A sales rep, an administration clerk, and the manager are walking to lunch when they find an antique oil lamp.
They rub it and a Genie comes out.
The Genie says, 'I'll give each of you just one wish.'
'Me first! Me first!' says the admin clerk. 'I want to be in the Bahamas , driving a speedboat, without a care in the world.'
Puff! She's gone.
'Me next! Me next!' says the sales rep. 'I want to be in Hawaii , relaxing on the beach with my personal masseuse, an endless supply of Pina Coladas and the love of my life.'
Puff! He's gone.
'OK, you're up,' the Genie says to the manager.
The manager says, 'I want those two back in the office after lunch.'
Moral of the story
Always let your boss have the first say.
A turkey was chatting with a bull.
'I would love to be able to get to the top of that tree' sighed the turkey, 'but I haven't got the energy.'
'Well, why don't you nibble on some of my droppings?' replied the bull. They're packed with nutrients.'
The turkey pecked at a lump of dung, and found it actually gave him enough strength to reach the lowest branch of the tree.
The next day, after eating some more dung, he reached the second branch..
Finally after a fourth night, the turkey was proudly perched at the top of the tree.
He was promptly spotted by a farmer, who shot him out of the tree.
Moral of the story
Bull Shit might get you to the top, but it won't keep you there.
An eagle was sitting on a tree resting, doing nothing.
A small rabbit saw the eagle and asked him, 'Can I also sit like you and do nothing?'
The eagle answered: 'Sure, why not.'
So, the rabbit sat on the ground below the eagle and rested. All of a sudden, a fox appeared, jumped on the rabbit and ate it.
Moral of the story
To be sitting and doing nothing, you must be sitting very, very high up.
THUS ENDS THE FIVE MINUTES MANAGEMENT COURSE
I. Internet resources for Real Estate Professionals are increasing on a daily basis
A. Some counties and title companies have their records online
1. In the future there will be less need to check records in the courthouse
2. Field landwork will be limited to acquiring necessary instruments in the field and indexing instruments in the
3. The bulk of record checking will be done in your own office
II. Public Records currently available
A. State Links to Counties
1.
2.
3.
4.
5.
6.
7.
a. State: www.state.la.us/gov_local.htm#govrelated
b. Lafayette Parish for entire state: www.lafayetteparishclerk.com/district.html
8. State and Local Government on the Net, links to counties across the country
d. www.statelocalgov.net/index.cfm
B. County Appraisal District Records in
1. Allows Real Estate Professionals to locate surface owner by legal description
2. locate address for landowners
3. Access addresses for landowners
4. Internet locations for County Appraisal District Records
a. www.taxnetusa.com/
b. www.txcountydata.com
C. County Treasurer/Assessor/Appraisal District
1.
www.oklahomacounty.org/cotreasurer/default.asp
2.
3.
4.
5.
6.
7.
8.
a. Tax Assessor: http://co.jefferson.tx.us/taxoffice/taxsearch.htm
b. Appraisal District: www.jcad.org
D.
1. Allows Real Estate Investor to check records in office
2. Reduces out of town overhead
3. Increases speed by eliminating travel
4. Access
a. Some counties are online for free
b. Some counties are available by fee by the county or private providers
5. Records accessible
a. Probate
b. Marriage
c. Assumed Name
d. Uniform Commercial Code
e. Official/Deed Records
6. Commercial Providers
a. http://countyrecords.landata.com/coverage.asp: Bexar, Brazoria, Collin, Comal, Dallas, Denton, Fort Bend, Galveston, Guadalupe, Harris, Hays, Kendall, McLennan, Montgomery, Tarrant, Travis, Williamson, Medina and Nueces Counties, Texas
b. CourthouseDirect: www.courthousedirect.com/Image.asp:
Imaging selected urban counties from across the country
c. Landtitle USA: www.landtitleusa.com/ :
1. Plats & Maps
2. Name Search
3. Real Property Records Search
4. Legal Description Search
5. Runsheets
d. TitleX: www.titlex.com : Anderson, Bastrop, Brazoria, Burnett, Cherokee, Calhoun, Fort Bend, Galveston, Goliad, Harris, Jackson, McLennan, Montgomery, Victoria, Rusk, Tarrant, VanZandt, Wharton, Williamson and Wood Counties, Texas
8. Public Provider
a.
www.ccweb.co.fort-bend.tx.us/opr/oprDefault.asp
b.
E. Birth, Death, Marriage and Divorce Records:
1. National
a. Death: www.ancestry.com/search/rectype/vital/ssdi/main.htm , Social Security Death Records
b.Birthdays: www.Anybirthday.com
c. Obituaries: www.arrangeonline.com
2.
a. Death: http://userdb.rootsweb.com/tx/death/search.cgi
b. Birth, Death, Divorce and Marriage indexes from the Bureau of Vital Statistics: www.vitalsearch-ca.com/gen/tx/tx_.htm :
III. Surface Maps
A. Aerial Maps: www.terraserver.microsoft.com/default.asp
1. helps locate surface improvements, obstructions, etc.
2. useful when writing Use and Possession Affidavit
3. helpful when selecting surface location
B. Topographical Maps: www.topozone.com/
IV. Translations: many times old instruments are in Spanish, including Mexican and Spanish Land Grants, and a translation is needed
A. http://world.altavista.com
V. People Locators: many times it is difficult to locate an individual or entity, therefore a Real Estate Investorman can conduct a more global search using several search engines:
A. theultimates.com/white/
1. Locate by name
2. Locate by address
3. Locate by phone number
B. www.whitepages.com
1. Reverse address
2. Reverse phone number
C. www.publicdata.com (for pay)
1. Drivers License Records
2. DMV Records
3. Selected Civil & Criminal Records
VI. State Agencies
A. Texas: Texas General Land Office:
www.glo.state.tx.us/
B.
C.
D.
VII. Federal Agencies: Bureau of Land Management: www.blm.gov/nhp/index.htm
A. Links
B. Job Bank
C. Member Chat
A. Oil Trash.com: www.Oiltrash.com
B. CourthouseDirect.com: www.courthousedirect.com/FreeDB.asp
XI. Non Internet Resources
A. Kanes Oil and Gas Forms: www.kanesforms.com
1. Oil & Gas Leases: Lease Riders
2. Affidavits
3. Assignments
4. Easements, Rights of Way, easements
5. Ratifications
6. Deeds
7. Escrow Agreements
8. Subordinations
AN OVERVIEW OF THE INVESTIGATION PROCESS
BACKGROUND
If a business combination is to have a reasonable chance of succeeding, it
must be properly planned and the acquisition candidate thoroughly
investigated. The purpose of this Guide is to assist clients and our
personnel in designing and performing a thorough investigation,
particularly one type of investigation commonly referred to as a
"Businessman's Review." The Guide is divided into two sections:
- An Overview of the Investigation Process
- The Businessman's Review Checklist
The first section discusses the various types and stages of a purchase
investigation, together with some common problems and exposure areas. The
second section contains a model Checklist for a Businessman's Review,
which is usually performed during the preliminary negotiations. The
purpose of the Businessman's Review is to obtain a general understanding
of an acquisition candidate and whatever information is required without
verification before deciding to proceed with the negotiations.
To decide whether a deal is as good as it appears, the acquiror should
conduct an investigation, and verify the representations the seller has
made to strike the deal. We broadly refer to this effort as the "purchase
investigation." It is an ongoing activity that begins even before there is
a general understanding. It may involve fact gathering, review, analysis
and verification, or only some of these activities depending on the
circumstances.
Why is the investigation so important? Because the risks inherent in
acquisitions increase dramatically without it. Buying a business without
adequate information, or with half-truths, can lead to a significant
financial loss. Although this may sound simplistic, this basic principle
is frequently violated.
In some instances, purchase investigations can be ineffective, and may not
provide the information necessary to properly evaluate the candidate and
made a sound decision. The cause may be poor communication,
misunderstandings, lack of careful planning, failure to fix
responsibilities and coordinate the effort and, perhaps most important,
the fact that the investigation often focuses on the quantity of
information it can obtain, rather than on the quality. Important
information either gets lost in a sea of paper or the right information
never gets collected.
For example, with respect to marketing information, acquirors should focus
on data that help them evaluate why the acquisition candidate has been
successful in the marketplace and whether its competitive strategy will
continue to be viable, not just on market share or growth statistics. With
respect to financial information, acquirors should focus on major exposure
areas, trends and unusual financial characteristics - not on every item in
the financial statements.
NATURE AND SCOPE OF A PURCHASE INVESTIGATION
Depending on their experience and time availability, a company's personnel
can perform a purchase investigation with or without the help of outside
consultants (e.g., accountants, investment and merchant bankers, lawyers,
special industry consultants, actuaries, appraisers). We recommend that
management play a major role in the investigation. This permits them to
obtain information that is important to the ultimate decision to proceed,
and can be helpful in the successful operation of the business after
acquisition.
The scope of an investigation may range from a minimal effort (such as a
review of available financial information, visits to company facilities
and discussions with management concerning representations made or other
matters) to a comprehensive effort (involving a detailed investigation
and/or purchase audit). The type of investigation depends on management's
need for information, the size and relative significance of the
acquisition candidate, the availability of audited and internal financial
information, the degree of inherent risk, the time allowed, etc. For
example, in the case of a tender offer, the ability to analyze internal
information on the target company may be limited. Consequently, the
acquiror and its professional advisers may not be able to do much more
than gather, compile and analyze available public information. However, in
the case of a private company, the need for a full-scale investigation is
much greater and is more difficult to perform. This would also apply to a
divestiture by a company.
Frequently, an acquiror performs more than one type of investigation on
the same candidate or performs its investigation in stages as the
acquisition process moves forward. For example, it may be advisable to
perform a preliminary investigation before the general agreement is
reached or before the contract is signed. As noted earlier, this
preliminary investigation is a "Businessman's Review." It is usually
performed without independent verification or audit, and is designed to
obtain and analyze information needed before deciding to proceed with the
negotiations.
Later, after a general agreement is reached, it is wise to extend the
investigation and audit the seller's financial statements and/or verify
the representations made by its management. Whether this later
investigation involves a complete purchase audit or only limited
verification procedures depends on the degree of assurance required.
Once a definitive agreement or contract is signed, a purchase audit may be
required to verify the closing date financial statements. If a purchase
audit was already performed before the contract signing, updating
procedures may be all that is required to detect material changes
occurring between the date of the purchase audit and the closing.
THE ROLE OF THE BUSINESSMAN'S REVIEW
At a fairly early stage, the acquiror needs to obtain sufficient
information about the seller's operations to make a decision whether or
not to proceed with the acquisition. The Businessman's Review fulfills
this need.
This Review involves fact gathering and analysis, usually without
independent verification, of an acquisition candidate's financial and
accounting records or other information obtained. The acquiror's
management may or may not participate in this Review, and the Review may
be performed in one or several stages at various points during the
negotiations. The Businessman's Review provides a broad understanding of
all aspects of the company's business, including:
- Industry information
- Marketing methods
- Manufacturing and distribution methods
- Financial reporting systems and controls
- Industrial relations
- Comprehensive understanding of the company's financial statements,
accounting data and tax posture
- Research and development programs
- Regulatory reporting requirement
- International operations
- Legal matters
Besides obtaining information on the seller, the Businessman's Review may
also include a detailed review and analysis of the information obtained.
The scope of this part of the Review usually depends on the nature of the
transaction and the particular needs of the acquiring company. Usually,
however, accounting and tax principles and practices are reviewed in
depth, with special emphasis on the problems related to the intended
acquisition. The acquiror and its independent accountants must agree at
the outset on the scope of this part of the Review, and the acquiror must
understand its objectives and limitations.
Because the Businessman's Review normally generates a great deal of
information, management should prepare a checklist of questions for the
seller in advance. This will ensure that the buyer gets the right kind of
information from the seller. The Checklist contained in the second section
of this Guide can be used as a model; it can be used in its present form,
or sections can be added or deleted to suit a particular situation. For
example, the "Industry Analysis" section can be deleted if an analysis is
already available on the seller's particular industry. Also, the section
on "Research and Development" activities may be omitted if it is not
relevant. A section on international factors can be added if the company
is engaged in international activities.
The Checklist focuses primarily on financial and accounting matters,
particularly in the review and analysis phase. Generally, the buyer has
focused on nonfinancial or operating matters during its own investigation
(e.g., quality of products, reputation with customers, manufacturing
efficiency, management capabilities, etc.). However, the independent
accountant can be helpful in obtaining this information as well, which
explains why the Checklist contains sections on nonfinancial and operating
matters.
PURCHASE AUDIT AND OTHER VERIFICATION PROCEDURES
In some cases, review and analysis may not be enough. The buyer may
require an audit of the seller's financial statements and/or verification
of the representations made by its management, depending on the desired
degree of assurance, the seller's past audit history and the time
permitted. These verification procedures may involve a comprehensive
purchase audit or specially designed auditing procedures applied to
specific accounts and/or exposure areas. For example, inventory is such a
significant item to manufacturing and distribution enterprises that
auditors are frequently asked to observe and test the physical inventories
and audit the valuation, with particular emphasis on excess and obsolete
inventory and valuation practices.
