Table of Contents

PREFACE V BOOK 1. DATA COLLECTION AND PREPARATION PART I. DUE DILIGENCE AND RISK ANALYSIS 1. LEGAL INFORMATION 1.1. Bylaws 1.2. Publications in Government Gazettes 1.3. Information at the Chamber of Commerce 1.4. Important contracts and agreements 1.5. Public financial statements 1.6. The fiscal condition of the company 1.7. Social responsibility of the company 1.8. Management roles and responsibilities 1.9. Corporate governance 1.10. Industry-specific legal regulations 1.11. Pending claims 2. INTERNAL FINANCIAL INFORMATION 2.1. Internal reports 2.1.1. Financial and operational reports 2.1.2. Valuation rules 2.1.3. Internal accounting reports, reports by the board of directors and the executive committee 2.2. Balance sheet data 2.2.1. Intangible fixed assets 2.2.2. Property, plant & equipment 2.2.3. Financial fixed assets 2.2.4. Inventory 2.2.5. Accounts receivable 2.2.6. Shareholders' equity 2.2.7. Provisions 2.2.8. Accounts payable after more than one year 2.2.9. Accounts payable within one year 2.3. Income statement 2.3.1. Income 2.4. Control 2.4.1. Internal control and audit 2.4.2. External audit 2.4.3. Audit committee 2.5. Financial analysis 3. ADMINISTRATIVE ORGANIZATION 3.1. General organization 3.1.1. Specification 3.1.2. Coherence 3.1.3. Bottlenecks 3.2. Information Technology 3.2.1. Hardware 3.2.2. Soft ware 3.2.3. Data 3.2.4. Special techniques 3.2.5. Continuity 3.3. Company continuity 3.3.1. Persons 3.3.2. Infrastructure 3.3.3. Contingency plan 3.3.4. Financial contingency 3.4. Internal control 3.5. Insurances 4. COMMERCIAL INFORMATION 4.1. Product policy 4.1.1. Current products 4.1.2. New product development 4.2. Pricing policy 30 4.2.1. Elements 4.2.2. Price setting for private consumer markets 4.2.3. Price setting for industrial markets 4.2.4. Special price setting 4.3. Sales policy 4.3.1. Administrative cycle 4.3.2. Terms and conditions 4.3.3. Sales organization 4.3.4. Special contracts 4.3.5. Special sales techniques 4.3.6. E-commerce 4.4. Customer base and market 4.4.1. Customer base 4.4.2. Customer segments 4.4.3. Order book 4.4.4. Market and market share 4.5. Communication and promotion 4.5.1. Corporate communication 4.5.2. Product communication 4.6. Distribution 4.7. Legal context 5. TECHNICAL INFORMATION 5.1. Infrastructure 5.1.1. Intangible assets 5.1.2. Means of production 5.1.3. Infrastructure for trade and services 5.2. Production techniques 5.2.1. Techniques 5.2.2. Technical processes 5.2.3. Quality control 5.3. Inventory techniques 5.3.1. Tangible organization 5.3.2. Loading and unloading 5.3.3. Inventory management 5.3.4. Internal accounting and security 5.4. Operational equipment 5.4.1. Means of transportation 5.4.2. Means of communication 5.4.3. Production site equipment 5.5. Buildings and premises 6. SOCIAL CHARTER 6.1. Legal environment 6.1.1. Social regulation 6.1.2. Employment contracts 6.1.3. Employee representation 6.1.4. Social documents 6.1.5. Special issues 6.2. HR Policy 6.2.1. Recruitment 6.2.2. Education and development 6.2.3. Succession planning 6.3. Remuneration 6.4. Health and safety 7. FISCAL INFORMATION 7.1. Fiscal laws 7.2. Documentation 7.3. Fiscal status 7.4. International consortia 8. ENVIRONMENTAL INFORMATION 8.1. Sites 8.1.1. Shops, stores and distribution centers 8.1.2. Environmental certificates 8.1.3. Permits 8.2. Waste and recycling 51 8.3. Assessment of operations 8.3.1. Pollution and annoyance 8.3.2. Organization 9. VARIOUS RIGHTS AND COMMITMENTS 9.1. Business securities 9.1.1. Mortgage or mortgage proxy 9.1.2. Collateral 9.1.3. Provider of collateral 9.2. Personal securities 9.2.1. Joint liability 9.2.2. First demand guarantee (unconditional commitment) 9.2.3. Complementary personal securities 9.3. Other commitments in support of credit 9.3.1. Commitments to refrain from action 9.3.2. Letter of intent 9.3.3. Declaration of subordination 9.4. Third party goods and