Mergers & Acquisitions For Dummies

Title Page
Copyright Page
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 1: Planning to Do a Transaction
Part 2: Marketing the Transaction
Part 3: Selling the Transaction
Part 4: Concluding and Combining
Part 5: The Part of Tens
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1 Planning to Do a Transaction
Chapter 1 Explaining Mergers and Acquisitions
Defining the Term
Seeing How M&A’s Occur
Introducing Important Terms and Phrases
Buyer
Seller
Investment banker
Transaction (also known as the deal)
Consideration
Equity
EBITDA
Adjusted EBITDA
New entity
Rolling equity
Leverage
Seller finance
Closing
Considering the Costs Associated with M&A
Tallying advisors’ fees and other costs
Paying off debt
Making post-closing adjustments
Planning for taxes
Defining Types of Companies
Neighborhood business
Small business
Middle market and lower middle market company
Large company (and beyond)
Chapter 2 Learning M&A Rules and Decorum
Knowing How the Game Is Played
Providing Updates to Employees
When selling a company
When buying a company
Discerning Two Types of M&A Processes
Making a Market in M&A
Mastering the rules of the road for sellers
Examining the rules of the road for buyers
Determining which bid is better
Entering the M&A Zone
Chapter 3 Utilizing the M&A Process
Trusting The Process
Reviewing the M&A Process
Step 1: Create a target list
Step 2: Make contact
Step 3: Send or receive a teaser or an executive summary
Step 4: Execute a confidentiality agreement
Step 5: Send or review the confidential information memorandum (CIM)
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
Chapter 4 Making Sense of the Economics of M&A
Timing the Market
Weighing Microeconomic Factors
Realizing that M&A is supply-side
Coming to grips with a limited supply
Buying a company is extremely difficult
Responding to clarity
Avoiding a “random sample of one”
Reversing roles
Demanding a limited resource
Inflating Valuations
Observing Systemic Issues
Detecting Tailwinds and Headwinds in M&A
Considering interest rates and valuations
Managing the issue of replacement income
Putting Together Your M&A Plan
Setting goals: Sellers
Considering owner options
Running a process: The options
Musing about deal types
Considering the constituents in the seller’s orbit
Getting to know the acquirer
Twisting the knobs
Timing the market: How feasible?
Analyzing life after the transaction
Setting goals: Buyers
Recognizing the components of acquiring companies
Defining criteria for buyers
Buyer’s folly: The Menu approach
Chapter 5 Finding Buyers and Sellers
Collaborating to Build a List
Brainstorming
Expanding (and winnowing) the list
Finalizing the list
Including competitors on your list
Acquiring (or selling to) a vendor or customer
Putting Together the Tools
Tempting buyers with an anonymous teaser
Keeping it short and sweet
Including only high-level financial info
Touting key selling points
Executing a Confidentiality Agreement (CA)
Considering the gist of a CA
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
Contacting Buyers
Finding the right person
Phoning a financial buyer
Phoning a strategic buyer
Scripting your pitch
Treading carefully when approaching competitors
Contacting Sellers
Receiving a call from a seller
Winning a bake-off
Having a thesis when buying
Using a successful script
You’re having a serious conversation! What now?
Getting Past Screeners
“Just send me an email and I’ll find the right person for you”
“We don’t do that kind of thing”
“What is this about?”
“I’m so-and-so’s assistant — I’ll forward your email”
Tracking Your Calls
Part 2 Marketing the Transaction
Chapter 6 Explaining and Influencing Valuation
Pondering the Meaning of Valuation
Seeing valuation as a confluence of various factors
Seeing valuation as more than just price
Seeing valuation as being at the intersection of many variables
Realizing the limits of a valuation report
Comparing Different Points of View
Looking at the business owner point of view
Adopting the investment banker point of view
Opting for a more complete picture
Going for a pro forma valuation
Prioritizing Net-versus-Gross Proceeds
Analyzing a Valuation Report
Looking at transaction comparables
Working with trading comparables
Using leveraged buyout (LBO) analyses
Opting for a discounted cash flow (DCF) analysis
Measuring Returns for the Buyer
Gauging internal rates of return (IRRs)
Looking for the payback
Cutting to the Chase: Give Us the Numbers!