These procedures often turn up undisclosed problems, particularly in
today's environment. Although management may not wish to incur the cost of
an audit, it does provide an additional level of assurance.
When the seller has a history of audits done by a reputable accounting
firm (which also may have prepared its tax returns), and the audited
financial statements are reasonably current, a purchase audit may not be
necessary, except in areas normally not covered by the annual audit, e.g.,
quality of the seller's products, its reputation with customers and other
nonfinancial areas. However, at a minimum, the seller's auditors'
workpapers should be reviewed in detail to identify potential problems and
exposure areas. This review may eliminate the need for independent
verification.
AREAS OF INVESTIGATION
The Businessman's Review, whether performed alone or in conjunction with
verification/auditing procedures, should accumulate a portfolio of basic
information about the seller. Depending on the extent of the particular
Review, it should investigate and analyze the areas noted below. If, after
the Review, the reliability of the information is suspect or if the buyer
wants greater assurance, a full purchase audit or other verification
procedures may be necessary.
COMPANY BACKGROUND AND HISTORY -
The general nature of the business, principal locations and facilities,
history and similar information should be collected in the early phase of
the investigation. In addition, information is usually obtained on
management, directors and outside advisers. Whenever possible, information
on recent developments in the company, plans for the future and major
problems, including lawsuits, government restrictions, environmental
considerations and sensitive transactions, should be covered.
INDUSTRY ANALYSIS -
When a proposed acquisition is in an industry new to the buyer, a detailed
industry review is prudent. This review normally is performed prior to the
investigation of a particular company.
Factors usually included in the industry analysis are:
- Competition - within the industry and from other industries - and
relative market share.
- Industry growth rates in sales and profits (past and projected),
and external factors affecting industry growth and profitability.
- Mergers and acquisitions in the industry - to determine if a
business combination is crucial for survival or growth in the
industry.
- Government regulations - degree and trends.
- Patents, trademarks, copyrights, etc. - important to the companies
within the industry.
- Key factors of success, barriers to entry and threats.
In many instances, companies may engage industry experts and consultants
to assist in the analysis.
FINANCIAL AND ACCOUNTING DATA -
it is useful to compare financial ratios by major business segments for a
period of years to determine important trends. These ratios usually
include, as a minimum, return on assets and stockholders' investment,
gross profit, profit margin, fixed charge coverage, current ratio, net
quick ratio and debt-to-equity ratio. Information concerning the impact of
inflation or cyclicality on operations and the company's ability to
operate in such an environment, together with current value and/or
replacement cost data and future capital requirements, also should be
obtained.
It also is useful to obtain and analyze the prior years' balance sheets,
statements of income and statements of changes in financial position, as
well as budgets and forecasts for the future. Understanding projected cash
flow and the underlying assumptions used in such projections is extremely
important. In addition, it is important to understand any differences in,
or questionable aspects of, accounting principles and practices followed
by the seller. The most important differences and questionable aspects
usually relate to bad debt reserves, inventory valuation depreciation,
accounting for long-term contracts, accounting for pensions and employee
benefits, reserves and special industry practices.
In the inventory valuation area in particular, questionable practices are
often uncovered such as valuing production overruns, excess stock or
returned goods at full cost.
TAXES -
The tax returns and status of tax examinations of the acquisition
candidate should be reviewed. This review normally will serve a dual
purpose. A review of the seller's tax status should satisfy the buyer that
the tax liabilities of the business being acquired are properly stated on
the seller's books. In addition, the tax review should focus on the
buyer's ability to monetize a portion of his investment through proper tax
planning strategies, tax attributes of the seller, etc.
The tax liability review essentially asks the question, "Has the seller
paid all its tax liabilities on a current basis and has a reasonable
reserve been accrued for known and anticipated adjustments likely to arise
on in-progress and future audits by various taxing authorities?" Although
the procedures used to satisfy these questions will vary depending on the
size of the candidate, complexity of the seller's particular tax
situation, etc., generally they will entail a review and analysis of the
tax returns filed for a minimum of three prior years with special emphasis
on the reconciliation between financial statement and taxable incomes,
together with a review of the most recent report of adjustments made by
the various taxing authorities, relating the nature of the adjustments to
years still open for examination. The results of this review then are
compared to the reserve for taxes, or so-called "cushion," to determine
whether the seller has provided adequately for any tax exposures.
Historically, these reviews focused primarily, if not exclusively, on
federal income tax issues that could result in a permanent tax cost.
Recent developments indicate that an expansion of scope probably is
warranted in many situations in the areas and local income taxes and the
interest cost of tax "timing items." Focusing on permanent disallowances
or adjustments measures a seller's liability for past taxes in absolute
dollars. In recent years, however, several countries, including the United
States, have escalated dramatically the interest imposed on assessments
for past taxes and most recently have adopted a compound versus simple
interest methodology. Thus, although timing differences such as
capitalization of repairs or a disallowance of financial statement
reserves will result in no additional tax over time, the shifting of
deductions to later years or acceleration of income to earlier years can
result in a very substantial interest cost.
State and local taxes also should be considered in this review process.
For example, in the United States, many states have become extremely
aggressive in taxing multistate enterprises. Some of those states are
actively pursuing collection of additional taxes for prior years. With the
advent of accelerated cost recovery in the United States, state taxes for
many enterprises are becoming an increasingly greater share of the overall
corporate tax bite. Accordingly, the buyer should consider a detailed
review of the seller's state and local taxes. Multinational companies
present unusual problems in this area and, depending on the size of the
international operations, may warrant tax reviews on a country-by-country
basis.
Succession of the seller's tax attributes also is an important area to
review. Because of recent tax legislation in the United States, many
companies today have tax net operating loss carryforwards, unutilized
investment tax and other credits. Depending on the type of acquisition
structure, these tax attributes can represent significant cash savings to
the buyer after the acquisition. Therefore, quantifying these attributes
is an important step in the review process. Quantification must go beyond
merely copying numbers from the tax returns. The buyer must get behind the
numbers and adjust the attributes for potential softness due to aggressive
tax positions that could be challenged successfully by the tax
authorities. If the buyer is purchasing a company's stock from an existing
consolidated group, an important part of this phase of the review is
advising the buyer on how to protect against the loss tax benefits
associated with postacquisition net operating losses or excess credits
that can be carried back for tax purposes to the preacquisition tax years
of the seller. This involves arranging the proper tax-sharing agreement
with the seller tailored to the specifics of the transaction.
Depending on the type of transaction, the tax review should also include a
tax basis analysis and an evaluation of potential "step-up" opportunities.
If the buyer is considering financing a potential acquisition by selling
off certain assets of the acquired company, it should make a careful
review of the potential taxes due on the sale of those assets, taking into
account the fact that tax basis of assets is usually less than the book
value. An evaluation of the seller's "step-up" potential and recapture tax
costs associated with this "step-up" starts with an allocation of the
purchase price to the various assets of the seller. From there, the
recapture costs associated with the allocation are quantified and compared
to the tax savings derived from "stepping up" the tax basis of the
seller's assets. Because the recapture taxes are required to be paid
within a short time after the acquisition and, typically, the "step-up"
will be realized over a number of year to arrive at a true comparison, it
is necessary to discount the future tax savings using a reasonable
interest rate. Unfortunately, recent tax law changes in the United States
have increased the potential for recapture tax liability, thereby making a
"step-up" of the tax basis of the assets less attractive unless a major
portion of the "step-up" can be allocated to inventories or similar
short-lived assets.
Investment tax credits, depreciation, international and DISC earnings and
profits and LIFO inventory reserves are just some of the types of
recaptures that could arise if a "step-up" is elected in the United
States. To combat these higher recapture costs, the buyer should look for
intangible assets of the seller that can be assigned value and for which a
useful life can be developed, e.g., patents, customer lists, etc.
HUMAN RESOURCES AND INDUSTRIAL RELATIONS -
The buyer must appraise the capabilities of the seller's management,
particularly when buying a company in an unrelated industry. The buyer
should interview key officers and managers, review their prior business
experiences, investigate their backgrounds and compare compensation
benefit levels and plans because changes often will result from the
transaction.
The buyer should review union contracts, strike history and related
factors to determine any existing problems. Many planned personnel savings
may not be possible because of labor agreements. Pension, profit sharing
and other employee benefit plans also must be reviewed to determine the
effect of the future operations of the combined business. If the seller
has many long-term employees, the buyer's cash flow will be depressed when
unfunded pension benefits must be paid upon retirement. On the other side
of the equation, many pension funds now have surpluses, making
acquisitions less expensive.
MARKETING -
The buyer should obtain information on and analyze various product and
marketing factors concerning:
- Sales, profit and backlog by product line
- Descriptions of major products and new product developments
- Annual and monthly sale histories (long-term trends and seasonal or
cyclical fluctuations)
- Government sales
- Major customers
- Marketing and sales organization, including special compensation
arrangements
- Sales planning and forecasting methods
- Advertising and promotion expenditures and methods
- Distribution channels and strategy
- Customer satisfaction and buying power
- Market shares of key competitors
- Product life cycles and technological obsolescence
- Pricing strategy
- Competitive strategy
- New product development
The trends should be compared to industry averages to determine the
company's relative performance. Competitive and potentially competitive
new products should be investigated because of their possible negative
impact on the seller's future results.
The marketing intelligence obtained and present sales trends by product
should be compared to an analysis (aging and usage by item) of inventory
to detect excess and obsolete inventory. Scrapping of inventory after the
company is acquired can be very costly.
MANUFACTURING AND DISTRIBUTION -
A review of the manufacturing and distribution areas should include:
- Each production facility (name, location, owned/leased, book value,
fair market value, capacity, employees, present condition, present
utilization, alternative uses, etc.).
- Manufacturing processes.
- Suppliers of major raw materials.
- Physical distribution methods (purchase, intracompany transfers,
final sales to customer).
- Manufacturing efficiency.
RESEARCH AND DEVELOPMENT -
The buyer should analyze past R&D programs (cost and actual or estimated
benefits), current and planned programs (estimated cost and benefits),
personnel and facilities utilized in R&D and the method of accounting for
R&D.
FINANCIAL AND MANAGEMENT CONTROL SYSTEMS -
Understanding a seller's internal reporting and control systems is always
important, particularly when the seller is in a different industry. The
acquiring company probably will rely heavily on the seller's existing
systems, since it is normally not possible to install identical systems in
both companies because of differences in operations or management
philosophy or because of the cost involved in conjoining systems.
Production and material control systems and order systems are particularly
important since deficiencies can seriously impact the company. However,
basic accounting controls are also important because of their potential
impact on the accuracy of reporting and employee fraud.
REGULATORY REPORTING REQUIREMENTS -
Reporting requirements promulgated by various regulatory authorities
should be given special attention because they can have a profound effect
on the future of the business. Ignoring them may result in substantial
fines and embarrassment. The buyer should be satisfied that the seller's
facilities in compliance with the various regulatory authorities, such as
the Environmental Protection Agency (EPA) and Occupational Safety and
Health Administration (OSHA) in the United States.
INTERNATIONAL FACTORS -
If the target company is engaged in international trade or has other
international activities, the acquiror should have a good understanding of
these international operations and how they impact the overall operation.
Questions concerning the international country's investment climate, trade
and investment restrictions, exchange controls, inflation rates and
reporting requirements should be addressed. Repatriation of earnings may
be necessary to repay acquisition debt, but may be impeded by exchange
controls or the seller's international tax credit limitation status.
DISCRETIONARY EXPENSES -
The seller can defer certain expenses, such as research and development
costs and repair and maintenance costs, for the short term with adverse
long-term effects. A careful review of these discretionary expenses can
avoid possible future unanticipated outlays of capital, which effectively
increase the cost of the acquisition.
COMMON PROBLEMS OR EXPOSURE AREAS
Following are some of the common financial and accounting problems
frequently uncovered in Businessmans's Reviews or other types of
investigations:
- Undervaluation of inventory by private companies to minimize taxes,
which can lead to distorted earnings trends and potential tax
assessments - This undervaluation usually is accomplished through
conservative pricing, excessive obsolescence writedowns or failure to
count inventory on hand accurately.
- Overvaluation of inventory due to unrecorded inventory obsolescence
or over-costing - This may be caused by product overruns, sales
returns and allowances, changing technology, new product development
and maturing or discontinued products. This may occur even when a
substantial LIFO reserve exists.
- Litigation - Few firms totally free from litigation. The most
common litigation results from product liability, which frequently
doesn't surface until after the acquisition is completed.
- "Dressing up" financial statements before selling a company - This
tactic can include deferral of R&D expenses and repairs and
maintenance, "release" of inventory reserves, inadequate reserves,
faulty estimates or changes in estimates or assumptions (e.g., for
bad debt reserves, pension accounting, sales returns and allowances,
warranties, slow-moving and excess inventory, etc.) and undisclosed
changes or aggressive accounting principles or methods.
