1. Explain, in your own words, characteristics that make a firm a good candidate for an...

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Finance

1. Explain, in your own words, characteristics that make a firma good candidate for an LBO.
2. Explain, in your own words, what is a contingent payment, whyis it used and what are the common types of contingentpayments.
3. Explain, in your own words, why there might be a conflict ofinterest in a management buyout.
4. Explain, in your own words, what an earnout agreement is andhow it shares the risk of a merger deal between the target andacquirer?
5. Explain, in your own words, the pros and cons of an assetdeal.

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1Characteristics of a Good LBO Candidate The following characteristics define the ideal candidate for a leveraged buyout While is it very unlikely that any one company will meet all these criteria some combination thereof is need to successfully execute an LBO Strong predictable operating cash flows with which the leveraged company can service and pay down acquisition debt Mature steady noncyclical and perhaps even boring Wellestablished business and products and leading industry position Moderate CapEx and product development RD requirements so that cash flows are not diverted from the principle goal of debt repayment Limited working capital requirements Strong tangible asset coverage Undervalued or outoffavor Seller is motivated to cash out of hisher investment or divest noncore subsidiaries perhaps under pressure to maximize shareholder value Strong management team Viable exit strategy 2Contingent payments companies require payment upon delivery of products or services but this isnt always the case Instead a company or business person may arrange a contingent payment which means the payment depends on a particular event or level of performance For example lawyers often set contingency payments that only require clients to pay if they win their cases Occurrence The most common type of contingency payment involves legal representation but other types of businesses may use them as well For example an advertising firm could set payment contingent on its ability to help a company increase its sales though this may prove more common when the company is just starting out and proving itself Sometimes a company may set contingency payments for loans For instance it may make the amount of the loan payment contingent on the debtors current income and resources Types Companies can set contingency payments in all sorts of forms Often contingency payments involve a percentage of the amount the paying party earns or receives For example a client may agree to pay a lawyer a percentage of the money he receives if he wins his case Sometimes companies also set commissions based on reaching certain sales levels In some cases however contingent payments may also include lumpsum payments or installment payments set to begin when a particular event occurs Contract Both the payor and the payee must agree to contingency payments In most cases parties to such an agreement draft a contract spelling out how the contingency arrangement will work Such a contract usually includes the amount of the contingency payment and the names of the parties who will provide and receive the payment Likewise these agreements usually include details about what happens if a party wants to cancel the agreement and how the parties will handle disputes over payment amounts and late payments or defaults 3 Management Buy Outs MBOs became popular in the United States in the late eighties and early See Answer

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