Common Questions about M&A

About Using Advisors

Every day business owners attempt to sell their companies without an advisor. When they do succeed, they have almost always left large sums of money on the table. More often than not, the deal never closes despite a major investment of time. Selling your business is the most complicated event of your professional life. There are far too many pitfalls involved with trying it alone to enumerate; however, you can rest assured that unless you talk to all the logical buyers for your business simultaneously and share the right information, you will not receive the best offer. Moreover, the smallest mistakes can cost you millions of dollars. All of our clients will tell you: 1.) that they received 20-100% more than they otherwise would have; and 2.) the process is dramatically more time consuming and complex than they ever imagined.

It is a mistake to wait until you are ready to sell your business to hire your advisor. While it is better late than never, the sooner you bring on an advisor, the more value they can add in positioning your company for a sale. We structure our engagements so that it costs you NO more to hire us early, because if we can help improve the value of your business, it is a win-win. One client hired us 7 years before deciding to sell, and we sold the company for over three times what it was worth when they hired us.

Experience is necessary, but not sufficient. The most important criteria is to hire someone who you can trust implicitly. You need to know they put your interests ahead of their own, which is rare in the M&A world. To determine that, speak to past clients. To evaluate capabilities, look at the transactions they have closed, what firms they have worked for, and the advisors’ education.

Although it is counterintuitive, using an advisor whose practice relies on selling companies to the same group of buyers is a bad idea. Industry experts are much closer to the potential buyers for your business than they are to you, since you are a “one-and-done” client. Those buyers might also be current or prospective clients. You need an advisor whose loyalty and commitment to you is uncompromised. We have sold over 100 companies across virtually all industries and know how to position a business in any sector. Contrary to popular belief, finding the right buyers is simple. We subscribe to a database that lists all private equity firms and corporations in the country, and includes all the deals they have completed. This database also includes the companies with sufficient resources to make acquisitions who have not done any deals before. We purposefully do not represent buyers, and we never put our relationship with a buyer ahead of our commitment to you.

A financial advisor such as Jacobs Capital is responsible for managing the sale process, identifying buyers/investors and negotiating and structuring the business terms of the transaction. Other parties are also needed to close a deal. Lawyers are required to address the legal issues, including preparing the necessary documents and agreements. Typically a CPA is required to make sure the deal is structured favorably for the seller from a tax standpoint.

About the Process

There is no standard answer to this question; it depends on a lot of factors, so consult with your advisor. In general, business owners significantly overestimate the problems that arise among employees while a transition in ownership occurs. If the matter is handled properly, disruption can be minimized.

Some key questions to consider include the following:
– Which employees are crucial to the future success of the business, which ones will need to be involved in the sale process, and which ones do not fall into either of those categories? Your strategy for each group may be different.
– Will retaining key employees impact the value of the company to the eventual buyer? Some owners provide incentives to key employees to stay through a transition period, particularly for employees who are not shareholders.
– Is the probable type of buyer in a similar business where there are likely to be redundancies after a merger? Or, is the likely buyer going to need most of the present staff to operate the business?
– What has been your historical relationship with your employees in sharing information on the company?
– Are there other endeavors that could serve as plausible explanations for the activities associated with selling a company? Some owners, for example, tell their employees they are looking for additional capital, which is generally part of the reason for the sale.

We first search our database of over 4000 financial groups that buy companies, and we screen for those that have an interest in companies of your size, in your industry, at your stage of development and those located in your region. We talk with you about logical candidates you may know of and which trade publications may contain names of likely candidates. We then perform independent research using numerous external databases, M&A listing services, and the Internet to identify potential candidates. When our list is complete, we review it with you before any contacts are made.

From the time clients provide us their information through a secure upload portal, all data is encrypted and stored in a secure central repository. Any third party with virtual data room access must sign a confidentiality agreement, and we control and monitor the activity of all individuals in the data room to ensure the highest level of security.

If you are selling your company, you might receive cash, stock of the buyer, a note from the buyer, or a variety of other forms of consideration. Often more than one of these are components of the offer. One common component of a purchase price (particularly when the owner’s role in the future success of the company is important or when the parties have different expectations for the future) is an “Earnout” which is a contract to pay additional sums based upon future events. For example, an earnout might be a 3-year agreement to pay the owners 10% of the profits that exceed a certain amount. The key when negotiating the structure of the purchase price is to fully understand the desires of the owner(s) and the resources and strategic interests of the buyer so the best fit between the two can be achieved.

The process of selling a company is much different than selling other things such as a house. We do not use an “asking price”. Rather, we make a list of all the possible industry and private equity buyers and reach out to all the ones you select on an anonymous basis. Once we receive signed non-disclosure agreements, we get as many of them to engage in our process as possible, provide them all the information they need to establish a valuation, and then have them put their cards on the table first. We host conference calls and site visits as appropriate. Once we have preliminary offers, we create a competitive process to ratchet up their prices and improve other deal terms to discover their highest and best offers before you select the buyer best suited for you. You will never wonder whether you secured the best deal.

We have sold companies in as few as two months, but that was under unusual circumstances. To optimize the outcome requires a thorough process that typically takes about six months.

About M&A Terminology

A strategic buyer is an operating company that would buy your business to further its growth and capabilities. Strategic buyers typically perceive certain synergies from combining your company with theirs. They may be looking to expand into a new market, add new products, access new customers, or increase in scale. They are more likely to make organizational changes after the deal closes, but if they perceive significant profit opportunities from combining the entities, they can afford to pay a higher price.

A financial buyer is an investment fund or individual that acquires companies purely for financial returns. They are more likely to leave the company alone if it is profitable, but will take an active role in the governance of the company if performance fails to meet expectations. Financial buyers generally want to sell the company or take it public in 3 to 7 years to provide liquidity for the institutions and/or individuals whose money they are investing.

Private equity funds come in a variety of shapes and sizes. The main concern of the business owner (besides the value of the offer) should be the cultural fit between the investor and the company’s management. The investor will likely have representatives on the board. Some funds are more active than others in managing the affairs of the business. Some are staffed with former operating executives, while others are staffed with young MBAs. Some specialize in certain industries, while others are geographically focused or more generalists. Each fund has criteria for the minimum and maximum investment. Some like to invest along side of other funds; others prefer to invest solo. Generally, the funds are self-selecting—they seek deals that meet the parameters of your company or they wouldn’t consider the transaction.

A Letter of Intent or a Term Sheet is a document outlining the basic terms of a transaction designed to make sure both parties have a common understanding of what has been agreed to verbally. The terms in the Letter of Intent are generally not legally binding.

The Purchase Agreement is the legally binding document that spells out all the details of the transaction. A purchase agreement can be quite lengthy and involved. It addresses many nuances that business owners are unfamiliar with, so it is important to make sure you are represented by a lawyer who has experience in corporate law involving transactions. You would not let your family doctor perform heart surgery; you need a specialist to help you through what may be the most important transaction of your career.

Due diligence is the process of collecting the information a buyer/investor needs to know to feel secure that they understand your business.

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