The Ideal M&A Transaction. Overview

Transcription

1 The Directors Education Series The Ideal M&A Transaction Kris Kavelaris President Broadbridge, Inc. Overview The Ideal Transaction can be broken into 2 major components: Ideal Conditions and an Ideal Process 1

2 Ideal Conditions: Owner is Ready Owner has built a nice Company and is ready to sell and move on to next phase of her/his life. The time has come other interests now supersede the satisfaction of running a business. Owner has saved and invested personal income appropriately Proceeds from sale of the Company will add measurably to Owner s wealth, but the sale will not define nor control the ability of the Owner to move on Owner is ready to make a clean / complete exit or leaving, which most often is best for all concerned. Ideal Conditions: Owner is Ready If Owner has children, a realistic, honest appraisal has been made and if the children are not as capable or better than the Owner they will get money / inheritance and not be given the Company nor will the Owner insist on them being retained if they can t stand on their own merits as employees. 2

3 Ideal Conditions: Company Being Sold is in Excellent Shape There is a good, growing Market. Company shown steady sales /profit growth year in and year out; recessions have not created sales dips or they have been slight and recovery has been quick. Products or services are well received in the marketplace, have competitive advantage; the Company is a formidable competitor and barriers to entry are material. There is good marketing, advertising, and selling methods, and a good distribution channel. Customer distribution is broad, i.e. there is a lack of concentration within a few large customers Ideal Conditions: Company Being Sold is in Excellent Shape The management team is highly capable, experienced and most important well rounded the Owner can be absent for extended periods and the Company is none the worse off. The Owner is more Board Chairman than Chief Executive / Operating Officer. The plant and equipment / productive facilities are well maintained there are cutting edge production / service delivery methods in place. Business processes throughout are cutting edge. The Company s Balance Sheet is solid. Debt is very responsibly employed. Adequate earnings have been retained in spite of the bite of having to pay income taxes to retain the net earnings. These points enable meaningful internal financing they provide entirely sufficient working capital not only for continuing operations, but for solid growth. 3

4 Ideal Conditions: Owner/Seller s Go To Market Team is In Place Under the direction of Owner + Board of Directors or Board of Advisors a Team has been assembled 2 3 years before going to market. It is skilled and experienced and includes: M&A Intermediary / Broker; Marketing / Production / Engineering/Financial executive employees; a Transactionexperienced Attorney and Tax Planning qualified CPA firm, Insurance Agency, HR Professionals, Real Estate / Equipment Appraisers, Environmental Consultancy. One Firm / Executive on the Team is appointed Project Manager should generally be the M&A Intermediary / Broker. Ideal Conditions: Buyer is Skilled and Well Prepared The well qualified Buyer has A solid set of objectives the target company must have or would like to have, as well as deal breakers / hard stops. (Buyer is not going into this touchy feely, i.e. without having done and recorded their objectives in clear, quite specific terms. If this isn t done, the Buyer is really gut feel analyzing and subject to emotion ofthe moment vagaries.) A minimum 20% down payment cash availability, and has pre qualified themselves with their bank Both Industry expertise AND well rounded management experience. 4

5 Ideal Conditions: Buyer is Skilled and Well Prepared Expertise buying and taking effective control of and running an acquisition This can supersede specific industry expertise A referenceable leadership style and documented success in growing an enterprise through people Her/his own team of people involved in the Transaction: Marketing / Production / Engineering/Financial executive employees; and Transaction experienced Attorney(s) and CPA firm. Ideal Conditions: Buyers Bank is Experienced Seller s Intermediary / Team has the experience in discerning the truth of Buyer s Bank s experience If Buyer does not have a long standing relationship and pre qualification Intermediary has explored whether or not Seller s Bank is apt to do the deal with a qualified Buyer Seller s Intermediary has a short list of Banks who ARE apt to do the deal with a qualified Buyer. 5

