Mergers & Acquisitions Articles

Article / Updated 12-05-2023

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. 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, have spent their careers building a company, so the process of selling a business is often something new and foreign to them. Business with revenues between $250 million and $1 billion are considered middle market. Those between $20 million and $250 million are lower middle market.

Cheat Sheet / Updated 05-16-2023

A merger or acquisition is a huge deal for any business, so you want your mergers and acquisitions (M&A) transaction to be a success from start to finish. Understanding the keys to M&A success helps you see the process through from step one to closing and integration.

Article / Updated 04-27-2023

Valuation is always the million-dollar question — well, often the multimillion-dollar question — in a merger and acquisition (M&A) negotiation. To get past the valuation impasse, here are a few ideas on ways Buyers and Sellers can settle valuation disagreements and move forward to a closing. Payments over Time If Seller wants a certain price for the company, Buyer may be willing to pay that price over a period of time. Buyer has the benefit of the time value of money (today’s dollars are worth more than tomorrow’s dollars, so paying today’s debts with tomorrow’s dollars is a benefit to Buyer), and Seller gets to tell everyone that he was able to get the valuation he wanted. Earn-out The venerable earn-out is a favorite deal component for Buyers because it allows the Seller to prove the company’s profitability. If the company achieves the goals Buyer and Seller agree to, Seller gets the earn-out. Keeping the earn-out metric simple and easy to measure reduces the chances of a dispute down the line. Earn-outs can be based on revenue, earnings, gross profit, or future year valuation. Partial buyout If a Buyer and Seller can’t agree on a valuation for a full buyout, a partial buyout is often the solution. Seller retains an ownership interest and can sell her remaining shares at some future date and hopefully at a higher valuation. In M&A lingo, this later sale is called a second bite of the apple. Most Buyers want a control stake in the business, meaning they acquire more than 50 percent of the company’s equity. Depending on the situation (and how the purchase agreement is written), however, Buyer may be amenable to buying a minority position. Sellers who retain a minority position should make sure a put option is part of the deal so that they can sell the remaining equity to Buyer at some future date at some future calculation. If Buyer ends up taking a minority position, Buyer should make sure the deal contains a call option; in other words, Buyer can buy the remaining equity from Seller at some future date at some future calculation. Stock and Stock Options Stock can be a great way for a Buyer to help finance an acquisition. If Buyer and Seller disagree over valuation, Seller may be receptive to taking stock in the parent company. The situation is often win-win: Buyer has to lay out less cash at closing, and Seller has the upside potential of stock appreciating in value. Buyer should carefully consider the dilutive effect (owning less of the company) that comes as a result of providing equity to Seller. Also, Seller should consider the marketability of that stock; in other words, does the stock trade on a public exchange, and is the average daily volume sufficient enough to allow Seller to unload his position? Hire the Seller Another way Buyers can provide Sellers with added dollars is by including a consulting contract in the purchase agreement. Buyers have the benefit of the Seller’s advice and counsel, and Sellers get the benefit of increased deal value. If a Buyer wants a Seller to stay on board for some period of time after the deal closes, offering Seller a bonus for not leaving can be another way to bridge a valuation gap. Buyer gets the security of knowing he won’t have to pay the bonus if Seller resigns early, and Seller knows she’ll receive added money by simply staying put. Combo package Be creative! These ideas aren’t mutually exclusive. You can offer a little more earn-out and less stock, or a larger note and a consulting agreement. You can increase the length of the earn-out term or consulting agreement. The only limit is your creativity. A creative deal-maker has unlimited ways to bridge a valuation gap.

