Tag Archives | due diligence

Securities Act of 1933

See Also:
Primary Market
Securities Exchange Act of 1934
Investment Banks
Secondary Market
Initial Public Offering (IPO)

Securities Act of 1933

The Securities Act of 1933 was a landmark decision in the United States to regulate the issuance of newly issued shares into the market – an initial public offering. The act is also there for companies to register before the issuance as to ensure reliability.

Securities Act of 1933 Meaning

The Securities Act of 1933 followed the stock market crash in 1929. It was a movement to regulate the markets as to not mislead investors. Furthermore, the idea requires due diligence so that the best possible information would hit the market. The 1933 Securities Act was also meant to do away with insider information. By requiring this information to be provided pre-issuance investors presented with the opportunity to buy shares of the firm, during the investment banker’s road show, can make well informed decisions. The due diligence required by the 1933 Securities Act is to have a full audit and compliance with Generally Accepted Accounting Principles (GAAP). Without registration and a following of the 1933 Securities Act rules a firm cannot be listed on a U.S. stock exchange until the requirements are satisfied.

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securities act of 1933

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Time To Find A New Lender?

See Also:
External Sources of Cash
Other People’s Money
Due Diligence on Lenders
Don’t Tell Your Lender Everything
Finding The Right Lender

Is It Time To Find A New Lender?

I was meeting with a business adviser last week named John and he asked me “When do you think it is in the best interest for a company to find a new lender?”

Determine Location On Lender’s Food Chain

I told John the first thing a company must determine is where they are located on the food chain of the lender. It may be hard to believe, but some lenders may not want their business. If the company does not realize the lender’s feelings and chooses to stay, the lender will take their business (money) until they realize they are being over charged and leave.

John then said “What you are saying is the lenders may not value some business.” I said that is right, and as you know, companies normally deal with a lender that makes the process faster and or easier. I then asked John “How many of your clients have done any due diligences to determine if the lender is going to help them meet their personal or business goals?” He looked a little funny and said “None that I know of.”

I said that is normally the case. When your client is talking to the lender, they need to determine if the lender is really listening. In some, if not in most situations, the lender is listening, but not about your needs. The lender may be listening for selling signals to seize upon the opportunity to offer you some product or service you really don’t need or want.

Fee Income

Lenders have diversified their services and are very interested in fee income. Fee income is defined as the income a lender receives without taking any risk. Checking account maintenance fees, loan closing fees, ATM fees, etc., meet this definition. Your client’s business may need some, if not all of the services offered, but is the lender asking questions about the company’s needs, or just selling their services?

Your clients should realize that lenders do not have their best interest in mind. Lenders are in business to make money, just like your clients. I have had lenders tell me they do not want to offer solutions that would reduce costs to their customers because they would loose their fee income and reduce their profits.

Your clients must remember to make sure the lender is listening and understanding their needs. Additionally, your clients should understand, the best lender may not be the fastest and easiest to deal with.

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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)

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.

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Mergers and Acquisitions

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Long Term Debt to Total Asset Example

Long Term Debt To Total Asset Ratio Example

Wiles is the CFO of a major corporation, Blastcorp. Blastcorp has been an extremely successful company, with expectations that it will become more successful and larger over time. In addition to the success and growth of the company, Wiles has managed his company properly up to this point, taking over and expanding operations to levels he had only hoped for. Wiles is now performing his monthly due diligence.

Wiles wants to know the ratio for Long Term Debt to Total Assets for his company. It is important to note that the long term debt to total asset ratio needs to be as low as possible. This makes sense because as the long term debt lowers or the total assets rises, the ratio goes down. Because both of those situations mean that the company is doing positive business. It seems obvious that lowering the long term debt to the total asset ratio is important for a company’s success. In order to calculate the ratio, he needs to be aware of the total long term debt that is associated with his company, as well as the figure for his total number of assets that is likewise associated with his company. This provides him information on solvency, the ability to meet financial covenants (requirements) for his loan provider, and a general measure of the performance of the corporation Wiles works for. He reviews his financial statements to find the information below. Wiles then performs a long term debt to total asset ratio calculation. The calculation is performed below:


$10,000,000 in total assets and $5,000,000 in long term debt

Long debt to total asset ratio = $5,000,000 / $10,000,000 = 0.5

This means that a company has $0.5 in long term debt for every dollar of assets.

Wiles must now review his loan agreement to assure himself that the corporation he works for will not violate covenants made for the coming months of this year. He finds that his company is safe.

Wiles would like to lower this Long Term Debt to Total Asset ratio. He makes a goal of making it only .4 or 40%. Due to the fact that Wiles is keeping up-to-date with his information and goal setting he can create the path to achieving his benchmark.

Long Term Debt to Total Asset

See Also:
Long Term Debt to Total Asset Ratio Analysis
Debt Ratio Analysis
Net Profit Margin Ratio
Company Debt: Pay Down or Borrow?

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Is It Time To Find A New Bank?

See Also:
Bankers’ Language is Financial Jargon
Categories of Banks
Finding the Right Lender
Funding Source Versus Lender
How to Manage Your Banking Relationship
Interest Rate

Is It Time To Find A New Bank?

I am sure some of you are saying bankers are bankers and you really don’t value the relationship. That is a topic for another time.

