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Title: Introduction to Corporate Finance/ M&A
Description: An Introduction to Corporate Finance and M&A for people new to the industry. These notes are the result of an intensive training programme at my workplace. They aim to cover a broad depth of topics to gain a fundamental understanding. Useful for interviews and those starting out in a role within this industry.

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Introduction to Corporate Finance/ M&A

Overview of typical corporate finance deals
▪ Trade acquisition
Acquisition by another a company usually not for financial investment purposes
...
This is because most trade buyers
tend to be large PLCs with significant cash balances on the balance sheet
...


▪ Private equity acquisition
These firms have a pot of money to invest, create value and re-sell the acquired
company for a profit
...


▪ Debt raise
Raising debt can either be for growth or PE motivations
...

Note on tax: no VAT on share sale on stamp duty and them CGT on share sales by
individuals
...
It could also be an upstream/ downstream
consolidation via acquisition of suppliers/ customers respectively
...
The synergistic benefits is why
Trade Buyers will only consider acquisitions in line with their overall strategy important to know for a CF advisor when pitching to buyers
...
This will be through growing companies with
a low CAPEX demand and high levels of cash generation - usually those within the
tech sector
...
Other revenue
streams for a PE firm include interest on loan notes to the business and a monitoring
fee for their chairman/ non-executive installed on the board
...
This is to maximise tax reliefs available on interest
...
This will be through growing companies with
a low CAPEX demand and high levels of cash generation - usually those within the
tech sector
...
Other revenue
streams for a PE firm include interest on loan notes to the business and a monitoring
fee for their chairman/ non-executive installed on the board
...
This is to maximise tax reliefs available on interest
...
The PE firm helps this by being v stringent in the business they pick to
buy, putting top management in place and holding them to account (noticeable
difference in ex-family firms) through the non-exec chairman and ensuring the future
strategy maximises profit
...
Most companies use EBITDA (a
proxy for cash) and a multiple to find the company value
...
Small, high growth businesses - often in the early
stages of setting up - will a sales multiple as they're often not making a profit
...

Working capital can be either dependant on the position at the time of acquisition
...
The adjustments will include things
like removing one-off, non-trading related items (e
...
fines)
...
If the latter is higher than the average, then this is a cash like item and vice
versa for debt like item
...
However, this
restricts their deal making ability in the wider market
...
Tech and then healthcare are most popular in the
industry due to the low capex requirements, high growth and cash generation
...
However, this
restricts their deal making ability in the wider market
...
Tech and then healthcare are most popular in the
industry due to the low capex requirements, high growth and cash generation
...
Have to explain any company weaknesses
creatively
...
The key point here is that the majority of information is financial based and
therefore lifted from the model
...


▪ Business plan
For a debt raise deal, the IM is referred to as the business plan
...
g
...


▪ Update paper
The potential buyers are updated on how the business has performed in the interim
period from IM release
...
g
...
To
do this, review the market, investment capability, historic track record, group
performance, funding landscape, potential buyers, current company valuation
...
NB: JVs are often ignored in
these scenarios by both potential buyers and lenders
...


▪ Exit paper
Advising mostly PE firms on how to exit a potential or current portfolio company
...


Advising mostly PE firms on how to exit a potential or current portfolio company
...


Funding sources and quantum
▪ Amortising vs non-amortising
These are the 2 main types of debt
...


▪ Loan notes
This can be loans from management
...
PE firms will use this
source of funding with the interest acting as a form of capital extraction, similar to
dividends but with a tax shield
...
This is often at a 2-3x EBITDA multiple amount with low interest
rates, stringent covenants and on an amortising basis
...

Credit
finds are similar to PE funds but are financed by the capital markets
...
Main example is asset based lending
...

Other examples include a revolving credit facility
...
Accordian/ acquisition
facilities are those to acquire companies and include a fee/ interest rate for nonutilisation
...
This greater flexibility has
an increased interest rate compared to usual non amortising loans
...
It allows the
bank to take on slightly more risk but compete with credit funds in offering debt to PE
firms which prefer the flexibility of bullet repayments
...
Map these by multiple and CAGR (return rate from start to
end of investment) and use the trend line to identify where our client fits in to find the
relevant multiple
...
EV will
therefore be the balancing figure
...
Important to note that a discount of
25% - 33% will be applied to non-listed companies from these
...


▪ Valutico
Software used to access the database of information mentioned above
...


