Sell-side M&A - Smart Moves and Deal-Killers


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About to sell your business? How do you prepare for the most important transaction of your life? Who should be on your team and when do you get your house in order? What are the keys to marketing the business and getting to a closing while avoiding the pitfalls that await less prepared sellers? Learn what successful sellers do to maximize valuation, and avoid mistakes that will kill any deal.

Sell-side M&A - Smart Moves and Deal-Killers

  1. 1. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 1#FirmexMCFirmex Webinar Series - M&A Master ClassSeptember 20, 20111:00 p.m. to 2:00 p.m.Twitter #FirmexMC, @FirmexAndrew J. Sherman, EsqJones Day51 Louisiana Avenue, N.W.Washington, D.C. 20001-2113ajsherman@jonesday.comSell-Side M&A:Smart Moves and Deal Killers
  2. 2. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 2#FirmexMCAbout FirmexFirmex is focused on providing the best virtual data roomsolution for managing corporate transactions and financialcomplianceWho uses Firmex?• Firmex community includesover 125,000 users worldwide• Conducted over 10,000 dealsWhy offer an M&A Master Class?• As part of our value-added service, we believe it is importantto offer educational resources to our expanding communityJoelLessemCEOFirmex
  3. 3. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 3#FirmexMCAndrew J. ShermanMr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,500lawyers worldwide.He is the author of 23 books on business growth, capital formation and the leveraging ofintellectual property, including Mergers & Acquisitions from A to Z and The AMAHandbook of Due Diligence.He has appeared as a guest and a commentator on all of the major television networks aswell as CNBC’s “Power Lunch,” CNN’s “Day Watch,” CNNfn’s “For Entrepreneurs Only,”USA Network’s “First Business,” and Bloomberg’s “Small Business Weekly.” He hasappeared on numerous regional and local television broadcasts as well as national andlocal radio interviews for National Public Radio (NPR), Business News Network (BNN),Bloomberg Radio, AP Radio Network, Voice of America, Talk America Radio Network andthe USA Radio Network, as a resource on capital formation, entrepreneurship andtechnology development.He has served as a top-rated Adjunct Professor in the Masters of Business Administration(MBA) programs at the University of Maryland for 23 years and at Georgetown Universityfor 15 years where he teaches courses on business growth strategy.He has served as General Counsel to the Young Entrepreneurs’ Organization (YEO) since1987. In 2003, Fortune magazine named him one of the Top Ten Minds in Entrepreneurshipand in February of 2006, Inc. magazine named him one of the all-time champions andsupporters of entrepreneurship.
  4. 4. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 4#FirmexMCMotivations of the Parties
  5. 5. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 5#FirmexMCContrasting & UnderstandingBuyer and Seller MotivationsSeller Motivations• Founder health/retirement• Legacy issues• Serial entrepreneur burn-out orlack of focus/strategic infidelity• Shareholder liquidity• Competitive necessity• Scale & distribution• Capitalize on innovation• Industry consolidation• Economic conditions• Opportunities for advancement foremployees• Access to larger contracts, globalmarkets and opportunitiesBuyer Motivations• Growth• Use of shares as currency• Typically harder to build than buy• Competitive response andpressures• Lack of internal innovation• Industry consolidation• Economic considerations• Diversification• Opportunities for advancement forteam
  6. 6. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 6#FirmexMCKey Issues Regarding Motivations• Understand the motivations and dealdrivers for both sides as an effectiveadvisor• Motivations may dictate terms, roles,structure and consideration• Motivations may dictate pace and timetableof transaction
  7. 7. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 7#FirmexMCUnderstanding theM&A Process and Timetable
