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Volume 1/05  -  24.01.2005

Dear Sir or Madam,

The Christmas holidays are over. I hope that we all made it into 2005 in good shape. After a few peaceful days, business is getting up to speed again: Hanover yesterday, Mannheim today, Warsaw tomorrow.

But the holidays were lovely, contemplative - in particular the family meeting at the foot of the Wasserkuppe hill: walks together over the snow-capped peaks of the Rhoen region, evening meals and discussions in the circle of the family. They are still to be found in these idyllic settings - families that function. Grandma, Grandpa, brothers and sisters, and all of the children living together under one roof or just a few metres apart in the same village. It is here that the elderly have work to do even in their old age. They look after the children or take care of the household. The “leisure society” of the 50-plus generation hasn’t made it this far, yet.

Values still stand for something here, and they are still adhered to in practice. Not only is mutual support within the family the most natural of things - one can rely on neighbourly help, too. In this traditional social setting, it is the most natural thing in the world for young people to marry and have children. The arguments of the 30-something city-based egoists to the tune that “uncertain future = no children” are simply not understood in this environment.

Why am I telling this story? Quite simply because it holds so many home truths about our lives today and lessons for coming to terms with the central problems facing modern society. If we want to find a survival strategy for our aging society, then we should maybe take a closer look at this traditional way of life and ask ourselves about the lessons we can learn for the challenges we face today. If you’re interested in my opinion, then please read the interview "Providing orientation - in 2005".

To change the theme: Again and again, we are asked about special terms from the world of mergers and acquisitions. In response to this we are setting up the new section “Tips & Tricks for Company Acquisition and Sale”. The theme today is the “earn-out clause”. Coming editions will cover “Vendor Due Diligence” and the advantages and disadvantages in detail.

The JP Team would like to wish you, your families, and your employees health, happiness and every success in 2005.

Yours

Heinz Jäger
- CEO of JP Mergers & Finance AG -

Topics of this issue

Management of Receivables:
Factoring – Make instant money from any deal!

The lasting decline in customer payment morale continues to cause problems for German companies. The associated outstanding sums are a threat to their liquidity and inhibit their enterprising activities. Factoring is an option for them to “instantly” transform receivables into cash - so getting their company back on course towards growth.

The principles behind factoring are simple:

The company agrees on a payment date with the customer that is based upon the existing supply and payment agreements, and then supplies the goods or services. Domestic contracts should have a term of payment not exceeding 90 days. This is the basis for the sale of receivables to a factor. If the customer is creditworthy, the factor pays the company immediately and then monitors the payment of the invoice. The date of payment by the customer is now of secondary importance as every acquired deal is practically a cash transaction. The brimming cash box means that fresh perspectives for new business are open to consideration.

Naturally enough, there’s a price to pay for rapid invoice settlement:

Along with a charge that covers the risk from the customer’s insolvency, and charges for the administration of the receivables (accounting, reminders, encashment, and legal costs), the factoring companies also charge interest for financing the receivables prior to settlement. The interest rates are, as a rule, lower than those typical to current accounts. Some factoring companies may additionally charge for enquiries about the creditworthiness of customers.

Aim of factoring:

The aim is for the factor to buy up all accounts receivable to ensure the highest possible level of liquidity. In practice, some receivables will not be purchased if the customer is not creditworthy, if the payment period is too long, or if the receivables are simply not suitable for factoring. The factor sets an upper limit for the purchase of individual receivables depending on the customer’s creditworthiness. Throughout the term of the contract, the factor continually checks the customer’s creditworthiness to verify or adjust the agreed liability commitments. Beneficial in such cases is the existence of credit insurance as the creditworthiness checks have already been carried out. Under certain circumstances, a combined procedure can be agreed with the factor whereby the financing of the receivables is added to the existing credit limits.

Requirements for factoring:

The factor will make a detailed screening of potential partners before entering into a contractual relationship. That means: Companies that do not reveal their most recent figures for the last two or three business years will have difficulty selling their receivables. An important consideration is that only healthy companies are in a position to participate in factoring. One could say that today, only companies with a positive rating will be offered a factoring contract.

Advantages of factoring:

Once a contract has been agreed, an entrepreneur generally need not worry about his own credit status. The short-term liquidity from factoring can provide a company with several advantages, such as special purchasing conditions, cash discounts, bulk discounts, etc., thus compensating for a great portion of the costs from factoring.

Companies with foreign customers often truly appreciate the complete relief from the dunning process and collection. Anybody who has had to deal with foreign customers who are unwilling or unable to pay knows exactly the kind of disproportionate costs that can arise for a supplier. The factor can handle not only the dunning and collection processes but the invoicing as well. As factors are far more rigorous about issuing demands, the outstanding sums are generally collected quicker.

