Mergers and Acquisitions An Insider’s Guide to the Purchase and Sale of Middle Market Business Interests 1st edition by Dennis Roberts ISBN 1119197386 978-1119197386

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ISBN 10: 1119197386
ISBN 13: 978-1119197386
Author: Dennis Roberts 

This book was designed not only for owners and managers of middle market businesses but as a training text for middle market M&A investment bankers and consultants. It discusses the art and science of middle market M&A as well the all-important psychology and behind-the-scenes negotiations pursued with a particular emphasis on obtaining the absolute highest value when selling a business. Subjects addressed include valuation, taxation, negotiations, M&A conventions, among many others from the buy-side and sell-side perspectives.

Subtitled “Tales of A Deal Junkie,” this serious but occasionally irreverent book tells it like it is, including anecdotes to provide a “feel” for what really goes on in middle market transactions. The author, a former practicing CPA and a business valuation expert, is a veteran M&A investment banker with years of real life experience. He also is a widely-acclaimed instructor in the M&A field and a nationally-respected practitioner who has trained thousands of investment bankers. No comparable book on the market today provides this degree of comprehensive and invaluable insight.

Mergers & Acquisitions An Insider’s Guide to the Purchase and Sale of Middle Market Business Interests 1st Table of contents:

About the Author xxi

Acknowledgments xxiii

Foreword xxv

Preface: A Profession xxvii

A Career in Middle Market Investment Banking xxvii

The Origins of a Deal Junkie xxvii

The Deal Junkie Arrives (Almost) xxviii

Why Another M&A Book? xxix

My Intended Audience xxx

Happy Families xxxi

Disclaimers, Apologies, and Modest Lies xxxiii

Chapter 1 The Middle Market Is Different! 1

Business Process Innovation, Growth Spurts, Regulatory Imperatives, and Capital 1

Not “Mom-and-Pop” Businesses 3

The Upper Market 4

What Exactly Is the Middle Market? 5

Does Size (Alone) Matter? 6

Brokers and Investment Bankers Servicing the Three Markets 7

Chapter Highlights 7

Notes 9

Chapter 2 Drivers of Middle Market Activity and the Sellers 11

Liquidity and Umbrella Drinks 11

Baby Boomers 11

Technology and the Information Age 12

It’s Not Your Father’s M&A World, Either 13

The Glass Ceiling that Sometimes Drives Transactions 14

Big Fish and Little Fish 14

Chapter Highlights 14

Note 15

Chapter 3 Finding—and Understanding—Buyers in the Middle Market 17

Scared Money 17

Understanding Buyer and Investor Types 18

Identifying Potential Buyers 29

Which Door to Open to the Buyers? 32

Chapter Highlights 34

Note 34

Chapter 4 Preparing a Middle Market Business for Sale and Running the Business while Selling It 35

Three Periods to Prepare to Sell a Middle Market Business 37

Litigation 43

Summing Up 44

Chapter Highlights 44

Note 45

Chapter 5 Rewarding and Retaining Key Staff in Connection with a Business Sale: Blackmail or Justice? 47

Overview 47

Key Employee Rewards in General 49

Timing Reward Payments 50

Timing Tax Issues in Rewarding Key Employees 51

The Importance of Clarity and Documentation—Avoiding Vague Promises 51

When to Negotiate Noncompete and Nonintervention Agreements with Key Employees 52

Being Alert to Potential Problems When Promises Made Are Not Consistent with the Duties and/or Influence of Key Employees 53

A Way to Avoid Key Employee Problems in the First Place 54

The Special Problems of Absentee Owners 54

Wrap-Up 55

Chapter Highlights 56

Chapter 6 Crystal Balls and Timing the Sale of a Middle Market Business 57

Bubbles, Cycles, and Business Values 58

Other Timing Opportunities—Roll-Ups 62

Chapter Highlights 63

Notes 64

Chapter 7 The Confidential Information Memorandum 65

The Acquisition Profile 66

Confidential Information Memoranda—Overview 66

Clients and Confidential Information Memoranda: An Intense Collaboration 66

Financial Statements in the Confidential Information Memorandum 74

Chapter Highlights 78

Notes 80

Chapter 8 Confidentiality While Doing the Deal 81

Confidentiality in General 82

Employees and Confidentiality: Two Approaches 83

The Investment Banker and Confidentiality: Communications between Banker and Client; Preventing Premature Disclosure 84

The Executive Summary and Confidentiality 85

Web Site Business-for-Sale Listings 85

Nondisclosure Agreements 86

Securities Laws and Confidentiality 88

Chapter Highlights 88

Chapter 9 Middle Market Investment Bankers and Intermediaries 93

The Telecom Deal 95

Using Professional Investment Banking Assistance and In-House Teams 95

Choosing the Right Investment Bank 100

Chapter Highlights 106

Note 107

Chapter 10 The External M&A Team, and Using the Team Correctly 109

The External M&A Team 110

Using the Team Properly and Sequencing the Professionals; Separating the Tasks and Single Negotiators 113

