Mergers and Acquisitions For Dummies

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Authors: Bill Snow

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Table of Contents

Introduction

About This Book
Conventions Used in This Book
What You're Not to Read
Foolish Assumptions
How This Book Is Organized
Part I: Mergers & Acquisitions 101
Part II: Taking the First Steps to Buy or Sell a Company
Part III: Starting the Deal on the Right Foot
Part IV: Firming Up the Deal
Part V: Closing the Deal . . . and Beyond!
Part VI: The Part of Tens
Icons Used in This Book
Where to Go from Here

Part I: Mergers & Acquisitions 101

Chapter 1: The Building Blocks of Mergers and Acquisitions
Defining Mergers and Acquisitions
Introducing Important Terms and Phrases
Buyer
Seller
Transaction (also known as the deal)
Consideration
EBITDA
Adjusted EBITDA
Closing
Adhering to Basic M&A Rules and Decorum
Follow the steps to getting a deal done
Understand M&A etiquette
Know what to tell employees â and when
Considering the Costs Associated with M&A
Tallying advisors' fees and other costs
Paying off debt
Post-closing adjustments
Sigh . . . talking taxes
Determining What Kind of Company You Have
Sole proprietorship
Small business
Middle market and lower middle market company
Large company (and beyond)
Chapter 2: Get ting Ready to Buy or Sell a Company
Considering Common Reasons to Sell
Retirement
Let someone else take the company to the next level
Divesting a division or product line
The industry is changing
I've got troubles, troubles, troubles
Selling a piece of the company
Planning Ahead to Ensure a Smooth Sale
Clean up the balance sheet
Pay off debt
Address legal issues
Trim staff and cut dead weight
Increase sales
Quantify owner's expenses and other add backs
Owner, make thyself expendable
Exploring Typical Reasons to Acquire
Make more money
Gain access to new products and new markets
Implement vertical integration
Take advantage of economies of scale
Buy out a competitor
Prepping before an Acquisition
Determine the appropriate type of acquisition
Get your company's balance sheet in order
Have the money lined up
Set up an acquisition chain of command
Buying a Company from a PE Firm
Understanding why PE firms sell
Evaluating a PE firm's portfolio company
Chapter 3: Previewing the Generally Accepted M&A Process
Take Note! The M&A Process in a Nutshell
Step 1: Compile a target list
Step 2: Make contact with the targets
Step 3: Send or receive a teaser or executive summary
Step 4: Execute a confidentiality agreement
Step 5: Send or review the confidential information memorandum
Step 6: Solicit or submit an indication of interest
Step 7: Conduct management meetings
Step 8: Write or review the letter of intent
Step 9: Perform due diligence
Step 10: Draft the purchase agreement
Step 11: Show up for closing
Step 12: Deal with post-closing adjustments and integration
Exploring Two Types of M&A Processes: Auction versus Negotiation
Who Has It Easier, Buyer or Seller?
Selling is easy if you know what you're doing
Buying is difficult even if you know what you're doing
Following the Power Shifts in the M&A Process
Looking at the factors of motivation
Understanding who has power
Reading the other party's situation
Maintaining as much power as possible when disclosing undesirable news
What to Tell Employees and When
Keep news of a sale process confidential
Never lie
A staggered release

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

Chapter 4: Financing M&A Deals
Exploring Financing Options
Buyer uses his own cash
Buyer borrows money
Buyer utilizes Other People's Money
Buyer seeks financial help from the Seller
Understanding the Levels of Debt
Surveying senior lenders and subordinated debt
Looking at lines of credit
Taking a Closer Look at Investors
Institutions versus individuals
Private equity (PE) firm
Strategic Buyer
Striking the Right Type of Deal
Exploring the differences among buyouts and majority and minority investments
Choosing an asset or a stock deal: What's Buyer buying?
Examining the All-Important EBITDA
Making Buyers' Return Calculations
Return on equity
Return on investment
Internal rate of return
Financing a Problem Child
Debt is greater than purchase price
The business has operating losses
Chapter 5: With a Little Help from Your Friends: Working with M&A Advisors
Choosing Wisely: Identifying Ideal Advisors
Utilizing Inside Advisors
CFO or other financial bigwig
Corporate development people
Hiring Outside Advisors
Consulting wealth advisors when you're ready to sell
Considering an intermediary
Lawyering up on both sides
Looking at accountants and auditors for Buyers and Sellers
I'm the tax man!
Recruiting more consultants to Buyer's team
Seeking friendly advice: Using friends and family as informal advisors
Skipping business appraisers
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
Getting started
Expanding and winnowing the list
Capping the list: How many (and which) companies to include
Sellers on Your Mark: Contacting Buyers
Speaking with the right person
Following a script that works
Easy Does It: Contacting Sellers
Getting the call off on the right foot
Using a successful script
You're having a serious conversation! What now?
Additional Tips for Getting Past Screeners
Recognizing who you're dealing with
Overcoming screener roadblocks
Tracking Your Calls