valuables 9.4.1. Clause on ownership restrictions 9.4.2. Leasing (financial) 9.4.3. Rent (operational) 9.5. Rights and commitments regarding buying and selling 10. CORPORATE INTERESTS 10.1. Financial relations 10.2. Operational ties 11. RISK ANALYSIS AND MATERIALITY 11.1. Aspects of risks 11.2. Materiality 11.2.1. First calculation 11.2.2. Second calculation 12. DUE DILIGENCE CONTRACT 12.1. Rendering data available 12.2. Confidentiality of data 12.3. Frames of reference and standards 12.3.1. Valuation rules 12.3.2. Valuation rules conglomerate acquiring company CHECKLIST DUE DILIGENCE 1. GENERAL CHECKLIST 1.1. General elements 1.2. Financial elements 1.3. Marketing information 1.4. Sales information 1.5. Product information 1.6. Information on services 2. RISK ANALYSIS 2.1. External aspects 2.2. Internal aspects PART II. DATA CORRECTIONS 1. GENERAL APPROACH 1.1. Essential accountancy 1.1.1. Classes of accounts 1.1.2. Classification 1.1.3. Valuation scheme 1.2. Valuation rules 1.2.1. Assets, equity and liabilities 1.2.2. Operational income 1.2.3. Valuation standards 1.3. Other influences 1.3.1. Judicial points of view 1.3.2. Legal context 1.3.3. Cultural differences and customs 2. SPECIAL ISSUES 2.1. Off-balance sheet elements 2.1.1. Guarantees and securities 2.1.2. Credit lines and revision of financing arrangements 2.1.3. Forward contracts 2.2. Research and development 2.2.1. Differences in valuation 2.2.2. Assessment of realization 2.2.3. Integration 2.3. Inventory and orders 2.3.1. Quality management 2.3.2. Outdated inventory 2.4. Employee compensation and benefits 2.4.1. Pension funds 2.4.2. Employee stock options 2.4.3. Restructuring 2.5. Conglomerate synergies 2.5.1. Flat-rate compensation 2.5.2. Fees for brand and logos 2.5.3. Transfer pricing 2.5.4. Reporting, communication, control 2.5.5. Employee remuneration 2.5.6. Standards for capital expenditure 2.6. Segmentation 2.6.1. Investments and disinvestments 2.6.2. Cash flow analysis 2.6.3. Profitability 3. VALUATION CORRECTIONS 3.1. Assets 3.1.1. Preliminary and formation expenses 3.1.2. Intangible fixed assets 3.1.3. Tangible fixed assets 3.1.4. Financial fixed assets 3.1.5. Inventory 3.1.6. Accounts receivable 3.1.7. Monetary assets 3.2. Equity and liabilities 3.2.1. Shareholders' equity 3.2.2. Provisions 3.2.3. Deferred taxes 3.2.4. Debts 3.2.5. Monetary debts 3.3. Income 3.3.1. Infrastructure and site 3.3.2. Turnover and terms and conditions 3.3.3. Purchasing raw materials, parts and commodities 3.3.4. Operational costs 3.3.5. Service and various goods 3.3.6. Workforce and remuneration systems 3.3.7. Investment policy and depreciations 3.3.8. Provisions and depreciations 3.3.9. Exceptional costs and revenues 3.4. Financial income and costs 3.4.1. Income from financial fixed assets 3.4.2. Income from current assets 3.4.3. Other financial income 3.4.4. Costs associated with debts 3.4.5. Depreciations of other current assets 3.4.6. Other financial costs 3.5. Rights and commitments 3.6. Arguments of current shareholders 3.7. Arguments of the acquiring company 3.7.1. Corrections by change in controlling interest 3.7.2. Corrections for strategy changes 3.8. Taxation rates and provisions 3.8.1. Conditions for application 3.8.2. Tax rates 3.8.3. Average profit 4. BUDGETS AND FORECASTS 4.1. Budgeting 4.1.1. Duration of reference period 4.1.2. Rhythm and nature of changes 4.1.3. From annual account to budget 4.2. Approach 4.2.1. Relevance of used figures 4.2.2. Feasibility of calculation method 4.2.3. User-friendliness 4.3. Forecasting techniques 4.3.1. Index models 4.3.2. Trend calculations 4.3.3. Extrapolation models 4.4. Budgeting techniques 4.5. Growth models CASE STUDY TARGET 118 Part 1. Essential 'Target' Data 118 Part 2. Due diligence assessments and corrections 118 Part 3. Revisions of income statements and budgeting BOOK 2. VALUATION TECHNIQUES INTRODUCTION PART I. VALUATION RULES AND