Mergers & Acquisitions For Dummies

Bill Snow is an authority on mergers and acquisitions. He has held leadership roles in public companies, venture-backed dotcoms, and angel funded start-ups. His perspective on corporate development gives him insight into the needs of business owners aiming to create value by selling or acquiring companies.

Introduction 1

About This Book 1

Conventions Used in This Book 2

What You’re Not to Read 3

Foolish Assumptions 3

How This Book Is Organized 4

Part 1: Mergers & Acquisitions 101 4

Part 2: Taking the First Steps to Buy or Sell a Company 4

Part 3: Starting the Deal on the Right Foot 4

Part 4: Firming Up the Deal 5

Part 5: Closing the Deal and Beyond! 5

Part 6: The Part of Tens 5

Icons Used in This Book 6

Where to Go from Here 6

Part 1: Mergers & Acquisitions 101 9

Chapter 1: The Building Blocks of Mergers and Acquisitions 11

Defining Mergers and Acquisitions 11

Introducing Important Terms and Phrases 12

Buyer 13

Seller 14

Transaction (also known as the deal) 16

Consideration 16

EBITDA 16

Adjusted EBITDA 17

Closing 17

Adhering to Basic M&A Rules and Decorum 18

Follow the steps to getting a deal done 18

Understand M&A etiquette 20

Know what to tell employees — and when 20

Considering the Costs Associated with M&A 21

Tallying advisors’ fees and other costs 22

Paying off debt 22

Post-closing adjustments 22

Sigh talking taxes 23

Determining What Kind of Company You Have 23

Sole proprietorship 24

Small business 25

Middle market and lower middle market company 25

Large company (and beyond) 25

Chapter 2: Getting Ready to Buy or Sell a Company 27

Considering Common Reasons to Sell 28

Retirement 28

Let someone else take the company to the next level 29

Divesting a division or product line 30

The industry is changing 31

I’ve got troubles, troubles, troubles 31

Selling a piece of the company 33

Planning Ahead to Ensure a Smooth Sale 35

Clean up the balance sheet 36

Pay off debt 37

Address legal issues 38

Trim staff and cut dead weight 38

Increase sales 39

Quantify owner’s expenses and other add backs 39

Owner, make thyself expendable 40

Exploring Typical Reasons to Acquire 41

Make more money 41

Gain access to new products and new markets 41

Implement vertical integration 41

Take advantage of economies of scale 42

Buy out a competitor 42

Prepping before an Acquisition 42

Determine the appropriate type of acquisition 42

Get your company’s balance sheet in order 42

Have the money lined up 43

Set up an acquisition chain of command 43

Buying a Company from a PE Firm 43

Understanding why PE firms sell 44

Evaluating a PE firm’s portfolio company 44

Chapter 3: Previewing the Generally Accepted M&A Process 45

Take Note! The M&A Process in a Nutshell 46

Step 1: Compile a target list 46

Step 2: Make contact with the targets 46

Step 3: Send or receive a teaser or executive summary 47

Step 4: Execute a confidentiality agreement 47

Step 5: Send or review the confidential information memorandum 47

Step 6: Solicit or submit an indication of interest 48

Step 7: Conduct management meetings 48

Step 8: Write or review the letter of intent 48

Step 9: Perform due diligence 49

Step 10: Draft the purchase agreement 49

Step 11: Show up for closing 49

Step 12: Deal with post-closing adjustments and integration 49

Exploring Two Types of M&A Processes: Auction versus Negotiation 50

Who Has It Easier, Buyer or Seller? 51

Selling is easy if you know what you’re doing 51

Buying is difficult even if you know what you’re doing 52

Following the Power Shifts in the M&A Process 53

Looking at the factors of motivation 54

Understanding who has power 55

Reading the other party’s situation 56

Maintaining as much power as possible when disclosing undesirable news 58

What to Tell Employees and When 58

Keep news of a sale process confidential 59

Never lie 59

A staggered release 59

Part 2: Taking the First Steps to Buy or Sell a Company 61

Chapter 4: Financing M&A Deals 63

Exploring Financing Options 63

Buyer uses his own cash 64

Buyer borrows money 65

Buyer utilizes Other People’s Money 65

Buyer seeks financial help from the Seller 66

Understanding the Levels of Debt 68

Surveying senior lenders and subordinated debt 68

Looking at lines of credit 68

Taking a Closer Look at Investors 69

Institutions versus individuals 69

Private equity (PE) firm 71

Strategic Buyer 73

Striking the Right Type of Deal 74

Exploring the differences among buyouts and majority and minority investments 74

Choosing an asset or a stock deal: What’s Buyer buying? 75

Examining the All-Important EBITDA 76

Making Buyers’ Return Calculations 77

Return on equity 77

Return on investment 77

Internal rate of return 78

Financing a Problem Child 78

Debt is greater than purchase price 78

The business has operating losses 79

Chapter 5: With a Little Help from Your Friends: Working with M&A Advisors 81

Choosing Wisely: Identifying Ideal Advisors 81

Utilizing Inside Advisors 83