- Receivables not collectible at recorded amounts - Doubtful
accounts, cash and trade discounts, dated receivables and sales
returns and allowances may not be adequately reserved.
- Certain investments may not be realizable - Investments accounted
for using the equity method and nonmarketable investments are
required to be written down only for "permanent impairment" in value,
not for temporary declines. Liberal judgments may have been applied
to avoid recognition of permanent impairment.
- Credibility and integrity of management - Often a private
investigation is needed to obtain sufficient information and
background on management to determine if they are right for the job
and trustworthy.
- Inclusion of personal expenses in the financial statements of a
private company - These expenses usually decrease reported net
income; however, this practice also can be used to yield a favorable
result when one does not exist, i.e., to change historical trends.
- Tax contingencies - One of the more important problem areas in an
acquisition. Most companies tend to be very aggressive when preparing
tax returns. A careful review of current and prior years' returns and
Revenue agents' reports should be made, and any unusual items should
be noted.
- Unrecorded liabilities - May include vacation pay, sales returns,
allowances and discounts (volume and cash), pension liabilities,
claims, items resulting from poor cutoffs, loss contracts and
warranties, among others.
- Related-party transactions - Most often found in private companies,
these can have a material effect on the company under new ownership
or on the historical trends presented.
- Inadequate financial controls, including poor pricing and costing
policies, and weak budgeting systems and controls.
- Major customers or contracts - Usually loss of one could have a
material effect on operations.
- Need for significant future expenditures - These could include
plant relocation or expansion, replacement of aging property, plant
and equipment and new product development.
- International operations - These present multiple problems of their
own including labor, management and operating difficulties, as well
as those of a financial nature.
- Unusual transactions and extraordinary items, such as sales of
assets - These often improve the trend presented and should be
identified and evaluated carefully.
The foregoing are some of the common financial and accounting problems
that a Businessman's Review and/or other type of investigation can
uncover.
CONCLUSION
A purchase investigation should provide the acquiror with a thorough
understanding of the seller's business, particularly concerning aspects
that are not readily known and/or are critical to the ultimate acquisition
decision. Accordingly, the investigation should be designed to obtain and
verify predetermined essential elements of information the acquiror needs
to evaluate the candidate properly. It also should provide for
verification of the information obtained whenever the reliability of that
information is important and/or suspect. The Businessman's Review is the
first step in the investigation process, and often the most critical. The
following section contains a Checklist that can be used for such Reviews.
This Checklist provides a standardized, fact-finding approach, eliminating
the initial start-up time and cost of designing information-gathering and
review procedures.
The importance of management's participation in the investigation cannot
be overemphasized. Management should be the prime mover, scope-setter and
leading edge of the investigation, in both financial and nonfinancial
areas. Too often management delegates the entire investigation to outside
accountants or industry experts, and important information is overlooked.
In addition, the "feel" for the seller, its management and qualitative
considerations so necessary in making the "buy" decision often are lost
when management does not take a primary role in the investigation.
THE BUSINESSMAN'S REVIEW CHECKLIST
INTRODUCTION
As discussed in the preceding section, this Checklist can help the buyer
obtain a broad understanding of all aspects of the seller's business
before independent verification is required. Verification or auditing
procedures frequently are employed at a later point in the negotiations to
substantiate the information obtained from using this Checklist.
The breakdown by area allows different members of management with
pertinent functional responsibility to review specific areas, with or
without the assistance of outside consultants.
The sections on Financial and Accounting Data, Financial Reporting System
and Accounting Procedures and Controls and Taxes are more detailed than
the other sections because they frequently are reviewed with the
assistance of independent public accountants. The other sections normally
are reviewed by company personnel with the occasional assistance of the
accountants or other outside specialists (engineers, employee benefit
specialists, actuaries, industry and marketing experts, etc.). Therefore,
these other sections are somewhat general because they are intended to
provide only a broad overview.
It is essential at the outset that management agree on the scope of the
review, its objectives and limitations, and the persons responsible for
reviewing each area. This will ensure that the right type of information
is obtained to properly evaluate the acquisition candidate.
This Checklist is intended only as a guide. Although the Checklist can be
used in its entirety, sections should be added or deleted to suit the
particular circumstances and information needs of each case.
I COMPANY BACKGROUND
A. Company Name
____________________________________________________________________________
B. Address
____________________________________________________________________________
C. Telephone Number
____________________________________________________________________________
D. Other Principal Locations (Describe)
1. Sales ___________________________________________________________________
2. Manufacturing ___________________________________________________________
3. Other ___________________________________________________________________
E. Date of Incorporation
____________________________________________________________________________
F. State of Incorporation
____________________________________________________________________________
G. Ownership
____________________________________________________________________________
1. Public or private _______________________________________________________
2. Exchanges on which traded _______________________________________________
3. Type of securities outstanding (common stock, preferred stock, etc.) ____
4. Principal stockholders and percentage of ownership ______________________
H. Directors
_______________________________________________________________________________
List all Directors Years as Other
Name Director Affiliations
-------------------------------------------------------------------------------
_________________________ ____________________ _________________________
_________________________ ____________________ _________________________
_________________________ ____________________ _________________________
_________________________ ____________________ _________________________
-------------------------------------------------------------------------------
Identify board committee participants and chairperson, i.e., audit
committee, etc.
I. Outside Experts
-------------------------------------------------------------------------------
Years Description
Name Employed of Relationship
-------------------------------------------------------------------------------
1. Attorneys ___________________ __________ _____________________
2. Auditors ___________________ __________ _____________________
3. Bankers ___________________ __________ _____________________
4. Other - describe ___________________ __________ _____________________
-------------------------------------------------------------------------------
J. Brief Description of Business - Attach detailed description, if available.
Include all significant business segments, organizational structures,
products or services the company has developed, etc.
K. Brief History of Company - Attach detailed description, if available.
Include any recent significant changes in ownership and business operations.
L. Selling Objectives of the Company and Related Information
1. Why is the company for sale? ____________________________________________
_________________________________________________________________________
2. Who are the individuals responsible for the sale of the company? ________
_________________________________________________________________________
3. Are there any minority or dissenting shareholder rights that may affect
the sale transaction? ___________________________________________________
4. What are the proposed terms and conditions of the acquisition (e.g.,
cash/stock/combination thereof, etc.)?
_________________________________________________________________________
_________________________________________________________________________
5. Is there an anticipated time frame to consummate the transaction? _______
_________________________________________________________________________
6. What are the tax objectives of the seller and its shareholders? _________
_________________________________________________________________________
7. What are the tax consequences to the seller and its shareholders? _______
_________________________________________________________________________
8. What is the anticipated accounting and tax treatment? ___________________
_________________________________________________________________________
9. Who is responsible for payment of brokers' fees (buyer/seller
responsibility)? What is the amount, terms, and when payable?
_________________________________________________________________________
_________________________________________________________________________
M. Management
1. What is the reputation of major shareholders, directors and management?
_________________________________________________________________________
_________________________________________________________________________
2. Will they continue after the sale with or without employment contracts?
_________________________________________________________________________
_________________________________________________________________________
3. Have the company's officers, directors or major shareholders been
involved in criminal or other legal proceedings?
_________________________________________________________________________
_________________________________________________________________________
4. Will the sale trigger severance or other employee benefit obligations,
loss of key customers or contracts, employee resignations, etc.?
_________________________________________________________________________
_________________________________________________________________________
5. Have obvious management actions been taken to make the company look more
attractive, i.e., deferral of bonuses, research and development,
advertising and capital improvement expenditures, etc.?
_________________________________________________________________________
_________________________________________________________________________
N. Recent Major Developments and Trends
1. Have there been any major trends or developments within the company?_____
_________________________________________________________________________
2. Have there been any major trends or developments within the industry
and competition?
_________________________________________________________________________
_________________________________________________________________________
O. Plans for the Future - Obtain corporate minutes for the past______years and
any operating plans (including those pertaining to contemplated discontinued
operations), forecasts, budgets, etc., that are available.
P. Related Parties - Are the operations of the company significantly impacted
by related-party transactions? If so, list the parties and describe the
relationship and transactions.
____________________________________________________________________________
____________________________________________________________________________
Q. Major Litigation, Pending or Potential - Describe and obtain letters from
attorneys assessing litigation.
____________________________________________________________________________
____________________________________________________________________________
R. Governmental Restrictions and Regulation - Describe impact on business._____
____________________________________________________________________________
S. Cyclical Factors-Describe any affecting the industry._______________________
____________________________________________________________________________
T. Credit and Securities Rating - Obtain Dun & Bradstreet Report and securities
analyst research reports (if a public company)._____________________________
____________________________________________________________________________
U. Major External Forces That Affect the Company - Describe and note the
source._____________________________________________________________________
____________________________________________________________________________
V. Political and Social Attitudes Toward the Company - Describe and note the
source._____________________________________________________________________
____________________________________________________________________________
W. Related Industry Perception - Describe the general perception of suppliers
and customers toward the company. Specific supplier and customer checks
should be performed as part of Section II (Industry Analysis), Section VII
(Marketing - Products), Section VIII (Manufacturing - Distribution) or as
part of subsequent verification procedures.
____________________________________________________________________________
____________________________________________________________________________
X. Other Comments _____________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________
II INDUSTRY ANALYSIS
A. Industry Structure
1. Number of companies by size category ___________________________________
2. Degree of industry concentration _______________________________________
________________________________________________________________________
3. Merger and acquisition trends
a. Vertical ____________________________________________________________
b. Horizontal __________________________________________________________
c. Other _______________________________________________________________
4. Business failures/successes
a. Trends ______________________________________________________________
b. Causes ______________________________________________________________
5. Industry structure
a. Geographic location _________________________________________________
b. Product lines _______________________________________________________
c. Channels of distribution ____________________________________________
d. Pricing policies ____________________________________________________
e. Degree of integration _______________________________________________
f. Type of customer ____________________________________________________
6. Barriers to entry by new companies _____________________________________
________________________________________________________________________
B. Industry Growth
1. Estimated Annual Growth Rate - Last _________Years
==============================================================================
Total $ % Increase Variation Analysis*
______________________________________________________________________________
a. Sales _______ __________ _____________________
b. Profits _______ __________ _____________________
c. Market Share _______ __________ _____________________
==============================================================================
2. Estimated Annual Growth Rate - Next __________Years
==============================================================================
Total $ % Increase Variation Analysis*
______________________________________________________________________________
a. Sales _______ __________ _____________________
b. Profits _______ __________ _____________________
c. Market Share _______ __________ _____________________
*This should include reasons for growth or lack thereof, including demand
changes, cyclicality, trends, market share changes, competitive changes, etc.
==============================================================================
3. Factors Affecting Growth
==============================================================================
Major Minor Describe
______________________________________________________________________________
(check one)
___________
a. Demographic trends _________________
____________________________________ _____ _____ _______________
b. General economic trends ____________
____________________________________ _____ _____ _______________
c. Disposal income ____________________
____________________________________ _____ _____ _______________
d. Interest rates _____________________
____________________________________ _____ _____ _______________
e. Industry composition and trends ____
____________________________________ _____ _____ _______________
f. Market size ________________________
____________________________________ _____ _____ _______________
g. Market share _______________________
____________________________________ _____ _____ _______________
h. Technological innovation ___________
____________________________________ _____ _____ _______________
i. Production design __________________
____________________________________ _____ _____ _______________
j. Economic of scale __________________
____________________________________ _____ _____ _______________
k. Product pricing and differentiation
____________________________________ _____ _____ _______________
l. Imports/Exports ____________________
____________________________________ _____ _____ _______________
m. Advertising or marketing developments
____________________________________ _____ _____ _______________
n. Government factors _________________ _____ _____ _______________
- Demand ___________________________ _____ _____ _______________
- Fiscal Policy ____________________ _____ _____ _______________
- Regulation _______________________ _____ _____ _______________
o. Customer buying power ______________
____________________________________ _____ _____ _______________
p. Environmental considerations _______
____________________________________ _____ _____ _______________
q. Other (describe) ___________________
____________________________________ _____ _____ _______________
==============================================================================
C. Competition
1. Other companies in industry and their strategy _________________________
________________________________________________________________________
2. Competition from other industries, i.e., substitute products ___________
________________________________________________________________________
3. Nature and extent of trade practices and cooperation ___________________
________________________________________________________________________
4. Key factors for success, barriers to entry and major threats to success
________________________________________________________________________
D. Customer/Suppliers by Industry
1. List major industries to which products are sold.
==============================================================================
Total Industry Sales/
% Growth Rate/Market Share
___________________________________________
Last Next
Description ( ) Years ( ) Years Source
______________________________________________________________________________
________________________________ ___________ _________ ________________
________________________________ ___________ _________ ________________
________________________________ ___________ _________ ________________
==============================================================================
2. Has there been significant growth of new customers/suppliers in the
last five years? ______________________________________________________
3. Has there been a trend integration of suppliers and reverse integration
of customers?
