Mergers and Acquisitions For Dummies (6 page)
Read Mergers and Acquisitions For Dummies Online
Authors: Bill Snow
Individuals:
Although it happens, an individual buying a middle market or lower middle market company is rare. When individuals buy companies, those companies tend to be small retail shops, consulting firms, or construction companies. Typically, these companies have revenues of less than $1 million.
As a Seller, know that who's on the other side of the negotiating table may change the way your M&A process works. Are the Buyers experienced deal people, or are they new to the process? For example, if your Buyer is a PE firm, rest assured that the people you're negotiating with know exactly what they're doing.
Seller
You can't buy something unless you have a Seller. Like Buyers, Sellers usually aren't individuals, though I often refer to them in the singular here for clarification purposes.
Seller
is a defined term, meaning it's capitalized for the purposes of documents and contracts.
Here's a quick look at the types of Sellers you may find in the world of M&A:
The spinoff:
A company may be divesting a division, a product line, or certain assets.
The change of control:
This company is selling enough of itself (more than 50 percent) to result in a change of control. In these cases, the owner or owners most likely receive the money. Colloquially, this approach is called
taking some chips off the table.
The recap:
Sometimes an owner wants to take some chips off the table without giving up control of the company. This situation is called a
recapitalization,
or
recap
for short.
The growth capital:
A Seller may issue more stock for the purposes of raising capital to invest in the business. In this case, the owner isn't actually selling the company but rather selling more stakes in the company. The money from the sale doesn't flow to the owner; instead, the company retains the money to fund growth.
Remembering why the Seller is selling the company, how much of the company he or she is selling, and where the money goes is key. Follow the money.
Transaction (also known as the deal)
The
transaction
is when Buyer sells a company to Seller. It's an abstract concept, as in, “We're working on a transaction that will sell ABC to XYZ.” It can also refer to the finished sale: “We completed the transaction yesterday.” (Don't confuse the transaction with the
purchase agreement,
a contract that memorializes the transaction. See Chapter 15 for more on this document.)
Transaction
is a more formal version of
deal;
most documents, agreements, and contracts use the word
transaction
(often capitalized as a defined term), but conversations and e-mails may use
deal
and
transaction
interchangeably. Think of
deal
as
transaction's
popular cousin from the wrong side of the tracks.
M&A personality types
Regardless of whether you're buying or selling, one helpful trick for getting deals done is to assess the personality of your negotiating counterpart. Based on my experience, you're liable to run across the following types of people:
The highly motivated:
This person has to get a deal done or he's doomed. He's so desperate to do a deal that he may â strike that,
will
â leave dollars on the table.
The ruler-of-the-universe business magnate:
He's from Experienced, Wily, and Cagey, Ltd.; he's made countless deals and knows exactly what he's doing. If you find yourself matched against this person, look out. The worst thing you can do is to turn into the highly motivated (see the preceding bullet); you'll get your clock cleaned.
The know-it-all who's never sold a company:
This person is one of the potential problem children of the M&A world. Quite often, he's an expert in one field and thus thinks he's an expert in everything. The best way to counteract this type of person is by asking questions, reasoning, and getting him to explain his point of view. Avoid simply saying “no” if you don't like his proposal. Challenge him. Your only hope of changing this person's mind is getting him to change it himself.
Mr. Irrational:
Mr. Irrational is the insane twin of the know-it-all, except without the strong logic skills. As a result, employing logic and reason doesn't work. An irrational person is difficult to work with, so your ability to get a deal done is limited. Give it your best shot and then walk away when the proceedings begin to get petty and frustrating. Interestingly enough, these irrational people often come to their senses after the heat of the battle fades. Don't fuel their irrationality with endless negotiating and discussions.
The earnest first-timer:
The country cousin of the know-it-all and Mr. Irrational, this person is so intent on doing everything letter-perfectly that he misses the proverbial forest for the trees. Work to get this person to do as you want, or he'll end up irritating you to no end.
The professional:
Typically, this type is the best person to work with. He's a deal pro who's been around the block many times, leaves emotion out of the negotiation, and works to close a deal on mutually beneficial terms.
The chronic negotiator:
This exhausting individual negotiates and fights for excruciatingly minor details over and over again. Although attention to detail is important and worth the hassle, endlessly negotiating those details eventually evokes the law of diminishing returns â you put in more time for smaller and smaller advancements. At some point the nit-picky details aren't worth the hassle. This person blasts through that point.
The renegotiator:
Don't confuse this person with the chronic negotiator (though the same person can be both). This guy's MO is to wait until the deal is seemingly done before asking (or demanding) that you change the terms. Don't give in; changing the deal at the last minute comes back to haunt you because you may be needlessly agreeing to concessions. Don't let the rush of closing a deal cloud your decision-making.