Chapter Highlights 116

Note 117

Chapter 11 Anyone Can Do M&A—Right? 119

Anybody Can Do This? 119

The Deal the Client Never Got 121

Experience and M&A 122

Chapter Highlights 123

Chapter 12 Two Types of Auctions: The Informal Auction and the Controlled Auction 125

Auctions in General 125

Document Rooms and Sequencing in the Controlled and Effective Auctions 127

Effective Auctions: A Summary 128

The Need for Auctions: What a Buyer Will Not Tell a Seller; How the Seller Finds Out; Is This Really Fair? 130

Chapter Highlights 133

Chapter 13 Financial Services Agreements, Estimating Professional Fees, and the Importance of Integrity around Large Sums of Money 135

Financial Services Agreements, Broadly Considered 135

Lawyers and Investment Banking Financial Services Agreement Reviews 136

Large Sums of Money and Odd Behaviors 137

Success or Contingent Fees Formulas (The Lehman Variations) 140

How Transaction Value Is Measured 142

Retainers (Commitment Fees) 147

Basic Contract Period 148

Trailer Periods 149

Breakup Fees 149

Carve-Outs and Approaches to Carve-Outs 150

Compensation to the Investment Banker in Warrants, Options, or Other Equity 151

Integrity and Investment Banking and Large Sums of Money 152

Bankers Fees Paid at Settlement—More about Large Sums of Money 153

Clients’ Overall Estimate of Professional Fees for a Typical Engagement 155

Chapter Highlights 155

Notes 164

Chapter 14 Investment Banking Representation on the Buy Side 165

The Buy Side 166

Buy- versus Sales-Side Representation 167

Buy-Side Fees 168

It’s All in the Planning 169

How Many Targets at One Time? 171

The Platform Philosophy versus the Financial Approach to Acquisitions 171

Who on the Buy Side Should Negotiate? 172

Orchestration (or Art) versus Science 173

Who Does the Investment Banker Represent? Possible Conflicts of Interest in Buy-Side Representation 174

Chapter Highlights 175

Chapter 15 The Letter of Intent: The Most Critical Document? 177

Content and Precedents of a Good Letter of Intent 178

The Buyer/Seller Advantage Curve 178

Preliminary versus Confirmatory Due Diligence 179

Exclusivity, Confidentiality, and the Letter of Intent 179

Affirmative Response Clauses 180

Weaknesses and Opportunities—Disclosure and Accuracy of Preliminary Due-Diligence Data 181

The “Honey, I Did the Deal” Rule Thoroughness of Business Terms 182

Use of Subtlety and the Effect of Precise Words in Letters of Intent: What the Definition of “Is” Is 183

Negotiating Protocol and the Letter of Intent 184

The Reverse Letter of Intent 185

LOIs from the Buy Side Point of View 185

Chapter Highlights 186

Chapter 16 Some Thoughts on the Psychology of M&A Negotiations 187

A Few Preliminary Thoughts on Negotiation 188

Preparation 188

Clients and Negotiation 189

Politicians and Honesty 189

Honesty and Integrity Are Still the Best Policies Making a Friend 190

Dangers of Written Argument 191

Every Deal Dies a Thousand Deaths 193

The End of the Middle Part of an M&A Negotiation Just Before the Letter of Intent 205

The Difficult or Unreasonable Negotiator 207

One Last Thought on Negotiations: A Confession 207

Chapter Highlights 208

Notes 209

Chapter 17 Initial Meetings with Buyers, Pricing the Company, and Pacing the Negotiations 211

Strange Role Reversals and First Meetings 212

Encourage All Offers, No Matter How Low . . . Getting Them into the Tent 217

The Truth, the Whole (?) Truth, and Nothing but the Truth 217

Timing, Sequencing, and Pacing the Deal while Pricing the Company 218

Chapter Highlights 219

Note 219

Chapter 18 Consideration and Deal Structure 221

It’s the Terms, Not the Price, Stupid! 221

Consideration and Consideration Types 222

Deal Structure 223

Frequently Offered Consideration Types—Overall 224

In Summary: Weighing and Comparing Offers 227

Recommending Against Deal Consideration 228

For Buyers: Creative Uses of Consideration as a Deal making Device 229

Stock and When It Is Priced 229

A Final Thought on Consideration Mixes 230

Chapter Highlights 230

Notes 231

Chapter 19 Earnouts 233

Why Earnouts Are Dreaded but Very Frequently a Deal Component 234

Whose Earnings Are These Anyway? 235

Avoid Confusion: Understand the Differences between Two Types of Earnouts 236

Elements of Negotiation in a Comfort (True) Earnout 237

When an Earnout Is Simply Frosting on the Cake 242

Earnouts and Taxes 242

Chapter Highlights 243

Chapter 20 The Proof Phase, or the Final Days 247

Confirmatory Due Diligence 247

The Definitive Agreement 248

The Final Days: Investment Bankers and Attorneys 250

The Critical Importance of Speed in the Final Days 250

The Closing and the Surprise at Closing 251

Chapter Highlights 253

Notes 254

Chapter 21 After the Nuptials: Postmerger and Acquisition Failures 255

A Brief Honeymoon, Perhaps; A Successful Marriage, Less Frequently 256

Chapter Highlights 259

Note 259

Chapter 22 Does a Sales-Side Client Need an Appraisal before Going to Market? 261

