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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Mergers & Acquisitions For Dummies (9781119543862) was previously published as Mergers & Acquisitions For Dummies (9780470385562). While this version features a new Dummies cover and design, the content is the same as the prior release and should not be considered a new or updated product. The easy way to make smart business transactions Are you a business owner, investor, venture capitalist, or member of a private equity firm looking to grow your business by getting involved in a merger with, or acquisition of, another company? Are you looking for a plain-English guide to how mergers and acquisitions can affect your investments? Look no further. Mergers & Acquisitions For Dummies explains the entire process step by step--from the different types of transactions and structures to raising funds and partnering. Plus, you'll get expert advice on identifying targets, business valuation, doing due diligence, closing the purchase agreement, and integrating new employees and new ways of doing business. * Step-by-step techniques and real-world advice for making successful mergers and acquisitions * Covers international laws and regulations * How to take advantage of high-value deals Going beyond the case studies of other books, Mergers & Acquisitions For Dummies is your one-stop reference for making business growth a success.
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Veröffentlichungsjahr: 2018
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Mergers & Acquisitions For Dummies®
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Mergers & Acquisitions For Dummies®
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Table of Contents
Cover
Introduction
About This Book
Conventions Used in This Book
What You’re Not to Read
Foolish Assumptions
How This Book Is Organized
Icons Used in This Book
Where to Go from Here
Part 1: Mergers & Acquisitions 101
Chapter 1: The Building Blocks of Mergers and Acquisitions
Defining Mergers and Acquisitions
Introducing Important Terms and Phrases
Adhering to Basic M&A Rules and Decorum
Considering the Costs Associated with M&A
Determining What Kind of Company You Have
Chapter 2: Getting Ready to Buy or Sell a Company
Considering Common Reasons to Sell
Planning Ahead to Ensure a Smooth Sale
Exploring Typical Reasons to Acquire
Prepping before an Acquisition
Buying a Company from a PE Firm
Chapter 3: Previewing the Generally Accepted M&A Process
Take Note! The M&A Process in a Nutshell
Exploring Two Types of M&A Processes: Auction versus Negotiation
Who Has It Easier, Buyer or Seller?
Following the Power Shifts in the M&A Process
What to Tell Employees and When
Part 2: Taking the First Steps to Buy or Sell a Company
Chapter 4: Financing M&A Deals
Exploring Financing Options
Understanding the Levels of Debt
Taking a Closer Look at Investors
Striking the Right Type of Deal
Examining the All-Important EBITDA
Making Buyers’ Return Calculations
Financing a Problem Child
Chapter 5: With a Little Help from Your Friends: Working with M&A Advisors
Choosing Wisely: Identifying Ideal Advisors
Utilizing Inside Advisors
Hiring Outside Advisors
Keeping Everyone on the Same Page: Avoiding Communication Breakdowns
Getting Your Banker Involved
Chapter 6: Finding and Contacting Buyers or Sellers
Creating a Target List
Sellers on Your Mark: Contacting Buyers
Easy Does It: Contacting Sellers
Additional Tips for Getting Past Screeners
Tracking Your Calls
Part 3: Starting the Deal on the Right Foot
Chapter 7: Assuring Confidentiality
Tempting Buyers with an Anonymous Teaser
Executing a Confidentiality Agreement
Handling a Breach of Confidentiality
Keeping the Cat in the Bag: Advice for Buyers
Chapter 8: Creating and Reviewing an Offering Document
The Offering Document in a Nutshell
Compiling the Executive Summary
Presenting the Company’s Background
Sharing the Go-to-Market Strategy
Doing the Numbers
Chapter 9: Properly Expressing Interest in Doing a Deal
Understanding the Indication of Interest
Including Key Bits of Information in an Indication of Interest
Chapter 10: Ensuring Successful First Meetings between Buyer and Seller
Understanding the Importance of Meeting in Person
Ironing Out Management Meeting Logistics
Perfecting the Seller’s Presentation
Prepping Buyers for Management Meetings
Reading the Tea Leaves: Did the Meeting Go Well?
Part 4: Firming Up the Deal
Chapter 11: An Insider’s Guide to M&A Negotiating
Keys to Negotiating Success
Using Successful Negotiating Tactics
Avoiding Common M&A Negotiating Mistakes
Surviving Unforeseen Twists and Turns
Chapter 12: Crunching the Numbers: Establishing Valuation and Selling Price
What’s a Company Worth? Determining Valuation
Meeting in the Middle: Agreeing on a Price
When Buyer and Seller Disagree: Bridging a Valuation Gap
Dealing with Renegotiation
Chapter 13: LOI and Behold: Making or Receiving an Offer
Signaling Sincerity with a Letter of Intent
Understanding the Salient Issues in the LOI
Agreeing to and Extending Exclusivity
You Have a Signed LOI — Now What?
Chapter 14: Confirming Everything! Doing Due Diligence
Digging into the Due Diligence Process
Providing Appropriate Information
Considering Requests for Additional Information
Chapter 15: Documenting the Final Deal: The Purchase Agreement
Drafting the Deal
Navigating the Final Purchase Agreement
Part 5: Closing the Deal … and Beyond!
Chapter 16: Knowing What to Expect on Closing Day
Gathering the Necessary Parties
Walking Through the Closing Process
Tying Up Loose Ends Shortly after Closing
Chapter 17: Handling Post-Closing Announcements and Adjustments
Start Spreading the News
Following Through: The Deal after the Deal
Dealing with Disputes
Chapter 18: Come Together: Integrating Buyer and Seller
Planning the Integration
Culling Products and Services
Combining Operations, Administration, and Finance
Handling Personnel: Successful First Steps for New Owners
Part 6: The Part of Tens
Chapter 19: Ten Considerations Prior to Signing an LOI
Is the Deal Too Good to Be True?
