Just a handshake for business deal between fellow alumni

Every generation needs a revolution - an entrepreneurial revolution

This post met a Chinese businessmen, who together with 2 others are engaged in real estate development.

The meeting was arranged so that we can possibly be partners in subdivision projects which no longer our expertise, we having shifted since 1997 (the Asian financial crisis) to memorial park development (that is almost 26 years)

This post emphasized that in one of our projects in West Visayas, a joint venture partners we simply shook hands and he said we can start anytime, since we both graduated from same school, hence there is no need

for security.  

How we wish it could be done that way.   Other mature businessmen say, trust no 

What needs to be done at the school to be acquired?

Every generation needs a revolution - an entrepreneurial revolution

Rizal Philippines
September 18, 2016

I was tasked by a holding company to help evaluate a school that is being negotiated for sale.  All ready, a downpayment  in the form of a P12,000,000 loan good for 6 mos has been granted to remove the TCT from escrow, and pay off the SSS premiums loans, Pag ibig.

A group has been tasked for a Due Diligence. The task of the DD group are two fold:

1.  Financial verification.  Are the revenues and expenses correct?

2.  Outside of the  financial, what are the drivers of the business:

      1. Internal analysis (management, delivery of the service, morale, leadership, facilities, MVP)

     2  External analysis:   competition, key factors for success, other business opportunities

The DD result is critical for the determination of strategies to cement the deal, and ensure ROI for the investors.

The deal would be something like this:

  Total purchase price:     P50 million

  Down payment:   P12, million

  Retirement             13 million

Balance                  25 million

    Since the property worth P70 million is in the name of an individual person, this will be transferred to a holding or real estate company and borrow P30 million for 10 years at 10% interest.  The monthly amortization would be P413,000 per month  Why P30 million? So that the balance would be used in upgrading the  school.

Some initial findings:

1. The revenues of the school P2 million a month (P24 M for 2014)

2.   The expenses seem to be overstated.  The interest expense amounting to P800,000 is lodged as direct expense (wrong entry)

3.  The total monthly expense  is P1.2 million (without interest expense)  thus if we add the P400,000 to the cash outflow, there would be P400,000 left for P4.8 million income for the year.  That is P48 million for the next 10 years + owning the land and building

4.  Now if you can look at other business opportunities:  collateral business related to the school (what are they.  This is subject to the research by the DD team.  They could have been hidden from the FS or is a business within the business or is overlooked by the owners)

What would be the strategy?

Is this a good buy?

Buying a business is like analyzing, reviewing a strama paper.

Every generation needs a revolution - an entrepreneurial revolution

Rizal Philippines
August 21, 2016.

Everything is so sudden. While I do not have the formal mandate yet that I would be an executive director of a holding company, a thick folder was sent to me to study the viability of buying a school.  (Elem to Senior High School)   There was a communication that contains a letter of intent to sell and the suggested closing is end of the month.

I reviewed the documents and found out that most of the information are for a loan transaction:  appraisal of the real property and FS (which I think looked funny)  If ever there is a valuation report, it has to be valuation of the business based on the FS?  They do not add up. Well the FS shows a school that is losing money.

If the purpose of the exercise is to buy the business, a lot more data is needed.  It is like a strama paper.   The objectives have to be defined and the strategy of how to make the school profitable, how to achieve ROI has to be defined.  A due diligence study has to be made before cogent decision can be made.

I did not realize that I am comfortable and at home in this kind of work.

These are the excerpts of my thoughts/communication to the Chairman of the Holding company:

Allow me to say some of my humble thoughts/comments on the paper which I read: 1.  The bulk of the information is for a loan transaction ie, the collateral and financials 2.  I could see a lot of discrepancy in the financial statements:   eg. the  income statement, the expenses (vs the worksheet) Have they made 100% correct representation on the data presented po Why are they selling?   Maybe they are not making money or enough However, I understand the plan is to buy the business and more information is needed to determine the viability of the business to be purchased: Internal Analysis: 1.   The main value proposition of the school, Primary Target Market 2   The competitive advantage 3.  Does the school possess the critical factors for success of the school 4.  Quality of management.  Shall the top management remain in case of sale, who shall remain, who shall resign/be retired?  Is this well managed 5.  Quality of the teaching staff/efficiency (the current ratio of staff vs students population is 1:10.  Is this an ideal ratio External analysis: 1.  Competitive analysis         of facilities      of teaching staff      of tuition fee.  Is the fee of P51,000 a reasonable tuition for a Las Pinas School (malapit na sa exclusive school fees)      enrollment 2. Why is their enrollment only 500? 3.  Where is their growth area?  Can the enrollment be increased? Strategy: Price 1.  How much is the just purchase price?   2.  Manner of payment Purpose 1.  What is the goal for the school?      Enrollment, revenue, , expenses,  Net income 2.  What is the strategy to achieve # 1. Operating the school: 1.  Who will run the school?  Shall we install a new dean (do we have a candidate now? Or shall there be a transition period until the purchase price is  completed 2. What changes must be made to make it generate cash flow for the holding company? .  My hypothesis is that:     If the enrollment can reach 1,000 ,reduce tuition to 35,000, there would be additional P11 million, and peg expenses to only say 12 to P15 m, then we can generate additional income of         P14 million for added revenues           10 million from cost reduction      the N.I can be 24 million or 40% ROI. vs purchase price of 50 million However, may I suggest that a due diligence be made. I talked to a school Dean CPA and I conclude that to properly know what to do with the acquisition and to validate this hypothesis