Case Studies: Case Study II

Using Up Your Cash Flow to Analyze a Corporate Acquisition

A company with about $75 million in sales volume was about to buy another company within the same industry (a competitor). We represented the buying company; a client of our firm. The buyer believed it could achieve significant cost savings by acquiring their competition. During the course of the negotiations, I had several meetings with the buying company’s CFO.

In one such meeting, I was reviewing his analysis of the purchase. During the course of my review I asked to see his cash flow projections to get a better understanding of the impact of the down payment, new debt and cost savings on the company's cash flow. The response I received was not surprising.

"We haven't put any cash flows together. I haven't had the time. Are they necessary?" he said.

I told him I thought cash flows were an absolute must. We needed to have a handle on what to expect and whether the purchase made sense. We volunteered to help if needed. He gave us the green light to work up the projections.

Here's what we did:

Step 1 – Key-In The Trial Balance

I asked for and received his most current trial balance. I met with my assistant and carefully went over the accounts, and I indicated which expenses were fixed and which were variable.

My assistant, Richard, keyed in the trial balance. Why do we key-in rather then import the data? Actually, keying-in data is just my personal preference; you may also import data in Up Your Cash Flow. The end result will be the same.

It took Richard about an hour and a half to complete the task.

Step 2 – Review The Data

Richard finished keying-in the trial balance data. He transferred the data into the program. I then reviewed his work to see if all of my instructions were followed. They were.

This process took about 1/2 hour.

Step 3 – Add Assumptions and Projection Data

There were several items needed to complete the forecast.

First we had to add forecasted sales for the next 12 months. We also had to include details of new borrowings and the terms of the existing loans.

A meeting with the CFO was in order.

During our meeting I entered the data he provided including some anticipated cost savings and the purchase of the new assets coming from the acquisition.

We created several scenarios (played "What if" games).

We met for about 4 hours.

Step 4 – Analyze the Results

What does it all mean?

The cash flow looked good. The acquisition made sense as long as sales and cost cutting goals were met.

The next day, I received a call indicating the purchase was off. The buyer and seller were no longer dealing with each other. When two entrepreneurs are representing themselves, it is not unusual. The negotiations became estranged.

Results:

No merger.

The CFO is still not doing any profit and loss or cash flow planning. The company’s sales have dropped and they’re running out of cash.

The bank is getting tough. Many businesses do not take the time to perform regular cash flow planning until they’re involved in a major event or in trouble.

The buying company is a manufacturing company with a trial balance consisting of a cost of goods section, a marketing department, a research and development department, and a General and administrative expense department. In total there were about 150 accounts.

The cash flow forecast for the acquisition took about 6 hours and was very detailed.

Conclusions:

We were able to provide cash flow forecasting and planning services for our client’s possible acquisition in a period of six hours using Up Your Cash Flow Software.

Had we used spreadsheets and models to perform our analysis, the process would have taken much longer to complete and most likely would have produced the same end result.

The client most likely would have not given us the go-ahead to do the analysis if he had seen an estimate for traditional (spreadsheet-based) forecasting and analysis services.

The client was impressed with our ability to perform the analysis in such a nimble manner.

- Harvey

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