_______________________________________________________________________
_______________________________________________________________________
4. Is there a dependence on a few key customer/suppliers? _________________
_______________________________________________________________________
E. Labor - Overall industry and regional analysis
1. Are adequate community services and skilled labor available? ___________
________________________________________________________________________
2. Are the local pay rates industry competitive? __________________________
________________________________________________________________________
3. Have there been recent union negotiations and/or labor contract renewals?
What were the results and settlements of union negotiations?
________________________________________________________________________
________________________________________________________________________
4. What is the degree of unionization in the industry? ____________________
________________________________________________________________________
F. Government Regulations
1. To what extent is the company regulated by the government? (describe) __
________________________________________________________________________
2. What regulatory agencies are responsible? ______________________________
________________________________________________________________________
3. Is there a trend to increased regulation? ______________________________
________________________________________________________________________
4. Are there any unique reporting requirements? ___________________________
G. Patents, Trademarks, Copyrights, etc.
Are patents, trademarks, copyrights, etc., important in the company's line
of business? If so, describe major patents; indicate expiration dates and
discuss any recent patent litigation.
H. Other information - Obtain and attach, if available, current periodicals,
newspaper, clippings, trade association releases, company-prepared
documents (including annual reports, projections, budgets and business
plans, public filings and brochures), Standard & Poor's Reports, Value
Line Surveys, Moody's Manual extracts, securities research reports,
government data including IRS publications and census studies, etc., that
provide additional background on the particular industry and competition
therein. This should include, wherever possible, the opinion of suppliers,
customers, distributors, competitors, lending institutions and other
involved parties. The material should include, but not necessarily be
limited to, what is being done by the leaders within the industry in terms
of product, processes, marketing, pricing, organization, financing and
performance trends in terms of volume, market share, profitability and
growth.
III FINANCIAL AND ACCOUNTING DATA
A. Financial Statements - Obtain:
1. Balance Sheets- Annual and interim for last _______ years.
2. Income Statements - Annual and interim for last ________ years.
3. Statements of Changes in Financial Position and Cash Flow - Annual and
interim for last _______ years.
4. Comparative financial statements for major business segments, product
lines and geographical locations (include a breakdown of sales, gross
profit, operating profit and net assets as a minimum).
_________________________________________________________________________
_________________________________________________________________________
5. Prospectuses and Registration Statements (if any) _______________________
_________________________________________________________________________
6. Most recent Proxy Statement _____________________________________________
_________________________________________________________________________
7. Interim Financial Statements and Form 10-Q - Most recent ________________
_________________________________________________________________________
8. Dun & Bradstreet, Standard & Poor's and/or Value Line Reports ___________
_________________________________________________________________________
9. Other SEC Filings-Forms 10-K, S-1, etc. _________________________________
_________________________________________________________________________
10. Financial and operating projections, budgets, business plans, etc. ______
_________________________________________________________________________
11. Federal, state and local tax returns and Internal Revenue Service, state
and local agent reviews for last _______ years.
B. Assets
1. Cash
a. Name and number of major disbursement accounts. ______________________
______________________________________________________________________
b. Average cash balance for last. _______ years.
c. Have all bank accounts been reconciled on a timely basis and all
unusual reconciling items been properly explained?
______________________________________________________________________
d. Are there any restrictions due to compensating balances? _____________
e. Is cash in other than local currency, and, if so, is it subject to
restrictions?
______________________________________________________________________
2. Receivables - Describe the recognition policy for recording revenues
and establishing receivables.
a. Accounts Receivable
- Credit Terms - Describe collection, discount and return policies.
____________________________________________________________________
- List receivables that are discounted/factored - With whom, cost,
terms, purpose, etc.
____________________________________________________________________
____________________________________________________________________
- List all major receivables segregating trade, employee and other
for amounts over _______ %, ______ %, _______ % of respective
balances. Also segregate and highlight accounts receivable that
represent conditional sales.
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
===============================================================================
Current
Amount
Name Receivable Terms Age % Explanation*
_______________________________________________________________________________
____________________ __________ ________ ____ _____ ___________________
____________________ __________ ________ ____ _____ ___________________
____________________ __________ ________ ____ _____ ___________________
____________________ __________ ________ ____ _____ ___________________
*Explain any trade receivables over _______ days old, and employee/officer or
other unusual receivables over $_______.
===============================================================================
b. Notes Receivable - List all notes over $ ________.
Indicate if any collateral is held.
===============================================================================
Amount Interest Explanation-
Name Receivable Rate Date Due Description
_______________________________________________________________________________
______________ ______________ _____________ _______________ _______________
______________ ______________ _____________ _______________ _______________
______________ ______________ _____________ _______________ _______________
______________ ______________ _____________ _______________ _______________
===============================================================================
c. Obtain a description of the company's bad debt reserve policy.
d. Obtain a summary of bad debt experience for the last ______ years
and most recent interim period.
e. Obtain support for and determine reasonableness of general and
specific reserve balances.
f. Obtain a summary of the reserve for returns and allowances for
the last _______ years.
g. Obtain receivable aging and turnover analyses for last ___ years.
3. Investments
a. Marketable securities - List all holdings.
(Segregate current and long-term portfolios.)
===============================================================================
Date Effective Market Original Carrying
Description Acquired Yield Value Cost Value
_______________________________________________________________________________
___________________________ ________ __________ ______ ________ __________
___________________________ ________ __________ ______ ________ __________
___________________________ ________ __________ ______ ________ __________
___________________________ ________ __________ ______ ________ __________
===============================================================================
b. Other investments - List all other investments.
===============================================================================
Date % of Effective Estimated* Original Carrying
Description Acquired Ownership Yield Value Cost Value
_______________________________________________________________________________
_________________ ________ ________ _________ _________ _______ _________
_________________ ________ ________ _________ _________ _______ _________
_________________ ________ ________ _________ _________ _______ _________
_________________ ________ ________ _________ _________ _______ _________
*Indicate source of estimates for all significant investigations. Attach
financial information, and determine if more detailed review is required.
===============================================================================
4. Inventories - Obtain breakdown for each major component and product
line. Determine location of inventory (on hand, in transit, at outside
warehouses, etc.), ownership vs. "bill and hold" or on consignment and
whether pledged as collateral for outstanding borrowings. Obtain
specifics.
===============================================================================
Category Age or Beginning Estimated
By Turn- of Replacement
Product over Latest Beginning Previous Valuation Estimated
Line Rate* Date of year ( ) Years Method Cost NRV
_______________________________________________________________________________
Raw
materials _____ ______ _________ _________ _________ _________ _________
Work in
process _____ ______ _________ _________ _________ _________ _________
Finished
goods _____ ______ _________ _________ _________ _________ _________
Total _____ ______ _________ _________ _________ _________ _________
_______________________________________________________________________________
NOTE; Include a breakdown of labor, material and overhead content by category.
*Disclose how calculated and details.
===============================================================================
a. Describe physical inventory and cutoff procedures. ________________
___________________________________________________________________
b. Describe inventory accounting records (e.g., do perpetual
inventory records exist?; is the gross profit method used to
determine interim inventories?).
___________________________________________________________________
___________________________________________________________________
c. Dates of last ______ physical inventories; amount and nature of
adjustments. Obtain book-to-physical reconciliations and analyses.
d. Date of next physical inventory. __________________________________
e. Describe inventory reserve policy (excess, slow-moving, obsolete,
etc.), and procedures to identify such inventory.
___________________________________________________________________
___________________________________________________________________
f. Describe procedures used to determine net realizable value. _______
___________________________________________________________________
g. Analyze reserves and writedowns for past ______ years and most
recent period.
h. Compare trends in product line sales, new product development and
changing technology to inventory levels by product.
___________________________________________________________________
___________________________________________________________________
i. Analyze seasonal inventory requirements/fluctuation. ______________
___________________________________________________________________
j. Describe the inventory and production cost system. Is a standard
or actual cost system used? What are the accounting implications?
___________________________________________________________________
___________________________________________________________________
- How is job or process costing accomplished? _____________________
- What costs are included in overhead, and what overhead
allocations are made? List overhead rates for past ______ years
and most recent period.
_________________________________________________________________
- What assumption is made about practical capacity for purposes of
absorbing overhead costs? Is it conservative?
_________________________________________________________________
- How are returns, overruns and scrap costed?
_________________________________________________________________
- Have variances been significance if a standard cost system is
used? If so, obtain an analysis of variances by product line for
the last ______ years.
k. Describe inventory valuation procedures and assess degree of
reliability.
___________________________________________________________________
___________________________________________________________________
l. List open long-term contracts, including name and type of customer,
price, terms, profit recognized, total estimated cost, costs
incurred to date and estimate to complete, progress billings to
date and scheduled, subcontractors, details and the method of
recording income or loss. Obtain an analysis of historical
variations and open contracts. Inquire about procedures used and
their reliability. Note: A separate investigate work program may
have to be designed if the seller produces under long-term
contracts due to the inherent lack of accounting precision
normally attributable to such contracts.
___________________________________________________________________
___________________________________________________________________
5. Plant, Property and Equipment
a. Land - Obtain for each major holding
===============================================================================
Estimated Value
-------------------
Date Basis of
Location Description Acquired Cost Amount Valuation Liens
-------------------------------------------------------------------------------
___________________ _____________ ______________ _______ __________ _____
___________________ _____________ ______________ _______ __________ _____
___________________ _____________ ______________ _______ __________ _____
___________________ _____________ ______________ _______ __________ _____
===============================================================================
b. Plant and Equipment - Obtain for each major facility
===============================================================================
Estimated
Original Book Estimated Replacement Accumulated Depreciation Remaining
Location Description Age Cost Value* Value* Cost Depreciation* Method* Life Lien
--------------------------------------------------------------------------------------------------------
________ ___________ ___ ________ ______ _______ ____________ ____________ ____________ _________ _____
________ ___________ ___ ________ ______ _______ ____________ ____________ ____________ _________ _____
________ ___________ ___ ________ ______ _______ ____________ ____________ ____________ _________ _____
________ ___________ ___ ________ ______ _______ ____________ ____________ ____________ _________ _____
*For tax and book purposes.
**Describe method and valuation, i.e., liquidation, going concern, etc.
========================================================================================================
c. Obtain a list of any significant plant, property and equipment
additions or retirements for past _______ years, and of projects
currently under construction or committed to.
d. Obtain a summary of all significant leasehold improvements,
including original cost, accumulated amortization, he period of
amortization and related lease expiration dates.
e. Describe the accounting policies of plant, property, equipment,
construction costs, interest during construction, start- up or
preoperating costs, recognition gains and losses upon
retirement/disposal and maintenance and repairs. Also describe
the depreciation and amortization policies.
_________________________________________________________________
_________________________________________________________________
f. Obtain a summary of changes in policy or estimates over the
past ______ years.
6. Other Assets - Obtain a description and analysis, including nature, how
they arose, capitalization and amortization policy, rights of use, liens,
threats to loss in value, appreciation, etc.
a. Goodwill _____________________________________________________________
b. Deferred charges _____________________________________________________
c. Research and development _____________________________________________
d. Organization costs ___________________________________________________
e. Contract rights ______________________________________________________
f. Patents ______________________________________________________________
g. Trademarks/Trade Names _______________________________________________
h. Other ________________________________________________________________
C. Liabilities
1. Accounts Payable
a. List all companies that constitute _____% or more of the total
accounts payable balance, or that account for _____% or more of annual
purchases during the past _____ years.
===============================================================================
Current Last Year $
Amount Amount of Description of Materials/
Name Payable Purchases Services Purchased
_______________________________________________________________________________
______________________ ___________ ______________ __________________________
______________________ ___________ ______________ __________________________
______________________ ___________ ______________ __________________________
______________________ ___________ ______________ __________________________
b. Describe any unusual credit terms or relationships that exist with
the companies listed, e.g., volume discounts, extended terms,
commitments, etc.
_____________________________________________________________________
_____________________________________________________________________
c. Describe normal credit terms - Are discounts taken, etc.? ___________
_____________________________________________________________________
2. Accrued Liabilities - Obtain an analysis of the current balance and the
balance at the past ______ years. Explain significant variations.
a. Have all required items been properly accrued, i.e., professional
fees, employee benefits, payroll, taxes, vacation pay, claims,
probable contingencies, severance and retirement benefits, warranty
costs, pension liabilities, planned move or facility shutdown costs,
utilities, unvouchered purchases, etc.?
_____________________________________________________________________
3. Notes Payable - List all notes over $ ______.
===============================================================================
Amount
_________________________________
Interest Payment
Payee Description* Rate Date Original Current Schedule
_______________________________________________________________________________
_______ _______________ _________ _______ __________ _________ __________
_______ _______________ _________ _______ __________ _________ __________
_______ _______________ _________ _______ __________ _________ __________
_______ _______________ _________ _______ __________ _________ __________
===============================================================================
4. Long-Term Liabilities - List.
===============================================================================
Amount
_________________________________
Interest Payment
Payee Description* Rate Date Original Current Schedule
_______________________________________________________________________________
_______ _______________ _________ _______ ___________ ________ __________
_______ _______________ _________ _______ ___________ ________ __________
_______ _______________ _________ _______ ___________ ________ __________
_______ _______________ _________ _______ ___________ ________ __________
*Include conversion rights, other equity features, prepayment premiums,
sinking-fund requirements, effects of ownership changes, and credit ratings by
outside sources.