How Is the Buyer Financing the Deal?
How Much Cash Is in the Offer?
What Are the Conditions of Escrow?
Is the Deal a Stock or Asset Deal?
How Does the Deal Settle Working Capital Issues Post-Closing?
Is the Inventory 100 Percent Salable?
Who Pays Off Any Long-Term Debt and What Happens to the Line of Credit?
What Are the Tax Implications of the Seller’s Accounts Receivable?
Is the Seller Signing a Noncompete Agreement with the Buyer?
Chapter 20: Ten Major M&A Errors and How to Avoid Them
Assuming the Deal Is Done after the LOI Stage
Being Unprepared for Due Diligence
Asking for a High Valuation with No Rationale
Figuring Buyers Won’t Discover Problems in the Financials
Underestimating the Other Side’s Sophistication
Failing to Understand Who Really Has the Power
Withholding Material Information
Blabbing about the Deal Before It Closes
Calling the Seller’s Employees without Permission
Contacting a Seller’s Customers or Vendors without Authorization
Chapter 21: Ten Possible Ways to Solve Valuation Differences
Payments over Time
Earn-Out Based on Revenues
Earn-Out Based on Earnings
Earn-Out Based on Gross Profit
Valuation Based on a Future Year
Partial Buyout
Stock and Stock Options
Consulting Contract
Stay Bonus
Combo Package
Appendix
Online Resources
Teaser
Indications of Interest
Letter of Intent
Due Diligence Checklist
About the Author
Advertisement Page
Connect with Dummies
Index
End User License Agreement
Guide
Cover
Table of Contents
Begin Reading
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Introduction
In every job — whether it be sales, managing retail establishments, raising capital, crunching numbers, writing, working with venture capitalists, creating online ventures, or working investment banking deals (I’ve done all these, by the way) — you quickly discover that you need a whole new set of rules, lingo, conventions, and nomenclature. And more often than not, what you need to know to excel at your job can be distilled into just a few salient points. If you’re lucky, you bump into a wise old sage who, upon experiencing your questioning, utterly confused face, and dispirited body language, simply says, “Forget all that other stuff; here’s what you really need to know.” Enter Mergers & Acquisitions For Dummies, an inside look at the process of buying and selling companies.
Although companies change hands every day, buying and selling can mean many things and take many forms. Who or what is the Buyer or Seller? What kind of transaction is it? How will the Buyer finance the deal, and what does the Seller receive? These are only a few of the considerations in any given mergers and acquisitions (M&A) deal. It’s so confusing!
As a result, business owners, some of the main participants in M&A, are often completely befuddled when the time comes to sell their businesses or make acquisitions. They don’t know anything about M&A because they’ve been focused on their own businesses and not on the business of buying and selling companies.
That’s why I wrote this book — to serve as your wise old sage as you jump into the wild M&A world.
About This Book
Although the M&A process, like any sales process, involves a step-by-step approach, I’ve written this book so you can simply refer to whatever section you need to read. Scan the index and table of contents and then go directly to the information you need.
When a Buyer and Seller are negotiating a deal, they’re on opposite sides of the table. The Buyer wants to get the best (that is, lowest) price, and the Seller wants to get the best (that is, highest) price. This book isn’t slanted one way or another. It’s not pro-Buyer or pro-Seller. Deals get done only when Buyer and Seller find common ground and agree to price and terms.
During the M&A process, many of the steps and techniques I discuss in this book apply to Buyers, Sellers, or both. I highly recommend Sellers read the Buyers’ information and vice versa. My hope is that this book provides some insights for both sides by helping each side see things from the other’s perspective. Understanding the other side’s motivation and rationale is key to getting a deal done. If you know what the other side is seeking or why she’s asking for something in a particular way, you’re in a better position to provide an answer that helps move the deal to a close. And closing deals, ladies and gentlemen, is what M&A is all about.
Conventions Used in This Book
I use a few conventions throughout this book to help make it more accessible:
I format new words in
italic
and accompany them with definitions.
Bold text
highlights the active parts of numbered steps and signals the keywords in bulleted lists.
Web sites appear in
monofont
. In some cases, Web addresses may have broken over more than one line during the book’s printing. Just type the address exactly as you see it; I haven’t added any characters to mark the line break.
Because “mergers and acquisitions” is kind of an unwieldy phrase, I often use the abbreviation “M&A.” You see it in the field all the time anyway, so why not use it here?
One challenge in this book is that two distinct yet related groups of people (Buyers and Sellers) may read this title. When I use “Buyer,” I’m referring to the individual or executives in a company seeking to acquire another company. When I use “Seller,” I’m referring to the owner of a company or the owner’s representatives (executives or advisors). I also use “you” to address you, dear reader, directly, even though the text in question may not apply to your specific situation. In those cases, I clearly alert you to whether I’m talking about Buyers or Sellers.
What You’re Not to Read
My goal for this book was to write an easy-to-read, introductory look at the world of mergers and acquisitions. At times, however, some of the text may be a bit technical and in-depth, so turned those parts into sidebars (those shaded gray boxes) or marked them with a Technical Stuff icon. You don’t need to read those parts unless you really, really, really, really want to know more.
Foolish Assumptions
I assume you bought this book for any number of reasons:
You’re a business owner or executive of a middle market or lower middle market company and are interested in selling a division, subsidiary, or entire company.
You’re an executive of a company and are interested in acquiring middle market or lower middle market companies.
You’re a business student who is interested in discovering more about mergers and acquisitions.
