Mergers and Acquisitions For Dummies (26 page)

Buyers of troubled companies shouldn't let Sellers repay all creditors. Instead, Buyers should take complete control of the situation, ask Sellers to submit a complete list of all the business's creditors, and directly pay all outstanding debt of the business at closing.

The business has operating losses

If a business has operating losses, Seller is wise to ask Buyer to pay for the assets of the business, which may have more value than the business. Sellers are strongly encouraged to speak with their accountants and lawyers before pursuing this course of action.

Another method of selling a business with losses is to determine the
contribution,
essentially revenues minus direct costs associated with those revenues (typically cost of goods sold, salespeople, marketing, and so on).

Say Seller has $30 million in revenue and $32 million in costs, resulting in $2 million in losses. Assume the direct costs associated with those revenues is $22 million. Therefore, the total nonsales and marketing administrative costs are $10 million ($32 million – $22 million). In this example, Seller would provide $8 million in contribution ($30 million – $22 million = $8 million) to Buyer, assuming Buyer has sufficient existing administrative overhead to absorb Seller without needing Seller's $10 million of nonsales and marketing administrative costs.

In this example, the question Seller should ask Buyer is, “What value does my company's $30 million in revenue and $8 million in contribution have to your company?”

For the right Buyer, all or most of Seller's $8 million in contribution would go to the bottom line. Even if Buyer figures it would need $7 million in overhead to handle Seller's revenues, that still leaves $1 million that would fall to the bottom line. Any investment banker worth his salt should be able to make that case!

Chapter 5

With a Little Help from Your Friends: Working with M&A Advisors

In This Chapter

Noting advisors you need when buying or selling a company

Establishing effective communication with advisors

R
ingo Starr nailed it. Well, actually John Lennon and Paul McCartney nailed it; Ringo just sang it. But it's true: Everyone needs a little help from his or her friends, whether those friends are genius writers of timeless pop music or the lawyers, accountants, and business advisors who help you engage in M&A activity. This chapter helps you pinpoint those advisors and ensure strong communication.

Choosing Wisely: Identifying Ideal Advisors

Whether you're a Buyer or Seller, successfully completing M&A transactions requires a skilled team of advisors who have negotiating experience, the right temperament to deal with many different personalities, and the willingness to listen to you whine and pout.

At the core, a deal is very simple: A Buyer gives a Seller money or some other store of value in exchange for a company. But a deal isn't just about numbers; it's about the personalities of the Buyer and Seller. Those personalities, along with the myriad motivations, needs, and wants on both sides that go hand in hand with putting together a deal, are what make completing a deal complicated.

The M&A deal-maker (Buyer or Seller) should be a
generalist
(have a broad knowledge of all the deal's aspects). The advisors should be the specialists for specific issues, such as accounting or negotiating business or legal issues.

Ideally, your deal advisors should have the following traits:

Depth of correct experience:
Clearly the most important aspect of any advisor is his experience! But don't stop simply at area of expertise. In addition to being an expert in law, accounting, tax issues, or whatever, make sure the person is an expert in M&A deal-making. For example, the attorney who wrote your will or disputed your property taxes may not be the person to advise you during an M&A transaction because that lawyer's professional experience probably doesn't translate to M&A prowess.

Confidence and self-assuredness:
You don't want an advisor who's a pushover. You need someone with a backbone, someone who's willing to challenge you and tell you when you have a bad idea. After all, if your advisor can't or won't tell you your idea is bad, how can you know when you legitimately have a good idea? Challenging you is just half the equation, of course; your advisors should be able to stand up to the other side as well. Wavering is fine in your gelatin, but it's a poor quality in an advisor, especially in M&A.

Tact and professionalism:
Your advisor shouldn't be so self-confident that he forgets to be polite. Negotiations during the sale of business can often become contentious and frustrating, thus devolving into name- calling and recrimination. An M&A professional should always refrain from letting business decisions and discussions become personal.

Ability to serve as a sounding board:
A good advisor should be able hold your hand (figuratively, of course) as you navigate the ambiguities of M&A. You also want an advisor who can offer you a shoulder to cry on when things get difficult or frustrating, an ear to listen when you vent, and a firm hand to slap you back into reality when you need it.

Logic and reason:
Negotiating doesn't mean forcing your will upon the other party. It involves understanding the needs and wants of the other side and working together, in good faith, to craft a mutually beneficial agreement. The ability to reason and logically explain your rationale is a key consideration for an advisor, and someone adept at the Socratic method is ideal.

The
Socratic method
is a process of using questions and answers to determine whether ideas, suggestions, and so on are logical and reasonable.

Calmness:
Advisors need to be calm, cool, and collected rather than prone to being overly emotional. (Think the Fonz, not Richie Cunningham.) Emotions can run hot in mergers and acquisitions. A company often represents a Seller's life's work, and dissecting that through the M&A process often makes Sellers feel open and vulnerable as they look back on mistakes they may have made and how those errors are affecting the proceedings. Buyers worry about financing and whether they're making a good buy; a bad acquisition can ruin a career. When you're in that kind of state, a team full of drama queens isn't very helpful.