Tag Archives | acquisition

Subordinated Debt

See Also:
Mezzanine Debt Financing (Mezzanine Loans)
Collateralized Debt Obligations
Outstanding Debt
Self-Liquidating Loans
Loan Term
What Your Banker Wants You to Know
Alternative Forms of Financing

Subordinated Debt Definition

Subordinated debt is a security which has a residual claim upon a company’s assets, after the senior debt holders have had their claims satisfied.

Meaning of Subordinated

Subordinated debt is usually taken on by a company who cannot reach better financing opportunities. Whereas, subordinated debentures often contain a higher interest rate due to the risky nature of the securities to investors. Investors would simply refuse to take on a security that has a residual claim on the assets unless the company were willing to pay more. This is also why many companies use this as a last option in financing because of the high costs involved.

Subordinated Example

For example, Parent Co. made an acquisition of Subsidiary Co. a year ago in a leveraged buyout (LBO) for $100 million. They were able to gain a loan from the bank with low interest rates at 5% for $75 million, and was offered a Line of Credit for $50 million. Parent Co. has recently had some trouble cutting costs and getting Subsidiary to run smoothly. Thus, they have used up the rest of its line of credit.

Parent Co. is looking to go public with an IPO soon. But they need financing now to stretch the company until it is able to provide a public offering. Therefore, Parent Co. receives subordinated debt at a rate of 8% for another $50 million. This is at a higher cost to the company/. But they can use it to postpone the debt woes until the company is able to make a public offering in the market. They can then use equity money to pay off the subordinated securities as well as the line of credit.

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

subordinated debt
Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

subordinated debt

0

Mergers and Acquisitions (M&A)

See Also:
Make-or-Buy Business Decision
Company Life Cycle
Company Valuation
Return on Equity
Financial Ratios
Joint Venture (JV)
Accretion

Mergers and Acquisitions Basics

Mergers and acquisitions (M&A) refer to the buying, selling, and combining of companies. In an M&A deal, two companies become one.

M&A deals are typically facilitated by investment bankers. Before going through with a merger or an acquisition, both sides of the deal will conduct due diligence – a thorough analysis of all aspects and consequences relating to the proposed deal – to make sure it will be beneficial to their side of the deal. Mergers and acquisitions are a normal part of business happenings in a healthy economy.

Merger or Acquisition?

Although many combine these two terms, there is a difference between mergers and acquisitions. Mergers refer to the combination of two companies. Mergers are often mutually acceptable by both companies and the new entity often combines the names of the two original entities. In a merger, the two companies that merge combine and become a new company. Furthermore, this involves surrendering the stocks of the old companies and issuing stock for the new company.

Acquisitions refer to one company purchasing another company. This typically occurs when one of the companies is significantly larger than the other company – the acquirer is larger than the target. In an acquisition, the target company ceases to exist as a separate entity and becomes a part of the acquiring company. Acquisitions are not always mutually acceptable to both parties. For example, a company can buy another company even if the target company does not want to be bought. Sometimes mutually acceptable acquisitions are called mergers to make the deal sound friendlier.

Friendly Merger or Hostile Takeover?

Mergers are always friendly, or mutually acceptable to both companies. Acquisitions can be either hostile or friendly. A hostile acquisition, or hostile takeover bid, is one in which the acquirer buys a target that does not wish to be bought. A friendly acquisition is one in which the target company does want to bought.

M&A Synergy

The purpose of an M&A deal is to achieve synergy. Basically, synergy is the concept that the whole is greater than the sum of its parts, or one plus one equals three. The idea is that the two companies will be more valuable together than they were as separate entities.

You can achieve synergies in various ways. The combined companies may achieve cost efficiencies, greater market share, a stronger competitive position, and enhanced revenues. You may also achieve these benefits through economies of scale, staff reductions, or sharing of technology. While striving for synergies is a goal in M&A deals, the combined companies do not always achieve the sought after synergistic benefits.

If you don’t leave any value on the table, then download the Top 10 Destroyers of Value whitepaper.

Mergers and Acquisitions

Strategic CFO Lab Member Extra

Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Mergers and Acquisitions

4

Nonrecurring Items

See Also:
Restructuring Expense
ProForma Financial Statements

Nonrecurring Items

In accounting, report abnormal or infrequent gains or losses in the company’s annual report as nonrecurring items. They are rare events or activities that are not part of the company’s normal business operations. They may also be called extraordinary items. You must disclose the details of any extraordinary items in a footnote in the company’s financial statements.

Extraordinary Items

Extraordinary items can distort a company’s earnings. Therefore, analysts will often prepare a pro forma income statement, excluding the effects of the extraordinary items, to see what the company’s financial performance would’ve looked like without the distortion of the abnormal occurrence.

Nonrecurring Items Examples

Examples of nonrecurring items include losses due to fire or theft, the write-off of a company division, the acquisition of another company, or the one-time sale of a large piece of property.


Is your closing process as efficient as it could be? Access our Complete Monthly Close Checklist to use when closing your company’s or your client’s monthly books. Nonrecurring Items

 

Nonrecurring Items

2

Intangible Assets

See Also:
Current Assets
Financial Assets
Fixed Assets
Goodwill Accounting Term
Research and Development

Intangible Assets Definition

An intangible asset is a right or non-physical resource of a company. They are usually developed as a result of an acquisition that has been made, or years of research and development to develop a process or idea.