You know a lot about your specific business but little or nothing about the business of buying or selling businesses.
You may be asking yourself, “Why the specific delineation of middle market and lower middle market companies?” Those two market segments, defined roughly as companies of $250 million to $1 billion in revenue (middle market) and $20 million to $250 million in revenue (lower middle market), are often overlooked by larger banks. The deals aren’t as large, the companies aren’t as famous or “sexy,” and when you have a plethora of top-tier MBA grads all clamoring to make a million bucks a year, the smaller fees from these smaller deals just aren’t of interest.
Although the lower middle market deals aren’t front-page headline blockbusters, the fact is the middle market and lower middle market are comprised of many more companies than the Fortune 500, which, when you think about it, is exactly 500 companies. The owners and executives of many, if not most, lower middle market companies are wholly unfamiliar with the business of selling a business and are therefore the perfect audience for this book. But although middle market and lower middle market company execs may be this book’s target audience, the information here is applicable for just about any kind of business sale transaction.
How This Book Is Organized
I organized Mergers & Acquisitions For Dummies in five essential parts. These parts cover the main facets of doing deals, from an introduction to the basics to the courting process to the documents and meetings involved to integrating Buyer and Seller.
Part 1: Mergers & Acquisitions 101
Part 1 gives you the lowdown on M&A’s foundations. Chapter 1 introduces you to some of the basic building blocks in the M&A world: words, phrases, decorum, players and their motivations, and generally accepted steps to buying and selling companies. Chapter 2 analyzes the rationale and motivations of Buyers and Sellers so that you can better understand the folks on the other side of the table (and maybe get some insight into your own goals as well). In Chapter 3, I provide an outline of the generally accepted M&A process; you have a much better chance of making a successful deal when you know what steps to follow.
Part 2: Taking the First Steps to Buy or Sell a Company
When you actually want to do deals, as opposed to merely thinking about doing deals, Part 2 gets you started on the first steps. You need money (or seashells, cigarettes, or some form of consideration that the Seller finds acceptable), and Chapter 4 offers some thoughts about financing M&A deals. Every deal-maker needs a little (well, a lot of) help, so Chapter 5 lays out the advisors you need in order to successfully buy or sell companies. M&A is really a form of dating, except with meetings, boring documents, and grueling travel. Chapter 6 provides you with colorful tips for successfully approaching Buyers or Sellers and explains why M&A is one of the few industries where selling is easier than buying.
Part 3: Starting the Deal on the Right Foot
In this part, I show you how to get going on a deal. Chapter 7 quietly discusses the cloak-and-dagger world of confidentiality. Chapter 8 deals with the offering document, which is basically the story a Seller tells a Buyer about the company, as well as how to write it and what to look for when you review it. M&A requires a certain level of discretion, and that level is high! In Chapter 9, I introduce you to the form and function of the indication of interest (IOI — this field loves its initialisms) that Buyer offers Seller when Buyer’s ready to move from talking about doing a deal to providing specific thoughts on an actual deal. (What can I say? M&A loves crafting documents, too.) The next steps are the management meetings between Buyer and Seller; Chapter 10 helps you navigate these meetings, which don’t have fancy abbreviations but can be tricky.
Part 4: Firming Up the Deal
When Buyer and Seller agree to do a deal, what’s next? Part 4’s topics, that’s what! First, Buyer and Seller have to agree to terms; M&A deals involve layer upon layer of complexity that you can and should negotiate. Chapter 11 takes you to the smoke-filled back rooms where deals are made; all cigar-chomping is figurative.
Chapter 12 plows the fields of valuation for you and reaps an answer to that most nagging of questions: What the heck is this company worth?
When Buyer and Seller want to stop playing the field and get married, they move on to the letter of intent (LOI). Chapter 13 takes you through the ins and outs of this key document. Due diligence is the next key phase; it’s where Buyer and Seller confirm certain facts from the other side just to be safe. Chapter 14 fills you in on what to expect during the confirmatory due diligence phase. Chapter 15 provides insight about converting the LOI and the results of due diligence into a final, binding purchase agreement.
Part 5: Closing the Deal … and Beyond!
Part 5 helps you successfully conclude the deal. In Chapter 16, you get the insider’s look at that important day. Chapter 17 details all the sordid adjustments one side or the other makes after the closing. After the deal is done and a new day has risen, Buyer and Seller must integrate and learn to live together. Integrating Buyer and Seller can be a difficult proposition that many people don’t think about, so Chapter 18 tackles this hidden issue.
Part 6: The Part of Tens
The Part of Tens is a For Dummies classic, so of course this book includes it as well. Chapter 19 clues you in to important questions to ask before signing an LOI. In Chapter 20, I warn you against mistakes that can sink a deal, and Chapter 21 offers ways to come to an agreement on valuation. I also give you an appendix full of resources such as a due diligence checklist, helpful online sources, and some sample M&A documents.
Icons Used in This Book
I use the following four icons throughout this book to help draw your attention to particularly important or salient bits of information (and let you know what bits aren’t essential):
This icon denotes info that can save you time and/or hassle as you work through a deal.
The Remember icon flags important points and concepts worth searing into your memory banks.
The text next to this icon is useful but not vital to the topic at hand; you can skip it if you’re in a hurry or just want the need-to-know information.
I use this icon to highlight potential M&A disasters you want to avoid.
Where to Go from Here
No matter your immediate interests or needs, I highly recommend reading Chapter 3, which provides an overview of the process. An understanding of the typical steps involved in a business sale can help you as you read other specific sections. From there, you can dive in and out of this book as you please. You will also find a handy “cheat sheet” for this book on dummies.com. Just search for Mergers and Acquisitions For Dummies Cheat Sheet from the Dummies.com home page.
