American Fortune M&A Process
Merger and Acquisition Process
Confidentiality in a business sale and acquisition needs to be incorporated into each part of the merger and acquisition process. Information needs to be carefully shared on a piecemeal basis and only after the recipient has met the appropriate qualifications and is found to be worthy to receive confidential information. Each step of the Merger and Acquisition Process needs to have protective systems in place to maintain and protect confidentiality. Without strict confidentiality controls, information will leak to competitors, employees, customers, and suppliers causing harm to the business being marketed for sale.
Defining Goals, Options and Exit Strategies in the M&A Process
Wide arrays of process options are available when structuring a confidential sale of a business. It is important for the business owner to carefully evaluate goals, options and selling requirements. Additionally, it is very important for the business owner to understand how the market (buyers) view value and how they evaluate and critique a business for sale. The business owner needs to consider some of the following key matters in the merger and acquisition process:
- Understand buyers and targeting a buyer category that will pay the highest price
- Understand business valuation methodology and how value is perceived in the market
- How to time the business sale for the best price and terms
- Taxes on the business sale and ways of structuring the sale to minimize taxes
- What kind of role if any does the business owner desire after the sale of the business
An outright business sale is one main option but many other options are available to the business owner such as: selling to the employees via an ESOP, selling a large portion of the business and remaining in a majority or minority ownership, recapitalize the business. To better understand these options and determine the most appropriate direction to pursue it is very wise to consult with a qualified Business Sale Advisor.
Recasting Financials in a Merger and Acquisition Process
Publicly traded companies Privately Held businesses are not necessarily required to be in compliance with Generally Accepted Accounting Principles (GAAP). All a closely held company is required to do is to prepare tax returns on an annual basis. The problem with most tax returns is that they are prepared in accordance with the Internal Revenue Code. The goal of these documents is simple; reduce tax liability within the letter of the law. As a consequence, the data presented to the government contains numbers that are formulated to show as low of a profit as possible. When attempting to obtain credit or in a sale of a business the owner of the business will find it challenging task to achieve if the business owner tries to use the same tax documents prepared with the specific purpose of reducing tax liability.
The income figures from the tax return will accurately represent revenue from all sources. However, the expenses taken make the tax return unsuitable for presentation elsewhere. Items such as depreciation, discretionary spending, owner’s perks and pensions lower the net profit figures, sometimes past zero on tax returns. Presenting a buyer with a financial statement showing a small or no profit is simply not in the best interest of the seller.
The benefit of recasting the income for sale of the merger and acquisition process is that the recasted income statement will show a better representation of the business, more than likely with more favorable numbers for the borrower. In order to recast financial statements, the following items should be adjusted to reflect reality: owner salaries, nonrecurring expenses and income, investments and non-operating expenses, interest payments, depreciation expense, rent expense, discretionary expenses, and pensions. The result of this procedure will be a more accurate and reliable presentation of income that buyers can use to gauge the activity of the business for sale.
The figures presented on the balance sheet attached to the tax return are so inaccurate that only the government finds them useful. In the business sale process business, buyers need more accurate numbers to work with to make decisions. The balance sheet computed per the tax rules is simply not accurate. Assets such as buildings and equipment are depreciated tax rules. However, in reality, this may not be the case. Another problem with the balance sheet is that inventory expressed on the tax return usually never reflects reality. The reason for this is because most private companies do not make the effort of maintaining accurate inventory numbers. To accurately adjust the balance sheet, a business sale advisor doing the recasting would adjust real estate and other assets, obsolete inventory, accounts receivable, loans to the owners, equipment not on the books, and goodwill as well. In the sale of business process, the recasted statement will give both the seller and buyer a better idea as to what is actually owned and owed by the company and what its true market value is.
Failure to properly present true “re-cast earnings” reduces the perceived value of a business. There are approximately 60 potential recasting adjustments that can be made to financials of a business that will benefit the seller. American Fortune provides services for the recasting of financials to make the business sale more attractive by making applicable adjustments which improve financial presentation and business value maximization.
Valuing a Business in a Merger and Acquisition Process
Business valuation reports have tremendous value in the sale of the business. A well-prepared business valuation by a qualified expert serves as an excellent tool to utilize with buyers and their advisers. The valuation will serve to support and defend the real market value of a business. Without proper valuation buyers and their advisers will be in a better position to play on the weaknesses of the business and discredit the asking price and negotiate the value of the business below the real market value.
The valuation report will help the business owner to understand the value drivers and the makeup of a business valuation so that they can have an opportunity to improve the value of their business. A Business Valuation procedure consists of objective and subjective value indicators. The objective parts are easy to measure and the valuator uses the market as a reference of value. Profits are the key indicator of value but it is not always easy to increase profits, but the real opportunity to increase a business value lies in the subjective parts of a business value. Some of the subjective value drivers include a case where the large portion of the revenue comes from one or two customers, the owner is very hands-on and from a buyers perspective they are the business, the owner takes too many perks from the business.
