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Explore M&As, in simple terms Mergers & Acquisitions For Dummies gives you useful techniques and real-world advice for making these business transactions a success, going beyond case studies to include international laws and regulations, environmental issues, and―most importantly―practical instructions you can really use. In plain English terms that anyone can understand, this book discusses the entire M&A process, including different types of transactions and structures, raising funds, partnering, identifying targets, business valuation, doing due diligence, closing the purchase agreement, and integrating new employees and new ways of doing business. If you’re getting involved in a merger with, or acquisition of, another company, read this book to gain a thorough understanding of what the heck is going on. Updated with deep dives into valuations, environmental issues, negotiating tips, and beyond. • Walk through the merger and acquisition process in practical terms • Learn the requirements and best practices you’ll need to follow • Hire the people who will help you through any M&A scenario • Conduct win-win negotiations and get the most out of M&As Mergers & Acquisitions For Dummies is a great choice for business owners and investors who need more information on the process and steps involved in successful M&A transactions. Title Page Copyright Page Table of Contents Introduction About This Book Conventions Used in This Book What You’re Not to Read Foolish Assumptions How This Book Is Organized Part 1: Planning to Do a Transaction Part 2: Marketing the Transaction Part 3: Selling the Transaction Part 4: Concluding and Combining Part 5: The Part of Tens Icons Used in This Book Beyond the Book Where to Go from Here Part 1 Planning to Do a Transaction Chapter 1 Explaining Mergers and Acquisitions Defining the Term Seeing How M&A’s Occur Introducing Important Terms and Phrases Buyer Seller Investment banker Transaction (also known as the deal) Consideration Equity EBITDA Adjusted EBITDA New entity Rolling equity Leverage Seller finance Closing Considering the Costs Associated with M&A Tallying advisors’ fees and other costs Paying off debt Making post-closing adjustments Planning for taxes Defining Types of Companies Neighborhood business Small business Middle market and lower middle market company Large company (and beyond) Chapter 2 Learning M&A Rules and Decorum Knowing How the Game Is Played Providing Updates to Employees When selling a company When buying a company Discerning Two Types of M&A Processes Making a Market in M&A Mastering the rules of the road for sellers Examining the rules of the road for buyers Determining which bid is better Entering the M&A Zone Chapter 3 Utilizing the M&A Process Trusting The Process Reviewing the M&A Process Step 1: Create a target list Step 2: Make contact Step 3: Send or receive a teaser or an executive summary Step 4: Execute a confidentiality agreement Step 5: Send or review the confidential information memorandum (CIM) Step 6: Solicit or submit an indication of interest Step 7: Conduct management meetings Step 8: Write or review the letter of intent Step 9: Perform due diligence Step 10: Draft the purchase agreement Step 11: Show up for closing Step 12: Deal with post-closing adjustments and integration Chapter 4 Making Sense of the Economics of M&A Timing the Market Weighing Microeconomic Factors Realizing that M&A is supply-side Coming to grips with a limited supply Buying a company is extremely difficult Responding to clarity Avoiding a “random sample of one” Reversing roles Demanding a limited resource Inflating Valuations Observing Systemic Issues Detecting Tailwinds and Headwinds in M&A Considering interest rates and valuations Managing the issue of replacement income Putting Together Your M&A Plan Setting goals: Sellers Considering owner options Running a process: The options Musing about deal types Considering the constituents in the seller’s orbit Getting to know the acquirer Twisting the knobs Timing the market: How feasible? Analyzing life after the transaction Setting goals: Buyers Recognizing the components of acquiring companies Defining criteria for buyers Buyer’s folly: The Menu approach Chapter 5 Finding Buyers and Sellers Collaborating to Build a List Brainstorming Expanding (and winnowing) the list Finalizing the list Including competitors on your list Acquiring (or selling to) a vendor or customer Putting Together the Tools Tempting buyers with an anonymous teaser Keeping it short and sweet Including only high-level financial info Touting key selling points Executing a