TECHNIQUES 1. PRINCIPLES 1.1. Historical building blocks of forecasts 1.1.1. Continuation of current operations 1.1.2. Company changes 1.1.3. Comparative data 1.2. Holistic approach to company valuation 1.3. Creative application 1.4. Subjective valuation 2. SUBSTANTIAL VALUE 2.1. Companies as business economic entities 2.2. Companies as asset investment vehicles 3. PROFIT VALUE 3.1. The concept of return 3.2. The profitability approach 3.3. The cash flow approach 3.3.1. Schemes for reconstructing cash flows 3.3.2. IAS - Cash flow tables 3.4. EBIT 4. DISCOUNTING 4.1. Essential principles 4.2. Techniques 4.2.1. Discount rate 163 4.2.2. Compound interest 4.2.3. Annuities 5. SUMMATION 6. AVERAGES 6.1. Simple average 6.2. Weighted averages 6.3. Statistical calculations 7. GROWTH 7.1. Historical average 7.2. Indices 7.3. Exponential growth 7.4. Budgeted growth 7.5. Potential growth 7.5.1. Potential growth rate 7.5.2. Balanced growth rate 7.5.3. Auto-financing (internal financing) 8. SCENARIO APPROACH 8.1. Income scenarios 8.2. Investment scenarios 8.3. Earn-out compensation 9. RETURN VALUE 9.1. Internal rate of return 9.2. Return on capital/Return on equity 9.3. Return on investment PART II. VARIABLES 1. INTEREST RATE 1.1. Simple interest rates 1.1.1. Risk-free investment 1.1.2. Risk compensation 1.1.3. Preferred returns 1.2. Weighted average cost of capital (WACC) 1.2.1. General WACC 1.2.2. Private companies 1.2.3. Non interest-bearing debts 1.2.4. Short term financing 1.2.5. Limitations 1.3. Capital Asset Pricing Model (CAPM) 1.4. Variable return values 1.5. Risk premium 1.6. Changes in risk over time Case study Target 1.7. Fiscal issues of return values 2. RISK REFERENCE PERIOD 2.1. Impact of the duration of the reference period 2.2. Limited or infinite reference periods 2.2.1. Limited reference periods 2.2.2. Indefinite reference period 2.3. Calculation scheme 206 Case study Target 3. DISCOUNT AND PREMIUM 3.1. Discount 3.1.1. Limitations in exercising control 3.1.2. Marketability 3.1.3. Percentage 3.2. Premium 3.2.1. Premium for controlling interest 3.2.2. Buy-out premium 3.2.3. Entrance premium 3.3. Multiplier 3.4. Conclusion 4. RESIDUAL VALUE 4.1. Principle 4.2. Equity value 4.3. Income value 4.4. Equity or income 5. SPECIFICS FOR CURRENT AND NEW OWNERS PART III. VALUATION METHODS 1. SHAREHOLDERS' EQUITY VALUE 1.1. Shareholders' equity according to accountancy 1.2. Asset investment value 1.2.1. Real estate 1.2.2. Portfolio of shares 1.2.3. Other asset investments 1.3. Substantial value 1.3.1. Book value 1.3.2. Cash or market value 1.3.3. Development value 1.3.4. Economic usefulness 1.3.5. Replacement value 1.3.6. Liquidation value 231 Case study Target 2. PROFIT VALUE 2.1. Marginal return method 2.2. The return threshold method 2.2.1. Basic formula 2.2.2. Flexible formula 238 Case study Target 2.3. The permanent return method 2.3.1. Correction of historical financial figures 2.3.2. Analysis of company returns 2.3.3. Financing 2.3.4. Discounting and summation 2.3.5. Comment on shareholders' equity value 2.3.6. Various accommodations 2.3.7. Flexible formula 243 Case study Target 2.4. Discounted Dividend Method 2.4.1. Original formula 2.4.2. Finite series 247 Case study Target 3. CASH FLOW METHOD (DCF) 3.1. Principles 3.2. Decision issues 3.2.1. Growth rate 3.2.2. Interest rate 3.3. Cash flow calculations 3.3.1. Cash flows according to annual accounts 3.3.2. Cash flows according to the IAS scheme 3.3.3. Arrangement 257 Case study Target 4. COMBINED METHODS 4.1. Standard method 4.1.1. Original formula 4.1.2. Flexible formula 270 Case study Target 4.2. Method of permanent funds 4.2.1. Original formula 4.2.2. Flexible formula 276 Case study Target 4.3. Weighted Values Method 4.3.1. Original formula 4.3.2. Flexible formula 281 Case study Target 4.4. Risk adjusted method 4.4.1. Original formula 4.4.2. Flexible formula 288 Case study Target 5. ALTERNATIVE