Mergers and Acquisitions For Dummies (40 page)

Average sale size:
Some Buyers want to acquire companies that make large sales. The larger the average sale size, the faster/more easily the company can grow.

Recurring revenue:
Similar to average sale size, the holy grail of
recurring revenue
(revenue that occurs over and over again after making the initial sale; think of your cellphone bill) helps a company grow. A company doesn't need to have 100 percent recurring revenue; the more the better, of course, but any amount of recurring revenue is worth mentioning in the teaser.

Revenue growth:
A company with growing top-line revenue usually has growing bottom-line profits.

Profitability:
The only thing better than a highly profitable company is a highly profitable company that's growing.

Proprietary whatever:
If the company has proprietary software or processes — something that the competitors don't have — that becomes a potential selling point.

The items in the list are just some examples. The teaser should highlight whatever makes the company special and different. You can find an example teaser in this book's appendix.

Executing a Confidentiality Agreement

If a Buyer is interested in seeing more after reading the teaser (covered in the preceding section), the Seller should execute a confidentiality agreement with the Buyer.

A
confidentiality agreement,
or CA (also known as a
non-disclosure agreement
or NDA), is an arrangement where both parties agree to share information with each other but to refrain from sharing the information with outsiders.

They also promise not to divulge the fact that discussions are ongoing. In other words, if you sign a CA, you agree that you can't even talk about the talks!

The CA isn't just a piece of paper or some perfunctory step in the M&A process. It's a serious legal document, and you need to treat it as such. Signing a CA means you have a legal and ethical obligation to keep your mouth shut.

Perusing the CA's contents

Here are the key aspects of a confidentiality agreement:

Confidentiality:
This one seems like a given, but it's nice to get this agreement down on paper.

Make sure the agreement excepts information already known, such as public information or general information, from the confidentiality requirement.

Use of materials:
The CA specifies that any materials exchanged during the M&A process are for evaluation purposes only. In other words, don't use the evaluation materials to, say, write your own business plan or create a TV sitcom.

Disclosure of materials:
Despite a pledge of confidentiality, the CA also explicitly states who the parties are allowed to disclose information to, such as outside advisors. Each party agrees to be responsible for any breach that its advisors cause.

Who's covered:
A CA specifies the identity of Buyer and usually includes language stating that Buyer can inform employees and advisors (lawyers, accountants, investment bankers, and so on) of the transaction and share information with these advisors. Buyer agrees to inform these other employees or advisors about the CA and be held responsible for any breach of confidentiality by these employees and advisors. Check out the later “Keeping the Cat in the Bag: Advice for Buyers” section for more.