Confidentiality Agreement (CA) Considering the gist of a CA Figuring out which party sends the CA Determining who gets more value out of the CA Handling a Breach of Confidentiality Confirming a breach Thinking long and hard about legal action Keeping the Cat in the Bag: Advice for Buyers Involving employees and advisors Discussing the deal in public Contacting Buyers Finding the right person Phoning a financial buyer Phoning a strategic buyer Scripting your pitch Treading carefully when approaching competitors Contacting Sellers Receiving a call from a seller Winning a bake-off Having a thesis when buying Using a successful script You’re having a serious conversation! What now? Getting Past Screeners “Just send me an email and I’ll find the right person for you” “We don’t do that kind of thing” “What is this about?” “I’m so-and-so’s assistant — I’ll forward your email” Tracking Your Calls Part 2 Marketing the Transaction Chapter 6 Explaining and Influencing Valuation Pondering the Meaning of Valuation Seeing valuation as a confluence of various factors Seeing valuation as more than just price Seeing valuation as being at the intersection of many variables Realizing the limits of a valuation report Comparing Different Points of View Looking at the business owner point of view Adopting the investment banker point of view Opting for a more complete picture Going for a pro forma valuation Prioritizing Net-versus-Gross Proceeds Analyzing a Valuation Report Looking at transaction comparables Working with trading comparables Using leveraged buyout (LBO) analyses Opting for a discounted cash flow (DCF) analysis Measuring Returns for the Buyer Gauging internal rates of return (IRRs) Looking for the payback Cutting to the Chase: Give Us the Numbers! Influencing Valuation Enhancing valuation Impacting valuations negatively Chapter 7 Creating and Reviewing an Offering Document Naming the Document Revealing the Offering Document’s New Look Inspecting the basics of the offering document Compiling the executive summary The thesis The seller’s rationale for seeking a deal The seller’s deal guidance Showcasing the company’s background The company’s past and present Ownership and legal entity Employee info and benefits Locations of offices and facilities Real estate Technology Legal disclosures Sharing the Go-to-Market Strategy Describing the market and products Product/service Customers and suppliers Sales and order processing Customer names Info about competitors Doing the Numbers Compiling historical financials Including financial projections Planning for a Smooth Transaction Finalizing financial statements Working with accountant-prepared statements Comparing audits and reviews Going the compilations route Dealing with inventory Compiling a quality of earnings (QoE) report Digesting a Company’s Financials Statement of cash flows Balance sheets Focusing on the short term Accounts receivable terms Looking at the long term Intangible assets The income statement Cost of goods sold Gross profit Other income and other expenses Net income Losses on the books Chapter 8 Reading and Writing the Offers Examining the Indication of Interest (IOI) Determining the purpose of indicating interest Including important information Preamble, platitudes, and buyer background Unveiling the valuation range Evaluating the type of deal offered Addressing the seller’s debt and any other conditions Providing a bit of legalese Enthusiastically concluding the IOI Signaling Sincerity with a Letter of Intent (LOI) Recognizing the Salient Issues in the LOI Valuation and deal structure Holdback and escrow Representations and warranties Financing Due diligence and timing Approvals and conditions Role of management Access to information Expenses Nondisclosure and publicity Nonbinding agreement Governing law or jurisdiction Agreeing to and Extending Exclusivity Considering exclusivity in preemptive bids Running out of time: Prolonging exclusivity Learning how buyers actually come up with bids Avoiding myopia Part 3 Selling the Transaction Chapter 9 Selecting Advisors Choosing Wisely: Identifying Ideal Advisors Choosing Inside Advisors CFO or another financial bigwig Corporate development personnel Hiring Outside Advisors Consulting wealth advisors when you’re ready to sell Considering an intermediary Lawyering up on both sides Accounting and auditing for dealmakers I’m the taxman! Recruiting more consultants to the buyer’s team Technology Marketing Environmental Avoiding Communication Breakdowns Getting Your Banker Involved Chapter 10 Hiring an Investment Banker Examining the Role of Investment Bankers Making a market Knowing the difference