Mergers & Acquisitions

Dennis J. Roberts,  CPA, CVA, ABV, is Chairman of The McLean Group, LLC, a national M&A firm whose primary focus is on Middle Market businesses. He lectures, teaches, and writes on M&A, business valuation, and corporate finance to national audiences, having more than thirty-five years of accounting and investment-banking experience involving a multitude of transactions across a wide variety of industries and markets. He is a regular contributor to various journals, including Thomson's Valuation Strategies and the Journal of Accountancy. He testifies frequently as an expert witness and was the chief valuator of the Nixon Watergate Tapes.

• About the Author xxiAcknowledgments xxiiiForeword xxvPreface: A Profession xxviiA Career in Middle Market Investment Banking xxviiThe Origins of a Deal Junkie xxviiThe Deal Junkie Arrives (Almost) xxviiiWhy Another M&A Book? xxixMy Intended Audience xxxHappy Families xxxiDisclaimers, Apologies, and Modest Lies xxxiiiChapter 1 The Middle Market Is Different! 1Business Process Innovation, Growth Spurts, Regulatory Imperatives, and Capital 1Not “Mom-and-Pop” Businesses 3The Upper Market 4What Exactly Is the Middle Market? 5Does Size (Alone) Matter? 6Brokers and Investment Bankers Servicing the Three Markets 7Chapter Highlights 7Notes 9Chapter 2 Drivers of Middle Market Activity and the Sellers 11Liquidity and Umbrella Drinks 11Baby Boomers 11Technology and the Information Age 12It’s Not Your Father’s M&A World, Either 13The Glass Ceiling that Sometimes Drives Transactions 14Big Fish and Little Fish 14Chapter Highlights 14Note 15Chapter 3 Finding—and Understanding—Buyers in the Middle Market 17Scared Money 17Understanding Buyer and Investor Types 18Identifying Potential Buyers 29Which Door to Open to the Buyers? 32Chapter Highlights 34Note 34Chapter 4 Preparing a Middle Market Business for Sale and Running the Business while Selling It 35Three Periods to Prepare to Sell a Middle Market Business 37Litigation 43Summing Up 44Chapter Highlights 44Note 45Chapter 5 Rewarding and Retaining Key Staff in Connection with a Business Sale: Blackmail or Justice? 47Overview 47Key Employee Rewards in General 49Timing Reward Payments 50Timing Tax Issues in Rewarding Key Employees 51The Importance of Clarity and Documentation—Avoiding Vague Promises 51When to Negotiate Noncompete and Nonintervention Agreements with Key Employees 52Being Alert to Potential Problems When Promises Made Are Not Consistent with the Duties and/or Influence of Key Employees 53A Way to Avoid Key Employee Problems in the First Place 54The Special Problems of Absentee Owners 54Wrap-Up 55Chapter Highlights 56Chapter 6 Crystal Balls and Timing the Sale of a Middle Market Business 57Bubbles, Cycles, and Business Values 58Other Timing Opportunities—Roll-Ups 62Chapter Highlights 63Notes 64Chapter 7 The Confidential Information Memorandum 65The Acquisition Profile 66Confidential Information Memoranda—Overview 66Clients and Confidential Information Memoranda: An Intense Collaboration 66Financial Statements in the Confidential Information Memorandum 74Chapter Highlights 78Notes 80Chapter 8 Confidentiality While Doing the Deal 81Confidentiality in General 82Employees and Confidentiality: Two Approaches 83The Investment Banker and Confidentiality: Communications between Banker and Client; Preventing Premature Disclosure 84The Executive Summary and Confidentiality 85Web Site Business-for-Sale Listings 85Nondisclosure Agreements 86Securities Laws and Confidentiality 88Chapter Highlights 88Chapter 9 Middle Market Investment Bankers and Intermediaries 93The Telecom Deal 95Using Professional Investment Banking Assistance and In-House Teams 95Choosing the Right Investment Bank 100Chapter Highlights 106Note 107Chapter 10 The External M&A Team, and Using the Team Correctly 109The External M&A Team 110Using the Team Properly and Sequencing the Professionals; Separating the Tasks and Single Negotiators 113Chapter Highlights 116Note 117Chapter 11 Anyone Can Do M&A—Right? 