  8. 8. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 8#FirmexMCUnderstanding Typical Sales ProcessesAuctionProcessControlledSaleTargeted SolicitationClosedNegotiationLevel of Disclosure • General publicdisclosure with widerange of potential buyerscontacted• Limited disclosure ofexistence of sale processwith a wide range of logicalbuyers contacted• Limited disclosure ofexistence of sale processwith high-level contactapproach to select range ofbuyers• Limited disclosure withfew parties contacted,focus on limited partieswho have showninterest in the past# of Potential Buyers • All buyers • All probable buyers • All logical buyers in TieredApproach• Most logical buyer(s)Approximate TimePeriod• Four month minimum • Typically 4 - 6 months • Typically 4 - 6 months • Typically 2 - 4 monthsAdvantages • May identify unexpectedbuyers• Stimulates sense ofcompetition amongbuyers• Maintains confidentiality• Stimulates sense ofcompetition among buyers• Reasonable market test• Limits perception of a broaderauction process• Speed of execution• Maintains confidentiality• Limits perception of abroader auction process• Perception of competitioncreated• Speed of execution• Maximumconfidentiality• Avoids perception of abroader auctionprocessDisadvantages • Delay in execution• Greater risk of access toconfidential material byuninterested parties• May create perception ofover shopped deal orinterfere with business• May cause some delay inbusiness execution• Risk of access to exposingconfidential material, underNDA, to parties that mayhave limited interest• May not reach full sphere ofbuyers• May not realizemaximum value• Will not reach fullsphere of buyers
  9. 9. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 9#FirmexMCPlan strategyand conductdue diligencePreparemarketingmaterialsConductformalmarketingeffortMonitor buyerdue diligenceReceive finalbids andnegotiateTypical Sale Process TimelineWeeks 1–2 Weeks 2–4 Weeks 5–12 Weeks 13–16 Weeks 16–24Phase I Phase II Phase III
  10. 10. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 10#FirmexMCPhase I – Preparation• Define objectives– Develop strategy– Determine timing– Identify assets for sale• Review operations– Assess strategic positions– Review historical and projected financials• Develop preliminary valuation analysis– Comparable public companies– Precedent transactions– Discounted cash flow analysis• Develop preliminary strategy– Potential buyers– Sale process– Sale of stock or assets– TimingPlan strategyand conductdue diligencePhase IWeeks 1–2
  11. 11. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 11#FirmexMCPhase I – Preparation (Cont’d)PreparemarketingmaterialsWeeks 2–4• Define key selling points• Prepare marketing materials– Executive Summary– Information Memorandum– Management presentation• Prepare NDA and initial bidprocess letter• Gather intelligence on potentialbuyers; motivations/concerns– Presumed level of interest– Financial strength– Buyers’ perspectives on value– Ability to execute a timely transaction• Finalize buyer list• Complete marketing strategyPhase I
  12. 12. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 12#FirmexMCPhase II – Marketing• Contact buyers• Distribute marketing materials– Executive Summary– NDA• Finalize management presentation• Send Descriptive Memorandum uponexecution of an NDA• Continue gathering market feedback• Prepare data room and due diligencesessions• Receive preliminary indications of interestConductformalmarketing effortWeeks 5–12Phase II
  13. 13. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 13#FirmexMCPhase II – Marketing (Cont’d)• Select participantsbased on:– Price– Terms– Fit• Arrange due diligence visits• Coordinate response to buyers’questions• Confirm financing arrangements (asappropriate)Monitorbuyerdue diligenceWeeks 13–16Phase II
  14. 14. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 14#FirmexMCPhase III – Closing• Receive and evaluate final bids• Handle exclusivity requests• Negotiate Definitive Agreement• Coordinate confirmatory due diligence• Expedite signing and execute DefinitiveAgreement• ----------------------------------------------------• Closing• Post-closing obligations and covenants• Integration and shareholder valueReceive finalbids andnegotiateWeeks 16–24Phase III
  15. 15. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 15#FirmexMCOverview of the Seller’sPreparation Process
  16. 16. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 16#FirmexMCM&A Process OverviewA Seller’s PerspectivePreparation• Hire an investmentbanker• Identify keystrengths andweaknesses• Determine salesstrategy andprocess• Identify key targetsand segment intotiers and waves• Prepare marketingmaterials andtimelineMarketing• Execute salesprocess strategy• Initiate contact withtargets• Manage buyersthroughmanagementmeetings• Provide preliminarydue diligence• Solicit and negotiateoffersClosing• Manage legal andfinancial duediligence• Negotiate definitivepurchase agreement• Manage throughdeal risk includingpitfalls, duediligence,employmentagreements,financing,operationalperformance, etc.