between a business broker and an investment banker Appreciating the Most Important M&A Skill Working with an Investment Banker Handling compensation Deliberating the percentage Tacking on a tail Looking for chemistry Timing the Deal: How Long Should a Process Take? Asking Interview Questions Asking the Ask Price Question Checking an Investment Banker’s References Chapter 11 Arranging Meetings Between Buyer and Seller Recognizing the Importance of Meeting in Person Arranging Management Meetings Assembling the key players Agreeing on a venue Setting the meeting agenda Perfecting the Seller’s Presentation Gathering the right material Making the seller’s presentation shine Preparing Buyers for Management Meetings Completing a walk-through Being careful with attendees Putting away those darn devices Determining Whether the Meeting Went Well Chapter 12 Financing the Transaction Exploring Financing Options Structuring M&A Deals Providing cash at closing Using the buyer’s own cash Having the buyer borrow money Having the buyer team up with other investors Having the buyer seek financial help from the seller Having the buyer use equity Rolling equity Having the buyer use contracts Assuming debt Taking a Closer Look at Investors Contrasting Institutions and individuals Looking at private equity (PE) firms Dealing with a family office Considering a strategic buyer Going with a fundless sponsor Keeping it on an individual basis Striking the Right Type of Deal Noting the differences between majority and minority investments Understanding supermajority rights Buying assets or stock Explaining how EBITDA impacts deals Comprehending the cost of capital Senior debt Looking at lines of credit Mezzanine financing Financing a Problem Child Debt is greater than purchase price The business has operating losses Chapter 13 Learning How to Negotiate Successfully Knowing Your Position Being prepared Reading the other party’s situation Providing information to the other side Using Successful Negotiating Tactics Negotiating with the decision-maker Bending where you can Remaining on an even keel Remembering your ABNs: Always be negotiating Digging into the nitty-gritty of negotiating Fessing up when you don’t know Saying “Here’s the deal that gets it done” Picking up the phone Offering a conditional if-then agreement Understanding that the first who speaks loses Being unafraid to haggle Being wary of a bad bluff Settling Common Transaction Issues Bridging a Valuation Gap Using an earnout to prove valuation Settling a valuation disagreement with a seller note Paying for a company with stock Selling less than 100 percent of the company Including a consulting contract Avoiding Common M&A Negotiating Mistakes Surviving Unforeseen Twists and Turns Putting a deal gone sideways back on track Negotiating in good faith Letting the other side win the last skirmish Dealing with Renegotiation Comprehending Why Transactions Fail Part 4 Concluding and Combining Chapter 14 Confirming Due Diligence Digging Into the Due Diligence Process Recognizing the key focal points of due diligence Reconciling bank statements Getting the process underway Allowing enough time for due diligence Covering the expense Conveying the due diligence info to the buyer Running the company during due diligence Looking More Closely at the Details of Due Diligence Corporate info Operations Financials Sales and marketing info Real estate and facilities info Fixed assets Inventory Supplier info Intellectual property Human resources Debt and financial dealings Environmental concerns Taxes Contract information Insurance Litigation history Governmental filings Requesting Additional Information Chapter 15 Documenting the Transaction Drafting the Deal Writing the first draft Redlining the initial draft Navigating the Final Purchase Agreement Confirming the name, rank, and serial number of the deal Determining what’s being sold, for how much, and when Knowing what to bring to the closing Reviewing the representations and warranties Handling seller’s reps and warranties Dealing with buyer’s reps and warranties Including mutual promises between the buyer and seller Securing against loss with indemnifications The Rise of Reps & Warranties (R&W) Insurance Determining who pays Looking at the exhibits and schedules Chapter 16 Closing and Integrating the Acquisition Gathering the Necessary Parties Walking Through the Closing Process Reviewing the flow of funds statement Signing the final purchase agreement and other documents Distributing the funds: Show me the money! Popping the champagne Tying Up Loose Ends Shortly after Closing Allowing time to fully close the books