Four Basic M&A Marketplace Valuation Contexts 263

Formal versus Preliminary Valuation in the Marketplace 264

Investment and Dynamic Value 265

The Answer 265

Appraisal Costs 266

A Preliminary Valuation in the Marketplace 266

Chapter Highlights 268

Notes 268

Chapter 23 The Rules of Five and Ten and the Super Rule of Five in M&A Valuation 271

A Foundation for the Valuation of Middle Market Businesses 272

The Rules of Five and Ten, Cocktail Party Conversation, and Quick Calculations 273

Two Bell Curves 273

The Super Rule of Five 275

The Greater Fool Theory (Buyer Beware) 278

Chapter Highlights 279

Notes 279

Chapter 24 An Introduction to the Basic Art and Science of Valuation (Sales-Side versus Buy-Side) as Applied to M&A Transactions, and Flavors of EBITDA Explained 281

So How Much Is It Worth? Valuation 101 282

Valuing Economic Assets in General and Business in Particular 283

M&A and EBIT(DA) 284

Another Approach to Valuation: The Discounted Future Earnings (DFE) Method versus Multiples 287

Chapter Highlights 290

Notes 291

Chapter 25 A Brief Discussion of Multiples and Multiple Realities 293

Multiples in General 294

Risk and Multiples 295

Derivative Multiples versus Actual Deal-Driving Multiples 295

Public Market versus Private Market Multiples 296

Arbitrage and Roll-Ups: A Practical Example of Public versus Private Company Valuation and Multiples 297

Chapter Highlights 298

Notes 299

Chapter 26 Qualitative Values Inherent in the Target Company 301

Quantitative and Qualitative Valuation 302

Two Law Firms 302

Value Drivers Go Well Beyond the Numbers 303

Obsolescence, or . . . Go into Plastics, Young Man 304

The Use of a Value Driver Analysis Contained in a Preliminary Valuation Report 306

Chapter Highlights 306

Note 306

Chapter 27 M&A Conventions and Establishing Balance Sheet Targets 307

Conventions and Their Need and Basis 307

The Balance Sheet in General 308

M&A Conventions in General 309

Entities and Businesses—Redux 310

M&A Balance Sheet Conventions, or, Who Gets the Balance Sheet? 310

Other Nonoperational Assets beside Cash 312

Establishing Targets for Deliverables, Usually the Balance Sheet—A Moment in Time 313

The Balance Sheet: At the Time of Negotiation or at the Time of Settlement? 314

Working Capital Targets on the Balance Sheet 314

Net Worth Targets on the Balance Sheet 315

Double-Counting Target Purchase Price Adjustments 316

Settlement of Differences—Truing Up 316

Operating in the Normal Course of Business 316

The Balance Sheet and Normalization 317

Chapter Highlights 318

Notes 319

Chapter 28 Special M&A and M&A Valuation Topics 321

Overview 321

Valuing Real Estate on the Balance Sheet 321

Technology Valuation: Is It a Business Yet? 324

Valuing the Nonprofitable Business 326

Valuing Rapidly Growing Businesses for Venture Capital and Similar Investments—Is This Really Valuation? 329

Chapter Highlights 335

Notes 336

Chapter 29 Common M&A Taxation Issues 337

A Brief Tax Overview 338

Entity Selection: S Corporations versus C Corporations and Asset versus Stock Deals 339

The Effect of Timing of S Corporation Elections and the Built-In Gains Tax 340

Other Transaction Structural Issues 341

Earnouts 341

The Effect of Tax Accounting Methods 342

Reorganization Deal Structures (Taking Stock) 343

Disposing of Business Interests by Gifting Prior to a Sale and Charitable Remainder Trusts 344

Divisive Reorganizations 345

Small Business Corporations 346

How Much Do Taxes Matter During the Negotiation? 346

Chapter Highlights 346

Notes 347

Chapter 30 The Business of Middle Market Investment Banking 349

What Is Investment Banking? 350

Some Ironies of the M&A Profession 351

Attention Deficit Disorder and the M&A Banker 352

People Skills 352

Entry Points to Investment Banking in General 353

Cultural Issues in Investment Banking Practices—Some Further Thoughts 358

Marketing: Half of Investment Banking Is Business Development 362

Multiple Marketing Approaches 364

Networking in General 371

Serving Clients and Executing Engagements Well 374

Securities Law Issues 376

Engagement Intake Management 378

Success in Life and M&A 379

The $10 Trillion Opportunity 380

Chapter Highlights 381

Notes 382

Chapter 31 A Postscript: The Capital Markets 385

Notes 395

Chapter 32 Another Postscript: The Unbundled Approach to Formal Valuation 397

A Bird, a Plane? 397

Notes 399

Index 401

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