Intangible Assets Meaning

Intangible asset valuation can be quite difficult. If an acquisition is made of another company the goodwill is the amount by which a company pays a premium over the fair value of the net assets. Intangible assets can also be developed over time through research and development, or may simply contain rights over a certain asset to keep competition. Intangible asset examples include the following:

  • Patents
  • Copyrights
  • Trademarks
  • Licenses
  • Leases
  • Franchises
  • Exploration permits

Most of these items are anti-competitive in nature. In that the developer maintains a right to be a sole provider of an idea or asset. Such is the case for patents or trademarks. These items protect the product for the developer so that they can retrieve the costs to develop the product or idea, thus giving an incentive to develop and expand on ideas. Intangible assets like a copyright protect a developer for life. Copyrights are usually for books to protect a writers creative work and protect his/her original thoughts.

Intangible assets measurement on the financial statements can be difficult at times because sometimes it is hard to see the future benefit from holding an intangible asset. Other times it is difficult to measure an intangible assets total life. Amortize most intangible assets over a certain amount of time. If there is a specified period like for a patent then it is easy to measure the amount of amortization, but if it is a franchise is maybe difficult to measure.

Valuation of Intangible Assets

When you perform a business valuation, it can be tricky to accurately value intangible assets. When a valuation becomes complex, it is standard practice to consult with a valuation firm. If you need help finding one, then we will get you connected with one of our strategic partners for your valuation needs. Fill out the form below to get connected:

We will receive your information between 9-5 Monday through Friday. You can expect to hear back within 24 hours. We only use your information to contact you for the desired help.

Intangible Assets

Strategic CFO Lab Member Extra

Access your Exit Strategy Execution Plan in SCFO Lab. This tool enables you to maximize potential value before you exit.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Intangible Assets

0

Golden Parachute

Golden Parachute

A golden parachute refers to a generous compensation package promised to a senior executive in the event that the executive leaves the company. It is a contractual agreement between the company and the employee. The contract stipulates the conditions under which the executive will receive it. Some of the conditions may include the following:

The compensation package may include the following

Advantages and Disadvantages

A golden parachute can make it easier for a company to attract and retain talented executives. A golden parachute can also discourage takeovers by increasing the cost of the takeover.

On the other hand, if they are dismissed due to poor performance, then companies still often provide excessive compensation for executives. Also, the cost of it may not discourage takeovers because it may be an insignificant cost compared to the overall cost of the takeover.


The golden parachute protects the company much like a CFO protects and guides the CEO. If you’re interested in becoming the trusted advisor your CEO needs, download your free How to be a Wingman guide here.

golden parachute

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

golden parachute

See Also:
How to Compensate Sales Staff
How to Keep Your Corporate Veil Closed
Corporate Veil
Employee Stock Ownership Plan (ESOP)
Intrinsic Value- Stock Options
How to Hire New Employees

0

Horizontal Integration

See Also:
Vertical Integration
Business Intelligence and Finance
Business Cycle
Manufacturing Cost
Economic Production Run (EPR)

Horizontal Integration Definition

Horizontal integration means that a company contains control over one part of the production process by controlling the majority or all of the resources at that particular junction of production.

Explanation of Horizontal Integration

Horizontal integration’s control over one process during production means that a company has established a dominance in the manufacturing, selling and distribution, or even the production of raw materials. If a company owns every bit of a production process then it is known as a horizontal monopoly. Although this is much more difficult to achieve than a vertical monopoly. Horizontal Integration was made famous by John D. Rockefeller’s Standard Oil company.

Horizontal Integration Example

For example, Baskey Energy is an oil company, in West Texas. They specialize in well servicing or common maintenance on wells dug. Furthermore, to keep the wells producing over the years, you need this service. Baskey has grown in size over the years because it has been aggressively pursuing other companies that are in the same market. The company has been doing this solely through acquisition work. Sometimes the company will buy another well servicing company even if it is not profitable just to put them out of business. This way Baskey can make money on the parts of a company through salvaging, and therefore, it means that there is less competition.

Before venturing into a horizontal integration, assess all sides of the situation. Your CEO needs you to be their trusted advisor or wingman. Learn how you can be the best wingman with our free How to be a Wingman guide!

horizontal integration

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

horizontal integration

0

Basis Definition

See Also:
Basis Points
Make or Buy Business Decision
Collateralized Debt Obligations
Carried Interests
Letter of Credit

Basis Definition

In accounting, the basis definition is the value of an asset for tax purposes. The basis of an asset is the cost of the asset reported to the Internal Revenue Service (IRS). It includes the original purchase price of the asset plus any acquisition expenses. The basis may increase by the value of any subsequent capital improvement in the asset. Or itt may decrease due to depreciation. Also, refer to basis as cost basis or tax basis.

The basis is also the amount used to calculate gains or losses if and when the asset is sold or scrapped.

Basis Examples

For example, if shares of common stock are purchased for $1,000 and sold three years later for $1,500, then the basis is still $1,000. As a result, the taxpayer would recordcapital gain of $500.

Likewise, if you purchase equipment for $1,000 with installation and shipping fees of $500, then the basis for that asset would be $1,500. If the equipment is depreciated down to $500 and then sell it for $300, then the taxpayer would record a loss of $200.

basis definition

0