CLASS THREE: Idea Generation and Opportunity Analysis Build or Buy Elikem Nutifafa Kuenyhia Management Consultant & Corporate Lawyer

 Recap of Class Two  The Process of Purchasing a Business  Cost-Conscious Marketing Research  Spend a Day in the Life of Your Customer  Speaker: Kekeli Gadzekpo  Questions

 Starting from scratch  Acquiring an existing business  Operating a franchise  Inheriting a business

 Self-Assessment  Be clear on why you want to make a purchase  Expectations  Risk profile  Personal Values  Preparation  Thoroughly research the opportunity  Patience? Wait for the right deal  Seek advice. Early!  Are you ready to acquire a company?

 Deal Criteria  To be efficient, must have a screening criteria Consistent - comparing apples to apples? Size of deal (purchase price) Type of company – technology focused, marketing etc Type of customer – industrial v. Consumer, international etc Geographic focus – Accra/Tema vs. Kumasi? Ghana? West Africa? Profile of current ownership Thorough – all relevant aspects of the acquisition Future? Potential for improving earnings and cashflow? Predictable cash flow Existing debt? - refinancing? Or servicing? Asset base to support new borrowings?

 Deal Sources  Personal contacts  Creativity – keeping your eyes open  Board members  Consultants – lawyers, accountants  Venture Firms  Brokerage Houses  Stock Exchange  Divestiture Implementation Committee  Press  Trade Associations/Industry Groups  Trade Fairs  Banks

 Resources  Energy, Patience, Common sense  Creativethinking/Wits  Cash – self vs. Leverage Your own skin in the game? Personal cash/ Personal Collateral Assets to support bank financing? Cashflow to service debt?  Credibility  Talent – Management Team/Advisors/ Financial Consultants, Lawyers, Industry advisors

 The Evaluation Process  Initial research evaluation & Detailed research Industry Company Competition Financials – profitability v. Potential; asset base, balance sheet  Valuation  3 main approaches  Market approach: Price is multiples of cashflow, earnings, comparables  Asset approach: book value, liquidation value  Earnings approach: Discounted EBIT, cashflow etc

 Other factors for valuation Growth: Company vs. Industry Bankability (asset composition, seasonality) Gap financing – cash flow financing  Expected ROI/Assumptions: Competition Organisational stability Management General desirability Market share Concentration of customers, suppliers, technology, channels etc

 Negotiating the Deal  Structuring the deal  Asset Purchase vs. Share purchase  Price  Seller Financing – deferred consideration  Bank Financing  Owner involvement post-acquisition  Contract negotiations (reps, warranties, indemnifications)  Further due diligence  Legal DD  Financial DD  Operations DD  Environmental, Real estate etc  Adding Value  Plan post acquisition  Operational changes?  Changing financial structures  Savings?

 Price = what a buyer is willing to pay in return for business/assets  – Exactly what is included?  Cash, inventory, real estates, goodwill, order book, consulting? Transition support?

 Acqusition skills  Understanding the acquisition process, deal structure, taxes, risks, legal issues etc.  Focus & resources to build credibility  Entrepreneurial drive to add value  Capital  Own equity  Financing Skills  Technical skills  Management skills  Marketing, production, finance, legal etc

 Pros:  Faster route to entrepreneurship  Experience of the previous owner  Easier to find finance  Cons:  Cultural/Employee related issues:  Customer and supplier relationships may not be inherited:  Business may be overpriced

 Seller self assessment  Objectives, Needs & Motivation  Operations Review  Products & Services  Production  Distribution  Organisation  Customers  Support  System  Legal etc  Markets, competition & growth opportunities  Financial analysis  Value Assessment  Target buyer profile  Offering memorandum

 The ‘Big Decision’ Myth  The ‘Survey Myopia’ Myth  The ‘Big Bucks’ Myth  The ‘Sophisticated Researcher’ Myth  The ‘Most Research is not Read’ Myth

Wrong Approaches  Limited contact with customers  Information vs. Knowledge  Preconceived ideas about customers’ situation

Right Approaches  Pay attention to customers  Gain information from customers  Be market-focused

Becoming Market-Focused:  Recognise that ‘customer’ means more than the next step in distribution chain  Count on customers for information not insight  Don’t expect brilliant insights each time you study a customer  Involve all levels of the organization in the drive to become market focused