  17. 17. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 17#FirmexMCStrategic Assessment OfGrowth/Exit AlternativesStrategic OptionsStatus Quo:Organic GrowthRun the current course, focusingon customer portable powersolutions and continuedindustry adoption of lithiumbattery solutionsBuy-Side M&ACreate increased momentum byacquiring select technologyassets and market access• Further revenue scalewould drive higher futuretransaction multiples• Cash position and privatestock may limit feasibilityof potential acquisitionsStrategic SalePursue a strategic sale,capitalizing on current salesgrowth and market momentumIPOA public offering would provideshareholders liquidity• Ensures Company doesnot lose focus duringongoing rapid growth• Limits financial exit forinvestors and managers• Capitalize on revenueperformance and marketshare acquisition• High growth rates andlarge target markets arethe key drivers of highertransaction multiples• Would provideshareholders acompelling financial exit• Will require scalesufficient to merit a $50-100 raise• Typically $500 millionvaluation required
  18. 18. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 18#FirmexMCKey Steps to Preparing for anM&A Transaction• Getting your house in order• Legal/Financial/Governance and IP Audits• Anticipating the due diligence needs/concernsof a prospective buyer• “Don’t call my baby ugly” Syndrome• Time to get Uncle Henry off the payroll(Anticipating the needs of a public buyer in apost-Sarbox world)
  19. 19. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 19#FirmexMCKey Steps to Preparing for anM&A Transaction (Cont’d)• Recasting and Positioning• Understanding a buyer’s value drivers• Due diligence is a two-way street (especially ifthe deal is structured with a heavy back-endor with the seller holding notes on buyer stock)• Assembling the advisory team• Determining the role of investment bankersand intermediaries• Preparing the offering memorandum
  20. 20. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 20#FirmexMCUnderstanding the Buyer’s StrategicMotivations• Your IP is getting in the way of something theywant/need to do• They have spotted a much larger opportunity andneed you technology/skill sets to seize theopportunity• It will take them too long to develop what youalready have and the window will not be open longenough• You have been just irritating enough fly in theirunderwear that they want to eliminate a competitor• You present an excellent beachhead or strategicentry point into a high growth marketplace
  21. 21. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 21#FirmexMCThe Exit Strategy Planning Flow ChartPlanning Your ExitSale or gift of businessto next generation(keeping it within the family)Sale of business to third parties (considering non-family ownership)Gift and estate-tax considerationsDealing with non-participating familymembersTo whom? For how much?Estate-planningconsiderationsStructureof the dealFinancing issuesThird-party buyersEmployeesStrategic vs. financial buyersGetting your house in order/Planning for the saleEstate-planning considerations
  22. 22. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 22#FirmexMCReaching the Decision to Sell1. Understanding Your Motivations and Objectives2. Building the Foundation for Value3. Timing and Market FactorsGetting the House in Order1. Assembling Your Advisory Team2. Legal Audit and Housekeeping3. Establishing Preliminary Valuation4. Preparing the Offering Memorandum5. Estate and Exit PlanningThe Selling Process and SellersDecisional Path
  23. 23. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 23#FirmexMCThe Selling Process and SellersDecisional Path (Cont’d)Marketing Strategy1. Targeting Qualified Buyers2. Use of Third Party Intermediaries3. Narrowing the Field of CandidatesChoosing a Dance Partner1. Selecting the Most Qualified and Synergistic Candidate(or Financial Candidate, depending on your objectives)2. Preliminary Negotiations3. Execution of Confidentiality Agreement4. Preliminary Due Diligence
  24. 24. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 24#FirmexMCThe Selling Process and SellersDecisional Path (Cont’d)Fighting It Out1. Execution of More Detailed Letter of Intent orMemorandum of Understanding2. Extensive Negotiations and StrategicAdjustments3. Structuring the Deal4. Accommodating the Buyers Team for Legal andStrategic Due Diligence5. Doing Due Diligence on the Buyer
  25. 25. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 25#FirmexMCThe Selling Process and SellersDecisional Path (Cont’d)Preparing for the Closing1. Preparation and Negotiation of the Definitive LegalDocuments2. Meeting Conditions to Closing3. Obtaining Key Third Party ConsentsThe ClosingPost-Closing Issues1. Monitoring Post-Closing Compensation/Earn-Outs2. Facilitating the Post-Closing Integration Plan3. Post-Closing Challenges
  26. 26. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 26#FirmexMCPreparing for the Sale of the Company• From the sellers point of view, the key to the process is preparation,regardless of motivation for selling. This means taking all thenecessary steps to prepare the company for sale from a corporatehousekeeping perspective. A seller must anticipate the questions andconcerns of a prospective buyer and be prepared to provide theappropriate information for review. In addition, a seller shouldunderstand the pricing parameters for selling the business inpreparation of discussing the financial terms and conditions.• We suggest that the preparation process begins with a strategymeeting of all members of the sellers team. It is the job of the teamto:– Identify the financial and structural goals of the transaction.– Develop an action plan and timetable.– Understand the current market dynamics and potential pricing range forthe business.