Article / Updated 07-18-2022

All M&A deal-makers need some extra help, so these resources, advisors, and private equity firms may come in handy. M&A groups, associations, and networking organizations M&A, as with most industries, has some networking and professional associations. If you’re thinking about pursuing a career in M&A, acquaint yourself with the following groups: Alliance of Merger & Acquisitions Advisors Association for Corporate Growth Global M&A Network Institute of Mergers, Acquisitions, and Alliances DealStream M&A virtual data rooms M&A deal-makers today utilize online data rooms for due diligence. Here are few of the commonly used rooms: Firmex Merrill Datasite Share Vault V-Rooms Periodicals The following sections help you satisfy your nose for news. The first section lists some good sources of M&A-specific news, while the second provides some sources for more-general business news. M&A periodicals Buyouts The Deal Deal Reporter Debt Wire Dow Jones LBO Wire Mergers & Acquisitions Merger Market Thompson Reuters Business periodicals Barron’s Bloomberg CFO Financial Times Forbes Fortune Inc Investor’s Business Daily Wall Street Journal M&A Advisors A deal-maker needs suitable counsel from lawyers and accountants. Some firms that focus on M&A transactions, especially for the middle market and lower middle market, include the following: Accounting and auditing Baker Tilly BDO Seidman Crowe Horwath Deloitte Ernst & Young Grant Thornton KPMG PriceWaterhouseCoopers RSM McGladrey Law firms Baker McKenzie Horwood Marcus & Berk Morrison Foerster Quarles & Brady Ulmer Berne Vedder Price Winston & Stawn Private equity firms Private equity is one of the usual suspects when it comes to finding a Buyer for a company. The United States alone has hundreds of private equity firms. Here are just a few of them. Audax Group Beecken Petty O’Keefe & Company Eos Partners Frontenac Company Gemini Investors Geneva Glen Capital Harbour Group H.I.G. Capital Huron Capital Partners LaSalle Capital Group Linsalata Capital Partners Mason Wells McNally Capital Monomoy Capital Partners Pfingsten Partners Prairie Capital Prospect Partners Saw Mill Capital Sverica International Svoboda Capital Partners Trivest Partners Wynnchurch Capital Agencies that regulate mergers & acquisitions An M&A advisor should be registered with the Financial Industry Regulatory Authority, Inc (FINRA). The Securities Investors Protection Corporation (SIPC) is a federally mandated entity charged with protecting investors from fraud, so you should be familiar with it as well. Online business references A few good sources for business information include the following. These sites don’t necessarily focus on M&A, but they provide great information and research tools for M&A-related work nonetheless. Biz Stats Capital IQ Deal Logic Ibis World Investopedia Avention US Census Bureau – Business & Industry

Article / Updated 03-26-2016

After you successfully acquire a company, you have to integrate it into your operations. Integrating acquisitions can be challenging; successful integration involves merging several aspects of the companies. Some considerations for successfully combining an acquired company with a parent company include the following: Product mix: One of the first integration considerations for Buyer is dealing with the product and service offers of the acquired company and the parent company. Some acquirers largely leave the product mix alone, while others will cut (and perhaps sell off) various products due to customer overlap, low quality, low sales volume, or simply because the product doesn't fit with Buyer's vision for the combined companies. Operations: One of the key reasons to make acquisitions is to realize costs savings in operations. An acquisition can mean Buyer is able to negotiate better terms with vendors and banks, condense operations into fewer locations, and institute improved accounting and inventory standards at the acquired company. Personnel: After a deal closes, Buyer has difficult decisions to make about the personnel at the acquired company, including whether to retain the management team or insert her own team to run the acquired company. Buyers may be able to realize savings by eliminating duplicate positions. Personnel decisions are sensitive issues, so handle them with compassion.

Article / Updated 03-26-2016

An M&A deal is the biggest deal of your life, so completing a successful transaction is key. Knowing a few key M&A tips — whether you're merging or acquiring — increases your odds of successfully completing an M&A deal. Secrets to success include the following: Retain capable and experienced M&A advisors. You can't complete this transaction alone, and a business owner who represents himself in a life-altering deal is asking for trouble. You need a dispassionate advisor, someone who has been through the process before and can guide you to a close. This advice is especially true if you're selling a business. Don't allow yourself to get too high or too low during the process. M&A is a roller coaster ride, with ups and downs around every turn as a deal you think is wrapped up one day falls apart the next day . . . only to come back together on the third day. You have to be able to keep an even keel. Check emotion at the door. Despite the frustrations of M&A, you need to keep your emotions in check. Yelling and screaming don't get the deal done. Logic, facts, and a cool demeanor do. Don't jump at the first offer. Ideally, you want to have multiple offers before deciding which deal to accept. Having options increases your chances of getting a great deal. Don't hold out for a marginally better offer. If you want to do a deal and the offer is sufficient, take it. Part of something is better than all of nothing, which may be what you get if you wait around for the perfect deal that never comes. Know when your position is weak or strong. Overplaying a strong hand can chase off otherwise suitable deals; misplaying a weak hand can scuttle the deal and perhaps your career! The market is the best way to determine your company's valuation. In other words, business appraisal services have limited value. Get out in the market and have actual conversations with actual Buyers.

