Read Mergers and Acquisitions For Dummies Online
Authors: Bill Snow
Mergers and Acquisitions For Dummies (49 page)
Although other income and other expenses should appear in the offering document, make sure you adjust the EBITDA for those other income or other expense items. Failure to clearly delineate other income and other expenses may blur the company's actual EBITDA (EBITDA generated as result of the company's normal operations and not as the result of one-time expenses or income).
Losses on the books
Companies with losses sometimes keep those losses on the books, applying those
net-operating losses
(NOLs) against future earnings and thus reducing a future tax liability. Be sure to mention any NOLs in your offering document. In years past, Buyers were able to acquire entities with NOLs and use those losses to reduce their tax burdens. However, Congress has greatly restricted that ability, so Buyers will want to know of any NOLs upfront.
If you're selling a business or attempting to buy a business with NOLs, speak with your tax advisor immediately.
Accounts receivable terms
An offering document should provide some guidance as to the selling company's terms with accounts receivable. Specifically, does the company expect payment within 30, 45, or 60 days (or some other amount of time)? Does the company provide a discount for early payments (and if so, what)? What is the reserve policy for uncollectible accounts? How much has been written off due to bad accounts?
Fixed assets (equipment)
Fixed assets
are the assets a company uses to make its product. These items run the gamut from desks, phones, and computers to vans, trucks, and delivery vehicles to heavy machinery and production equipment.
The office stuff (desk, phone, computers, and so on) probably doesn't have much value to Buyer in terms of collateral for financing. Neither do the vehicles; they depreciate very quickly. However, the
hard assets
(the machinery and production equipment) often form the basis of assets that can serve as collateral to back a loan.
Inventory
Although not all companies have inventory (for example, consultancies and most business service firms), those that produce or distribute a product find that inventory is a key component for Buyer's financing and thus an important note in the book. Inventory is considered a
current asset,
which means (in theory) that it should be convertible to cash within a short period of time, usually a month or less.
If you're a Buyer, pay close attention to inventory. Is it all sellable? If the Seller has been building up inventory with unsellable or slow-moving stock, you may not be able to utilize 100 percent of the inventory to help with financing the acquisition.
Intangible assets
An offering document should have a listing of all intangible assets.
Intangible assets
include brand names, patents, trademarks, and Internet domain names â items whose value you can't easily measure. These assets don't usually help Buyer finance the deal, but they can still be valuable: Household names such as Apple, Exxon, and Walmart (and even smaller-market companies that are less widely known but still prestigious within their market segments) all have intangible value simply because their names are so well known.
If Seller doesn't want to include some of these intangibles in the deal (perhaps she wants to retain a certain domain name that isn't used), she needs to specify those carve-outs in the book.
Understanding a Seller's vulnerability
Going through an M&A sales process in general, and writing an offering document specifically, can leave Seller feeling extremely exposed. If you're a Seller or potential Seller, you aren't alone! And if you're on the buying side, take a moment to read this sidebar so you can sensitize yourself to the worries and fears of Sellers.
Sellers feel vulnerable because every decision they've made throughout their careers â good, bad, and everything in between â is fodder for discussion. Every problem, every wart, and every misstep that Sellers would rather forget get rehashed and brought to light. Sellers often have to explain and discuss embarrassing decisions and poor investments. It's the ultimate mea culpa for many business owners.
But Sellers can comfort themselves with the fact that they aren't the only ones to go through this process. Buyers are like doctors: They've seen it all or will at least pretend like they have.
Sellers afford themselves some level of safety by remembering the following tips:
Hire a capable intermediary:
As I discuss in Chapter 5, an intermediary often acts as hand-holder for the business owner and serves as a valuable buffer. An intermediary can make the initial overtures without tipping off the fact that a certain company is for sale until a confidentiality agreement is in place, whereas the mere act of a Seller approaching the Buyer sets off the alarms.
Keep your cards close to your vest.
Sellers can protect themselves through the slow, gradual release of information. Each divulgence has its time and a place.
Assume the position:
At some point, Sellers have to just get over their shyness and prepare themselves to feel as if they're being paraded naked through town, poked and prodded, and generally abased and abused. It isn't pretty, but it's what happens!