METHODS 5.1. Funding Method 5.1.1. Original formula 5.1.2. Flexible formula 293 Case study Target 5.2. The EVA Method 5.2.1. Original formula and flexible formula 298 Case study Target 5.3. ZEN Formula and Economic Value 5.3.1. ZEN formula 5.3.2. Economic value 5.3.3. ROI and growth 303 Case study Target 6. GLOBAL REFERENCES 6.1. Turnover as a key index 6.2. Capacity approaches 6.3. Industry approaches 6.4. Non-documented revenues 7. GLOBAL METHOD 7.1. Substantial value 7.1.1. Concepts 7.1.2. Formula 7.1.3. Weighting substantial value 7.2. Return 7.2.1. Concepts 7.2.2. Formula 7.2.3. Weighing returns 7.4. Growth rate 7.5. Interest rate 7.6. Risk period 7.7. Special circumstances 7.8. Surplus returns for potential new owners 7.9. Formula 323 Case study Target 1.1. Initial valuation 1.2. Excess profit 8. SUMMARY 9. CONCLUSIONS PART IV. SPECIAL CIRCUMSTANCES 1. NON-PROFITABLE COMPANIES 1.1. Loss-making companies 1.1.1. Principles 1.1.2. Fiscal losses 1.1.3. Negative shareholders' equity 1.2. Insufficiently profitable companies 1.3. Asset stripping 1.4. Asset deal 2. DIVERSIFIED COMPANIES 2.1. Segment data 2.2. Income attribution 2.3. Attribution of growth 2.4. Invested capitals 2.5. Sum total of segments 3. GROWING COMPANIES 3.1. Growth phases 3.2.1. Formulas 3.2.2. Specifics of growth companies 3.2. Fast growth 4. CYCLICAL AND SEASONAL OPERATIONS 5. INTERNATIONAL COMPANIES 5.1. Differences associated with different accounting standards 5.2. Differences in taxation 5.2.1. General taxation of profits 5.2.2. Other taxes and duties 5.3. Foreign currencies 5.3.1. Exchanging foreign currencies 5.3.2. Budgets and forecasts 5.3.3. Cost of capital 5.3.4. Exchange rate risk 6. FINANCIAL INSTITUTIONS 6.1. Credit companies 6.2. Valuation techniques 6.3. Insurance companies 7. CONSOLIDATED GROUPS 7.1. Valuation without consolidation 7.2. Goodwill 7.3. Minority interest 7.4. Cost of capital 7.5. Non-included companies 8. LEGAL AND COURT VALUATION 8.1. Legal valuation 8.2. Succession 8.3. Purchase and sales commitments 8.4. Employee participation 9. ONE-MAN BUSINESS OR SOLE PROPRIETORSHIP PART V. STOCK EXCHANGE COMPANIES 1. PRINCIPLES 2. FINANCIAL REPORTING 2.1. List of IAS/IFRS standards 2.2. IFRS 1 - First application 2.3. SIC-IFRIC comments 2.4. Shortlist of specific IAS/IFRS standards 2.5. Cash flow scheme 3. RISKS 3.1. Portfolio management 3.2. Technical analysis 3.3. Kinds of risks 3.4. Ratings 4. RETURN-BASED FORMULAS 4.1. Stock exchange indexes 4.1.1. Alpha 4.1.2. Beta 4.1.3. VIX 4.1.4. Correlation 4.2. Cost of capital 4.2.1. CAPM 4.2.2. Internal rate of return 4.3. Cost of third party equity 4.4. Discounted cash flow 5. MULTIPLE CALCULATIONS 5.1. Price/Earnings ratio 5.2. P/E ratio and growth 5.2.1. Returns 5.2.2. Dividend payments and equity 5.3. Corrections to increase comparability 5.3.1. Equity structure 5.4. Comparable ratios 5.4.1. Dividend yield ratio 5.4.2. Market book value FINAL REPORT TARGET CASE STUDY APPENDIX APPENDIX 1 CASE STUDY CONCEPT INTRODUCTION CASE STUDY DATA 1. Return Threshold Method (part III 2.2) 2. Permanent Return Method (part III 2.3) 3. Discounted Dividends Method (part III 2.4) 4. Discounted Free Cash Flow (part III) 5. Standard Method (part III 4.1) 6. Method of Permanent Funds (part III 4.2) 7. Weighted Values Method (part III 4.3) 8. Risk Adjusted Method (part III 4.4) 9. Funding Method (part III 5.1) 10. Economic Value Added Method (part III 5.2) 11. Zen-Formula and Economic Value (part III 5.3) 12. Global Method (part III 7) 430 EPILOGUE APPENDIX 2 IAS/IFRS 433 International Financial Reporting Standards 433 International Accounting Standards 433 Final Interpretations Issued by the International Financial Reporting Interpretations Committee 434 Final Interpretations Issued by the Standing Interpretations Committee BIBLIOGRAPHY Historical sources 435 Recommended literature 435 Websites (found to be active at 02.15.2013)