Article / Updated 03-26-2016

Going through an M&A deal can be an intimidating process (for both the mergers and acquisitions teams), but that process thankfully follows some concrete steps. Here's the step-by-step process that nearly every M&A deal follows: Compile a target list. You can't buy or sell a business unless you have a list of suitable Sellers or Buyers. Contact the targets. Making a phone call and discussing the target's interest is important. That discussion allows you to gauge the target's interest level and whether proceeding makes sense. Knowing how to make a pitch is an art, and believe it or not, being a Buyer is far more difficult than being a Seller! Send/receive a teaser. The teaser (sometimes called an executive summary) is the document Seller sends to Buyer to give Buyer just enough information (the product, the customers, the problem the company solves, and some high-level financials) to make Buyer want to learn more. The teaser is usually anonymous; that is, Buyer doesn't know which specific company is sending the document. Sign a confidentiality agreement. Both sides agree to keep the deal discussions and materials confidential. Send/review the confidential information memorandum (CIM). The CIM or deal book is the Seller's bible and provides all the information (including company history, product descriptions, financials, customer info, and more) Buyer needs to determine whether to make an offer. Submit/solicit an indication of interest (IOI). Buyer expresses interest in doing a deal by submitting this simple written offer, most often with a valuation range rather than a specific price. Conduct management meetings. Buyer and Seller get a chance to meet face to face. In these meetings, Seller provides Buyer with an update of the business and guidance for future performance. Additionally, both sides gauge how compatible they are. Ask for or submit a letter of intent (LOI). Based on the material in the CIM and on the updates from the management meetings, Buyer submits this detailed offer with a firm price. Conduct due diligence. In the due diligence phase, Buyer examines Seller's books and records to confirm everything Seller has claimed. Write the purchase agreement. Buyer and Seller memorialize the deal in this legally binding contract. Close the deal. Closing is rather anticlimactic: Both sides sign lots of papers, Buyer gives Seller the money, and Seller gives Buyer the company. Handle any post-closing adjustments and integration. Closing isn't the end of the deal. Buyer and Seller usually have some post-closing financial adjustments, and Buyer has to integrate the acquired company into the parent company or make sure it can continue to operate as a standalone business.

Article / Updated 03-26-2016

If you’re thinking about chasing acquisitions or selling your business or merging with another, understanding where your business fits in the market is important. The distinction has to do with size, 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. Definitions vary, but for all practical purposes, you can divide the market into sole proprietorship, small business, lower middle market company, middle market company, and large company (and beyond). 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 million to $500 million Investment banker 3,000 Large company (and beyond) $500 million+ Bulge bracket investment banker 3,000 Source: Census Bureau 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. 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. 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.