Beyond this book, the best advice I can offer for anyone who wants to buy or sell companies or work as an advisor in the M&A industry is to get off your duff and get in the game. Books are great, and I certainly hope you find Mergers & Acquisitions For Dummies to be an extremely valuable resource, but the fact remains that the best way to learn something is to do it yourself. The only way you can truly get a handle on buying and selling companies is to actually buy and sell companies.
I’m a big believer in “ground up” learning. No, I’m not talking about deli meats; I’m talking about getting your hands dirty and learning business from the ground up. You’re going to make mistakes, but finding out what doesn’t work is the best way to learn. If you want to be successful in M&A (as a Buyer, a Seller, or an intermediary), you’re best served if you can talk from a level of actual experience. Those experiences should ideally include successfully selling a product or service, interacting with customers, hiring and firing employees, merchandising, marketing, working in human resource compliance, banking, making a payroll, filing taxes, and bookkeeping. (Mopping some floors and scrubbing a few toilets won’t kill you, either.) You don’t want to be the only one at the table who hasn’t dealt with real-world business issues and problems. Being the least-qualified person in the room is never a good thing!
One of the big ironies for the investment banking world is that most people who do what I do didn’t start their careers with the plan of being an investment banker. I’m often asked how to get into the investment banking industry. I always say the same thing: “Most of us who do this didn’t choose this career. Go do something else. Get involved in a business first, and then segue into investment banking.”
One final thought: One of the keys to M&A is accounting. If your accounting skills are suspect (or nonexistent), you need to take a class, stat! Most community colleges offer accounting classes, and you can probably audit the class instead of taking it for credit.
Part 1
Mergers & Acquisitions 101
IN THIS PART …
This part delves into the basics of M&A: The players, their motivations, the terms, the nomenclature, the conventions of the industry, and the rules and regulations. I also discuss reasons to buy or sell a company, and I walk you through the generally accepted process of buying or selling a company on a step-by-step basis.
Chapter 1
The Building Blocks of Mergers and Acquisitions
IN THIS CHAPTER
Becoming familiar with the main vocabulary of mergers and acquisitions
Understanding the rules of the road
Opening your eyes to potential costs
Figuring out where your company fits
Mergers and acquisitions is a complicated field, so this chapter provides a basic overview: an introduction to the basic terms and phrases, a discussion of decorum and the basic M&A process, a look at the players and the category of deals, and my handy-dandy guide to helping business owners determine what kind of businesses they have.
Defining Mergers and Acquisitions
Mergers and acquisitions (or M&A for short — the M&A world is rife with acronyms and initialisms) is a bit of a catchall phrase. For all intents and purposes, M&A simply means the buying and selling of companies. When you think about it, mergers and acquisitions aren’t different; they’re simply variations on the same theme.
In the strictest sense, a merger is a combination of two or more entities where each merging entity has an equal stake in the new enterprise and each merging entity has a very clearly defined role in the new entity. This ideal is the vaunted merger of equals. Daimler’s 1998 combination with Chrysler was a merger of equals. In a more practical sense, so-called mergers of equals are rare; one side usually ends up controlling the enterprise. For example, the years following the Daimler-Chrysler merger showed that Daimler executives planned all along to control the combined entity.
Although actual mergers do occur, most of the activity in the M&A world centers on one company buying another company, or the acquisitions category. I like to think using the word merger keeps the uninitiated on their toes; plus, talking about combining two companies as equal partners rather than about committing a hostile takeover sounds much more egalitarian.
Mergers are far less common than acquisitions. An acquisition is when one company buys another company, a division of another company, or a product line or certain assets from another company. Actually, an acquisition is when any kind of business purchases another part (or all) of another business. Although some companies grow organically (from within by creating and selling products or services), an acquisition allows a company to bypass the growth stage by simply buying existing sales and profits. Starting up a new product line may be less expensive than buying an existing one, but the market may take a while to adapt to the new product, if it does at all. For this reason, buying other companies rather than relying on organic growth may make sense for a particular company.
The fact that one can transfer a company’s ownership through a sale often comes as a bit of surprise to many people (including many business owners, believe it or not). Business owners, especially owners of middle market and lower middle market companies (with revenues between $250 million and $1 billion [middle market] and between $20 million and $250 million [lower middle market]), have spent their careers building a company, so the process of selling a business is often something new and foreign to them.
In addition to being an activity, M&A is an industry. As this book illustrates, the steps to doing a deal, the names of documents and processes, the conventions, and the sundry tips and insights I provide are all based on de facto industry standards that have developed over time, and my humble hope is that this book helps introduce you to those standards and conventions.
Introducing Important Terms and Phrases
Like any topic, M&A has a language that you have to get a handle on to understand the field. Although I introduce many more terms and phrases throughout the book, the following words are part of the basic building blocks of M&A.
The lingua franca of M&A is an amalgam of accounting and banking terms sprinkled with initialisms, acronyms, and words and phrases adjusted and twisted to suit certain needs at certain times. Pay close attention to the terms I define throughout the book. Although some are tricky, I use them all for a reason.
Buyer
You can’t sell something unless you have a buyer for it. Although Buyers (both potential and actual) are typically companies or entities, I often refer to them as individuals for clarity.
In documents and contracts and agreements, you usually see Buyer as a defined term, which means it’s capitalized. When you read those documents, Buyer looks like the name of a person. In fact, to make it seem really formal, M&A professionals often drop the word the from Buyer.