===============================================================================
5. Banking Relationships - List all banks with whom the company maintains a
borrowing relationship.
===============================================================================
Line of
Credit
Terms/
Unused Letters Commitment Interest Borrowing
Bank Name Location Balance of Credit Fees Costs History
_______________________________________________________________________________
_____________ ___________ ________ __________ ____________ _________ __________
_____________ ___________ ________ __________ ____________ _________ __________
_____________ ___________ ________ __________ ____________ _________ __________
_____________ ___________ ________ __________ ____________ _________ __________
===============================================================================
6. Obtain Loan Agreements and Indentures - Can all debt be assumed in the
case of an asset purchase or liquidation? State restrictions on debt
assumptions, if any.
_________________________________________________________________________
_________________________________________________________________________
7. Describe financial covenants, and attach latest compliance computations
and auditor's/ officers' certification.
_________________________________________________________________________
8. What assets, if any, are pledged as collateral against the liabilities?
_________________________________________________________________________
9. Obtain an analysis of short-term borrowing patterns for past _____ years
(minimum and maximum levels, average amount, weighted average interest
rate, etc.), and compare to the cyclical nature of sales, inventory and
production levels, indicate interest rate and security required, if any.
_________________________________________________________________________
10. Describe any "off-balance-sheet" financing and obtain a summary of terms
and restrictions.
_________________________________________________________________________
D. Potential Unrecorded Liabilities - is an overall review for unaccrued and
unrecorded liabilities regularly performed by the seller? How?
____________________________________________________________________________
Have the following been considered?
1. Product and sales related:
a. Product safety or truth-in-advertising problems.
b. Product liability claims - Obtain a summary of reserves for
warranties for the past _____ years and discuss warranty policy,
reserve requirements and unusual trends with management.
c. Service guarantees.
2. Employee related:
a. Obtain recent compliance reports or deficiency letters issued by
governmental agencies or other regulatory authorities.
b. Describe any OSHA, EEO or other violations, and actions the company
has taken to resolve them.
_____________________________________________________________________
c. Are there any occupational diseases inherent to the industry? _______
d. What other unusual employee obligations exist? ______________________
e. Is the company a member of a multiemployer pension plan, and have the
related funded and unfunded accumulated benefits been calculated?
_____________________________________________________________________
f. Do unions have the right to veto planned facility shutdowns or be
compensated as a result?
_____________________________________________________________________
3. Environmental problems - Have there been any environmental regulation
violations or warnings given to the company? If so, what actions does
the company plan to take to resolve them, and what will the related
cost be?
_________________________________________________________________________
_________________________________________________________________________
4. Sensitive transactions--Describe the nature, extent and action taken with
respect to any sensitive transactions or irregularities.
_________________________________________________________________________
E. Contingent Liabilities and Commitments
1. Leases
a. List all leases for which the company is obligated by category
(capital or operating).
===============================================================================
Years Remaining Description of Description of
Minimum --------------- Escalation/ Renewal/
Annual Non- Adjustment Purchase
Description Amount cancellable Total Terms Options
_______________________________________________________________________________
______________ ________ ____________ ______ _____________ ________________
______________ ________ ____________ ______ _____________ ________________
______________ ________ ____________ ______ _____________ ________________
______________ ________ ____________ ______ _____________ ________________
===============================================================================
b. List the aggregate minimum capital lease payments for the next ______
years, and the related imputed interest (in the aggregate) to derive
the present value of such future lease payments. Has such amount
been reflected as a liability? How has the related asset been
reflected?
_____________________________________________________________________
c. How does the present value of capital leases compare to their fair
market value?
_____________________________________________________________________
d. Describe major sublease terms. ______________________________________
_____________________________________________________________________
e. Has the availability/cost of entering into new lease agreements been
assessed?
_____________________________________________________________________
2. Litigation
a. Has the company been involved in any significant litigation in the
past ______ years, or is it threatened by pending or unsettled
claims? If so, list and describe the nature of those claims and the
current status. Attach legal opinions and representation letters
provided to the company's auditors, if available.
b. Are there any legal problems or potential litigation presently facing
the industry, and if so, what effect might this have on the company?
_____________________________________________________________________
c. Are there any potential antitrust problems, and have they been
considered in connection with the proposed acquisition?
_____________________________________________________________________
3. Loan Guarantees
a. List any loans for which the company is a guarantor, and assess the
financial condition of the related companies. Do subsidiary loans,
guarantees or exchange laws restrict dividend payments to the parent
company?
_____________________________________________________________________
4. Open Contracts
a. List all open contracts. Describe the nature and potential cost,
including informal agreements (i.e., consultants, severance, death,
pension, etc.).
_____________________________________________________________________
F. Stockholders' Equity - Net Worth
1. Summarize for all classes of stock:
a. Type ________________________________________________________________
b. Shares Authorized ___________________________________________________
c. Shares Outstanding __________________________________________________
d. Voting Rights _______________________________________________________
e. Liquidation Preferences _____________________________________________
f. Dividends ___________________________________________________________
g. Terms of Warrants and Options Outstanding ___________________________
h. Major Owners ________________________________________________________
i. Date Acquired by Major Owners _______________________________________
j. Major Owner Cost Basis ______________________________________________
k. Market Price Range __________________________________________________
l. Special Terms, Conversion Features __________________________________
2. Obtain a shareholders' list.
3. Obtain a list of treasury stock activity for the past ______ years.
4. List any stock option or purchase plans, and attach details concerning
each.
_________________________________________________________________________
G. Accounting Policies
1. Obtain a summary of significant accounting policies and procedures.
2. Obtain auditor's report and management's representation letters for the
past ______ years. Are there any issues or events that resulted in other
than an unqualified opinion?
3. Describe any significant changes in accounting principles, policies or
estimates over the past ______ years.
_________________________________________________________________________
4. Describe any accounting policies that are unique to the company's
industry.
_________________________________________________________________________
5. Describe any accounting policies that differ from industry practice,
represent alternative methods where other preferable methods exist, or
are excessively conservative or aggressive.
_________________________________________________________________________
6. Determine if the interim financial statements are prepared on a basis
consistent with that of the annual report. Describe any differences.
_________________________________________________________________________
7. Describe any proposed accounting pronouncements or government regulations
that may have significant impact on the company.
_________________________________________________________________________
8. Describe major accounting policy differences from that of the buyer.
_________________________________________________________________________
9. Have the financial statement effects of the above been quantified, where
appropriate, and have financial ratios been adjusted accordingly?
_________________________________________________________________________
H. Financial Statement Ratio Analysis
See Exhibit l for key ratios frequently used to help evaluate a proposed
acquisition.
1. Future Operating Results and Pro Forma Estimates
a. Has support projected financial statements been obtained? ___________
_ What methodology is the forecasted growth based upon (e.g.,
regression analysis, trend projection and extrapolation,
economic and/or industry indicators, market studies, management
estimate)?
_________________________________________________________________
_ Are the assumptions concerning sales growth (volume and price,
gross margins, working capital requirements, operating expenses,
capital expenditures, financing requirements and terms, etc.),
reasonable based on historical results, trends, industry and
overall business expectations, etc.?
_________________________________________________________________
b. Do the basic financial ratios (i.e., profit to equity and sales,
sales to assets and others in Exhibit l) indicate that projected
levels of growth are feasible without significant infusions of
outside capital or changes in historical financial ratios? If not,
how will increased financing, faster asset turnover, improved profit
margins and dividend increases be accomplished?
_____________________________________________________________________
c. Identity and describe any factors that could impact the pro forma
financial statements significantly and that are not readily apparent
from a review of the historical financial statements. The following
items may not be recorded at their current fair market value. The
extent to which these and other factors affect the pro forma
statements will depend on whether the acquisition is accounted for
as a pooling of interests or purchase and whether it is taxable or
nontaxable.
_____________________________________________________________________
Items that may not be recorded at fair market value--
_ Lease agreements
_ Long-term receivables/obligations
_ Plant, property and equipment
_ Inventory
_ Intangible assets, patents, copyrights, computer software
_ Distribution agreements, customer lists, licenses
_ Pension obligations and assets
_ OSHA, EPA and other regulatory deficiencies and related expected
obligations
_ Severance costs (anticipated layoffs)
_ Customer lists, licenses, franchises, air rights, easements
_ Net of tax valuation adjustments (resulting from different tax
vs. accounting valuations)
_ Other
Potential future earnings adjustments
_ Excessive expenses incurred to reduce tax liability, i.e.,
personal expenses, excessive owner compensation, etc.
_ Functions performed by parent for which no cost has been allocated
_ Salary adjustments required for a more competitive wage; other
employee benefit requirements
_ Expected changes in material or other costs
_ Incremental depreciation and amortization charges resulting from
expected asset/liability revaluation; other effects of
asset/liability revaluations
_ Different tax provision due to new ownership structure and tax
basis
_ Cost savings from elimination of duplicate facilities, overhead
and "synergy"
_ Reduction in interest income from excess cash
_ Expected sales of facilities
_ Other
Accounting Policies
_ Changes required to conform to the buyer's accounting principles
_ Anticipated industry changes/trends in accounting principles, and
effect upon present and future operations
I. Impact of Inflation on Operations and Financial Position
Provide additional information that will aid the buyer in determining the
current and future value of the business operations in view of possible
inflation/deflation including the following:
1. Impact on Financial Statements
a. If FIFO is used to value inventory, has the company prepared an
estimate of the impact of restating costs for current prices (i.e.,
elimination of "inventory profit") for each product line to determine
real gross profit?
_____________________________________________________________________
_____________________________________________________________________
b. Have sales price increases during the last year (and projected for
the next year) offset the increase in costs? Has the gross profit
percentage been maintained?
_____________________________________________________________________
_____________________________________________________________________
c. If depreciation or rental expenses were calculated on the estimated
replacement cost of property, plant and equipment and leases, what
impact would this have on reported and budgeted net income?
_____________________________________________________________________
_____________________________________________________________________
d. Assuming interest on all long-term debt was at a current rate, what
impact would this have on net income?
_____________________________________________________________________
_____________________________________________________________________
e. After adjusting for each of the above factors, what is the return on
capital? Is it still acceptable? Does it exceed the cost of capital?
_____________________________________________________________________
_____________________________________________________________________
2. Review of Company's Ability To Operate in an Inflationary
Environment--How does the company manage each of the following to assure
current inflation is taken into account?
a. Sales price increases to pass through increased costs
b. Receivables
_ Speed in billing
_ Use of lock boxes in key geographical areas
_ Discount policy
_ Collection efforts
c. Fixed assets
_ Financing methods
_ Major replacement or expansion needs
_ Appropriation procedures
_ Increasing/decreasing fuel costs on older, less efficient
facilities
d. Accounts payable and accrued liabilities
- Deferral of payments
- Cash discount policy
- Pension and tax payment timing
e. Financing
- Type
- Timing
- Cyclical requirements
f. Labor costs
- Competitiveness of wages
- Influence of unions
- Pension funding assumptions
- Impact of possible relocation
g. Budgeting and planning
- Availability of accurate cash-flow projections
- Assumptions used in long-range planning
- Taxes
h. Impact of inflation of foreign operations
- Impact on exchange rates- Use of hedging contracts
i. Insurance coverage
-Frequency of review
IV FINANCIAL REPORTING SYSTEM AND ACCOUNTING
PROCEDURES AND CONTROLS
A. Management Reports
1. Obtain copies of key management reports
2. Describe each as follows:
Prepared Period Covered/ Reason for
Description By Issued Date User Report
______________________________________________________________________________
____________________ ________ _______________ ____ _______________________
____________________ ________ _______________ ____ _______________________
____________________ ________ _______________ ____ _______________________
____________________ ________ _______________ ____ _______________________
3. Are performance reports prepared for all major areas of accountability?
Do these reports related actual performance to plans and budgets? Is
Adequate information provide information provided to manage
effectively and make informed judgments?
________________________________________________________________________
________________________________________________________________________
B. Reporting Structure
1. Described the interface of subsidiaries, divisions and departments with
corporate headquarters concerning centralized reporting requirements.
_______________________________________________________________________
2. Describe how the financial and management reporting systems work.
_______________________________________________________________________
C. Internal Controls
1. Obtain the corporate policies and procedures manual, if any, and broadly
assess comprehensiveness. Determine how compliance with these policies
and procedures is enforced.
2. Obtain independent accountants' memorandum on accounting procedures and
internal controls for past_______ years.
3. Describe the composition, policies and procedures of the internal audit
department, and obtain internal audit department reports for past______
years and management response thereto.