  27. 27. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 27#FirmexMCPreparing for the Sale of the Company(Cont’d)– Determine who are the logical buyers of the business andwhy the business for sale would be a compelling asset toeach of the specific the target buyers– Identify the potential legal and financial hurdles to asuccessful transaction (e.g., begin thinking about whatproblems may be "transactional turnoffs" to a prospectivebuyer), such as unregistered trademarks, illegal securitiessales, or difficulties in obtaining a third-party consent.– Outline and draft the offering memorandum.– Develop a definitive "to do" list in connection with corporatehousekeeping matters, such as preparation of board andshareholder minutes and maintenance of regulatory filings.– Identify how and when prospective buyers will be contacted,proposed terms evaluated, and final candidates selected.
  28. 28. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 28#FirmexMCSTEP 1: Selecting the Sellers TeamOne of the most important steps in the preparationprocess is the selection of a team of advisors toorchestrate the sale of the business.The team will help the company’s internal preparationand create the offering memorandum whichsummarizes the key aspects of the companysoperations, products and services, and personnel andfinancial performance.In many ways, this offering memorandum is akin to atraditional business plan, and serves both as a roadmap for the seller and an informational tool for thebuyer.
  29. 29. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 29#FirmexMCSTEP 1: Selecting the Sellers Team(Cont’d)• When selecting members for the team, a sellershould choose people who:– Understand the sellers motivation, goals, and postclosing objectives.– Are familiar with trends in the sellers industry.– Have access to a network of potential buyers.– Have a track record and experience in mergers andacquisitions with emerging growth and middle-marketcompanies.– Have expertise with the financing issues that will faceprospective buyers.– Know tax and estate planning issues that may affectthe seller both at closing and beyond.
  30. 30. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 30#FirmexMCSTEP 1: Selecting the Sellers Team(Cont’d)At a minimum, the team should include the following members:1. Investment banker/financial advisor. An investment banker orfinancial advisor counsels the seller on issues relating to marketdynamics, trends, potential targets, valuation, pricing, and dealstructure. He or she assists the seller in understanding the market,identifying and contacting prospective buyers, and in negotiatingand evaluating offers. Finally, in many cases, multiple offers mayhave divergent structures and economic consequences for theseller, so evaluation of each offer is conducted by the banker.2. Certified public accountant. A certified public accountant (CPA)assists the seller in preparing the financial statements and relatedreports that the buyer (or buyers) inevitably request. He or sheadvises the seller on the tax implications of the proposedtransaction. The CPA also assists in estate planning and instructuring a compensation package that maximizes the benefitsassociated with the proposed transaction.
  31. 31. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 31#FirmexMCSTEP 1: Selecting the Sellers Team(Cont’d)3. Legal counsel. The transactional attorney is responsible for awide variety of duties, including:a. Assisting the seller in pre-sale corporate "housekeeping," whichinvolves cleaning up corporate records, developing strategiesfor dealing with dissident shareholders, and shoring up third-party contractsb. Working with the investment banker in helping evaluatecompeting offersc. Assisting in the negotiation and preparation of the letter of intentand confidentiality agreements such as Exhibit 2-1, whichshould be signed by all potential buyers who are providedaccess to the sellers books and recordsd. Negotiating definitive purchase agreements with buyerscounsele. Working with the seller and the CPA in connection with certainpost closing and estate and tax planning matters
  32. 32. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 32#FirmexMCSTEP 2: The Target List• A key step in any merger or acquisition process is generating alist of the potential buyers. The first step in generating thetarget list is determining the set of categories of companies thatwould be likely interested in the selling entity. Once all of thepotential categories are determined, it is a relativelystraightforward exercise to determine which companies belongin each of the categories.• After the initial target list is created the next step is applying alogical filter to reduce the set to a more focused set of buyers.Companies that clearly cannot afford to purchase the companyfor sale, were recently acquired themselves, or have neverpurchased a business before, are inferior acquirers thancompanies with strong balance sheets (or buoyant stock) thathave a history of successfully buying and integratingcompanies.
  33. 33. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 33#FirmexMCSTEP 3: The Legal Audit• The next step in the preparation process is toget the company ready for the buyersanalysis and due diligence investigation. Apre-sale legal audit should be conducted inorder to assess the state of the company; it iscritical to identify and predict the problems thatwill be raised by the buyer and its counsel.The legal audit should include corporatehousekeeping and administrative matters, thestatus of the sellers intellectual property andkey contracts (including issues regarding theirassignability, regulatory issues, and litigation.