Influencing Valuation
Enhancing valuation
Impacting valuations negatively
Chapter 7 Creating and Reviewing an Offering Document
Naming the Document
Revealing the Offering Document’s New Look
Inspecting the basics of the offering document
Compiling the executive summary
The thesis
The seller’s rationale for seeking a deal
The seller’s deal guidance
Showcasing 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
Describing the market and products
Product/service
Customers and suppliers
Sales and order processing
Customer names
Info about competitors
Doing the Numbers
Compiling historical financials
Including financial projections
Planning for a Smooth Transaction
Finalizing financial statements
Working with accountant-prepared statements
Comparing audits and reviews
Going the compilations route
Dealing with inventory
Compiling a quality of earnings (QoE) report
Digesting a Company’s Financials
Statement of cash flows
Balance sheets
Focusing on the short term
Accounts receivable terms
Looking at the long term
Intangible assets
The income statement
Cost of goods sold
Gross profit
Other income and other expenses
Net income
Losses on the books
Chapter 8 Reading and Writing the Offers
Examining the Indication of Interest (IOI)
Determining the purpose of indicating interest
Including important information
Preamble, platitudes, and buyer background
Unveiling the valuation range
Evaluating the type of deal offered
Addressing the seller’s debt and any other conditions
Providing a bit of legalese
Enthusiastically concluding the IOI
Signaling Sincerity with a Letter of Intent (LOI)
Recognizing the Salient Issues in the LOI
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
Nondisclosure and publicity
Nonbinding agreement
Governing law or jurisdiction
Agreeing to and Extending Exclusivity
Considering exclusivity in preemptive bids
Running out of time: Prolonging exclusivity
Learning how buyers actually come up with bids
Avoiding myopia
Part 3 Selling the Transaction
Chapter 9 Selecting Advisors
Choosing Wisely: Identifying Ideal Advisors
Choosing Inside Advisors
CFO or another financial bigwig
Corporate development personnel
Hiring Outside Advisors
Consulting wealth advisors when you’re ready to sell
Considering an intermediary
Lawyering up on both sides
Accounting and auditing for dealmakers
I’m the taxman!
Recruiting more consultants to the buyer’s team
Technology
Marketing
Environmental
Avoiding Communication Breakdowns
Getting Your Banker Involved
Chapter 10 Hiring an Investment Banker
Examining the Role of Investment Bankers
Making a market
Knowing the difference between a business broker and an investment banker
Appreciating the Most Important M&A Skill
Working with an Investment Banker
Handling compensation
Deliberating the percentage
Tacking on a tail
Looking for chemistry
Timing the Deal: How Long Should a Process Take?
Asking Interview Questions
Asking the Ask Price Question
Checking an Investment Banker’s References
Chapter 11 Arranging Meetings Between Buyer and Seller
Recognizing the Importance of Meeting in Person
Arranging Management Meetings
Assembling the key players
Agreeing on a venue
Setting the meeting agenda
Perfecting the Seller’s Presentation
Gathering the right material
Making the seller’s presentation shine
Preparing Buyers for Management Meetings
Completing a walk-through
Being careful with attendees
Putting away those darn devices
Determining Whether the Meeting Went Well
Chapter 12 Financing the Transaction
Exploring Financing Options
Structuring M&A Deals
Providing cash at closing
Using the buyer’s own cash
Having the buyer borrow money
Having the buyer team up with other investors
Having the buyer seek financial help from the seller
Having the buyer use equity
Rolling equity
Having the buyer use contracts
Assuming debt
Taking a Closer Look at Investors
Contrasting Institutions and individuals
Looking at private equity (PE) firms
Dealing with a family office
Considering a strategic buyer
Going with a fundless sponsor
Keeping it on an individual basis
Striking the Right Type of Deal
Noting the differences between majority and minority investments
Understanding supermajority rights
Buying assets or stock
Explaining how EBITDA impacts deals
Comprehending the cost of capital
Senior debt
Looking at lines of credit
Mezzanine financing
Financing a Problem Child
Debt is greater than purchase price
The business has operating losses
Chapter 13 Learning How to Negotiate Successfully
Knowing Your Position
Being prepared
Reading the other party’s situation
Providing information to the other side