119Anybody Can Do This? 119The Deal the Client Never Got 121Experience and M&A 122Chapter Highlights 123Chapter 12 Two Types of Auctions: The Informal Auction and the Controlled Auction 125Auctions in General 125Document Rooms and Sequencing in the Controlled and Effective Auctions 127Effective Auctions: A Summary 128The Need for Auctions: What a Buyer Will Not Tell a Seller; How the Seller Finds Out; Is This Really Fair? 130Chapter Highlights 133Chapter 13 Financial Services Agreements, Estimating Professional Fees, and the Importance of Integrity around Large Sums of Money 135Financial Services Agreements, Broadly Considered 135Lawyers and Investment Banking Financial Services Agreement Reviews 136Large Sums of Money and Odd Behaviors 137Success or Contingent Fees Formulas (The Lehman Variations) 140How Transaction Value Is Measured 142Retainers (Commitment Fees) 147Basic Contract Period 148Trailer Periods 149Breakup Fees 149Carve-Outs and Approaches to Carve-Outs 150Compensation to the Investment Banker in Warrants, Options, or Other Equity 151Integrity and Investment Banking and Large Sums of Money 152Bankers Fees Paid at Settlement—More about Large Sums of Money 153Clients’ Overall Estimate of Professional Fees for a Typical Engagement 155Chapter Highlights 155Notes 164Chapter 14 Investment Banking Representation on the Buy Side 165The Buy Side 166Buy- versus Sales-Side Representation 167Buy-Side Fees 168It’s All in the Planning 169How Many Targets at One Time? 171The Platform Philosophy versus the Financial Approach to Acquisitions 171Who on the Buy Side Should Negotiate? 172Orchestration (or Art) versus Science 173Who Does the Investment Banker Represent? Possible Conflicts of Interest in Buy-Side Representation 174Chapter Highlights 175Chapter 15 The Letter of Intent: The Most Critical Document? 177Content and Precedents of a Good Letter of Intent 178The Buyer/Seller Advantage Curve 178Preliminary versus Confirmatory Due Diligence 179Exclusivity, Confidentiality, and the Letter of Intent 179Affirmative Response Clauses 180Weaknesses and Opportunities—Disclosure and Accuracy of Preliminary Due-Diligence Data 181The “Honey, I Did the Deal” Rule Thoroughness of Business Terms 182Use of Subtlety and the Effect of Precise Words in Letters of Intent: What the Definition of “Is” Is 183Negotiating Protocol and the Letter of Intent 184The Reverse Letter of Intent 185LOIs from the Buy Side Point of View 185Chapter Highlights 186Chapter 16 Some Thoughts on the Psychology of M&A Negotiations 187A Few Preliminary Thoughts on Negotiation 188Preparation 188Clients and Negotiation 189Politicians and Honesty 189Honesty and Integrity Are Still the Best Policies Making a Friend 190Dangers of Written Argument 191Every Deal Dies a Thousand Deaths 193The End of the Middle Part of an M&A Negotiation Just Before the Letter of Intent 205The Difficult or Unreasonable Negotiator 207One Last Thought on Negotiations: A Confession 207Chapter Highlights 208Notes 209Chapter 17 Initial Meetings with Buyers, Pricing the Company, and Pacing the Negotiations 211Strange Role Reversals and First Meetings 212Encourage All Offers, No Matter How Low . . . Getting Them into the Tent 217The Truth, the Whole (?) Truth, and Nothing but the Truth 217Timing, Sequencing, and Pacing the Deal while Pricing the Company 218Chapter Highlights 219Note 219Chapter 18 Consideration and Deal Structure 221It’s the Terms, Not the Price, Stupid! 221Consideration and Consideration Types 222Deal Structure 223Frequently Offered Consideration Types—Overall 224In Summary: Weighing and Comparing Offers 227Recommending Against Deal Consideration 228For Buyers: Creative Uses of Consideration as a Deal making Device 229Stock and When It Is Priced 229A Final Thought on Consideration Mixes 230Chapter Highlights 230Notes 231Chapter 19 Earnouts 233Why Earnouts Are Dreaded but Very Frequently a Deal Component 234Whose Earnings Are These Anyway? 235Avoid Confusion: Understand the Differences between Two Types of Earnouts 236Elements of Negotiation in a Comfort (True) Earnout 237When an Earnout Is Simply Frosting on the Cake 242Earnouts and Taxes 242Chapter Highlights 243Chapter 20 The Proof Phase, or the Final Days 247Confirmatory Due Diligence 247The Definitive Agreement 248The Final Days: Investment Bankers and Attorneys 250The Critical Importance of Speed in the Final Days 250The Closing and the Surprise at Closing 251Chapter Highlights 253Notes 254Chapter 21 After the Nuptials: Postmerger and Acquisition Failures 255A Brief Honeymoon, Perhaps; A Successful Marriage, Less Frequently 256Chapter Highlights 259Note 259Chapter 22 Does a Sales-Side Client Need an Appraisal before Going to Market? 