I have not written here in a couple of weeks. My desk is cluttered and I have clients marching towards a closing of one fashion or another. Convenient excuses, but true all the same.
Not as often as I would like, I am engaged by a client to locate a strategic acquisition opportunity. This is a difficult process, loaded with transaction nuances and obstacles between a desire and a closing.
From the buyer's perspective, he establishes an acquisition's attributes - industry segment, geography, scale, union/non-union, healthy/distressed, growing/stable or contracting, both from a revenue and a net income perspective. If I do my job well, that determines the size of our playing field. I can waste a lot of people's time if the scope of my buy side search is too broad. I mean, it can go the full spectrum - 'I want to buy this specific company' to ' I sort of think that I would like to add another company with about $5M in revenue, profitable, and located in the mid-Atlantic.'
I will need to spend some quality time with the second buyer to limit the scope of potential acquisitions. That's one of those things that I have put on my experience bookshelf.
From the seller's perspective; as a business owner his reality is that he receives between 10 and 20 calls a year from business brokers and investment bankers that want him to list his company for sale with them. Sometimes, if you can believe it, these calls start off with, 'Mr. Smith I represent a buyer who is interested in buying your firm.' That may be true, but you can appreciate a seller's skepticism.
I attempt to work with buy side clients who understand the valuation process, better if they are experienced, and just a dream if they are crystal clear on the attributes of the acquisition that they seek...because I can locate companies that fit criteria, and that is a load of fun.
For the seller...'Mr. Smith would you consider a discussion with a qualified investor willing to offer you a fair price for your firm?' If he's willing, then likely the first step is to exchange confidentiality/non-disclosure agreements followed by three years of financial information for the firm. There are a truckload of 'adjustors' to net income to establish an adjusted EBITDA; but the financial statements serve to establish the framework on which interest can be determined and an offer can be made.
Typically, buyer and seller would not communicate until the buyer formally conveys interest. This is in the form of a non-binding letter that establishes a value range, timing for closing, and any buyer contingencies. If the seller thinks that that is within reason; additional communication follows to provide clarity; perhaps more financial information; and buyer's best attempt to present his company in the best light possible.
As an aside, there is no rule in the merger and acquisition business that says, 'an owner's liquidity needs at exit are in any way correlated to the value of the enterprise he seeks to exit.' A fair offer is one that is substantiated by relevant historical and on market comparable companies and some educated windage regarding synergy, incremental investment required, and the value of any consulting agreement reached. If a fair offer is six times adjusted EBITDA, and a seller's need is eighteen; there really will not be any productive dialogue. The seller's reality is that he either needs to change his needs or the EBITDA his company produces. It is a waste of everyone's time to believe negotiations will bridge a twelve multiple gap and to not disclose the discrepancy in a forthright manner, well, it's just bad form. Assuming those hurdles are scaled, the seller would then present a Letter of Intent (LOI), still non-binding, but more formal, containing more detail and precisely describing price, terms, contingencies, and timing for closing to occur. A 'break up fee' may be included that basically keeps both parties at the table unless some material fact is discovered during a due diligence review that would change the value of the enterprise or the offer.
Once the LOI is executed, a period of time is given for the buyer to review the books and records, meet the employees, review the business processes - all due diligence; equivalent to a three hour teeth cleaning; not particularly pleasant, but part of the process. The goal is for the buyer to convince himself that the company is as represented and not headed for a cliff the day that he takes the keys. The best thing for a seller to do in this stage is to present clean books and records for review. If the shop is in order, the due diligence process is not an onerous burden. If it's not, it's like finding a cavity with no Novocaine - it will take longer and be far more painful than it needs to be.
It's all a process. Reasonable people that can communicate rather than coerce; listen rather than lecture; be objective rather than defensive will get to the end of the day and be better for it.