Using Successful Negotiating Tactics
Negotiating with the decision-maker
Bending where you can
Remaining on an even keel
Remembering your ABNs: Always be negotiating
Digging into the nitty-gritty of negotiating
Fessing up when you don’t know
Saying “Here’s the deal that gets it done”
Picking up the phone
Offering a conditional if-then agreement
Understanding that the first who speaks loses
Being unafraid to haggle
Being wary of a bad bluff
Settling Common Transaction Issues
Bridging a Valuation Gap
Using an earnout 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
Including a consulting contract
Avoiding Common M&A Negotiating Mistakes
Surviving Unforeseen Twists and Turns
Putting a deal gone sideways back on track
Negotiating in good faith
Letting the other side win the last skirmish
Dealing with Renegotiation
Comprehending Why Transactions Fail
Part 4 Concluding and Combining
Chapter 14 Confirming Due Diligence
Digging Into the Due Diligence Process
Recognizing the key focal points of due diligence
Reconciling bank statements
Getting the process underway
Allowing enough time for due diligence
Covering the expense
Conveying the due diligence info to the buyer
Running the company during due diligence
Looking More Closely at the Details of Due Diligence
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
Requesting Additional Information
Chapter 15 Documenting the Transaction
Drafting the Deal
Writing the first draft
Redlining the initial draft
Navigating the Final Purchase Agreement
Confirming the name, rank, and serial number of the deal
Determining what’s being sold, for how much, and when
Knowing what to bring to the closing
Reviewing the representations and warranties
Handling seller’s reps and warranties
Dealing with buyer’s reps and warranties
Including mutual promises between the buyer and seller
Securing against loss with indemnifications
The Rise of Reps & Warranties (R&W) Insurance
Determining who pays
Looking at the exhibits and schedules
Chapter 16 Closing and Integrating the Acquisition
Gathering the Necessary Parties
Walking Through the Closing Process
Reviewing the flow of funds statement
Signing the final purchase agreement and other documents
Distributing the funds: Show me the money!
Popping the champagne
Tying Up Loose Ends Shortly after Closing
Allowing time to fully close the books
Making a working capital adjustment
Shifting from Entrepreneurial to Professional
Spreading the news
Telling the seller’s employees about the deal
Making a good first impression
Making a media announcement
Following Through: The Deal After the Deal
Closing the loop on post-closing adjustments
Wrapping up the contingent payments
Maximizing the earnout
Collecting the note
Dealing with the stock
Dealing with Disputes
Handling breaches
Violations of the noncompete and nonsolicitation agreements
Discrepancies with working capital
Breaches of representations or warranties (R&W)
Making claims against escrow
Chapter 17 Ensuring a Successful Acquisition
Planning the Integration
Assembling a buyer’s transition team
Backstopping problems with a bench strength plan
Determining the level of autonomy
Covering the carve-out bases
Planning the first 90 days
Immediately
Within 30 days after the close
Within 90 days after the close
Culling Products and Services
Combining Operations, Administration, and Finance
Handling Personnel: Successful First Steps for New Owners
Addressing cultural differences
Resolving conflict
Remembering who’s in charge: You!
Setting a high bar and being consistent
Picking your battles
Acting like a leader at all times
Making friends
Instituting accountability
Focusing on the customer
Introducing cost-benefit analysis
Communicating rules and responsibility
Recognizing that hard work earns the right to play
Delegating responsibility and authority
Firing people
Part 5 The Part of Tens
Chapter 18 Ten Transaction Pitfalls
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 It a Stock Deal or an Asset Deal?
How Is Working Capital Settled Post-Closing?
Is the Inventory 100 Percent Salable?
Who Pays Off 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 19 Ten Reasons Acquisitions Fail
Overleveraged
Poor Execution
Culture Clash
Fired by Customers
Lack of Synergies
Shoddy Systems
Reporting and Bureaucracy
The Zombie
Responsibility with No Authority
Wrong Management
Chapter 20 Ten Lurking Problems for Sellers
Quality of Earnings and Inventory
The Ask-Price Question
Owner Succession
Rent
Re-Trade
Working Capital Target
Accruals
Parallel Activities
The End-Run Approach
Taxes
Index
EULA