“Buyer” isn’t a one-size-fits-all category. A Buyer may acquire all or part of a company, the stock of the company, or certain or all assets and even assume some of the liabilities. Despite this wide variety of possibilities, Buyers typically fall into four broad types:
Strategic Buyers:
These Buyers are other companies planning to combine operations of the two companies to some extent (as opposed to buying strictly for financial reasons). For example, when Oracle buys a company, Oracle is considered a strategic Buyer because it buys companies that have some sort of synergy to its business.
Financial Buyers:
Financial Buyers
are funds of money that buy companies. Financial Buyers of middle market and lower middle market companies are typically private equity (PE) funds, which are essentially large pools of money (see
Chapter 4
for more).
Other companies backed by PE funds:
The company will be the new owner of the acquired company, but another entity (the fund) is providing the dough to do the deal.
Individuals:
Although it happens, an individual buying a middle market or lower middle market company is rare. When individuals buy companies, those companies tend to be small retail shops, consulting firms, or construction companies. Typically, these companies have revenues of less than $1 million.
As a Seller, know that who’s on the other side of the negotiating table may change the way your M&A process works. Are the Buyers experienced deal people, or are they new to the process? For example, if your Buyer is a PE firm, rest assured that the people you’re negotiating with know exactly what they’re doing.
Seller
You can’t buy something unless you have a Seller. Like Buyers, Sellers usually aren’t individuals, though I often refer to them in the singular here for clarification purposes. Seller is a defined term, meaning it’s capitalized for the purposes of documents and contracts.
Here’s a quick look at the types of Sellers you may find in the world of M&A:
The spinoff:
A company may be divesting a division, a product line, or certain assets.
The change of control:
This company is selling enough of itself (more than 50 percent) to result in a change of control. In these cases, the owner or owners most likely receive the money. Colloquially, this approach is called
taking some chips off the table.
The recap:
Sometimes an owner wants to take some chips off the table without giving up control of the company. This situation is called a
recapitalization,
or
recap
for short.
The growth capital:
A Seller may issue more stock for the purposes of raising capital to invest in the business. In this case, the owner isn’t actually selling the company but rather selling more stakes in the company. The money from the sale doesn’t flow to the owner; instead, the company retains the money to fund growth.
Remembering why the Seller is selling the company, how much of the company he or she is selling, and where the money goes is key. Follow the money.
Transaction (also known as the deal)
The transaction is when Buyer acquires a company from Seller. It’s an abstract concept, as in, “We’re working on a transaction that will sell ABC to XYZ.” It can also refer to the finished sale: “We completed the transaction yesterday.” (Don’t confuse the transaction with the purchase agreement, a contract that memorializes the transaction. See Chapter 15 for more on this document.)
Transaction is a more formal version of deal; most documents, agreements, and contracts use the word transaction (often capitalized as a defined term), but conversations and e-mails may use deal and transaction interchangeably. Think of deal as transaction’s popular cousin from the wrong side of the tracks.
M&A PERSONALITY TYPES
Regardless of whether you’re buying or selling, one helpful trick for getting deals done is to assess the personality of your negotiating counterpart. Based on my experience, you’re liable to run across the following types of people:The highly motivated: This person has to get a deal done or he’s doomed. He’s so desperate to do a deal that he may — strike that, will — leave dollars on the table.The ruler-of-the-universe business magnate: He’s from Experienced, Wily, and Cagey, Ltd.; he’s made countless deals and knows exactly what he’s doing. If you find yourself matched against this person, look out. The worst thing you can do is to turn into the highly motivated (see the preceding bullet); you’ll get your clock cleaned.The know-it-all who’s never sold a company: This person is one of the potential problem children of the M&A world. Quite often, he’s an expert in one field and thus thinks he’s an expert in everything. The best way to counteract this type of person is by asking questions, reasoning, and getting him to explain his point of view. Avoid simply saying “no” if you don’t like his proposal. Challenge him. Your only hope of changing this person’s mind is getting him to change it himself.Mr. Irrational: Mr. Irrational is the insane twin of the know-it-all, except without the strong logic skills. As a result, employing logic and reason doesn’t work. An irrational person is difficult to work with, so your ability to get a deal done is limited. Give it your best shot and then walk away when the proceedings begin to get petty and frustrating. Interestingly enough, these irrational people often come to their senses after the heat of the battle fades. Don’t fuel their irrationality with endless negotiating and discussions.The earnest first-timer: The country cousin of the know-it-all and Mr. Irrational, this person is so intent on doing everything letter-perfectly that he misses the proverbial forest for the trees. Work to get this person to do as you want, or he’ll end up irritating you to no end.The professional: Typically, this type is the best person to work with. He’s a deal pro who’s been around the block many times, leaves emotion out of the negotiation, and works to close a deal on mutually beneficial terms.The chronic negotiator: This exhausting individual negotiates and fights for excruciatingly minor details over and over again. Although attention to detail is important and worth the hassle, endlessly negotiating those details eventually evokes the law of diminishing returns — you put in more time for smaller and smaller advancements. At some point the nit-picky details aren’t worth the hassle. This person blasts through that point.The renegotiator: Don’t confuse this person with the chronic negotiator (though the same person can be both). This guy’s MO is to wait until the deal is seemingly done before asking (or demanding) that you change the terms. Don’t give in; changing the deal at the last minute comes back to haunt you because you may be needlessly agreeing to concessions. Don’t let the rush of closing a deal cloud your decision-making.Consideration
Consideration is what Seller receives from Buyer as a result of selling the business. In its most obvious form, the consideration is cash, but cash is not the only way to pay for a business. Buyer may issue stock to Seller in exchange for the business. Seller may accept a note from Buyer (Buyer promises to pay later). Or perhaps the price of the business is contingent, and Buyer pays Seller an earn-out based on the performance of the business after the transaction’s completion.