Article / Updated 03-26-2016

Seller financing — why would a Seller do such a thing? Oh, that’s right: to help get am M&A deal done! A Seller willing to provide financing to a Buyer gains the benefit of being able to move on to the next phase of life — retirement, hobbies, charity work, or perhaps starting another business — while receiving consideration as the result of the sale. Although cash is always king, a Seller who wants to get out of running the business may find that extending financing (in other words, accepting a promise from Buyer to pay Seller later) helps achieve that goal. Seller financing also can be a way for a Buyer and Seller to conclude a transaction where Buyer is having difficulty obtaining outside capital. Instead of paying back a third-party lender (a bank, for example), Buyer pays back Seller. Seller is taking on the role of the lender. The typical forms of Seller financing include Seller note: Seller effectively loans money to the Buyer in order to help with the financing of the acquisition. Money doesn’t flow from the Seller to the Buyer and then back again. Instead, Seller agrees to allow Buyer to pay a certain portion of the transaction price at some later date. Typically, these notes earn interest, either paid on a regular schedule (such as monthly, quarterly, or annually) or accrued and added to the loan, thus repaid when the loan is repaid. Earn-out: Any kind of payment tied to some future measure of the acquired company’s performance is an earn-out. If Seller believes the company is worth more because she believes future earnings will reach a certain level, Buyer may agree to pay that higher price if the company achieves that certain goal. Earn-outs may be based on top line revenues, operation profit, EBITDA, gross margin, gross profit, sales increases, and so on. If you agree to an earn-out, keep it as simple as possible. Overly complicating an earn-out is a sure recipe for a disagreement. For Sellers, the best measure of an earn-out may simply be sales. Post-closing, Seller won’t have any control over expenses or allocated expenses, so any target based on profitability will be tough to measure. Delayed payments: Because time is effectively a part of consideration, delaying payments may be a way for Seller and Buyer to bridge a valuation gap. Simply allowing Buyer to make payments over time affords the Buyer with the ability to pay the price that the Seller wants to receive. Although as Seller you’d prefer $10 today, perhaps you’d be inclined to take $1 per week for the next 15 weeks. Consulting agreement: An effective way to increase the deal value to Seller is to offer her a consulting agreement that pays her money over some period of time. Any or all of these plans may be good options for a highly motivated Seller who trusts Buyer to hold up his end of the bargain. As a Seller, accepting any kind of contingent payment involves an element of risk because you can’t be as sure you’ll be paid in full as you can when the cash is in your hand at closing. To mitigate some of that risk, demand some sort of premium for accepting it by making the contingent price higher. Simply put, pay me $10 million today, or $5 million today plus another $10 million in three years.

Article / Updated 03-26-2016

In certain circumstances, Buyer may want to use stock to pay for all or part of an M&A deal. And in certain circumstances, Seller may be wise to accept that stock, though she should speak with her tax advisor about the tax ramifications of that arrangement. Issuing stock allows Buyer to make an acquisition without using cash or borrowing money (or by using less cash and borrowing less money). The downside for Seller is that the stock obviously isn’t the same as cash. Seller has to convert that stock into cash by finding a Buyer for it. Although Buyers may be tempted to issue more stock as a way of financing an acquisition, they should carefully consider the effects of diluting their stock in that way. Is issuing more stock really the best course of action, or does borrowing money to finance the acquisition make more sense? The pluses and minuses of accepting stock as a form of consideration really boil down to the issue of liquidity: How easily can Seller sell that stock? Here are a few issues Sellers should consider when thinking about accepting Buyer’s stock: Is the stock traded on a public exchange, and if so, which exchange? If stock isn’t publicly traded, the owner of that stock may be severely limited in his ability to convert that stock into cash. If Seller doesn’t anticipate needing that cash anytime in the foreseeable future, perhaps she can risk owning illiquid stock. But accepting illiquid stock doesn’t make sense if Seller needs the cash soon. Sellers looking at accepting nonpublicly traded stock should consider Buyer’s prospects of eventually going public. If those prospects are limited, Seller may be in for a long-term ownership position in a private company. If Buyer’s stock is publically traded, the next thing to remember is that not all stock is equal. Accepting stock traded on a major exchange (NYSE or NASDAQ) is far more desirable than accepting stock traded over-the-counter (OTC) or on the Pink Sheets because the major exchanges have far stricter listing requirements. What is the average daily volume? Average daily volume (the average number of shares traded per day over a period of time) is an important consideration, too. If a stock is thinly traded (has a low average daily volume), the Seller who accepted it may be limited in her ability to sell that stock. For example, say Seller receives 10 million shares of stock as part of the consideration for selling her business. If the stock trades at $1 per share, Seller has $10 million worth of stock. However, if the average daily trading volume is, say, 10,000 shares, she essentially has an illiquid stock. Putting in a trade for all 10 million shares results in crashing the share price. If only 10,000 shares (on average) trade hands per day, the odds that she can sell 10 million shares in a short period of time are virtually nil. On the other hand, a stock with a higher trading volume is usually easier to sell. In general, the average daily volume is higher for stocks listed on NYSE and NASDAQ than for stocks listed OTC or on the Pink Sheets. Stock (public or nonpublic) received as a result of a business sale is usually restricted, meaning that the owner of that stock can’t sell the stock for some period of time. That length of time depends on securities regulations. In order to help prevent a crash of the stock price, Buyer may ask Seller to agree to a restricted period longer than current securities laws. Even if securities law restrictions no longer restrict a stock, a thinly traded stock is effectively a restricted stock (it’s pretty hard to sell a stock that no one’s buying).