4. Obtain any other significant documentation concerning internal control.
5. Obtain Audit Committee minutes.
6. Based upon the information obtained in 1-5, and discussions with
management, describe and broadly assess the overall internal control
environment, noting any significant weaknesses.
D. Computer Facilities
Type of Date
Machine Ownership Installed Location Applications
______________________________________________________________________________
_______________ ______________ _________ ____________ ____________________
_______________ ______________ _________ ____________ ____________________
_______________ ______________ _________ ____________ ____________________
_______________ ______________ _________ ____________ ____________________
1. List outside computer services utilized.________________________________
________________________________________________________________________
2. How do users perceive the EDP function? How do user and EDP department
perceptions differ? How effective is communication between EDP and user
personnel?
________________________________________________________________________
________________________________________________________________________
3. Obtain any recent evaluations of the EDP function and note significant
weaknesses, problems and/or opportunities.
E. Insurance
1. Property - List policies and describe significant conditions, benefits
and frequency of review. Also list and describe any self-insurance
plans. Summarize significant claims filed over past______ years.
Compare coverage to estimated replacement cost of assets held and
contingent liabilities.
a. Are there significant unaccrued costs on open or incurred but not
reported claims?_____________________________________________________
b. Are increased premiums anticipated as a result of unfavorable trends
or the need for increased coverage?__________________________________
_____________________________________________________________________
c. Are significant retroactive premium adjustments anticipated?_________
_____________________________________________________________________
2. Obtain information on other insurance policies in force, e.g., product
liability, officer life, medical, etc., as noted above.
F. Long-Range and Budgetary Planning
1. Describe the process employed and objectives. Note the personnel
responsible.
a. Do the individuals within the organization help develop the
objectives and plans for their area of accountability, and are plans
communicated to the appropriate personnel?
_____________________________________________________________________
b. Does the budgeting system continually monitor the accuracy of
forecasts? Are there procedures established to explain major
variations (actual versus budget) on a current basis? Have
explanations for significant variations over the past........ years
been provided?
_____________________________________________________________________
c. Does the company develop and maintain contingency plans in the event
actual results vary significantly from budget?
_____________________________________________________________________
d. How is profitability of individual business units and product lines
monitored? Are financial ratios, controllable expense analyses,
contribution to overhead analyses, direct costing and other financial
evaluation techniques employed?
_____________________________________________________________________
_____________________________________________________________________
G. Procedures and Organization Manuals
Provide a brief description, including the use of manuals and personnel
responsible for preparation.
___________________________________________________________________________
___________________________________________________________________________
H. Other Significant Areas
Describe other significant aspects of the company's operations as they
relate to financial reporting and accounting procedures and controls.
___________________________________________________________________________
___________________________________________________________________________
V TAXES
A. Applicable Taxes - Describe, including federal, state and local income,
property, excise and other taxes paid by the company
1. Federal_________________________________________________________________
2. State___________________________________________________________________
3. Local___________________________________________________________________
B. Federal Income Taxes
1. Examinations conducted by local tax authorities, i.e., the Internal
Revenue Service (IRS) in the United States:
a. Last year examined___________________________________________________
b. Amount of deficiencies and nature of adjustments in last_______ years
examined.
c. Have the results of the above reviews been reflected in the current
reserve for taxes for both the years examined and the years
subsequent to the examination?_______________________________________
_____________________________________________________________________
d. Status of the current examinations___________________________________
_____________________________________________________________________
e. Tax years open and closed to future tax authority examination________
_____________________________________________________________________
2. Tax carryforwards - Amounts by year of expiration and type (i.e., net
operating loss, capital loss, ITCs, FTCs, R&D credit, etc.
________________________________________________________________________
3. Describe any special industry considerations - including depletion
allowances, special credit or deductions, etc.
________________________________________________________________________
4. Obtain a reconciliation of the effective income tax rate to the
statutory tax rate for the past_______ years. Obtain an analysis of the
deferred tax provision for the past_______ years.
5. Obtain an analysis of the current income tax requirements and compare
the total of those requirements to the current income tax reserve.
Obtain an analysis of the components of the deferred income tax reserve,
and assess the reasonableness and future cash requirements.
C. State and Local Taxes
1. Have all applicable state and local tax returns been filed?_____________
2. Have there been any state tax audits or disputes?_______________________
________________________________________________________________________
3. List the amount of deficiencies and nature of adjustments in the last
________ years examined.
________________________________________________________________________
4. Have the results of the above reviews been reflected in the current
reserve for taxes for both the years examined and the years subsequent
to the examination?
________________________________________________________________________
________________________________________________________________________
5. Have federal deficiencies been reflected in state and local tax
reserves?_______________________________________________________________
6. Tax carryforwards - amounts by year of expiration and type. Note that
not all states permit carryover of losses.
________________________________________________________________________
7. Is the company complying with regulations regarding sales and payroll
tax collection and remittance?
________________________________________________________________________
________________________________________________________________________
D. Tax Planning and Preparation
1. Is the company's tax planning and compliance performed internally or by
outside accountants and/or attorneys?
________________________________________________________________________
________________________________________________________________________
2. Has the company taken advantage of all potential tax savings? Are
aggressive interpretations adequately reserved for?
________________________________________________________________________
________________________________________________________________________
3. Does the company maintain adequate tax basis records?___________________
________________________________________________________________________
E. Other Considerations - Describe any other significant tax planning
considerations of interest to the buyer; include potential tax savings not
currently achieved but that could be achieved by the buyer, e.g., LIFO,
accelerated depreciation, installment sales, FSC, accelerated pension or
other expensing, etc., or proposed legislation that may adversely affect
the company to be acquired.
___________________________________________________________________________
___________________________________________________________________________
F. Factors Affecting Purchase Structure and Price
1. Obtain an analysis of the tax basis of assets being acquired and an
estimate of the fair value of the assets being acquired and liabilities
assumed; estimate the recapture tax liability assuming that such is
triggered; consider the following:
a. Depreciation - machinery and equipment and buildings
b. Investment and other tax credits
c. LIFO inventory reserves
d. Research and development
e. International, FSC or DISC earnings and profits
f. Previously expensed items, e.g., supplies, tools and dies, etc.
g. Other
2. Determine if there are deferred intercompany gains or nondeductible
writeoffs that may result in additional taxes.
3. Determine the existence of "golden parachute"-type arrangements.
4. Determine the expected transaction effect on net operating loss and tax
credit carryovers.
5. What are the expected benefits of a taxable vs. nontaxable transaction?
Has the present value of step-up benefits been compared to the recapture
and related tax liability cost?
________________________________________________________________________
VI ORGANIZATION - HUMAN RESOURCES AND INDUSTRIAL
RELATIONS
A. Organization Chart--Obtain the most recent chart, or describe the
organization.
1. Are job descriptions updated as required to meet changing conditions?
Do they define reporting relationships, responsibility, authority and
basis for performance measurement?
________________________________________________________________________
2. Is the organization structure consistent with short- and long-range
business requirements?
________________________________________________________________________
3. Are potential savings available through consolidation, realignment and
other restructuring actions?
________________________________________________________________________
4. Are key personnel policies compatible? _________________________________
B. Key Executive Personnel - provide the following information (attach
resumes, if available), and highlight recent and/or anticipated key
personnel losses:
______________________________________________________________________________
Years Written/
in Years Prior Unwritten
Title Present with Business Compen- Employment
Name Position Age Position Co. Experience Education sation Agreements
_______________________________________________________________________________
____ ________ ____ ________ _____ __________ _________ _______ _____________
____ ________ ____ ________ _____ __________ _________ _______ _____________
____ ________ ____ ________ _____ __________ _________ _______ _____________
____ ________ ____ ________ _____ __________ _________ _______ _____________
-------------------------------------------------------------------------------
1. Are successful and proven management personnel available to carry out
plans, or does everything depend on one key person? What happens if an
employee is not available for an extended period?
_________________________________________________________________________
2. Is there a blend of youth and experience, or are most employees in the
same age or experience bracket?
_________________________________________________________________________
3. Are there cohesive lines of authority and communication? Do all parts of
the unit work closely together? Is there an integrated approach to all
major problems?
4. Is there excessive domination of operations and planning by any one
individual?
_________________________________________________________________________
5. Have development plans been established for key managers and
high-potential employees?
_________________________________________________________________________
6. What is the strategy for filling key positions? Can internal development
alone meet requirements or will intercompany transfer or outside hiring
be required? Are outside consultant used? What has been past experience?
____________________________________
7. Are local laws prohibiting discriminatory hiring and advancement
practices being complied with?
_________________________________________________________________________
8. Is the compensation plan being administered so as to attract and retain
top-quality personnel? Are salary levels competitive with industry norms?
_________________________________________________________________________
9. Have any of the company's key management personnel or directors been
involved in:
a. Criminal proceedings? ________________________________________________
b. Regulatory commission violations? ____________________________________
c. Significant civil court litigation? __________________________________
d. SEC or IRS investigations? ___________________________________________
10. Key nonexecutive personnel by department.
_______________________________________________________________________________
Years
Total with Training Sick Compen-
Department Male Female Age Company Education Program Turnover Days sation
_______________________________________________________________________________
__________ ___________ ___ _______ _________ ________ ________ _____ _________
__________ ___________ ___ _______ _________ ________ ________ _____ _________
__________ ___________ ___ _______ _________ ________ ________ _____ _________
__________ ___________ ___ _______ _________ ________ ________ _____ _________
-------------------------------------------------------------------------------
a. What are the critical functions staffed with well-qualified people?
b. Are there special personnel or skill needs, e.g., related to
technology, marketing, manufacturing (short- or long-term)?
_______________________________________________________________________
c. What are the plans to respond to skill needs or technical obsolescence?
_______________________________________________________________________
d. Is there or will there be an excess of manpower in some functional
areas?
_______________________________________________________________________
e. Can excess people be retrained for other positions within the
organization if the need arises?
_______________________________________________________________________
C. Employee Benefits--Review accounting treatment, including amounts,
personnel covered and eligibility:
1. Describe pension plan, how funded and amount of unfunded or overfunded
vested benefits. Extract key pension plan provisions (e.g., effect of
employee terminations on vested benefits) and actuarial assumptions.
Include amount of unrealized gains and losses in portfolio. In the
United States, attach latest ERISA financial statement filings and
actuarial studies.
2. Describe profit sharing, bonus, incentive and deferred compensation
plans.
3. Describe other benefit, retirement, social and severance plans,
including escalation clauses, if any.
4. Describe medical and sick leave benefits and policies. Also determine
the number, type and cost of claims over the past_______years, and
specifically identify any significant open claims.
5. Describe vacation/holiday policies.
6. Describe stock option or related equity incentives.
7. Describe policies related to travel and entertainment expenses.
8. Describe policies related to use of automobiles, airplanes, limousines,
boats, etc.
9. Comment on escalation clauses or expectations, if any, within current
fringe benefit programs. Expected higher levels of benefits and/or
inconsistencies with the buyer should be highlighted.
10. Obtain a summary of the company's rating for unemployment and workmen's
compensation.
11. Determine if either buyer or seller would need to upgrade its benefits
programs or salaries as a result of the acquisition to effect
uniformity.
12. What are medical and life insurance costs for postretirement, and when
are they provided?
13. Other--Describe.
D. Union Contracts (Attach significant contracts):
1. Name(s) of union(s)
2. Control of membership (i.e., local or national)
3. Employees covered
4. Length of contract(s)
5. Expiration date(s)
6. Other significant terms-Describe (i.e., escalation clauses, regular
rate increases, productivity clauses, promotions, retirement and other
benefits, hiring and firing, hours/work week, etc.)
E. Labor Relations
1. Strike History-include all in past________years:
_______________________________________________________________________________
Date Union Duration Cause Settlement
______________________________________________________________________________
________ __________ ___________ ______________ __________________
________ __________ ___________ ______________ __________________
________ __________ ___________ ______________ __________________
________ __________ ___________ ______________ __________________
------------------------------------------------------------------------------
2. List of grievances filed and arbitration awards.________________________
3. Are labor contract problems anticipated? _______________________________
4. If there is no union, are organizing efforts taking place that might
change that status? Are changes likely to occur after acquisition? _____
5. Are significant increases anticipated for contracts nearing expiration?
___________________________________
F. Labor (Payroll) Ratio Analysis
See Exhibit I for key ratios frequently used to help evaluate a proposed
acquisition.
VII MARKETING - PRODUCTS
A. Product Lines--Describe major products or product lines within the segments
identified in the "Financial and Accounting Data" section. Include all
that constitute ___% or more of total company sales. Summarize the
following:
_______________________________________________________________________________
Sales/Operating Income
Gross Profit*
________________________________
Last ( ) Year to Current-Year Total Order
Name of Line Description Year Date Estimate Backlog**
_______________________________________________________________________________
_______ __________________ _______ ________ ____________ ______________
_______ __________________ _______ ________ ____________ ______________
_______ __________________ _______ ________ ____________ ______________
_______ __________________ _______ ________ ____________ ______________
Total Product Line
======== ============= ==============
Total Company ======== ============= ==============
======== ============= ==============
*Detail by geographic region, distribution channel and type of customer,
as available.
