.00

INSURANCE 6,765.00

LEGAL & PROFESSIONAL SERVICES 725.00

OFFICE EXPENSES 33,557.00

OTHER BUSINESS PROPERTY 12,860.00

LICENSES 5,234.00

PROMOTIONAL 2,397.00

BANK & CREDIT CARD FEES 2,180.00

TITLES & FEES 5,854.00

BOOKKEEPING 540.00

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Total Expenses $93,079.00

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NET PROFIT £ 56,921.00

There are many factors that affect and contribute to a business' profitability that could never be covered in one article. Just keep in mind that the purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported. Then from that information, decisions can be made effectively.

Michael Reid

Michael Reid - marketing/promotions Small Business Promotions, Inc http://www.submitarticlesforfree.com

you can redistribute this article freely however you must keep my contact information including my website address.

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Cash Flow Statements and Why We Need Them

Accountants

Cash Flow Statements and Why We Need ThemBy Joseph Devine

A cash flow statement is the motor oil for any business finance engine. It measures the amounts of money that come into a company and out of it over a given time period. This way a company is able to keep track of how much cash it has on hand to pay expenses and buy assets.

Some people might confuse a cash flow statement with an income statement. An income statement only measures whether or not the company made a profit, whereas a cash flow statement can tell you whether or not the company generated c ash during the time period. These concepts may seem a bit confusing. Just because a company has generated cash does mean that it has generated profit and vice versa. Cash flow statements work particularly with cash where as income statement s may also deal with assets.

Cash flow statements use information from both income statements and balance sheets. Using this information, the cash flow statement will reveal the net increase or decrease in cash for the period. Most cash flow statements are divided into three separate activities: operating activities, investing activities, and financing activities.

Operating Activities

Operating activities shows cash flow from net income to net losses to cash used in and for operation procedures. Sometimes, non- cash items are adjusted for any cash that was used or provided by utilizing other operating assets and liabilities.

InvestingActivities

Investing activities is usually the second part of a cash flow statement. This includes the purchases or sales of long-term assets, such as property, equipment, and even stocks. These actions are still represented as " cash in" or " cash out" depending on what is purchased.

Financing Activities

This is the third part of the cash flow statement. And, as the name might suggest, the financing activities section tracks financing activities. For large companies this includes money raised by issuing stock in the company, or borrowing many from banks. Paying back these loans are also considered under this section of the cash flow statement.

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Joseph Devine