Legal Blog

M & A Nuggets: Drill Down on Earnings

shutterstock_388459930To determine a purchase price to offer to the seller, purchasers most often analyze some form of the target’s earnings, whether EBITDA, net cash flow or some other measure.  When analyzing the seller’s income statement and statement of cash flows, care must be taken to make sure that the earnings number you use supports your purchase price. For example, EBITDA is often used as a key measure to determine purchase price.  EBITDA means earnings before interest, taxes, depreciation and amortization.  Often, however, only depreciation, and not amortization, is added back to determine EBITDA.  With the emergence of technological, internet based and biotech companies in the past decades, the presence of amortization on a target’s income statement has become much more prevalent, and therefore must be taken into account. Next, as a result of a recent change in accounting principles, one line item on the income statement, known as extraordinary items, will no longer stand out.  In the past, companies were required to report extraordinary items as separate line items on the income statement.  Beginning with fiscal years starting December 16, 2015, extraordinary items will no longer be reported as separate line items.  Care must therefore be taken in the due diligence process to inquire about and investigate extraordinary items.  Last, it is important that you understand whether there have been any changes in accounting principles used during the years of the earning statements you are examining.  If there have been changes in accounting principles, your understanding of them will allow you to smooth out the earnings.  There are many other earnings statement items that must be carefully analyzed, but the bottom line is that a forensic analysis of your target’s earnings statement must be conducted to assure that you are not overpaying for your target.

 

manuggets subscribe2

ABOUT GLENN D. SOLOMON

Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businessesstructuring ownership agreements, and advising companies in financial distress

 

 

 

 

ABOUT OFFIT KURMAN

Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With 120 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our eight offices serve individual and corporate clients in the Maryland, Delaware, New Jersey, and Northern Virginia markets, as well as the Washington DC, Baltimore, Philadelphia, and New York City metropolitan areas. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.

You can connect with Offit Kurman via our BlogFacebookTwitterGoogle+YouTube, and LinkedIn pages.  You can also sign up to receive Law Matters, Offit Kurman’s monthly newsletter covering a diverse selection of legal and corporate thought leadership content.

MARYLAND | PENNSYLVANIA | VIRGINIA| NEW JERSEY | NEW YORK | DELAWARE | WASHINGTON, DC