**Include the following information:
- Age of significant backlog orders
- Delivery date quoted customers on significant current orders, and actual
performance expected relative to dates promised
- Expected profitability of backlog
_______________________________________________________________________________
B. Major Products-This section should be prepared for each of the major
products listed above.
Also attach descriptive literature (e.g., product brochures):
1. Name ____________________________________________________________________
2. Description _____________________________________________________________
a. Components/key raw materials _________________________________________
b. Price ________________________________________________________________
c. Quality ______________________________________________________________
d. Customer service _____________________________________________________
e. Product life _________________________________________________________
f. Market size __________________________________________________________
g. Market share _________________________________________________________
h. Franchising protection _______________________________________________
i. Warranty terms _______________________________________________________
j. Patent/trademark protection __________________________________________
k. Technological sensitivity ____________________________________________
l. Competitive strategy and assessment __________________________________
m. Future plans _________________________________________________________
3. Date introduced ________________________________________________________
4. Significant modifications ______________________________________________
5. Amount in inventory and turnover (historical and projected) ____________
6. Distribution methods ___________________________________________________
7. Return history _________________________________________________________
8. Annual production capability ___________________________________________
9. Advertising-Promotion methods _________________________________________
10. Customers ______________________________________________________________
a. List all that account for____% or more of total product sales.
Indicate any special pricing policies, product warranties, return
privileges, contractual agreements (terms, expectation of renewal),
customer complaints and relationships dependent on a specific
individual within the company. Obtain available financial
information for significant customers.
______________________________________________________________________________
Total Sales
____________________________________________
Next Year's
Last ( ) Years Year to Date Budget
______________ ____________ ___________
% of % of
Total Total Total
Customer Name/Location $ Product $ Product $ Product
_______________________________________________________________________________
______________________________ ______ ________ _____ _________ _____ _______
______________________________ ______ ________ _____ _________ _____ _______
______________________________ ______ ________ _____ _________ ______ _______
Total All Other ====== ======== ====== ======== ====== =======
Total Product Line* ====== ======== ====== ======== ======= ======
*Amount from VII-A
-------------------------------------------------------------------------------
b. What industry purchases the products, and how are the products used?
___________________________________________________________________
c Why do companies and individuals purchase the products? What
differentiates the products from others in the industry (i.e.,
price, service, availability, etc.)?
____________________________________________________________________
11. Monthly sales history by segment and/or major product line
_______________________________________________________________________________
Next Year's
Last ( ) Years This Year* Budget
_____________________ _________________ _____________________
% of % of % of
$ Total $ Total $ Total
_______________________________________________________________________________
January _______ ________ ________ _________ _________ ______________
February _______ ________ ________ _________ _________ ______________
March _______ ________ ________ _________ _________ ______________
April _______ ________ ________ _________ _________ ______________
May _______ ________ ________ _________ _________ ______________
June _______ ________ ________ _________ _________ ______________
July _______ ________ ________ _________ _________ ______________
August _______ ________ ________ _________ _________ ______________
September _______ ________ ________ _________ _________ ______________
October _______ ________ ________ _________ _________ ______________
November _______ ________ ________ _________ _________ ______________
December _______ ________ ________ _________ _________ ______________
Total 100% 100% 100%
======= ======== ======== ========= ========= ==============
*Actual to date plus estimate for remainder of year.
------------------------------------------------------------------------------
12. Product line comparison to industry (last - years and next - years.).
Describe key assumptions.
------------------------------------------------------------------------------
Sales Gross Profit
___________________________________ ____________________
Name of Product Industry Market Company/
Product Line Total Total Share% Industry Average
______________________________________________________________________________
_____________ __________ _________ __________ ____________________
_____________ __________ _________ __________ ____________________
_____________ __________ _________ __________ ____________________
_____________ __________ _________ __________ ____________________
------------------------------------------------------------------------------
13. Competitors' history and projections (last ______ years and _____ years)
Obtain Standard & Poor's, Value Line and Dun & Bradstreet Reports. Also
obtain description of the overall strategies and goals for these
companies, and the specific strengths and weaknesses
------------------------------------------------------------------------------
14. Amount of sales, if any, subject to renegotiation. List all open
contract, terms, conditions, etc.
15. Summary of intracompany/intercompany sales.
------------------------------------------------------------------------------
Total Sales
________________________________________________
Last ( ) Years Current Year
_________________________ ____________________
%of Total %of Total
Description $ Product $ Product
------------------------------------------------------------------------------
__________________ ______________ ____________ ____________ _________
__________________ ______________ ____________ ____________ _________
__________________ ______________ ____________ ____________ _________
__________________ ______________ ____________ ____________ _________
------------------------------------------------------------------------------
16. Unit Pricing
a. Obtain the following:
- Description of how prices and discount policies are developed by the
company and its competitors.
- List average unit prices of major products (last ------ years and
next ------ years).
------------------------------------------------------------------------------
Price
Product Year Company/Competition
______________________________________________________________________________
_____________________________ ________________ __________________________
_____________________________ ________________ __________________________
_____________________________ ________________ __________________________
_____________________________ ________________ __________________________
------------------------------------------------------------------------------
b. What has been the price movement in relation to frequency of
occurrence, magnitude of occurrence, elasticity of demand and sales
promotion?
________________________________________________________________________
- What is the industry's ability to meet current and future product
demand?
________________________________________________________________________
- Does management believe cost increases could be passed on? Why?
________________________________________________________________________
_ Is the company sensitive to industry price changes?
________________________________________________________________________
- Is there a price leader? Which company? Describe circumstances.
C. Other Products - Less than - % of total company sales.
------------------------------------------------------------------------------
Sales
East Current
Year Current Year
Last to Year Backlog Gross
Name Description Year Date Total Total Profit
------------------------------------------------------------------------------
___________ _____________________ _____ _____ _____ ________ ________
___________ _____________________ _____ _____ _____ ________ ________
___________ _____________________ _____ _____ _____ ________ ________
___________ _____________________ _____ _____ _____ ________ ________
Total ===== ===== ===== ======== ========
------------------------------------------------------------------------------
D. Marketing and Sales Organization
1. Obtain a description of the company's marketing and sales strategy.
2. Obtain organization chart. If no available, or flow-chart the
organization.
E. Personnel
1. Describe key personnel(i.e. experience, age, training, etc.).
2. Describe how marketing and sales personnel are compensated (i.e. salary
commission, incentive plans, etc.). List and describe any contractual
agreements.
3. Describe training programs, if applicable.
4. Are bonus incentive plans, quotas, etc., used to increase sales
initiative?
F. Sales Planning
1. How are plans formulated? Is there a general consistency between
geographic locations and market segments?
___________________________________________________________________________
2. Who is responsible? Are there account or territorial coverage plans?
___________________________________________________________________________
3. Describe use of sales reports and external information.
___________________________________________________________________________
G. Advertising Expenditures - Obtain an analysis of the last-----year and
next------years projections.
------------------------------------------------------------------------------
Type Amount %of Sales Description
------------------------------------------------------------------------------
a. Media ________ _________ _______________________________
b. Point of sale ________ _________ _______________________________
c. Other ________ _________ _______________________________
Total
Advertising
Expenditures ======== ========= ===============================
------------------------------------------------------------------------------
1. Does the company use an advertising agency, and are the results of
advertising evaluated? How do expenditures and results compare to
competitors? To industry norms?
___________________________________________________________________________
H. Public Relations
1. Does the company have a public relations department or utilize outside
consultants?
___________________________________________________________________________
2. Is there a planned public relations program and, if so, at whom is it
directed (i.e. stockholders, press, customers, financial community,
etc.)?
___________________________________________________________________________
I. Describe the company's philosophy on new product promotion and advertising.
Have specific programs been undertaken to create new markets, enlarge
existing markets, obtain new accounts or improve sales to existing
account? Compare current with prior programs and highlight any deferral
of advertising/promotion efforts to increase current earnings at the
expense of future earnings and product development.
___________________________________________________________________________
___________________________________________________________________________
J. Competitive Position
Has an assessment of the company's position and projected future position
in the industry vis-a-vis the competition been made? Discuss with how they
perceive the company's strengths and weaknesses relative to its competition
and what factors they attribute to helping or preventing them from
achieving their objectives. What are the key factors for success, barriers
to entry and threats to success?
___________________________________________________________________________
___________________________________________________________________________
K. Marketing Ratio Analysis
See Exhibit 1 for key ratios frequently used to help evaluate a proposed
acquisition.
VIII MANUFACTURING - DISTRIBUTION
A. Production Facilities
Describe each production as follows:
Facility
______________________________________
No. 1 No. 2 No. 3 No. 4
____________________________________________________________________________
1. Name ________ ________ ________ ________
2. Location ________ ________ ________ ________
3. Date Constructed ________ ________ ________ ________
4. Owned/Leased ________ ________ ________ ________
5. Cost ________ ________ ________ ________
6. Book Value ________ ________ ________ ________
a. Method ________ ________ ________ ________
b. Years ________ ________ ________ ________
7. Estimated Remaining Life ________ ________ ________ ________
8. Capacity ________ ________ ________ ________
a. Floors ________ ________ ________ ________
b. Square Feet ________ ________ ________ ________
c. Production Units ________ ________ ________ ________
9. Shifts ________ ________ ________ ________
10. Employees ________ ________ ________ ________
11. Present Condition ________ ________ ________ ________
12. Capacity Utilization ________ ________ ________ ________
13. Alternative Uses ________ ________ ________ ________
B. Machinery and Equipment - List principal machinery and equipment, including
cost, age, accumulated depreciation, depreciation rates, condition,
replacement cost, location, production use, specific or general nature and
capacity utilization.
C. Manufacturing Processes - Obtain description of the manufacturing processes/
operations that take place at each of the facilities listed previously, Have
plant visits been made where significant operations exists? Have the
following been considered in assessing the nature of the process?
1. What kind of manufacturing process exists?
a. Mass production or job shop oriented
b. Product or process structured flow
c. Production to order or for stock
2. Have the key components of the manufacturing process been identified?
________________________________________________________________________
3. Nature of operations:
a. What are the major operations and their sequence (e.g, component
fabrication and machining, component assembly, final assembly and
testing)?
_____________________________________________________________________
b. What is the relationship of the cost of each operation to total
product cost?
_____________________________________________________________________
c. What percentage of total factory floor space is used for each major
operation?
_____________________________________________________________________
d. What is the degree of mechanization and automation for each major
operation (highly automated machinery, semiautomatic, etc.)?
_____________________________________________________________________
4. To what extent are finished products and components standardized?
________________________________________________________________________
5. What programs exist for increasing standardization and ensuring quality
control?
________________________________________________________________________
6. What are the major components of total production cycle time?
________________________________________________________________________
a. Lead Time - resource acquisitions, production engineering, planning
and scheduling.
b. Manufacturing time - volume effects (e.g., can several units be in
process at the same time?) and product mix effects.
7. Are subcontractors utilized?
________________________________________________________________________
8. Productivity:
a. What are the current trends in manufacturing productivity?
_____________________________________________________________________
b. Are there indications of technical obsolescence?
_____________________________________________________________________
c. Does product design restrict the selection of the manufacturing
process?
_____________________________________________________________________
d. Is the design conducive to an efficient manufacturing process
(safety, degree of accuracy, etc.)?
_____________________________________________________________________
e. What degree of integration exists between product and manufacturing
engineering?
_____________________________________________________________________
9. Has the efficiency of this process been compared to competitors in the
industry?
________________________________________________________________________
10. Does the plant layout appear efficient?
________________________________________________________________________
D. Purchasing
1. Procedures
a. Obtain a copy of the company's purchasing procedures or, if not
available, determine through discussion with management informal
procedures that may exist.
2. Supplier
a. List the basic raw materials used in the manufacturing process.
b. List all suppliers who furnish ________% or more of the total material
purchases for any of the facilities listed previously for the
Last ________ years and next years:
Unit Price
Supplier and Total
____________________ Type of Purchased Special
Facility Name Location Material Amount Terms
______________________________________________________________________
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
________ ________ ________ ________ ________ ________
c. Determine (though discussion with management, etc.) the economic
condition of the suppliers' industry, including competitive structure,
and the related possibility of significant raw materials shortages,
interruption of deliveries or price fluctuations.
d. List and describe any long-term supply contracts and/or reciprocal
buying agreements.
e. Summarize intracompany/intercompany purchases:
Total Purchases
_______________________________________
Last - Years Current Year
% of % of
Description $ Total $ Total
______________________________________________________________________
______________________________ ________ ________ ________ ________
______________________________ ________ ________ ________ ________
______________________________ ________ ________ ________ ________
______________________________ ________ ________ ________ ________
E. Maintenance
1. Capitalization vs. expense policies and scheduled maintenance and repair
expense for the past ________ years and next ________ years; explain
inconsistent trends or unusual expenditures.