In the sale of a business, a well prepared and documented business valuation report provides a solid view of business value in an open marketplace. This provides the business owner with an understanding of the real value expectation prior to the actual sale of a business process.
Value Enhancement Strategies in the M&A Process
The ideal approach for the business owner is to utilize Business Exit Strategies (services) several years prior to the start of sale of business process. For businesses owners that have immediate needs and goals to sell their businesses, there are some last minute things that can be done to help support and or enhance the value of their business. It’s very prudent to enlist the help of a Business Sale Advisor for review of the business and to make specific recommendations for immediate and positive results on enhancing the value of a business. When implemented prior to the marketing of the business for sale, these corrections and procedures will enhance marketability (sale) and support as well as increase the value of a business being prepared for sale.
Due Diligence and Sale Of a Business Process Prior to Marketing
Buyers along with their advisers will perform extensive due diligence business sale process prior to acquiring a business. So it is very prudent that the seller along with their advisers performs their own due diligence and business sale process prior to marketing the business for sale. A self-analysis process (due diligence) that simulates the due diligence performed by buyers and their advisers will prepare the business for scrutiny by the buyers and their advisers. Keep in mind that when buyers and their advisers perform the due diligence process they are also seeking weakness of the business which they will definitely utilize to reduce and offset the asking price. The buyers and their advisers will deliberately utilize the findings of their due diligence to systematically attempt to nibble away at the seller’s asking price. Unless a seller and their advisers have properly identified, reviewed and prepared to deal with all of the businesses weakness of the business listed for sale the buyers and their advisors will definitely have the upper hand and succeed in getting a great deal.
Business Offering Memorandum in a M&A Process
When buyers will carefully follow a sale of business process, they expect to be able to receive as much information as possible so that they can review and determine their interest in acquiring this business. The offering memorandum normally consists of substantial information on the business listed for sale as well as three to five years of historical financial records. The memorandum can range from approximately 10 to 50 pages. A professionally packaged and presented business for sale increases a buyer’s confidence and comfort level, thereby increasing the likelihood of a successful business sale. Although the industry standard process dictates that the buyer is given a comprehensive offering memorandum after they sign a non-disclosure agreement, American Fortune recommends that for the sake of confidentiality the information in the offering memorandum be “piecemeal ed”. As a way of gauging interest and qualification of the buyer, American Fortune recommends careful review and scrutiny of the buyer prior to releasing the name and identity of the business being marketed for sale. Once the buyer is carefully screened and evaluated for financial capability American Fortune recommends releasing information piece by piece while carefully gauging the buyers fit and worthiness to receive ongoing information on the business for sale.
Marketing Strategy In a M&A Process
First of all marketing, advertising and any form of promoting a business for sale needs to be performed in a way that preserves confidentiality at all times. There are several effective ways of promoting a business for sale, some are passive and some require a strategic approach to obtain the attention of targeted buyers. Business owners can try to market the business for sale but usually run into numerous obstacles such as the ability to maintain confidentiality as well as lack of experience, expertise and lack of process to handle such an undertaking. It is wise to engage a qualified business sale and acquisition firm to handle such matters.
Targeting a Buyer in a Merger and Acquisition Process
It’s very important to know which category of buyers would likely be interested in a given business offered for sale. Furthermore, it’s also very beneficial to know which category of buyers would find the most value in a particular business offered for sale. Once the buyer targeting has been evaluated and determined the next step is to have a proven business sale process to target these potential buyers in an appropriate manner.
Qualification of Buyers in a Merger and Acquisition Process
Confidentiality must be a priority in this process. Although these targeted buyers are being solicited for their interest for a possible acquisition it does not mean that they should be able to dictate the process. These buyers need to be subjected to careful screening for fit and financial capability. Those that refuse to cooperate with the qualification process are not real buyers. The pre-qualification in a business sale process is a very crucial step in preventing wasted effort as protecting the confidentiality of the business and its information.
Buyers Preliminary Due-Diligence Stage in a M&A Process
Once a buyer has been deemed to be qualified as potentially a good fit for an acquisition of the business next step is the sharing of information procedure by the seller and their business sale advisor. American Fortune recommends that the information is shared a piece at a time since this early process stage of review by the buyer may bring about a reconsideration of interest in the business being offered for sale. Therefore in sharing too much information in early stages, the seller risks having their business information overexposed to a party posing as a buyer who could someday use such information to the detriment to the seller and their business.
This stage of the due diligence process has a duration of approximately 4-6 weeks and varies depending on the size and complexity of the business. Much of the effort in this stage is placed on the financial records of the business being offered for sale.