I will help you answer the question, is it time to find a new bank? I believe the answer to that question is hidden in where you or your company is located on the food chain of the bank. It may be hard to believe, some banks may not ever want your business. But, if you choose to be there, they will take your business until you get mad and leave.

What I am saying is your bank may not value your business. People normally bank where they bank because it is faster and or easier (we all know this to be the American way). How many of you have done any due diligence to determine if the bank is going to help you meet your personal or business goals?

When Is It Time to Find a New Bank?

Answer that question by asking yourself about the following topics.

Are They Really Listening to You?

First of all, when you are talking to your bank are they really listening to you? In some, if not in most situations, they are listening to you but not about your needs. Your bank may be listening for selling signals to seize upon the opportunity to offer you some product or service you really don’t need or want. In other words, do you want your banking services super sized?

Matching the Services You Need

You probably know that in the banking world today, banks have diversified their services and are very interested in fee income. I am not saying that you or your business does not need some if not all of the bank’s services they are offering. But are they asking you questions about you or your company to match the services you need? They are probably not. And furthermore, they probably do not ask you any questions at all.

Fee Income

I touched on fee income and that banks are very interested in increasing this revenue.

To make sure we are all talking about the same thing, a definition of fee income is required. I define fee income as the income a bank receives without taking any risk. Such as checking accounts’ maintenance fees, loan closing fees, ATM fees, etc., meet this definition. I call this death by bank fees to you or your company for the benefit of the bank.

Don’t think banks have your best interest in mind? They are in business to make money like the rest of us. I am involved in the area of non-bank financing. Banks have told me they do not want to offer solutions that would reduce cost to their customers because they would loose their fee income resulting in a reduction of their profits. You must remember everything is negotiable and understand all of your options.

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Due Diligence on Lenders

See Also:
Relationship with Your Lender
Finding the Right Lender
The Dilemma of Financing a Start-up Company
Every Business has a Funding Source, Few have a Lender
Angel Investor

Due Diligence on Lenders

I am sure all of you have applied for some type of a loan from some institution to be used for college, car, home or business. By the end of the process, you have given them applications and supporting documents that, in some cases, can weigh several pounds. When I am involved in a transaction with a client, I encourage them to do as much due diligence on my company, Summit Financial Resources, as we will do on them.

Example of Due Diligence on Lenders

For example, I was recently told by a business woman named Robin that all lenders are the same. A little concerned with her comment, I asked “Why do you feel that way?” She went on to tell me that banks are controlled by the government; therefore, all banks have the same rules, so all banks are the same. She continued by saying, “I just use the bank located nearest to my business.” I replied, “I agree that government does control banks. But, the government rules are guidelines, and the lenders create their lending policies and procedures from these rules. Therefore, each lenders’ policies and procedures are different, so you really should consider doing due diligence.”

The reason for the due diligence is to determine which lender understands your needs, and to make sure the lender’s policies and procedures will meet those needs. Also, I believe you should make certain the lender understands and values your business.

While looking at me as if she was not sure I was believable, she asked “What should I ask a lender? They have the money and I don’t want to make them mad by asking questions about them.” I replied by saying “Well, if that is the case, do you really want to get in a lending relationship with them?” Now appearing convinced, she wanted to know what she should be looking for in a lender and stated “All I know for sure is I need their money to have the cash to grow my business.”

Decide On The Lender

I told her, first of all, you need to decide what size of lender is appropriate and again, to make sure they meet your needs. In my opinion, location does not come into the mix. I categorize lenders into four groups, big market, middle market, small market and those in it for the money (I will share details of this conversation in next week).

Next, do you like the lender? Does he or she want to understand your needs and value your business? The lender is going to check out your credit and personal references, so ask the lender for some current or past customers. The lender’s customers can provide you with information on the lender’s strengths and weaknesses.

Another thing you want to talk about with the lender is their support staff. Make sure you are comfortable with the pre-funding and post funding support staff. By doing this you will know if the support will be via voice mail system, Internet, or a real person.

Robin did find the lender she liked with Summit. I visited with her later and she thanked me and shared the many successes her business has experienced. Then she told me she had shared her new found knowledge of due diligence with her business associates.

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Due Diligence

See Also:
Due Diligence on Lenders
Mergers and Acquisitions (M&A)
Audit Committee
Loan Agreement

Due Diligence Definition

The Due Diligence definition is an extensive qualitative and quantitative look at a company. It helps company leaders make the best informed business decision about a company. Furthermore, Due Diligence is often associated with audits, where it is required before a public offering. In addition, it is associated with mergers and acquisitions to reduce the risk in the market for these activities.

Due Diligence Meaning

Due Diligence often becomes necessary when a large transaction is about to take place like a merger or loan agreement, or when the company’s financials are going to be presented to the public. Oftentimes, due diligence requires the assessment to be both qualitatively as well as quantitatively.

Qualitative Due Diligence

A qualitative act of due diligence may be to assess the mental state and capability of the management. This can be done through the following:

Quantitative Due Diligence

In comparison, quantitative due diligence includes thorough investigations of the books and records. This can range from asset appraisals to day to day transactions. A thorough understanding of internal controls and its effectiveness also become necessary to ensure the risk for the business is as low as possible.

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due diligence definition

due diligence definition

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