▪ Hlookups and Vlookups
▪ SumIf and SumIfs (same principles for others e
...
Count)
Latter allows multiple criteria for a SumIf in the format: [criteria range, criteria], [criteria
range 2, criteria 2]

▪ Sum Product
Allows 2 lists to be multiplied and sum'ed

▪ Awareness of volatile formulas (offset, indirect, sum product etc
...
Go to name manager to define a list
...

'OR' & 'AND': 'IF' formula modifiers that are often combined
...
Go to name manager to define a list
...

'OR' & 'AND': 'IF' formula modifiers that are often combined
...
of working days within a listing using hard coded date
parameters
Min/Max: sets a smallest/ biggest limit within a listing - good way of setting a floor to
prevent values from going below a threshold
...
)

Financial modelling – operational
▪ Uses of and benefits in a deal scenario
The process of building a model involves understanding what outputs the client
requires
...
The complex
element is then thinking of how to map certain inputs to these outputs
...


▪ Ability to update for actuals
▪ Sensitisation
Through varying the inputs

▪ Different stakeholders that use models and the different outputs they need
Lenders, buyers, sellers and internal management

▪ Model templates

▪ Review and checklists

Financial modelling – returns
▪ Funding structure
A returns model is mainly for CF advisors and PE firms to use for forecasts and
whether its profitable to buy a company and when the best time to exit is
...
The model isn't concerned with the
TopCo, MidCo, Bidco structure
...


▪ Management rollover
Existing management - who are usually the shareholders - have X% of their equity
bought out (usually 50%) with the remainder held by them post completion as an
incentive to stay on
...
Keyman insurance
also place in case of incapacitation of key figures
...
The nominal
value of the shares will have to be paid by the relevant management team in the first
instance before the equity value of shares is distributed in a few years time
...
E
...
they could be asked to put up £20k
worth of shares as the nominal value with the market value being £200k of those
shares
...
Sellers also use
insurance to prevent being sued post completion (this is invalid if reason for being
sued is fraud
...
The MM
shows the return over a longer term whilst IIR is more short term
...
It is a set of accounts created
using the management accounts closest to the month end of the deal leading to a
more time pressured situation
...
The lead advisor has less control over the final amount to be paid
...
It is a set of accounts created
using the management accounts closest to the month end of the deal leading to a
more time pressured situation
...
The lead advisor has less control over the final amount to be paid
...
It creates 2 opportunities for the DD and legal team to work on the
deal: the initial DD and legal work on the company to be acquired and then again once
completion accounts have been finalised
...
Adjustments are made for items such as leakage (dividends taken
out); cash increases; interest accumulated
...

The funds flow shows what will be paid off on day 1
...
g
...
e
...

Note that you cannot have any rounding errors in the amounts to be paid as this
invalidates the legal agreement
...
Any directors' loans and share options will
be an in and out
...
Trade
buyers tend to pay off these debts as they're usually immaterial to a PLC and they
prefer low gearing levels
...


▪ Profits ticker
This is the daily EBITDA/ cash created which will add on the to equity value for each
day from the lockbox agreement to the completion
...

These are agreed upfront and thus in 2 categories: permitted and non-permitted
...

SPA/ BPA sections to review: Considerations, locked box, completion, warranties,
schedules (share %; completion mechanism; warranties, locked box); definitions
...
Most of relevant data contained in
the bank within the schedules
...

FA sections to review: Facilities, conditions of utilisation; repayment; fines and fees;
interest; indemnities; event of default; payment mechanics; remedies and waivers;
conditions and waivers; definitions
...
Ensure you know what's under
'warranty' and what's under 'indemnity
...


▪ Consideration
▪ Permitted leakage
E
...
legal fees around acquisition

▪ Ticker

Networking
▪ Regional vs national market

When liaising with a 3rd party, understand which region their office caters for
...
Late stage relationships
can seem opportunistic
...
Credit funds are useful to obtain
information about precedent deals
...
Can build a quid pro quo
relationship
...
CF advisors can build a quid pro quo relationship be referring ex-owners
who have sold their business to wealth managers
Title: Introduction to Corporate Finance/ M&A
Description: An Introduction to Corporate Finance and M&A for people new to the industry. These notes are the result of an intensive training programme at my workplace. They aim to cover a broad depth of topics to gain a fundamental understanding. Useful for interviews and those starting out in a role within this industry.