Financing Expansion
My company has enjoyed a good run of success, and is now considering purchasing a competitor in order to expand further. After twelve years of business, we have expanded, becoming profitable, and are now franchising as well. In order to adopt a nationwide strategy with an eye to going global, we are looking at options for expansion. Taking over a competitor is one of the main options. This paper will analyze the idea of taking over a competitor, especially with respect to how to finance such a transaction.
Different Valuation Methods
There are several valuation methods that can be used to analyze the competing company. These are adjusted book value, capitalized adjusted earnings, discounted future earnings, the cash flow method and the gross revenue multiplier (Collin.edu, 2013). Another technique is to base the valuation on the stock market valuation of a similar company. The company we are going to take over is a private company, but we can in theory use a public company as a comparable. Given the size of the company that we are seeking to take over, however, there does not appear to be a good public comparable. Therefore, this option is being rejected. The other five options are focused along the lines of analyzing the financial statements of the prospective takeover. Clearly, if the company is looking to sell, we can acquire these statements.
The adjusted book value of the operation method reflects that we are paying for the firm's assets. This makes sense because we have our own brand and management systems. The assets are the key thing that we are acquiring, and that includes the established customer base. Thus, by taking the book value of the company and making adjustments for assets and liabilities that are not on the balance sheet, and then paying a slight premium, we can arrive at an adjusted book value.
Basing the price on the capitalized annual earnings is another method. The annual earnings are accounting profits, which is an issue because we are paying cash. Therefore, it might be better to use cash flows. In...
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