Part III: Starting the Deal on the Right Foot

Chapter 7: Assuring Confidentiality
Tempting Buyers with an Anonymous Teaser
Keeping it short and sweet
Including high-level financial info only
Touting key selling points
Executing a Confidentiality Agreement
Perusing the CA's contents
Figuring out which party sends the CA
Determining who gets more value out of the CA
Handling a Breach of Confidentiality
Confirming a breach
Thinking long and hard about legal action
Keeping the Cat in the Bag: Advice for Buyers
Involving employees and advisors
Discussing the deal in public
Chapter 8: Creating and Reviewing an Offering Document
The Offering Document in a Nutshell
Compiling the Executive Summary
The thesis
Seller's rationale for seeking a deal
Seller's deal guidance
Presenting the Company's Background
The company's past and present
Ownership and legal entity
Employee info and benefits
Locations of offices and facilities
Real estate
Technology
Legal disclosures
Sharing the Go-to-Market Strategy
Description of market and products
Customer names
Info about competitors
Doing the Numbers
Historical financials
Financial projections
Balance sheet basics
Income statement basics
Losses on the books
Accounts receivable terms
Fixed assets (equipment)
Inventory
Intangible assets
Chapter 9: Properly Expressing Interest in Doing a Deal
Understanding the Indication of Interest
Including Key Bits of Information in an Indication of Interest
Preamble, platitudes, and Buyer background
The proposed deal: Valuation range and other considerations
The legalese
An enthusiastic send off
Chapter 10: Ensuring Successful First Meetings between Buyer and Seller
Understanding the Importance of Meeting in Person
The buyer gets to interact with key management
Both sides perform due diligence on the other
The parties gauge chemistry
Ironing Out Management Meeting Logistics
Assembling key players
Agreeing on a venue
Setting the meeting agenda
Perfecting the Seller's Presentation
Gathering the right material
Making Seller's presentation shine
Prepping Buyers for Management Meetings
Reading the Tea Leaves: Did the Meeting Go Well?

Part IV: Firming Up the Deal

Chapter 11: An Insider's Guide to M&A Negotiating
Keys to Negotiating Success
Know your position
Remember the goal: Closing a deal
Negotiate with the decision-maker
Bend where you can
Take it one day at a time
Remember your ABNs: Always be negotiating
Using Successful Negotiating Tactics
Say “Here's the deal that gets it done”
Pick up the phone
Offer a conditional if-then agreement
Understand that the first who speaks loses
Don't be afraid to haggle
Beware of a bad bluff
Avoiding Common M&A Negotiating Mistakes
Surviving Unforeseen Twists and Turns
Getting a deal gone sideways back on track
Negotiating in good faith
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
Testing the waters
Buyers: Measure returns
Sellers: Create a compelling valuation
When Buyer and Seller Disagree: Bridging a Valuation Gap
Using an earn-out to prove valuation
Settling a valuation disagreement with a Seller note
Paying for a company with stock
Selling less than 100 percent of the company
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
Salutation and preamble
Valuation and deal structure
Holdback and escrow
Representations and warranties
Financing
Due diligence and timing
Approvals and conditions
Role of management
Access to information
Expenses
Exclusivity
Non-disclosure and publicity
Nonbinding agreement
Governing law or jurisdiction
Agreeing to and Extending Exclusivity
Considering exclusivity in pre-emptive bids
Running out of time: Prolonging exclusivity
You Have a Signed LOI â Now What?
Chapter 14: Confirming Everything! Doing Due Diligence
Digging into the Due Diligence Process
Getting the process underway
Allowing enough time for the due diligence phase
Covering the expense
Conveying the due diligence info to Buyer
Business as usual: Running the company during due diligence
Providing Appropriate Information
Corporate info
Operations
Financials
Sales and marketing info
Real estate and facilities info
Fixed assets
Inventory
Supplier info
Intellectual property
Human resources
Debt and financial dealings
Environmental concerns
Taxes
Contract information
Insurance
Litigation history
Governmental filings
Considering Requests for Additional Information
Chapter 15: Documenting the Final Deal: The Purchase Agreement
Drafting the Deal
Writing the first draft
Redlining the initial draft
Navigating the Final Purchase Agreement
Confirm the name, rank, and serial number of the deal
Determine what's being sold, for how much, and when
Know what to bring to the closing
Review the representations and warranties
Secure against loss with indemnifications
Agree on how to handle a rep and warranty breach
Get acquainted with the exhibits and schedules

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