CFO or other financial bigwig 84

Corporate development people 84

Hiring Outside Advisors 84

Consulting wealth advisors when you’re ready to sell 85

Considering an intermediary 86

Lawyering up on both sides 88

Looking at accountants and auditors for Buyers and Sellers 89

I’m the tax man! 89

Recruiting more consultants to Buyer’s team 90

Seeking friendly advice: Using friends and family as informal advisors 92

Skipping business appraisers 92

Keeping Everyone on the Same Page: Avoiding Communication Breakdowns 93

Getting Your Banker Involved 95

Chapter 6: Finding and Contacting Buyers or Sellers 97

Creating a Target List 97

Getting started 98

Expanding and winnowing the list 99

Capping the list: How many (and which) companies to include 101

Sellers on Your Mark: Contacting Buyers 103

Speaking with the right person 104

Following a script that works 107

Easy Does It: Contacting Sellers 110

Getting the call off on the right foot 111

Using a successful script 112

You’re having a serious conversation! What now? 113

Additional Tips for Getting Past Screeners 114

Recognizing who you’re dealing with 114

Overcoming screener roadblocks 115

Tracking Your Calls 118

Part 3: Starting the Deal on the Right Foot 121

Chapter 7: Assuring Confidentiality 123

Tempting Buyers with an Anonymous Teaser 123

Keeping it short and sweet 124

Including high-level financial info only 125

Touting key selling points 125

Executing a Confidentiality Agreement 126

Perusing the CA’s contents 126

Figuring out which party sends the CA 127

Determining who gets more value out of the CA 127

Handling a Breach of Confidentiality 128

Confirming a breach 129

Thinking long and hard about legal action 129

Keeping the Cat in the Bag: Advice for Buyers 130

Involving employees and advisors 130

Discussing the deal in public 130

Chapter 8: Creating and Reviewing an Offering Document 133

The Offering Document in a Nutshell 133

Compiling the Executive Summary 135

The thesis 135

Seller’s rationale for seeking a deal 140

Seller’s deal guidance 140

Presenting the Company’s Background 140

The company’s past and present 141

Ownership and legal entity 141

Employee info and benefits 142

Locations of offices and facilities 142

Real estate 143

Technology 143

Legal disclosures 143

Sharing the Go-to-Market Strategy 143

Description of market and products 144

Customer names 146

Info about competitors 146

Doing the Numbers 147

Historical financials 147

Financial projections 150

Balance sheet basics 150

Income statement basics 151

Losses on the books 153

Accounts receivable terms 153

Fixed assets (equipment) 154

Inventory 154

Intangible assets 154

Chapter 9: Properly Expressing Interest in Doing a Deal 157

Understanding the Indication of Interest 158

Including Key Bits of Information in an Indication of Interest 159

Preamble, platitudes, and Buyer background 160

The proposed deal: Valuation range and other considerations 160

The legalese 163

An enthusiastic send off 163

Chapter 10: Ensuring Successful First Meetings between Buyer and Seller 165

Understanding the Importance of Meeting in Person 166

The buyer gets to interact with key management 166

Both sides perform due diligence on the other 166

The parties gauge chemistry 167

Ironing Out Management Meeting Logistics 167

Assembling key players 168

Agreeing on a venue 168

Setting the meeting agenda 169

Perfecting the Seller’s Presentation 170

Gathering the right material 171

Making Seller’s presentation shine 171

Prepping Buyers for Management Meetings 172

Reading the Tea Leaves: Did the Meeting Go Well? 173

Part 4: Firming up the Deal 175

Chapter 11: An Insider’s Guide to M&A Negotiating 177

Keys to Negotiating Success 177

Know your position 178

Remember the goal: Closing a deal 178

Negotiate with the decision-maker 179

Bend where you can 180

Take it one day at a time 180

Remember your ABNs: Always be negotiating 180

Using Successful Negotiating Tactics 181

Say “Here’s the deal that gets it done” 181

Pick up the phone 181

Offer a conditional if-then agreement 182

Understand that the first who speaks loses 183

Don’t be afraid to haggle 183

Beware of a bad bluff 183

Avoiding Common M&A Negotiating Mistakes 184

Surviving Unforeseen Twists and Turns 186

Getting a deal gone sideways back on track 187

Negotiating in good faith 187

Chapter 12: Crunching the Numbers: Establishing Valuation and Selling Price 189

What’s a Company Worth? Determining Valuation 189

Meeting in the Middle: Agreeing on a Price 192

Testing the waters 192

Buyers: Measure returns 193

Sellers: Create a compelling valuation 194

When Buyer and Seller Disagree: Bridging a Valuation Gap 196

Using an earn-out to prove valuation 197

Settling a valuation disagreement with a Seller note 197

Paying for a company with stock 197

Selling less than 100 percent of the company 200

Dealing with Renegotiation 200

Chapter 13: LOI and Behold: Making or Receiving an Offer 203

Signaling Sincerity with a Letter of Intent 203

