Earnings: What lies beneath?

The current economic climate of restricted credit and gloomy prospects for growth makes assessing the value and debt capacity of targets ever more critical in M&A transactions. 

Understanding the historical earnings trend of a target is a fundamental precursor to preparing and assessing most business plans.  Multiples of earnings are frequently used as a proxy for value in determining both bid prices and appropriate levels of debt financing.  Earnings trends, however, are rarely transparent due to costs and revenues which, although accounted for correctly, can mislead due to their non-recurring nature.  Proposed adjustments are often subjective and can lead to disagreements between buyer and seller.

The challenge is how to ensure deals can still be financed and also add value.  Pitfalls of failing to understand the underlying earnings of a target can be serious - incorrect valuations, inappropriate debt packages, the inability to obtain finance or not completing the deal are all possible.

Early identification of items which distort earnings trends can help sellers to prepare sensible business plans and give buyers and financiers the confidence to go through with deals.  Ideally this should take place before a target is put up for sale so that both parties have realistic value expectations.  Detailed analysis can be performed either on a discrete basis or as part of a vendor due diligence exercise.  Where items are not identified prior to going to market and come to light during the deal process the value implications can also be addressed with appropriate support during the negotiation phase.

Contact details
Email: Mark Webster
Tel: +44 (0)191 269 4011