Offer To Purchase Agreement in a Merger and Acquisition Process
It has evolved that the market standard is for the buyer to issue a Letter of Intent (LOI). The letter of intent is typically non-binding except for a few areas of the letter. American Fortune does not believe that the Letter of Intent practice is in the best interest of the business seller. American Fortune views letters of intent as “trial balloons” which is a negotiation tactic. LOI’s, however, do have their place with very large deals, mostly companies with revenues of $250 million or higher. Very large size deals have in place significant levels of sophistication on the sell and buy side and therefore an LOI works well for this group of businesses. American Fortune recommends that for businesses with less than $100 million in revenue that an Offer to Purchase process is utilized. The Offer to Purchase is a preliminary agreement whereby the key issues are negotiated such as price and basic terms along with certain contingencies such as buyers continued due diligence and buyers ability to obtain financing for the acquisition. This technique is very effective in the sale of a business process since It serves as a precursor to the definitive purchase agreement.
Buyers Full Due-Diligence Stage in a Merger and Acquisition Process
After the Offer To Purchase Agreement is agreed to and executed by both parties the buyer and their advisors can resume their due diligence. The second phase of the due diligence process typically consists of a detailed review of areas of concern to the buyer and their advisors. The due diligence process can be compared to an audit by an accounting firm but in addition to auditing financial matter of the business the buyer and their advisors may review and inspect many areas of the business such as the operations, processes and procedures, contracted services, human resource areas, equipment, quality control and other areas of the business. Financial and operational representations are made during the sale process. If the seller and their advisors performed their own due diligence (audit) they would be prepared to deal well on any issues and concerns that the buyer and their advisors would bring up. It’s a prudent practice to anticipate what information the buyer and their advisors will likely be seeking. It may also be beneficial in the sale process for the seller to prepare certain representations about the business via a signed document. This approach will help abate fears and concerns that a buyer and their advisors may have resulting in a shorter due diligence period and a faster sale. This phase of the due diligence process is very critical if the buyer and their advisory team find problems the may lose interest in the business and the sale transaction could be jeopardized.
It’s very common in a business sale that a buyer and their team capitalize on the due diligence phase to seek out weak parts of the business and each time a weakness is found the buyer and their team expect that the seller a concession against the previously agreed to price. Most businesses have some weaknesses but produce exceptional financials results so keep in mind that buyers will strategically capitalize on these weakness in order to offset (reduce) the previously agreed to price. These tactics are very common, especially with experienced and large company buyers. So it’s prudent to learn how to deal with these tactics in a very effective way.
Transaction & Deal Structuring in a M&A Process
The sale of a business process can take on many different forms with each form having opposite effects on the seller and the buyer. As an example it’s advantageous for a seller to want to sell their business via a “stock sale” but for most buyers, it’s more advantageous to handle the business sale via an “asset sale”. This key issue and numerous other issues have to be discussed and negotiated. Some examples of the negotiation points include: liabilities assumed by the buyer, transfer and negotiation of leases, receivables and payable issues, outsourced services, employment contracts, consulting agreements, non-compete agreements, current contract commitments, advertising contracts, assets retained by the seller, customer agreements, earn-outs, supplier agreements employee perks and benefits, stock ownership retention. It’s important for the seller to have the right merger and acquisition process in place to measure up to the strength of the buyer’s advisory team.
Definitive Agreement Negotiation in a M&A Process
The Definite Agreement in the sale of a business document that evolves as result of the negotiation process of numerous issues and terms. It includes the initial terms from the Offer To Purchase Agreement as well as terms and issues that were negotiated and agreed by both parties after the execution of the Offer To Purchase Agreement. The Definitive Agreement represents a culmination of effort put forth by the seller, buyer and their respective advisor(s).
Closing and Transition Period of a M&A Process
This is the culmination point in the sale of a business when seller and buyer along with their respective consultants gather to perform a final review and execution of the purchase agreement along with numerous other sale documents. At this event, the ownership of the business officially passes from the seller to the buyer. Per previous business sale agreements the seller typically stays with the business in an advisory position for a transition period that may last from a few weeks to several months. The transition typically includes the transferring of key relationships, training, guidance, advisory services and sharing of proprietary information needed to successfully operate the business. Sellers adviser(s) may also be called to be available to provide assistance following a transaction to ease the integration associated with an acquisition process and help resolve any post-closing matters that could arise.
Make American Fortune your trusted consultant in a sale of business or acquisition of a business and you will experience superior expertise and exceptional results. Call us at (800) 248-0615 to speak with an experienced Business Sale Consultant.
To learn more about more about Sale of Business Process (Merger and Acquisition Process) click on the following links: Alliance of Merger & Acquisition Advisers® (AM&AA); Association For Corporate Growth; Merger & Acquisition Source; International Business Brokers Association (IBBA); Mergers, Acquisitions and Business Transfers.
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Merger and Acquisition Process by American Fortune Mergers & Acquisitions