261Four Basic M&A Marketplace Valuation Contexts 263Formal versus Preliminary Valuation in the Marketplace 264Investment and Dynamic Value 265The Answer 265Appraisal Costs 266A Preliminary Valuation in the Marketplace 266Chapter Highlights 268Notes 268Chapter 23 The Rules of Five and Ten and the Super Rule of Five in M&A Valuation 271A Foundation for the Valuation of Middle Market Businesses 272The Rules of Five and Ten, Cocktail Party Conversation, and Quick Calculations 273Two Bell Curves 273The Super Rule of Five 275The Greater Fool Theory (Buyer Beware) 278Chapter Highlights 279Notes 279Chapter 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 281So How Much Is It Worth? Valuation 101 282Valuing Economic Assets in General and Business in Particular 283M&A and EBIT(DA) 284Another Approach to Valuation: The Discounted Future Earnings (DFE) Method versus Multiples 287Chapter Highlights 290Notes 291Chapter 25 A Brief Discussion of Multiples and Multiple Realities 293Multiples in General 294Risk and Multiples 295Derivative Multiples versus Actual Deal-Driving Multiples 295Public Market versus Private Market Multiples 296Arbitrage and Roll-Ups: A Practical Example of Public versus Private Company Valuation and Multiples 297Chapter Highlights 298Notes 299Chapter 26 Qualitative Values Inherent in the Target Company 301Quantitative and Qualitative Valuation 302Two Law Firms 302Value Drivers Go Well Beyond the Numbers 303Obsolescence, or . . . Go into Plastics, Young Man 304The Use of a Value Driver Analysis Contained in a Preliminary Valuation Report 306Chapter Highlights 306Note 306Chapter 27 M&A Conventions and Establishing Balance Sheet Targets 307Conventions and Their Need and Basis 307The Balance Sheet in General 308M&A Conventions in General 309Entities and Businesses—Redux 310M&A Balance Sheet Conventions, or, Who Gets the Balance Sheet? 310Other Nonoperational Assets beside Cash 312Establishing Targets for Deliverables, Usually the Balance Sheet—A Moment in Time 313The Balance Sheet: At the Time of Negotiation or at the Time of Settlement? 314Working Capital Targets on the Balance Sheet 314Net Worth Targets on the Balance Sheet 315Double-Counting Target Purchase Price Adjustments 316Settlement of Differences—Truing Up 316Operating in the Normal Course of Business 316The Balance Sheet and Normalization 317Chapter Highlights 318Notes 319Chapter 28 Special M&A and M&A Valuation Topics 321Overview 321Valuing Real Estate on the Balance Sheet 321Technology Valuation: Is It a Business Yet? 324Valuing the Nonprofitable Business 326Valuing Rapidly Growing Businesses for Venture Capital and Similar Investments—Is This Really Valuation? 329Chapter Highlights 335Notes 336Chapter 29 Common M&A Taxation Issues 337A Brief Tax Overview 338Entity Selection: S Corporations versus C Corporations and Asset versus Stock Deals 339The Effect of Timing of S Corporation Elections and the Built-In Gains Tax 340Other Transaction Structural Issues 341Earnouts 341The Effect of Tax Accounting Methods 342Reorganization Deal Structures (Taking Stock) 343Disposing of Business Interests by Gifting Prior to a Sale and Charitable Remainder Trusts 344Divisive Reorganizations 345Small Business Corporations 346How Much Do Taxes Matter During the Negotiation? 346Chapter Highlights 346Notes 347Chapter 30 The Business of Middle Market Investment Banking 349What Is Investment Banking? 350Some Ironies of the M&A Profession 351Attention Deficit Disorder and the M&A Banker 352People Skills 352Entry Points to Investment Banking in General 353Cultural Issues in Investment Banking Practices—Some Further Thoughts 358Marketing: Half of Investment Banking Is Business Development 362Multiple Marketing Approaches 364Networking in General 371Serving Clients and Executing Engagements Well 374Securities Law Issues 376Engagement Intake Management 378Success in Life and M&A 379The $10 Trillion Opportunity 380Chapter Highlights 381Notes 382Chapter 31 A Postscript: The Capital Markets 385Notes 395Chapter 32 Another Postscript: The Unbundled Approach to Formal Valuation 397A Bird, a Plane? 397Notes 399Index 401