_________________________________________________________________________
2. List any maintenance facilities, and describe the company's program for
maintenance and repairs.
_________________________________________________________________________
3. Determine if the company is following its regular maintenance program.
(Has maintenance been deferred?) Highlight deferral of preventive
maintenance to increase current earnings at the expense of future
earnings.
_________________________________________________________________________
F. Distribution
1. Describe physical distribution methods and transportation facilities
utilized. Estimate costs where possible.
Company Competition
______________________________________
% of % of
$ Sales $ Sales
_________________________________________________________________________
a. Raw material purchases ________ ________ ________ ________
b. Intracompany transfers ________ ________ ________ ________
c. Finished goods to customers ________ ________ ________ ________
G. Does the company use any of the following techniques to operate efficiently
in the manufacturing and inventory management areas:
1. Control of inventory using "ABC," zero inventory and/or "just in time"
inventory techniques.
________________________________________________________________________
2. Setup and production line time reduction studies________________________
3. Plant utilization and layout studies____________________________________
4. Obsolescence reviews____________________________________________________
5. Long-term supplier contracts____________________________________________
6. Responsibility accounting for inventory and scrap_______________________
7. Value engineering (input from purchasing into decisions made by
engineering regarding the components of new products)___________________
8. Parts standardization___________________________________________________
9. Establishment of a cycle counting program_______________________________
10. Reduction of ECNs (Engineering Change Notices)__________________________
11. Purchasing reviews (e.g., usage vs. substitution, competitive bidding,
approved vendor list, etc.)_____________________________________________
12. Vendor evaluation procedures (quality, timeless, price)_________________
13. Establishment of a routing system_______________________________________
14. Time and motion studies_________________________________________________
15. In-line vs. batch manufacturing_________________________________________
16. Make or by analyses_____________________________________________________
H. What is management's plan for capital expansion and investment over the next
five years, and have any commitments been made? Analyze that plan to
determine if future capital investment is (1) merely to maintain present
capacity or (2) to increase present production capabilities that will
increase future profitability. Are these plans consistent with present
condition of facilities, production needs on projections and anticipated
technological changes?
____________________________________________________________________________
____________________________________________________________________________
I. Obtain a summary of historical capital expenditures, and comment on
significant variations contained therein. Highlight current deferrals and
expenditure programs to improve liquidity and comment on the future impact
thereof.
____________________________________________________________________________
____________________________________________________________________________
J. Productivity/Efficiency Ratio Analysis
See Exhibit 1 for key ratios frequently used to help evaluate a proposed
acquisition.
IX RESEARCH AND DEVELOPMENT
A. Major Programs
1. Completed in last 5 years
Description Cost Estimated Benefits
_________________________________________________________________________
______________________________ _____________ ________________________
______________________________ _____________ ________________________
______________________________ _____________ ________________________
______________________________ _____________ ________________________
2. Currently in process
Cost
_________________
Est. To Est. Time To
Description To Date Complete Complete Estimated Benefits
_________________________________________________________________________
____________________ _______ ________ ____________ __________________
____________________ _______ ________ ____________ __________________
____________________ _______ ________ ____________ __________________
____________________ _______ ________ ____________ __________________
3. Proposed for future
Estimated
________________________
Description Cost Time Estimated Benefits
_________________________________________________________________________
___________________________ ___________ ___________ __________________
___________________________ ___________ ___________ __________________
___________________________ ___________ ___________ __________________
___________________________ ___________ ___________ __________________
B. List any significant products recently developed and/or under development by
competition.
C. What attempt has been made to develop new or improved products to satisfy
current customers' needs in existing and potential markets, and customer
needs currently being met by other products?
____________________________________________________________________________
D. Personnel
Name Salary Background
____________________________________________________________________________
________________________________________ ___________ _____________________
________________________________________ ___________ _____________________
________________________________________ ___________ _____________________
________________________________________ ___________ _____________________
1. Review for current and proposed staffing
_________________________________________________________________________
2. Evaluate technical competence
-------------------------------------------------------------------------
E. Facilities-Laboratories (Describe)------------------------------------------
-------------------------------------------------------------------------
________________________________________________________________________
F. Discuss current vs. historical levels of R&D and highlight variations
thereof , particularly with respect to any apparent deferral of R&D effort
to increase current earnings and the effect of this policy on future
product development and earnings and in comparison to industry trend. Are
budgets sufficient to maintain or improve the company's competitive
position?
___________________________________________________________________________
___________________________________________________________________________
G. Compare industry expenditures for R&D to that of the company and its
competitors. Review the percentage of expenditures for R&D costs to sales
for the last------years, and explain
major variations.
H. What is status of patents, trademarks, etc.?_______________________________
___________________________________________________________________________
I. Are proprietary rights protected by the company for all R&D projects in
the United States as well as international markets?
___________________________________________________________________________
___________________________________________________________________________
EXHIBIT I-FINANCIAL RATIOS
INTRODUCTION
The ratios presented in this exhibit are frequently used to help evaluated
a proposed acquisition. If the buyer desires these ratios, the following
should be performed with respect to them:
1. Compute (or request management to compute) the ratios for - years;
2. Identify and explain significant trends and variations between
years;
3. Compare the ratios to industry averages and key competitors;
obtain explanations for significant variations;
4. Review the calculations to ensure that significant, unusual or
nonrecurring items have been considered and/or disclosed.
A. FINANCIAL STATEMENT RATIO ANALYSIS
__________________________________________________________________________
Sales/Profitability
Factors Equation Purpose
__________________________________________________________________________
Gross Profit Margin = Gross Profit Measures gross profit margin,
------------ and, by comparing to prior
Net Sales periods, can be used to
determine trends
Pretax Profit Margin = Income before Taxes Measures profit per sales
------------------- dollar after all expenses
Net Sales (except income taxes)
Net Return on Sales = Net Income Indicates net profitability
------------------- of each dollar of sales
Net Sales
General Income Various Measures relationship of
Statement Analysis major expense categories as
percent of sales; cost of
sales to operating and
selling, general and
administrative expenses;
major components of cost of
sales as percent of total;
profitability of sales by
division, location or product
line, and to other income and
expenses
Return on Total = Net Income Measures profitability on the
Investment ------------------- total capital invested
Total Capital
Return on Equity = Net Income Measures the return on
------------------- invested capital
Total Shareholder
Equity
Return on Assets = Net Income Indicates return on each
-------------------- average dollar of assets
Average Total Assets
Price/Earning Ratio = Market Price Measures the future
--------------------- expectation of the trading
Earnings public and potential
dilutive effect on buyer's
equity or earnings per
share
_______________________________________________________________________________
Liquidity Factors
_______________________________________________________________________________
Current Ration = Current Assets Measures ability to pay
-------------------- short-term obligations
Current Liabilities
Quick Ratio = Current Assets- Measures ability to pay
Inventories short-term obligations
-------------------- without utilizing inventory
Current Liabilities funds
Stockholder's = Stockholder's Equity Measures long-term
Equity Ratio -------------------- liquidity; measures
Total Assets financial strength and
cushion for creditors
Working Capital to = Working Capital Indicates net liquid assets
Total Assets --------------------- relative to total
Total Assets capitalization
Overall Liquidity = Total Assets Measures the overall
Ratio --------------------- liquidity of the company
Total Liabilities
_______________________________________________________________________________
Working Capital and
Debt Factors
_______________________________________________________________________________
Working Capital = Net Sales Measures how effectively
Turnover ---------------------- working capital is used
Average Working to generate sales and
Capital whether a company has a
high proportion of fixed
or slow assets
Assets Utilization = Net Sales Indicates the efficiency
---------------------- with which total resources
Average Total Assets are used
Cash Flow to Total = Net Cash Flow Measures cash generated in
Assets ----------------------- relationship to assets
Total Assets
Debt-to-Equity = Debt Measures debt levels of
Ratios ------------------------ the company in comparison
Stockholders' Equity to owner's equity
Total Liabilities = Total Liabilities Measures the relative
to Stockholders' ------------------------ "ownership" of the
Stockholders' Equity company's assets by
owners and creditors
Debt Coverage Ratio = Earnings before
Interest and Taxes Measures the ability to
------------------------- pay off debt
Annual Debt Service
Times Interest = Earnings before Measures the extent to
Earned Interest and Taxes which earnings could
------------------------- decline before
Interest Charges resulting
in an inability to pay
annual interest charges
Ratio of Earnings = Earnings before
to Fixed Charges Interest and Taxes Measures the extent to
plus Fixed Charges which earnings can
------------------------- decline without
Fixed Charges affecting the ability to
meet fixed costs
_______________________________________________________________________________
Realizability and Cash Management Factors
_______________________________________________________________________________
Cash Cycle = Receivables + Measures the number of
Inventory days in the cash cycle
_________________________
Average Cost of
Goods Sold
Receivables = Net Credit Sales Indicates efficiency of
Turnover __________________________ receivables collections
Average Trade and effectiveness of
Receivables (net) of credit policies
Past-Due Index = Total Receivables
Past-Due Used to indicate trends
__________________________ in collection activity
Total Receivables
Bad Debt Expense
as a Percentage of = Bad Debt Expense
Sales ___________________________ Measures bad debt
Total Credit Sales trends
Inventory Turnover = Cost of Goods Sold Measures number of
___________________________ times average
Average Inventory inventory "turned
over" or was sold
during the period
_______________________________________________________________________________
B. LABOR (PAYROLL) RATIO ANALYSIS
__________________________________________________________________________
Labor (Payroll)
Analysis Factors Equation Purpose
__________________________________________________________________________
Sales per Employee = Net Sales Measures the efficiency
_____________________ of employee utilization
Number of Employees
Average Salary per Total Payroll
Employee by Division = Expense for Division
or Class
_____________________ Measures overall salary
Number of Employees levels
in Division or Class
Total Payroll and Total Payroll and
Benefits as a = Benefits Expense
Percentage of Sales ______________________ Measures labor costs
Net Sales relative to sales
Benefits as a Benefits
Percentage of = _______________________ Measures level of
Payroll Total Payroll benefits relative to
Expense payroll
Employees Per Number of
Supervisor = Employees
_______________________ Helps identify
Number of top-heavy supervisory
Supervisors structures
Number of
Employees That Quit
Employee Turnover = or Were Terminated Measures employee
_______________________ stability and
Average Number of satisfaction
Employees
__________________________________________________________________________
C. MARKETING RATIO ANALYSIS
__________________________________________________________________________
Marketing Analysis
Factors Equation Purpose
__________________________________________________________________________
Returns as a Returns
Percentage of Sales = _______________________ Measures customer
Sales before Returns satisfaction and/or
but after Discounts product quality
Marketing Expense Marketing Expense
as a Percentage of = _______________________ Measures the cost of
Sales Sales marketing programs
relative to sales
generated
Gross Profit per Gross Profit
Marketing Dollar = _______________________ Measures marketing
Marketing Expense effectiveness
Discounts as a Discounts
Percentage of Sales = _______________________ Indicates the level
Gross Sales of discounts given
Selling Expense as a Selling Expense
Percentage of Sales = _______________________ Measures the level of
Sales selling efforts
expended for the
current level of
sales
Net Salesmen's
Sales per Salesman = Sales Measures salesmen's
_______________________ efficiency and
Number of Salesmen productivity
Sales Salaries and Sales Salaries and
Commissions as a = Commissions Measures the sales
Percentage of Sales _______________________ payroll cost relative
Sales to sales
__________________________________________________________________________
D. PRODUCTIVITY/EFFICIENCY RATIO ANALYSIS
__________________________________________________________________________
Productivity/Efficiency
Analysis Factors Equation Purpose
__________________________________________________________________________
Available Direct
Direct Labor Labor Hours - Idle
Utilization = Time
_______________________ Measures efficiency
Available Direct of employees
Labor Hours
Production per Units Produced
Direct Labor Hour = ________________________ Measures employee
Direct Labor Hours productivity
(including overtime)
Overtime Hours
Percentage of Hours = Worked
Worked on Overtime ________________________ Measures overtime
Total Hours Worked and capacity
utilization
Labor Cost to Total Labor Cost
Production Cost = ________________________ Measures proportion
Total Product Cost of labor cost to
total production
cost
Material Costs to Cost of Material
Total Production = ________________________ Measures proportion
Costs Total Product Cost of material to
total production
cost
Manufacturing Manufacturing
Overhead to Total = Overhead Measures proportion
Production Cost ________________________ of manufacturing
Total Product Cost overhead to total
production cost
Productive Machine
Machine Utilization = Hours
________________________ Measures efficiency
Total Available of equipment and
Machine Hours scheduling
Number of Units
Scrap Rate = Scrapped Measures how
________________________ efficiently
Total Units Produced materials are used
Direct Labor Hours
Direct Labor Hours ________________________
as a Percentage of = Total Hours of Measures the level
Total Factory Hours Factory and of production
Production support personnel
Personnel
Warehouse and Warehouse and
Delivery Expense = Delivery Expense
per Order ________________________ Measures the cost
Number of Orders of filling an order
__________________________________________________________________________