Before closing new deals, the company can find out from the factor the amount of potential credit limit within which receivables can be bought up, and steer the sales activities accordingly.

Many factoring companies issue special software programs to facilitate the rapid exchange of data. Invoices that have been issued thus arrive online with the factor and payment orders for the amounts can be issued on the same day.

Overview of the advantages of factoring:

• Security of business: The sale of receivables transfers the risk of the customer’s insolvency to the factor who is then committed to collecting the debt: late-paying customers are no longer a problem.

• More cash available: Upon closure of contract, the factor guarantees to pay the full gross sum of the invoice in advance against a factoring fee ( 75 – 100 % depending on the factor and on the form of the contract). The factor transfers any deduction upon payment by the customer or 90 – 120 days after expiry of the payment period (depending on the factor).
  Improved balance-sheet structure: A greater capitalisation and a lower amount of short-term payables put the company into a better negotiating position with banks and suppliers, and also improve their rating. The results are improved conditions for credit and purchasing.

• New business: Improved liquidity opens up free space for the development of new business. For example, changes in pricing can be reacted to immediately.
  Lower costs: Factoring makes existing credit insurance redundant. Since the factor verifies the financial solvency of the customer and, as a rule, then accepts up to 100 % of the risk from bad debt, the time-consuming and cost-intensive checks on customer creditworthiness can be spared.

• Other advantages: Relief for the internal debtor accounting, dun and collection departments.

Tips and suggestions to consider before closing a factoring contract:

• Check that your receivables have not already been assigned to a bank.

• Ask the bank about effects on the credit line in the event of cession.

• Select a factoring partner that is experienced in dealing with companies of your size.

• Request the factor to demonstrate references.

• Check carefully all of the offers for cost factors, especially any charges that may arise (e.g. from non-purchased receivables or in case of a customer's insolvency).

• Insist upon written confirmation of the conditions for the adjustment of interest rates and observe developments in the interest rates.

• Check in advance if the liquidity and credit conditions granted to you by the factor meet your needs.

• Bear in mind that the factor will decide at short term upon the acceptance of the application.

Or / and

• In selecting your factoring partner and negotiating contracts, take advantage of the know-how of experts such as specialised brokers.
   

Author: Stefan Reims (Shareholding director of Heydt, Reims & Partner GmbH & Co. KG)

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Servicing in industry

As you know, we have increased our efforts to form co-operations between enterprises in the East and in the West since our neighbours joined the EU. For anybody becoming familiar with the realities that our neighbours face, only a closer look reveals the differences between us.

Companies in these two worlds have very different conceptions of the tasks that are to be done in-house and those that are better handled by specialists. In this context we should apply the word servicing, otherwise known as outsourcing.

As early as the 1960’s, western companies outsourced the task of cleaning. In the 80’s, the work of complete repair and servicing departments was handed over to external organisations. Today, entire self-supporting industries have developed in logistics for example and even IT outsourcing. The consideration behind this development is one and the same: apparently simple tasks were traditionally handed over to whoever had to deal with a handicap. The recipients were untrained and quite simply too expensive, a fact that exacerbated the cost burden. The outsourcer only accepts the level of qualification on the job market that he needs. By focussing on the intended activity, he quickly develops specialised knowledge of the work processes involved and provides the appropriate machines and tools along with IT support. A new branch is born.

In Germany, hundreds of thousands of people are employed in this way.

In Poland, for example, this standard has not yet been introduced. Everybody does everything, even if it is less efficient and more expensive. However, here too are wide-awake contemporaries who would just love to get to grips with this opportunity if only they had the necessary capital for the machines which would produce gains in efficiency.

Let’s continue with the example of cleaning services. Cleaning the large shopping centres that are typical to every city requires self-propelled sweeping machines and snow cleaners, mobile high-pressure cleaners, telescopic work platforms. All require the investment of tens of thousands of Euros. The sums are enough to stifle any entrepreneurial ambitions. This is where we have an outstanding example of potential cross-border co-operation.

And another example from Poland. Entrepreneurs on location see the market, they know who to address for acquisition. He understands sourcing from the job market and the procurement of chemicals. He is familiar with the expectations and possibilities. What he doesn’t have are the machines and, most significantly, the required capital. What the German expert can provide is the sometimes ridiculed know-how that is based on decades of experience. Written out in process descriptions, manuals, calculation schemes, efficiency control systems, reports. It the two could come together, then the one side could rapidly put together an operation and the other side could chalk up an additional plot of occupied territory on his strategic world map.

There are other examples similar to this. Speak to us, we are familiar with them. And we know the potential partners. Those from the East and those from the West. We are bringing them together!
 