  34. 34. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 34#FirmexMCSTEP 3: The Legal Audit (Cont’d)• The goal is to find the bugs before the buyers counsel discoversthem for you (which would be embarrassing as well as costly from anegotiating perspective) and to get as many of the bugs out aspossible before the first buyer is considered. For example, now maybe the time to resolve any disputes with minority shareholders,complete the registration of copyrights and trademarks, deal withopen issues in your stock option plan, or renew or extend yourfavorable commercial leases.• It may also be a good time to set the stage for the prompt response ofthose third parties whose consent may be necessary to close thetransaction, such as landlords, bankers, key customers, suppliers, orventure capitalists. In many cases, there are contractual provisionsthat can prevent an attempted change in control without suchconsent. For those bugs that cant be exterminated, dont try to hidethem under the carpet. Explain the status of any remaining problemsto the prospective buyers and negotiate and structure the ultimatedeal accordingly.
  35. 35. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 35#FirmexMCSTEP 3: The Legal Audit (Cont’d)• The legal audit should include an examination of certain key financialratios, such as debt-to-equity, turnover, and profitability. The auditshould also look carefully at the companys cost controls, overheadmanagement, and profit centers to ensure the most productiveperformance. The audit may also uncover certain sloppy or self-interested business practices that should be changed before you sellthe company. This strategic reengineering will help build value andremove unnecessary clutter from the financial statements andoperations.• Even if you dont have the time, inclination, or resources to makesuch improvements, it will still be helpful to identify these areas andaddress how the company could be made more profitable to thebuyer. Showing the potential for better long-term performance couldearn you a higher selling price, as well as assist the buyer in raisingcapital needed to implement the transaction.
  36. 36. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 36#FirmexMCSTEP 4: Preparing the OfferingMemorandum• The fifth step in the preparation process is toidentify a marketing strategy to attractprospective buyers. This strategy shouldinclude developing a profile of the "ideal"buyer, identifying how and when buyer will beidentified, determining who will meet withpotential buyers, and gathering a set of initialmaterials to be given to potential buyers andtheir advisors. These initial materials are oftenreferred to as the offering memorandum.
  37. 37. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 37#FirmexMCSTEP 4: Preparing the OfferingMemorandum (Cont’d)• This offering memorandum should include the following information:– Executive summary– Market opportunity– History– Business overview– Products, services and pricing– Manufacturing and distribution– Sales, marketing and growth strategy– Competitive landscape– Management team and organizational overview– Risks and litigation– Historical financial information– Projected financial performance– Supplemental materials
  38. 38. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 38#FirmexMCSTEP 5: The Game Plan• Once the transaction preparation and Offering Memorandumare complete, the process can be managed any number ofways. A major decision at this stage is in determining howclosely the process should match a formal auction.• A formal auction typically is based upon sending standardizedcompany materials to a large audience, providing the targetswith specific dates of management meetings and timing forwhich offers are due.• This formal process can lead to very positive results; however,no buyer likes an auction. An auction ensures that the “winner”values the deal more than other auction participants, and assuch, some companies refuse to participate in auctions, thusclosing the door to potential buyers.
  39. 39. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 39#FirmexMCSTEP 5: The Game Plan (Cont’d)• A less formal approach, however, can yield similar if not better resultsto an auction. In this approach the investment banker coordinatesmore informally with identified buyers, and ensures that each of thetarget buyers are contacted simultaneously. In addition, each of thetargets are examined more closely for strategic fit, and often thecommunication and marketing materials are tailored to underscorethe strategic rationale of the proposed transaction.• There are multiple benefits to this approach. First, each buyer isdifferent, and providing a tailored message may be better received. Alikely buyer may review a large number of potential deals (even if feware done), and helping the evaluator come to the proper conclusioncan be best accomplished in more focused communication. Second,for each pairing of buyer and seller, there are different synergies to behad. If a seller truly wants to maximize the value obtained from thebuyer, then understanding the synergies available is critical andnecessary. Finally, investment bankers typically have interacted withmany of the target buyers in the past.
