Friday, March 05, 2010
What would you do?
Its good to be back writing after a long lay off. I have been busy with work, busy with stocks, learning what life is all about and i found “the girl.” anyways im not here to talk about my personal life but i do have to admit that what im going to write about has been keeping me busy day and night the past five months. A few months ago we came across this business and the owners were open to selling it to us. So my father and i were interested because it was a business that we were familiar with. The story goes like this... the offer started with a price of around P530m to be paid in three tranches. But after further negotiations the price was brought down to P500m and still to be paid in three tranches. The business has around 100 branches and the takeover of these will also be in three tranches. The estimated returns will be around 16% per annum assuming that everything goes according to plan. The plan is to do cost cutting measures especially on some expenses that we consider “somehwat excessive” and also at the same time making sure that the operations of the business wont be affected when these cost cutting measures are enforced. The only problem with the operations of the business is something i would call extreme. When i say extreme it means that there are a few of very profitable branches and a lot of branches that are either making marginal profits, breaking even or losing money. After further study of the day to day operations of the business and after studying how much we can cut from expenses we discovered that only 40 branches would be making a good profit and the rest would either be losing money or making a marginal profit which if you really think about it... its not worth it to operate and waste your time on. So i would say this would be the most important factor to go or back off the deal. Do you maintain and support all the existing branches or do you close the 60 mediocre or losing branches and then incur a loss of around P30m but in exchange you are able to streamline operations. It was also mentioned that returns would be 16% per annum but we havent yet put into consideration the effect of competition with it driving prices down and with it profits also and that would also mean a longer payback period and lower rate or return. Is 16% return per annum enough for an investment like this? Should we have tried to lower the purchase price? Can you say this is a good investment? Or this is a bad investment? Should one pay a premium for something that one has expertise in? Cause we calculated that the goodwill of this takeover would be around P17m-P20m. Is the goodwill valued fairly? Or is it too much? How can one really value the exact amount of goodwill? Some of the drawbacks of a takeover also would be that you will inherit all the problems of the existing business or as they say “caveat emptor” or buyer beware. Cause no amount of due diligence can really expose ALL the problems of the business it will only be when you takeover and run the business that you will see all its problems. But the main reason why one would consider taking over is that you get into an existing business(one thats running already when you consider it is so hard to start up), one that has clients already, the manpower necessary, the needed infrastructure to conduct business and immediate income(assuming the business is making money). But i do have to point out that despite this not all takeovers are successful also so there would be still some risk. So i would like to hear what you think. Any comment, suggestion or question would be welcome. Or you could also tell me what steps you would take if you were in this situation. Thank you. Take care always and God bless.