Leventhal & Horwath - Lecture Notes PDF

Preview

Summary

Mandatory Case: Leventhal & Horwath
Detailed Lecture Notes
Professor: Michael Mische ...

Description

Lavanthal & Horwath 

Was the largest firm at the time, Philly = flagship office



Large presence on east coast



Key learning points o Growth o Risk management o Governance  Legal structure of the firm  How the firm is managed o Legislative Reform  Private securities litigation reform act of 1995  3 major things  Took great aim at professional plaintiffs o They look at what you do and wait for you to mess then sue you  Frivolous lawsuits o Usually professional plaintiffs bring these against companies o Usually have no legal merit or a cause of action  Safe harbor provisions o Partnerships  General partnerships  Advantage: easy business form to establish  Existed for thousands of years.

 Accounting firms  Matter of convenience and responsibility  J&S= joint and several responsibilities o Even if I own 1% of firm, I am equally responsible for up to 100% of its liabilities o Personal assets are also at risk, can lose homes, cars, etc.. o Public has more confidence in general partnerships because owners have personal assets at risk.  Majority of the business up until the 90’s were partnerships.  L&H operated as a general partnership  PPI – practice protection insurance o as a partner, you buy PPI o depending on number of units in the firm (percentage ownership), you pay a certain amount based on that percentage o Insurance – combination of cash reserves and insurance policies  Protects from malpractice and errors  Does not protect from criminal activity o L&H make decision to run naked – no PPI  L&H utilized litigation, litigation is very expensive o Limited Liability Partnership, LLP 

1948 Paramount Decree



WYCOFF Triangle

2

o The Bermuda triangle of business o Large, medium, and small size professional service firms. Medium sized firm always get beat up the most. o L&H was a medium sized firm o L&H wants to grow, they want to reach Big 4 status. There is a mobility barrier in-between. Barrier is caused by prestige and market dominance. It is impenetrable.  In order to do this, they needed to find clients, grow revenues and add people. o Audit clients are highly inelastic. Very hard to get an audit client to change their current auditors. o L&H attempt to go around Big 4 barrier by taking on many acquisitions. They go off on a big acquisitions binge.  After acquisitions, L&H had severe quality control issues.  Did not follow extreme due diligence  They had a very reckless acquisition strategy.  Must evaluate clients too because once integrated into a top firm, billable rates will increase significantly, and some of the clients will not accept that.  They didn’t evaluate the quality of clients. o Potential future with clients? What is the integrity of the management?  Who are the partners? What are their credentials? Are they smart? Do they have a lot of clients?  Valuation of firm can be completed after these questions have been answered.

3

 Easiest way is to look at the past 5 years of revenues to project the next 5 years (with some growth factor) and adjust up or down based on assets of the firm. o 2.5 – 3.2x  Revenue is highly unpredictable unless they have long-term relationships with some clients.  Growth in revenue does not equal growth in profitability  L&H hits iceberg at full speed – big lawsuits lost  Partners have to either pay or declare bankruptcy to seek protection from the courts.  General partnerships create enormous risk of liabilities.  Thus LLP’s are created.  With an LLP, the liabilities are restricted to the companies assets. To learn more and get OneNote, visit www.onenote.com.

4...