Consideration is not an either-or situation. In other words, the consideration may consist of some cash at closing, stock in the acquiring company, and an earn-out. Or perhaps the consideration is a note plus an earn-out. No single right or wrong way to structure a deal exists. Structuring a deal by using various forms of consideration is similar to twisting the knobs on a stereo: To get it just right, you may have to increase the bass and turn down the treble. Chapter 4 provides a much deeper dive into the ways Buyers can finance deals.
Consideration is usually a defined term and therefore capitalized in documents and so forth.
EBITDA
EBITDA (earnings before interest, tax, depreciation, and amortization) is one of those horrible business jargon terms, but it’s unavoidable in M&A. EBITDA (and its variations) forms the basis for most deals.
EBITDA is the cash flow of a company without accounting for interest payments or interest income, tax bills, and certain noncash expenses (depreciation and amortization). In other words, EBITDA measures the cash generated from doing what the company is supposed to do: sell its goods or services.
Why is this number so gosh-darn important? EBITDA is often (but not always) the basis a company uses to determine its valuation (see Chapter 12) and is often a defined term in the agreements and contracts. Banks quite often include EBITDA as one of the covenants for making a loan.
EBITDA is commonly pronounced ee-bah-dah. And in case you’re wondering, EBITDA is not a generally accepted accounting principles (GAAP) term. (Neither is adjusted EBITDA, which I cover in the following section.) However, both EBITDA and adjusted EBITDA are perfectly acceptable terms for the purposes of M&A activities.
Adjusted EBITDA
Adjusted EBITDA, which is EBITDA’s wild and crazy cousin, is simply EBITDA with adjustments! For example, a business owner often takes a salary larger than industry standards, so a Buyer may want to add back part of that salary to arrive at a more reasonable level of earnings. Say the owner of a company with $20 million in revenue receives total compensation of $500,000 when the industry standard for the president of a like-sized company is $250,000. In this case, adding $250,000 (plus the pro-rated amount of income tax) back to the EBITDA figure makes sense.
Other adjustments to EBITDA may include add backs for other owner-related expenses (cars, gas, cellphone, country club, health club, and so on). If certain employees won’t be part of the business after the deal is complete, adding back their salaries (and corresponding payroll tax and benefits expenses) is appropriate.
No set standard exists for adjusted EBITDA; adjusted EBITDA is whatever Buyer and Seller agree it is.
Although running certain personal expenses through a business may be common, the practice may run afoul of the IRS. Consult with your tax advisor for the proper treatment of personal expenses.
Closing
Closing is what Buyer and Seller dream of! It’s why we M&A folks do what we do. In fact, it’s so important that I devote an entire chapter (Chapter 16) to closing. In a nutshell, closing is the day when Buyer hands over the consideration to Seller and Seller hands over the company to Buyer.
Adhering to Basic M&A Rules and Decorum
Knowing the M&A language is important (see the earlier section “Introducing Important Terms and Phrases”), but understanding the rules of the M&A game and the decorum for its participants is equally important. Much like a poker game, the actions, the inactions, the movements, the gestures — in other words, the “tells” — are hugely important in the world of buying and selling companies.
If you’re going to get into the M&A business, you have to know what to do and what to expect. Those caught off guard are those who won’t be successful. Simple as that. Inadvertently (and incorrectly) broadcasting yourself as an M&A amateur can be hazardous to the health of your deal.
Follow the steps to getting a deal done
Remember that the M&A process is a serial process — transactions follow a step-by-step process. The following list gives you an overview of that process; I strongly encourage you to check out Chapter 3, where I discuss the steps in more detail.
Even though M&A follows a step-by-step process, the process often isn’t linear. It goes through unforeseen twists and turns, so you have to be able to adjust.
Compile a target list.
For Sellers, this means creating a list of potential Buyers, and for Buyers, this means a list of business owners who may be potential Sellers.
Make contact with the targets.
Reach out to an executive or owner of a company on your list from Step 1. I prefer to make phone calls when contacting Buyers and Sellers.
Send a “blind teaser” if you’re selling or ask for an executive summary if you’re buying.
If both sides (Buyer and Seller) have some level of interest in exploring a deal after the initial contact, Seller provides Buyer with a little bit of info in the form of an anonymous teaser. That way, Buyer isn’t inundated with too much info, and Seller maintains confidentiality and anonymity.
Sign a confidentiality agreement.
In this legal document, Buyer promises not to disclose Seller’s private information or even the fact that conversations about a potential transaction are ongoing.
Send an offering document if you’re selling, or review the offering document if you’re buying.
The offering document is the deal book, the document that contains the information about the company for sale. A well-written offering document should contain enough information for Buyer to make an offer.
Ask for an indication of interest if you’re selling or submit one if you’re buying.
Buyer submits a simple letter expressing his interest in doing a deal. If the indication meets Seller’s approval, she invites Buyer to a meeting.
Conduct management meetings.
Management meetings give Buyer and Seller an opportunity to meet face to face. Seller provides Buyer with updated figures from when the offering document was written, and based on this update, Buyer may or may not submit a formal offer.
Ask for a letter of intent (LOI) if you’re selling or submit one if you’re buying.
The LOI is the formal offer. However, it’s still nonbinding, so each party can still walk away from the deal at this stage.
Participate in due diligence.
Due diligence occurs after Buyer and Seller come to terms. During this step, Buyer reviews, examines, and inspects Seller’s books, records, contracts, and more to verify that all the Seller’s claims are accurate.
Craft a purchase agreement.
During due diligence, Buyer and Seller write a purchase agreement to finalize the deal both sides negotiated. This document is final and legally binding.