6 Ideal Conditions: Other Stakeholders and Secondary Participants Appraised and Supportive It s a Small World After All there are few secrets and few times when absolute secrecy is critically important; usually it is a fiction residing in the Seller s mind. Employees, Seller s Bank, Customers, Suppliers: Need to be appraised of the situation at the correct time Need to be On Board Rumor Control needs be established and assigned to a capable party: Should generally be the M&A Intermediary / Broker NOT the Seller. Ideal Conditions: Interpersonal & Emotional Environment The place Key and Other Stakeholders are at is Healthy: Competitive, cooperative, Collaborative Ideal Transaction has Collaborative win win attitude Win lose virtually always comes back to bite If Seller holds paper Seller retains a stake in the outcome: win lose is a very bad place in this circumstance 6

7 Ideal Conditions: Interpersonal & Emotional Environment Realism as to expectations from both sides and as to all issues Lack of excessive greed Interpersonal & emotional health is simply the most conducive environment to getting an Ideal Transaction done timely, effectively, efficiently, win win AND for the continued health of on going interrelationships. Ideal Conditions: Quantitative and Qualitative Data, Information and analytics are complete and good Financial / Accounting Numbers and data are complete and good Valuation model(s) utilized are sound and protect Key Stakeholders. (See prior Module for detailed discussion of this VERY KEY issue.) The 3 Key Stakeholders understand the difference between Economic Value, Finance value, and the Gap. These points are openly acknowledged and mutually addressed them. Refer to Gap as Going Concern value and NOT as Blue Sky or Airball. All other sales, production, product costing / pricing data are complete and good. Due diligence data is complete and good and available e.g. contracts, contingencies 7

8 Ideal Conditions: Economy supports a long term successful Deal: The Economy is healthy and stable conducive to A House is built brick by brick. Interest rates are stable within a range, and refinancing interest rates and terms when the current debt instruments come due are not foreseeably onerous. Ideal Process Note that there is no hard and fast rule about the order of the following steps. They generally happen in the order presented, but not always. Some happen concurrently, generally with those next to them in the sequence. Probably the Most Key Point in this Module is: 7 of 10 potential Deals or Transactions that probably should happen don t happen for lack of skilled guidance and support in the following 3 areas this is the Intermediary s most important task! There are huge emotions inherent in selling or buying a business There is need to compromise The transaction process needs to be understood and worked through in an effective, efficient, understandable way. (The Transaction process is generally not well known, and in fact it s a mystery to many who have never done one.) 8

9 Ideal Process: Seller Preparation and Go To Market Execution Seller has managed the Company for sale in 3ish years before taking it to market: Hasn t skimped on re investment in people, product development, marketing, production / service delivery. Manages company as though s/he was not going to sell. 12 months > 6 months before going to market the Advisory Team guides Seller in what Residential Realtors call staging the home for sale A realistic Offering Price value range is established using current Financial Statements just prior to going to market. Sound Valuation methodologies are employed A realistic Offering Price and Walk Away Price and terms are set. Ideal Process: Seller Preparation and Go To Market Execution The Intermediary/Broker ID s the best buyer types, pool(s) of prospects, and marketing methods based on them Decisions are made as to inviting Offers / holding an Auction, going to Competitors, seeking interest among Private Equity Firms or Family Offices and the like. A good marketing / advertising project plan, and time line is prepared(dates and deadlines set), and the plan is executed. Direct Marketing mail, phone Internet Advertising Word of Mouth The Other Stakeholders and Secondary Participants are informed 9

10 Ideal Process Financial and Operating Data and Due Diligence Information is gathered and put into a Presentation Format: Intermediary / Broker and Company employees gather all necessary Financial / Operating and related Due Diligence information and put it in good form: A majority of Due Diligence data can be gathered well before any specific Buyer prospect asks for it. Having it readily available markedly speeds up the Transaction, i.e. gets it done much faster. Data is housed in a Virtual Data Room [Hereafter VDR]. Electronic access is given to Buyers via a web browser / the internet. All the data is high security and access is password protected. Ideal Process Response to Buyer Contact: Provide Buyer VDR Access, Answer questions, Have introductory Meeting(s) Preliminary introduction to Company and the opportunity generally via phone or in person networking most detailed data and specific identities is/are held confidential just generalities are shared. If preliminary introduction interests Buyer Nondisclosure Agreement / Confidentiality Agreement is obtained Qualify Buyer Prospects financial, experience 10

