Mergers and Acquisitions For Dummies (39 page)
Read Mergers and Acquisitions For Dummies Online
Authors: Bill Snow
Letter of intent:
I like to have as many letters of intent as possible, hopefully at least five.
Purchase agreement:
This entry is the ultimate goal! One lucky target with whom you're hammering out a purchase agreement gets this designation.
At a glance I can tell where I am with each target. I can also very easily add up how many teasers I've sent, how many books are being reviewed, and how many targets are stuck at the left-message step.
I keep a similar spreadsheet when buying companies, with a few minor differences. For example, the teaser sent and offering document sent categories become teaser reviewed and offering document reviewed.
Reviewing a sample call-tracking system
When making my calls, I record every conversation and e-mail in our customer relationship management system (CRM). I also set up a spreadsheet such as the following so that I can keep quick tabs on the status of each target. Depending on your CRM system, you may or may not need to set up a spreadsheet.
Purchase Agreement | 1 |
Letter of Intent | 5 |
Management Meeting | 6 |
Indication of Interest | 8 |
Book Sent | 33 |
Teaser Sent | 57 |
Conversations | 99 |
Left Message | 11 |
Sent E-mail | 5 |
No Contact | 0 |
In Contact w/Parent | 18 |
In Contact w/Broker | 0 |
In Contact w/Subsidiary | 4 |
Not a Fit (no contact) | 8 |
Total | 145 |
In the example shown nearby, I start the process with roughly 120 targets. As you see, the total number by the end of the process grows to 145. That number is a bit inflated because I add 18 new contacts as I make my calls and discover the decision-maker is at a parent company. At another four companies, I started with the parent company but ended up speaking with a subsidiary. These companies are essentially duplicates.
Eight of these companies prove to an inappropriate fit, and no calls are made. In five examples, I'm unable to get the decision-maker on the phone, so as a last gasp I send an e-mail to the general e-mail box of the company. Unsurprisingly, nothing comes of those five e-mails. In 11 cases I leave a voice mail (multiple voice mails, actually) and never receive a reply call.
For those of you scoring at home, that's 22 targets that are duplicates (granted, I add them as I make calls) and another 24 that aren't a right fit or don't respond to my overtures.
Of the 99 targets I speak to, 57 request a teaser, 33 review the offering document, and 8 submit offers. We accept six of those offers and conduct management meetings with those groups. Five of those companies submit LOIs, and from all of that, we close a deal with one Buyer.
As you can see, having a sizeable-enough targets list (which I cover earlier in the chapter) is vitally important. In this situation, relying on a random sample of one would be risky; we may not be able to close a deal.
Part III
Starting the Deal on the Right Foot
In this part . . .
S
elling or buying a business involves numerous critical checkpoints, so this part covers the early milestones. Chief among these checkpoints is the offering document, otherwise known as the deal book. Also important is the issue of confidentiality: how to ensure it and what to do if someone breaches it. I discuss the documents and methods Buyers use to signal their interest to Sellers, and I provide insights and tips for meetings between Buyers and Sellers.
Chapter 7
Assuring Confidentiality
In This Chapter
Enticing Buyer interest with a teaser
Securing a confidentiality agreement
Avoiding confidentiality breaches (and taking care of any that occur)
E
lmer Fudd had the right idea; the wabbits surely would've scattered if he'd announced his intention to shoot up the forest. Similarly, broadcasting the details of an ongoing M&A deal can have disastrous effects (especially if you're the Seller). That's why confidentiality is so important in mergers and acquisitions. In this chapter, I introduce you to the methods Buyers and Sellers utilize to assure confidentiality.
Tempting Buyers with an Anonymous Teaser
A
teaser
is an aptly named document: Its intent is to give a Buyer just enough information (the product, the customers, the problem the company solves, and some high-level financials) to make him want to learn more. Another aspect of the teaser is that it's (usually) anonymous. Most often, a Seller's M&A advisor (investment banker or business broker, usually) is the person who forwards the teaser to a Buyer.
I don't recommend sending teasers to Buyers without initially phoning them to have a conversation to gauge whether they have any interest in the opportunity. This method keeps me from wasting my time and theirs. Also, speaking with Buyers means they'll be expecting your teaser and will most likely give it proper consideration instead of considering it unsolicited junk mail. Of course, I sometimes make an exception if I have a long-standing business relationship with a particular Buyer who knows me well and will take a look at my e-mail because I've already established my credentials as a professional, serious business person. (Those who know me, stop rolling your eyes!)
If, after reviewing the teaser, the Buyer isn't interested in learning more about the company, the advisor hasn't disclosed the fact that a specific company is for sale. No names are divulged until the Buyer signs a confidentiality agreement (CA).
Teasers are obviously not anonymous if an employee of the selling company contacts Buyer. Using an intermediary (see Chapter 5) is imperative if Seller wants to maintain anonymity until a confidentiality agreement is in place. I cover confidentiality agreements later in this chapter.
Anonymity is another important facet of the teaser. If a competitor learns that a company is for sale, it may use that information to spook the common prospects and even steal existing clients of the selling company. Also, all things being equal, if you don't need to give up a bit of information, why should you?
Another important reason for the teaser is that a slow release of information is often better than dumping everything in Buyer's lap all at once. If Buyer is inundated with information, he may not be willing to dig in and find the reasons why he should pursue a deal. It's analysis paralysis. Releasing information slowly makes moving to the next step easy for Buyers.
Keeping it short and sweet
Brevity is the soul of a well-written teaser, so keep it to one page. The reader needs to quickly understand what the company does. The teaser doesn't need to delve into details; that's what the offering document is for (see Chapter 8). The teaser just needs to impart the basics.
Sellers, get to the point! The teaser should only provide enough information to spark the Buyer's interest. Don't waste time reconstructing the development of your industry or trying to impress the reader with your encyclopedic knowledge of this or that. Get to the salient points. Write it so that your mother can understand it.
Buyer isn't a “black box” that automatically and immediately processes a huge amount of data. Buyer is a person or a group of people who need time to process that data. Providing an overload of data will most likely result in Buyer not even bothering to wade through it; he has tasks he can do that require less effort!
Including high-level financial info only
In the spirit of brevity (see the preceding section), the only financials a teaser needs are revenue and EBITDA. (If a company has an excess of add backs â see Chapter 8 â the teaser should use adjusted EBITDA.) Some industries or situations may require slightly more financial information, such as gross profit of EBIT or other specific statistics (number of customers, units sold, and so on).
A teaser should have three to five years of historical financial recap plus three to five years of projections. For ease of use, the teaser's income statement should also show expenses as a percent of revenue.
Sellers, don't go overboard. Err on the side of keeping it simple. If the statistic doesn't add anything, don't put it in the teaser. Remember, Buyer may or may not be an expert in your specific industry, so give him only what he needs.
Touting key selling points
These selling points are the key strengths of the business. Companies have certain key discrete value propositions that differ from company to company and from industry to industry. Here are some examples:
Proprietary relationships with vendors:
If a company is the only company (or one of a limited few) that can buy from a certain vendor, that's a selling point you can trumpet in the teaser.
Nature of customer relationships:
For some Buyers, acquiring companies with Fortune 500 relationships is a main consideration. For others, selling to consumers or middle market companies is the key aspect.