Attend closing.
After due diligence is complete and the purchase agreement is drafted, Buyer and Seller close the deal. Seller turns over the keys of the business to Buyer; Buyer forks over money to Seller.
Deal with post-closing adjustments and integration.
A deal is not done the day it closes! In most cases, Buyer and Seller have some post-closing adjustments to navigate, and Buyer has the task of integrating the two companies.
Understand M&A etiquette
If you aren’t careful, you can easily give off the wrong signal inadvertently during your M&A proceedings. Failure to follow up quickly, return calls, and give complete answers is an easy way to turn off the other side and kill a deal. Show interest in doing a deal. If you’re not interested in pursuing a deal, communicate that to the other side. Here are a few more quick pointers to help you make the best impression:
Respond to a direct question with a direct answer.
Sellers most often break this rule. Instead of addressing a basic question like “What were revenues last year?” with a simple answer, Seller decides to dive into a 15-minute monologue about something that sounds impressive. In this case, Seller doesn’t impress Buyer; Buyer merely gets bored and may even wonder what Seller is hiding.
Don’t put on airs.
Sometimes one side is so intent on impressing the other side that it instead looks foolish, childish, and amateurish. The best course of action? Just be yourself. Don’t think you need to go out of your way to impress someone. Trying to impress someone rarely works and often backfires.
If you don’t know something, just say you don’t know it.
You’re not going to impress the other side by talking about things you don’t know. If you’re not sure, simply say, “I need to check into that and get back to you.”
When you say you’re going to do something, follow through and do it! No explanation needed.
Know what to tell employees — and when
Ambiguity is no one’s friend. The disclosure to the outside world that a company is for sale can be a devastating bit of news. Competitors may pounce and try to steal customers by implying that the sale may impact product quality or through some other scare tactic. For this and many other reasons, news of a potential business sale should be a very closely guarded secret known to only a select few until the time is right to make the announcement.
Likewise, revealing a sale or impending sale to employees is a delicate, critical matter. The timing of such an internal announcement often depends on your situation and whether you’re doing the buying or the selling. The following sections give you some insight into this important topic.
When you’re selling your company
If employees find out that their employer is for sale, they may get twitchy and nervous. The news that a company is for sale can cause key people to begin looking for work elsewhere. For this reason, Sellers should tell employees about a potential sale on a strictly need-to-know basis.
Staggering the release of the business sale news is acceptable. Not everyone needs to learn the news at the same time.
For example, key executives and managers need to know before lower-level employees. Exactly who that is depends on the specifics of each company. Generally, the CFO needs to know, and depending on the size of the firm, she may need to let certain key employees in on the secret. Financial disclosure is very important, and people in the accounting department can usually figure out when something is going on — they’re suddenly inundated with very unusual and exacting requests for financial data!
If an employee asks you about a rumor that the company is for sale, neither confirm nor deny the rumor, but never lie. If you tell the employee that the company is not for sale and then the company makes a sale announcement two months later, that employee will feel betrayed and her trust will be broken. Instead, tell her that the owners are exploring some options, including bringing in investors to help take the company to the next level.
When you’re buying companies
For Buyers, letting employees know that the company is seeking acquisitions has little downside. Think about it: How much harm can come from your competitors finding out that your company is so successful that you’re exploring making acquisitions?
Treat the confidentiality clause in the confidentiality agreement very seriously. Loose lips sink ships. A sure way to scuttle a potential deal is for Buyer to talk about it with people who aren’t part of the process. See Chapter 7 for more details about confidentiality.
Considering the Costs Associated with M&A
Although the main cost in any M&A transaction is most likely the cost to acquire the company (or assets), both Buyers and Sellers incur other costs. These costs range from the retinue of advisors needed to close deals, paying off debt, adjustments made after the close, and, regrettably, taxes.
Tallying advisors’ fees and other costs
As I explain in Chapter 5, M&A deal-makers can’t do the job alone. Any Buyer or Seller should retain a capital M&A advisor (investment banker), a lawyer, and an accountant. These people don’t work for free, so their charges are part of the expenses of doing a deal. Of course, advisor fees vary based on the deal and how much work the advisor does, but here are some very general guidelines:
A lawyer may charge anywhere from $25,000 to more than $100,000.
An accounting firm may charge anywhere from $25,000 to $75,000.
Investment banking fees vary, but in a very general sense, you should expect to pay roughly 3 percent to 10 percent of the transaction value.
Some deals involve other costs as well, including a real estate appraisal, an environmental testing, a database and IT examination, and a marketing analysis. Fees vary, of course, but all these functions likely cost anywhere from $10,000 to more than $100,000 apiece.
This section may seem a bit wide open, but nailing down the costs without knowing the deal is impossible. The best way to get a concrete estimate of a particular deal’s fees is to speak with advisors and ask them to ballpark their expenses.
If you’re worried about fees spiraling out of control, negotiate a flat fee, or a capped fee, from your advisors if possible. Not all will be willing to do this arrangement. If you get pushback, you can always agree that if the advisor does the work for a flat fee now, you’ll give him the ongoing legal or accounting work post-transaction.
Paying off debt
One of the areas that Sellers often overlook is the debt of the business. Unless stipulated, a Buyer doesn’t assume the debt. If a company has $5 million in long-term debt and the company is being sold for $20 million, the Seller needs to repay that debt, thus reducing the proceeds to $15 million.