  40. 40. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 40#FirmexMCCommon Seller Preparation Mistakes• Impatience and indecision. Timing is everything. If you seem tooanxious to sell, buyers will take advantage of your impatience. If yousit on the sidelines too long, the window of opportunity in the marketcycle to obtain a top selling price may pass you by.• Telling others at the wrong time. Again, timing is critical. If you tell keyemployees, vendors, or customers that you are considering a sale tooearly in the process, they may abandon your relationship inanticipation of losing their jobs, their customer or supplier, or from ageneral fear of the unknown. Key employees, fearful of their jobs,may not want to chance relying on an unknown buyer to honor theirsalary or benefits. A related problem for companies that are closely-held (or if one person owns 100% of the shares) is how to reward andmotivate key team members who may have contributed over time tothe company’s success and will not be participating in the proceeds ofthe sale at closing. It is critical that their interests are aligned with theseller and that they work hard and stay focused on getting to theclosing table.
  41. 41. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 41#FirmexMCCommon Seller Preparation Mistakes(Cont’d)• Retaining third-party transactions with people youre related to. If there arerelationships that will not carry over to the new owner, shed these ghostemployees and family members. They should follow you out the door oncethe deal is secured.• Leaving loose ends. Purchase minority shareholder interests so that the newowner wont have to contend with their demands after the sale. Very fewbuyers will want to own a company that still has remaining shareholders, whomay present legal or operational risks. Its akin to the real estate developerwho needs 100 percent of all of the lots in a development to agree to sellbefore proceeding with its plans--a lone straggler or two can break the deal.• Forgetting to look in your own backyard. In seeking out potential buyers, lookfor those who may have a vested interest in acquiring control of the company,such as key customers, employees, or vendors.• Deluding yourself--or your potential buyers--about the risks or weaknesses ofyour company. Your credibility is on the line--a loss of trust by the potentialbuyer usually means that he will walk away from the deal.
  42. 42. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 42#FirmexMCSelling the Proforma• The price that a buyer may be willing to pay dependson the quality and reasonableness of the profitprojections you are able to demonstrate andsubstantiate. The profit and loss statement, balancesheet, cash flow, and working capital requirements aredeveloped and projected for each year over a five-yearplanning period.• Using these documents, together with the enhancedvalue of your business at the end of five years, you cancalculate the discounted value of the companys futurecash flow and develop a recasted set of financialstatements and projections. This establishes theprimary economic return to the buyer for theiracquisition investment analysis.
  43. 43. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 43#FirmexMCStay In Control Of The Process• Integrate your planning, goals, and decisionsprior to offering your business for sale• Have specific goals and objectives for thetransaction, both for your business andyourself• Third party transactions are vastly differentthan other types of transfers alreadydiscussed• It’s a marathon, not a sprint, and it’s not overuntil the check clears
  44. 44. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 44#FirmexMCYou Still Have A Business To Run• You are still in charge until the sale, and maybe involved afterwards as well• You need to continue to manage profitably andincrease value• The same principles that make the transactioneasier also increase the valuation• If you let the situation alter your managementactions you may unwittingly put yourself in adetrimental negotiating position
  45. 45. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 45#FirmexMCWatch Out For These Mistakes• Distraction – don’t spend too much time onthe transaction and not enough time on thebusiness• Altering plans – proceed with managing,growing, and investing as if there is notransaction• Mentally spending money – don’t plan yourvacation until the check has cleared
  46. 46. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 46#FirmexMCLook At Your Business Like The Buyer• How would you improve your business ifyou weren’t resource constrained• Market conditions may affect your timingdecision or value potential• Strategic and financial buyers havedifferent value drivers• The Offering Memorandum willcommunicate your business in the bestlight
  47. 47. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 47#FirmexMCHow Does Your Business Stack UpAgainst Others In The Industry?• Financial– Revenue and profitability– Compensation and cost structure• Market position– Strategic value– Customer base• People– Skills– Culture
  48. 48. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 48#FirmexMCSummary• Show your business to its best advantage– The buyer doesn’t know you or the business theway your family does– The whole process is more adversarial• Make it easy for someone else to take over– No surprises, hidden skeletons, or complicatedrelationships– Operations should be smooth and welldocumented• Advance planning pays huge dividends
  49. 49. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 49#FirmexMCQuestions & Answers
  50. 50. ©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 50#FirmexMCThank YouNext M&A Master Class is October 20th, 1pm Eastern.Buy-side M&AQualifying your Seller & Finding ValueFound a prospective acquisition or out looking? How will2011/2012 post-recession values affect your acquisitionstrategy? How to assemble your acquisition team andapproach the seller? What are best practices in valuating,structuring, and financing the deal. Most importantly, learn howto overcome common roadblocks and keep your deal on’s Recorded Webinar, Slides, and Complementary Checklistswill be made available in tomorrow’s follow-up email.