Author: Dr. Dieter Kurandt

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Providing orientation - in 2005
Interview with Mr. Heinz Jäger, graduate in commerce, CEO of JP Mergers & Finance AG

Matthias Noll (MN)¹: How stable an economic development do you expect in 2005?

Jäger: After five decades of continuous growth in Western Europe and stagnation in the countries influenced by the former Soviet Union, we now see a complete change of circumstances: The private sector in countries like Poland will see growth in double figures over the next few years. Even allowing for the decline in the state sectors, overall growth in Poland will appreciably exceed 5 %.

MN: …and in Germany?

Jäger: Here in Germany we will remain stuck in a phase of recession. The exceptions will be the export-driven branches and a few niche sectors. In other areas, projects such as product innovation, major investment or corporate take-overs are thin on the ground. Instead, we will see continued job losses, outsourcing, and transfer to countries with lower wage levels. The mood in Germany will remain gloomy, irrespective of growth at 1 or 2 %. Germany isn’t suffering from a dip in growth. Germany is in need of rehabilitation.

MN: Don’t theories such as yours just lead to even more uncertainty?

Jäger: Possibly, but with Germany in such a dire condition we are forced to look the home truths in the face. If we don’t, then there’s zero chance of achieving a turn-around. What’s more, planet Earth in the early 21st century has become a more dangerous place. In many sectors it has become almost impossible to make reliable planning. The Dollar is falling, oil prices are unusually high, we are threatened by acts of terror, and the political management of Germany’s recovery is unprofessional.

MN: This risks you mention almost all apply to Poland, too.

Jäger: Indeed, but Poland has several positive influences working in its favour: Personnel costs, for example, are just one third of those in Germany. Consider that the average German pensioner has an income that is double that of a person employed in Poland. Differences of that magnitude simply cannot continue to exist. A series of adjustment processes will be the result. Personnel costs in Poland will increase and those in Germany will fall. No high-wage country can successfully legislate to keep work-hungry Polish people at bay until 2007. You will see soon enough that not just Polish nursing staff or farm workers will arrive on the scene. All of the German service industries will see an immigration of young, ambitious employees from our neighbours in the East.

MN: And what is at the root of growth in Poland?

Jäger: Polish consumers have a lot of catching up to do. Just visit the home of your average Polish family and it will be obvious to you which goods are on their shopping lists. Also, Polish companies are working hard to modernise with the help of EU subsidies. And last but not least: Poland is a target country for investors from old Europe and the USA. These are all factors that will facilitate strong growth for years to come. As long as Poland remains politically stable - and I have no doubts about that - then it is going to be a worthwhile exercise to invest and take part in the economic activities in that country.

MN: Coming back to Germany. What are the most important measures?

Jäger: To begin with, the Germans must wake up to reality, to communicate this, and to work on finding the best solutions. Firstly: Pensions paid to the retired and to civil servants are simply too high, for example. They must be reduced drastically. The “leisure society” of the elderly must make way for the reintegration of our pensioners with tasks that are worthwhile and important in our society today. Second, the Germans need a young society. Only the controlled immigration of at least 800,000 qualified, young and ambitious people each year can reactivate the typical youthful properties of mobility, innovativeness, creativity and entrepreneurialism. Third: The bureaucracy in Germany society has to be dusted off. My estimate is that at least 50 % of the employees in public sector are surplus to requirements.

MN: And what about the value system?

Jäger: It applies to Poland just as much as to Germany. Demands are made of all of us here: Parents, grandparents, the state, the church, but especially the entrepreneur. Leadership in hard times like these means providing a leading light to give direction to insecure employees. In times where there’s no longer such a thing as “a job for life”, people need the feeling that they are in control of their life planning.
 

¹ This interview was conducted by Matthias Noll, Chief Editor of the JP Director’s Report.

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 JP Mergers & Finance AG



 

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Tips & Tricks for Company Acquisition and Sale (1):
The Earn-out Clause

1. The buyer gains security and pays the higher purchase price only if the target values are actually achieved.

2. The buyer not only improves his security; he also benefits from a financing effect which can be considerable. The sums exceeding the basic purchase price are not payable immediately. The payment extends over the agreed period and is mostly carried out in multiple tranches.

3. The company’s positive development often means that the vendor benefits from a higher purchase price than originally expected. However, the vendor should ensure that he can monitor or maintain influence over the business and accounting policies of the purchaser.

Author: Matthias Noll

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Acknowledgements & contact

JP Mergers & Finance AG
Schillerstr. 101
D-63512 Hainburg
 

Tel.: +49 (6182) 9904-83
Fax: +49 (6182) 9904-88
eMail: Vorstand@JPMergers.com
Internet: www.JPMergers.com

Chief editor: Matthias Noll

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