Post-closing adjustments
Another area that Sellers often don’t think about is the adjustments made to the deal after closing. Most often this is in the form of a working capital adjustment, which occurs when the working capital (receivables and inventory minus payables) on the estimated balance sheet Seller provides at closing doesn’t match up with the actual balance sheet as of closing that the Buyer prepares at a later, agreed-upon date (usually 30 to 60 days after closing). Buyer and Seller do a working capital adjustment to true up (reconcile) their accounts; this adjustment is typically (though not always) minor. If the actual working capital comes in lower than the estimate, Seller refunds a bit to Buyer (often by knocking some money off the purchase price). If the figure comes in higher than the estimate, Buyer cuts Seller a check.
Say Buyer agrees to pay $10 million for a business and that Buyer and Seller agree that working capital has averaged $2 million. If Seller’s estimated balance sheet shows working capital to be $1.5 million, Seller has to provide Buyer with $500,000. With a working capital adjustment, Buyer just pays Seller $9.5 million rather than $10 million.
Why take working capital adjustments? Simply put, working capital is an asset, and if less of that asset is delivered at closing, Buyer is due a discount from the agreed-upon purchase price (and vice versa). Without a working capital adjustment, Seller would have every incentive to collect all the receivables (even if done at deep discounts), sell off all the inventory, and stop paying bills, thus inflating payables. Buyer would take possession of a business that has been severely hampered by the previous owner. Buyer then has to spend money to rebuild inventory and pay off the old bills and doesn’t have the benefit of receivables.
Sigh … talking taxes
Sellers often forget that they likely face capital gains tax on the business sale. That’s one reason Sellers generally prefer stock deals; a stock deal likely has a lower amount of tax. For many (but not all) Sellers, an asset deal exposes them to double taxation: The proceeds are taxed at the time of the sale at the company level, and then the owner pays again when the company transmits the proceeds to her. (Chapter 15 gives you the lowdown on stock and asset deals.)
Speak to your financial advisor about your specific tax situation.
Determining What Kind of Company You Have
As I state throughout the book, Mergers & Acquisitions For Dummies is primarily for Sellers or Buyers of middle market and lower middle market companies. But what exactly constitutes those types of companies, and how do you define other company types? The distinction has to do with size, most often revenues and profits.
Then you have the issue of critical mass. Critical mass is a subjective term, and it simply means size: Does the company have enough employees, revenues, management depth, clients, and so on to survive a downturn? Smaller businesses most often do not have enough critical mass to be of interest to acquirers. Capital providers who may be able to help finance acquisitions will have little or no interest, too. Although critical mass differs for different companies, in a general sense a company with $30 million in revenue and $3 million in profits has a better chance of surviving a $1 million reduction in profits than a smaller firm with only $500,000 in profits.
If you’re thinking about chasing acquisitions or selling your business, understanding where your business fits is important. Who may be interested in acquiring it?
Definitions vary, but for the purposes of this book, I’ve divided the market into sole proprietorship, small business, lower middle market company, middle market company, and large company (and beyond). Table 1-1 defines these companies at a glance; the following sections delve into more detail.
TABLE 1-1 M&A Company Types
Company Type
Annual Revenue
M&A Advisor
Number of US Companies
Sole proprietorship
Less than $1 million
Business broker
6 million
Small business
$1 to $10 million
Business broker
1 million
Lower middle market company
$10 to $250 million
Investment banker
150,000
Middle market company
$250 to $500 million
Investment banker
3,000
Large company (and beyond)
$500 million+
Bulge bracket investment banker
3,000
Source:www.census.gov/epcd/www/smallbus.html
Sole proprietorship
Sole proprietorships are companies with revenues of less than $1 million. They’re your neighborhood pizza joints, corner bars, clothing boutiques, or small legal or accounting practices.
Although these businesses are viable going concerns (aren’t facing liquidation in the near future) and often trade hands, they’re too small to be of interest to PE firms and strategic Buyers, as well as corresponding service providers who assist in M&A work. (Flip to the earlier section “Buyers” for more on these kinds of Buyers.)
Why are sole proprietorships of little or no interest to an acquirer? Simply put, buying a $1 million business and a $100 million business requires about the same amount of time and the same steps and expenses, so if you’re going to go through the trouble of buying a company, you may as well get your money’s worth and buy a larger concern. Making dozens of tiny acquisitions is just not worth the time or expense.
Small business
Small businesses usually have annual revenues of $1 million to $10 million. These businesses are larger consulting practices, multiunit independent retail companies, construction firms, and so on. Unless the company is incredibly profitable (profits north of $1 million, preferably $2 million or $3 million), small businesses are too small to be of interest to most strategic acquirers and PE funds.
Although PE funds and strategic acquirers are usually not interested in smaller companies, they occasionally make exceptions if a company has a unique technology or process. In these cases, the acquirer can take that technology or process and deploy it across a much larger enterprise, thus rapidly creating value.
Middle market and lower middle market company
Lower middle market companies are companies with $10 million to $250 million in annual revenue; middle market companies have revenues of $250 million to $500 million. These companies typically have enough critical mass to be of interest to both strategic acquirers and PE funds. Also, because these deals are larger than small business and sole proprietorship deals, M&A transaction fees are large enough to justify the involvement of an investment banking firm.
Large company (and beyond)
Companies with revenues north of $500 million are considered large, huge, gigantic, and, if revenues are well into the billions, Fortune 500. Although transactions are typically very large, the fact is very few companies are large. The middle and lower middle markets are far larger.
Firms in this category typically use bulge bracket investment banks. These entities are the largest of most sophisticated of investment banks. They also charge enormous fees.
The term bulge bracket originates from the placement of a firm’s name on a public offering statement. Public offerings of securities typically involve multiple firms, and the largest firms, or managers of the offering, want their names to the left, away from the names of the smaller firms. The placement of the names looks as if they were bulging, hence the moniker.