Buyers, be cognizant of these feelings, too. Be gentle! Buyers should only ask for documents and information needed to close the deal.
Chapter 9
Properly Expressing Interest in Doing a Deal
In This Chapter
Delving into the indication of interest
Going steady with exclusivity
T
he indication of interest (also known as the indication or IOI) is a key landmark in any business sale. This document provided by the Buyer suggests a valuation range that he is willing to pay for a company. Typically, a Seller receives indications from numerous Buyers. If the Buyer's indication is acceptable, the next step is for her to attend a management meeting (see Chapter 10) and submit a letter of intent (LOI â see Chapter 13).
Think of the indication as akin to a father asking his daughter's date, “What are your intentions with my daughter, young man?” The indication provides an overview of Buyer's intentions and sets the stage for what the final deal will (well, may) look like.
An indication may sound like a teaser (which I cover in Chapter 7), and in some ways it is. A teaser is compiled by a Seller (or a Seller's intermediary); an indication of interest is created by the Buyer. Essentially, the indication is the Buyer's teaser. The teaser is document (often anonymous) that explains the basics of the company for sale: products, customers, revenues, profits. The indication isn't anonymous; it's a specific Buyer's first volley, expressing the Buyer's interest in a written and therefore somewhat formal medium.
In this chapter, I introduce you to the ins and outs of indicating interest in doing a deal.
Understanding the Indication of Interest
As a rule, I don't allow a client to meet with a Buyer until I know that Buyer's intentions. An
indication of interest
is simply a quick way for the Buyer to say to the Seller, “We're interested in doing a deal.” The document goes on to say, “Based on the information you've provided us, we're interested in buying your company and are willing to pay a price somewhere between X and Y.” The key component of the indication is the valuation range. But other considerations lurk in this short and quick document.
Even though the indication isn't a binding offer and likely contains some legal-weasel words about it “not constituting an actual offer,” the mere existence of the indication helps elevate the offer to something more substantial than a simple discussion. Putting words on paper is a powerful thing.
Putting your indication where your mouth is
Although an indication of interest isn't a binding offer, it's an important step that shows Buyer is willing to do something. Granted, that “something” is only typing out a page or two of mostly boilerplate text, signing that document, and e-mailing it to the other side, but it's still action.
An indication of interest is a way to separate the wheat from the chaff. Because people often take the path of least resistance, “doing something” means challenging the status quo, so given the choice between risking the wrath of their bosses by trying to break the boss's
stasis
(inaction), employees often elect to do nothing. It's easier that doing something and reduces the chances of getting fired by making an acquisition that fails.
When Buyer does take the time to submit an indication, Buyer is now signaling both his ability and his willingness to break through the chains of stasis. Someday, that may even involve real work, such as getting on an airplane, visiting a site, having meetings, and negotiating the final deal.
The other reason indications are so important is that for most businesspeople, saying you're going to do something, shaking someone's hand, or e-mailing an indication invokes the honor system where your word is your bond. You move from the purgatory of stasis into the arena of effort and work. You stir your own psyche into action.
Believe it not, many people in business are unwilling (or unable) to take concrete steps forward and make decisions. These are timewasters. Although not the nominal intent of the document, the indication of interest can help cull the herd of timewasters and pretenders and provide the Seller with a concise group of Buyers willing (on paper, at least) to move forward.
Sellers prefer to get a quick “yes” or “no” answer from prospective Buyers. After contacting Buyer, Seller much prefers to either receive an indication of interest or a quick decline. The worst are the time-wasters who never respond (I call them zombies â the living dead). If you're a Buyer, have the common courtesy to always close the loop with any prospective Seller by giving a timely “yea” or “ nay” answer.
Sellers want to receive as many indications of interest as possible. The actual number is a function of a few factors:
The quality of the company/opportunity
The thesis in the offering document (refer to Chapter 8)
The quality of Seller's intermediary (that is, how good a job he does at generating interest)
The strength of Seller's target list (see Chapter 6)
If a company is solid in all these categories, Seller should receive five to ten indications.