Making a working capital adjustment Shifting from Entrepreneurial to Professional Spreading the news Telling the seller’s employees about the deal Making a good first impression Making a media announcement Following Through: The Deal After the Deal Closing the loop on post-closing adjustments Wrapping up the contingent payments Maximizing the earnout Collecting the note Dealing with the stock Dealing with Disputes Handling breaches Violations of the noncompete and nonsolicitation agreements Discrepancies with working capital Breaches of representations or warranties (R&W) Making claims against escrow Chapter 17 Ensuring a Successful Acquisition Planning the Integration Assembling a buyer’s transition team Backstopping problems with a bench strength plan Determining the level of autonomy Covering the carve-out bases Planning the first 90 days Immediately Within 30 days after the close Within 90 days after the close Culling Products and Services Combining Operations, Administration, and Finance Handling Personnel: Successful First Steps for New Owners Addressing cultural differences Resolving conflict Remembering who’s in charge: You! Setting a high bar and being consistent Picking your battles Acting like a leader at all times Making friends Instituting accountability Focusing on the customer Introducing cost-benefit analysis Communicating rules and responsibility Recognizing that hard work earns the right to play Delegating responsibility and authority Firing people Part 5 The Part of Tens Chapter 18 Ten Transaction Pitfalls Is the Deal Too Good to Be True? How Is the Buyer Financing the Deal? How Much Cash Is in the Offer? What Are the Conditions of Escrow? Is It a Stock Deal or an Asset Deal? How Is Working Capital Settled Post-Closing? Is the Inventory 100 Percent Salable? Who Pays Off Long-Term Debt, and What Happens to the Line of Credit? What Are the Tax Implications of the Seller’s Accounts Receivable? Is the Seller Signing a Noncompete Agreement with the Buyer? Chapter 19 Ten Reasons Acquisitions Fail Overleveraged Poor Execution Culture Clash Fired by Customers Lack of Synergies Shoddy Systems Reporting and Bureaucracy The Zombie Responsibility with No Authority Wrong Management Chapter 20 Ten Lurking Problems for Sellers Quality of Earnings and Inventory The Ask-Price Question Owner Succession Rent Re-Trade Working Capital Target Accruals Parallel Activities The End-Run Approach Taxes Index EULA Explore M&A, in simple terms Mergers & Acquisitions For Dummies provides useful techniques and real-world advice for anyone involved with – or thinking of becoming involved with – transactional work. Whether you are a transactions pro, a service provider tangentially involved in transactions, or a student thinking of becoming an investment banker, this book will provide the insights and knowledge that will help you become successful. Business owners and executives will also find this book helpful, not only when they want to buy or sell a company, but if they want to learn more about what improves a company's value. The evaluation process used by M&A professionals to transact a business sale is often quite different from the processes used by owners and executives to manage those businesses. In plain English terms that anyone can understand, this book details the step-by-step M&A process, describes different types of transactions, demonstrates various ways to structure a deal, defines methods to identify and contact targets, provides insights on how to finance transactions, reveals what helps and hurts a company's valuation, offers negotiating tips, explains how to perform due diligence, analyzes the purchase agreement, and discloses methods to help ensure the combined companies are successfully integrated. If you're getting involved with a merger or an acquisition, this book will help you gain a thorough understanding of what the heck is going on. Updates to this second edition include quality of earnings reports, representation and warranty insurance, how to hire investment bankers, changes to the offering documents, the rise of family offices, and the ubiquity of adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) as a basis for valuation. Understand the merger and acquisition process in a simple, easy-to-understand manner Learn the nomenclature and terminology needed to talk and act like a player Determine how to hire the people who will help you conduct M&A deals Discover tips on how to successfully negotiate transactions Mergers & Acquisitions For Dummies is a great choice for business owners and executives, students, service providers, and anyone interested in M&A transactions.