Understanding the Salient Issues in the LOI 205

Salutation and preamble 206

Valuation and deal structure 206

Holdback and escrow 207

Representations and warranties 207

Financing 208

Due diligence and timing 209

Approvals and conditions 209

Role of management 209

Access to information 209

Expenses 210

Exclusivity 210

Non-disclosure and publicity 210

Nonbinding agreement 211

Governing law or jurisdiction 211

Agreeing to and Extending Exclusivity 211

Considering exclusivity in pre-emptive bids 211

Running out of time: Prolonging exclusivity 212

You Have a Signed LOI — Now What? 213

Chapter 14: Confirming Everything! Doing Due Diligence 215

Digging into the Due Diligence Process 216

Getting the process underway 216

Allowing enough time for the due diligence phase 216

Covering the expense 217

Conveying the due diligence info to Buyer 218

Business as usual: Running the company during due diligence 218

Providing Appropriate Information 219

Corporate info 220

Operations 221

Financials 221

Sales and marketing info 222

Real estate and facilities info 223

Fixed assets 224

Inventory 224

Supplier info 225

Intellectual property 225

Human resources 226

Debt and financial dealings 226

Environmental concerns 227

Taxes 228

Contract information 228

Insurance 229

Litigation history 229

Governmental filings 231

Considering Requests for Additional Information 231

Chapter 15: Documenting the Final Deal: The Purchase Agreement 233

Drafting the Deal 234

Writing the first draft 234

Redlining the initial draft 235

Navigating the Final Purchase Agreement 235

Confirm the name, rank, and serial number of the deal 237

Determine what’s being sold, for how much, and when 237

Know what to bring to the closing 237

Review the representations and warranties 239

Secure against loss with indemnifications 243

Agree on how to handle a rep and warranty breach 244

Get acquainted with the exhibits and schedules 244

Part 5: Closing the Deal . . . and Beyond! 247

Chapter 16: Knowing What to Expect on Closing Day 249

Gathering the Necessary Parties 249

Walking Through the Closing Process 250

Reviewing the flow of funds statement 250

Signing the final purchase agreement and other documents 253

Distributing the funds: Show me the money! 254

Popping the champagne 254

Tying Up Loose Ends Shortly after Closing 255

Allowing time to fully close the books 255

Making a working capital adjustment 255

Chapter 17: Handling Post-Closing Announcements and Adjustments 257

Start Spreading the News 257

Telling Seller’s employees about the deal 258

Making a media announcement 259

Following Through: The Deal after the Deal 260

Closing the loop on post-closing adjustments 260

Wrapping up the contingent payments 261

Dealing with Disputes 262

Handling breaches 262

Making claims against escrow 264

Chapter 18: Come Together: Integrating Buyer and Seller 265

Planning the Integration 266

Assembling a Buyer’s transition team 266

Determining the level of autonomy 267

Covering the carve-out bases 267

Communicating with Seller before the close 268

Transition process: Planning the first 90 days 269

Culling Products and Services 271

Combining Operations, Administration, and Finance 272

Handling Personnel: Successful First Steps for New Owners 274

Addressing cultural differences 274

Resolving conflict 277

Acting like a leader at all times 279

Making friends 280

Instituting accountability 281

Firing people 282

Part 6: The Part of Tens 285

Chapter 19: Ten Considerations Prior to Signing an LOI 287

Is the Deal Too Good to Be True? 287

How Is the Buyer Financing the Deal? 288

How Much Cash Is in the Offer? 288

What Are the Conditions of Escrow? 288

Is the Deal a Stock or Asset Deal? 288

How Does the Deal Settle Working Capital Issues Post-Closing? 289

Is the Inventory 100 Percent Salable? 289

Who Pays Off Any Long-Term Debt and What Happens to the Line of Credit? 290

What Are the Tax Implications of the Seller’s Accounts Receivable? 290

Is the Seller Signing a Noncompete Agreement with the Buyer? 290

Chapter 20: Ten Major M&A Errors and How to Avoid Them 291

Assuming the Deal Is Done after the LOI Stage 291

Being Unprepared for Due Diligence 292

Asking for a High Valuation with No Rationale 292

Figuring Buyers Won’t Discover Problems in the Financials 292

Underestimating the Other Side’s Sophistication 293

Failing to Understand Who Really Has the Power 293

Withholding Material Information 293

Blabbing about the Deal Before It Closes 294

Calling the Seller’s Employees without Permission 294

Contacting a Seller’s Customers or Vendors without Authorization 294

Chapter 21: Ten Possible Ways to Solve Valuation Differences 297

Payments over Time 297

Earn-Out Based on Revenues 298

Earn-Out Based on Earnings 298

Earn-Out Based on Gross Profit 299

Valuation Based on a Future Year 299

Partial Buyout 299

Stock and Stock Options 300

Consulting Contract 300

Stay Bonus 300

Combo Package 301

Appendix 303

Index 333