Mergers and Acquisitions For Dummies (45 page)

Real estate

If Seller owns the real estate where the facility is located, she may be interested in selling the business but retaining the property and having the new owner pay rent. This situation is very common and in many cases is Buyer's preferred method. If Seller wants to sell the land as part of the deal, that sale is usually a separate deal.

Use a real estate agent to sell land or real estate; M&A intermediaries (investment bankers or business brokers) aren't usually licensed real estate agents.

Technology

Buyers need to know Seller's computer systems, software, phone systems, Web sites, domain names, and anything else technology related. After all, if Buyer is going to someday run Seller's business, Buyer needs to know how Seller runs it.

Legal disclosures

Major areas of legal disclosure include safety, environmental, and tax issues. The company should mention any lawsuits to which it's a party. Unless a company has specific issues to disclose (and it should disclose any and all issues), this section is a very quick read. Essentially, Seller says, “Ownership has no knowledge of any problems” or “Ownership believes it's in compliance with . . . .”

Sellers should speak with their legal advisors about proper wording of any legal disclosure.

Sharing the Go-to-Market Strategy

An offering document isn't just all numbers and accounting and EBITDA; a good deal book needs to describe the company's go-to-market strategy, commonly called
sales and marketing.
The following sections focus on some considerations to keep in mind when creating or reviewing the sales and marketing section of an offering document.

In addition to providing information about sales and marketing, a good offering document should provide the Buyer with information about the sales by product line and/or sales by customer, though it shouldn't use specific customer names at this juncture. See the later section “Customer names” for more on the to-name-or-not-to-name issue.

Description of market and products

A company exists to sell a product and/or offer a service, so the offering document should reflect careful attention to the explanation of the selling company's product/service, customers and suppliers, and sales and order processing. The following sections outline some basic questions Seller needs to answer regarding each of these categories.

Product/service

I doubt Sellers are shocked to find that Buyer is interested in buying the company because of its products or services. With that in mind, the offering document needs to provide plenty of information about products and services, including answering the following questions:

What is the product or service?
What does the company sell? The offering document should provide details about this most basic aspect of the company. You may think this information is something Buyer should already know, but remember that Buyer likely has multiple decision-makers, and some of the people reading the offering document may not have been involved in the early discussions and therefore may not know anything about the company.

What is fueling growth?
If sales are stagnant (or falling), what factors cause that? Providing Buyer with some insights as to market trends and challenges is important in helping Buyer understand the value drivers for a company.

Is any portion of the revenue recurring?
Recurring revenue is often the holy grail for acquirers. A company with high percentage of revenue that recurs month after month or year after year may be able to garner a higher valuation than a company that starts each month at zero.

You may also hear that a company scales very well.
Scale
can mean recurring revenue; in other words, after a salesperson has made a sale, she doesn't need to go back and sell that same customer again and can instead focus on winning new customers. Scale can also mean very large sale prices. For example, a company that sells $1 million pieces of equipment probably scales better than a company selling a $10 widget.

Does the company experience any seasonality?
In other words, are sales stronger during certain parts of the year and weaker in others? Buyer needs to know about seasonality so that it can plan accordingly. For example, companies with extreme seasonality may need a credit line. The company will tap the credit line during the slow season(s) and pay off the line during flush times.

How many product offerings does the company have?
If the company offers a physical product (as opposed to a service), how many stock keeping units (SKUs) does it sell? A
stock keeping unit
is simply a number assigned to a specific product; the more SKUs a company has, the more different products it can offer its customers.

A high number of SKUs can be a warning sign for Buyer because too many SKUs may mean the company is spread too thin or is stocking a lot of slow-moving inventory. Slow-moving inventory can be a waste of cash. Too many SKUs can also be an opportunity for Buyer because Buyer may be able to eliminate this slow-moving product and improve the efficiency and profitability of the company. What constitutes too many SKUs depends on each specific industry and each specific company.

Customers and suppliers

Having products and services without customers to buy them makes no sense, so as Seller, you want to give some information about customers in the offering document. Additionally, you need to provide some detail on your vendors and suppliers; you have to get those products or raw materials from somewhere! Here are some topics to consider in this section of the offering document:

Who buys the company's products/services?
Because a company is a pipe dream until it has actual paying customers, Seller needs to describe its customers to Buyer. Depending on its needs, Buyer may want access to new customers or to be familiar with the customers.