11 Ideal Process Give access to VDR Answer Buyer s detailed questions generally via teleconference. This is generally an iterative loop. (Note: Sharing more vs. less data at this stage tends to allow for an Offer to Purchase vs. Letter of Intent Buyer can better formulate a good Price + Terms proposal.) In person meeting at facility after Intermediary has vetted buyer and a large portion of information has been reviewed / questions answered. Some buyers are visual want to come early ideal is when they ve done material homework Ideal Process Note: Success is most probable when Buyers approach the Acquisition opportunity in two (2) mental stages Do I want this company? What are all the reasons to like this company? My focus is finding all the positives. I will note any shortcomings but will continue my investigation with a positive perspective driving to make the purchase as long as I don t hit any obvious deal breakers and I can see how I can improve the shortcomings and sub optimal conditions. I elect to make a provisional offer. I m committed to making this deal happen. I am now in Due Diligence. I am looking for accuracy of data to solidify my offer. I will also determinedly search for deal breakers. I will drive to a successful conclusion unless I hit a hard stop. 11

12 Ideal Process: Receive and Negotiate an Offer to Purchase and Diligence Phase Experience shows verbal discussion and provisional compromise regarding an Offer to Purchase [Hereafter OTP] results in a tighter document and clearer understanding; the Principals have agreed on the Key elements and can focus on the next level of price/terms these are critical but there are generally no huge surprises from excessive generalizing on either party s behalf. Benefits of OTP vs Letter of Intent [Hereafter LOI] the devil is in the next level details after Key Price and Terms. Going to an OTP provides these details. Too often a LOI sounds good, and THEN the seller is shocked when buyer fleshes out the details of what they meant over the next days and weeks! Buyer can employ escape contingencies with an OTP which is binding just like buying a home. Ernest money is given Ideal Process: Receive and Negotiate an Offer to Purchase and Diligence Phase No shop / no continued marketing provision may / may not be included Project managers on both sides set a time line / project plan look for long lead items (appraisals, environmental) Project managers on both sides collaborate on win win compromises. All parties gather around a round table with Principals making decisions is much more conducive to success than endless s, proposals, counter proposals between Intermediaries and Lawyers. Buyer s Bank is appraised of provisional deal and Seller / Buyer incorporate Bank feedback on provisional financing 12

13 Ideal Process Seller Team supports Buyer Due Diligence Efforts and Deal Terms Tightened As points are uncovered in Due Diligence and further thought is given to Purchase Agreement Terms details : Business people on both sides structure and write out the business / economics of the deal in one Draft Document. THEN this reasonably detailed tightened Draft Document is given to attorneys for review for areas of risk, omissions, insertion of representations and warranties etc. Differences are settled around the round table from the previous slide by the Principals not the Intermediaries or Attorneys. They can help/ guide / suggest but negotiation should NOT be left to them. Tax considerations / tax planning is a concurrent activity. Note that Tax issues are an adjunct not the main driver. Principals sign off on contingencies according to the document schedules The data needs of Buyer s Bank are addressed / met during this process. The Bank s needs escalate during the process and Seller Team steps up to meeting data, document, and agreement requests on a timely basis. Ideal Process Purchase Agreement is solidified, Bank Financing Commitment is Obtained, and Final Long lead items are secured: Final points are settled via compromise. Again, verbal discussion among the parties the Principals especially and quick follow up with written documents to insure correct capturing of the agreements is a huge contributor of getting the Transaction done win win and timely. Long lead activities Appraisals and Environmental inspections are completed and results are dealt with as needed Final Purchase Agreement [Hereafter PA] documents are prepared, reviewed and signed off on 13

14 Ideal Process: Transition Efforts are Implemented: In a true win win Ideal Transaction the tightly constructed and agreed upon OTP and PA, coupled with the moral commitments of personal honor by the Principals, Other Stakeholders, and Secondary Participants allows for the Buyer to come on site and begin Transition efforts prior to actual closing: Employee meeting(s), management team meetings, Customer introductions in selected circumstances Other transaction activities are set case by case The Directors Education Series Speaker Contact Information Kris James Kavelaris, CPA, CNA Broker/President Broadbridge, Inc. (262) Office (262) Mobile Kris@BroadbridgeInc.com Broadbridge, Inc. P.O. Box Delafield, WI