M & A Transaction Process

Their commitment goes beyond financial support, as they believe in establishing a collaborative team of peers, all of whom have a hand in the company's progress. When they combine management's industry and operational expertise with their own, the company's full potential is unlocked, and value is created. They will provide support through active participation on the board of directors, working with management to formulate strategic direction and to empower company growth.

These groups we bring will be partners in the truest sense of the word and believe in working alongside management to create significant shareholder value over the long term. There is no specific "playbook" for how they work alongside companies like yours. Instead, they rely on and empower management to be the day-to-day operators of the business while they serve as trusted partners with the resources and expertise to help companies unlock their next phase of growth. Whether organizing "whiteboard" sessions to discuss organic growth opportunities or leading diligence and execution efforts on a potential add-on acquisition, they act as a resource to management teams in the analysis and execution of key strategic initiatives.

In the marketing stage, the initial exchange of information takes place.

As in marketing, the point is not only to gain some interest in an offering but to offer just enough preliminary info to entice the target market to ask for more.

When a teaser is sent out, we contact private equity firms with the basics of the business, including:

1. Business description
2. Product and/or service offerings
3. High-level financial information

If, after reading the teaser, the private equity firms are interested in the prospective company, they will move on to signing a Non-disclosure Agreement (NDA).

The Confidential Information Memorandum (CIM) is a confidentiality package sent from us about your company. This is where most of the leg work for the private equity firm lies. There is a combined need to perform due diligence and valuation.

The process may differ from one PE shop to another, but this step often involves a meeting with the firm's investment committee. They may create an expense budget to aid with getting through the deal, but most often, the purpose is to seek approval for the first-round bid for you guys to consider. The data exchange must be considered a complex and sensitive deal. Due to the volume of data and the need for it to be easily accessed, the data rooms we set up are a great place to satisfy these needs regarding confidential data exchange.

As there are many benefits to acquisitions, it is beneficial for the senior managers of both parties to meet and discuss what these might be.

These benefits are called business synergies, which could include improved pricing power, buying power, shared technology and information, and reduced competition in some cases.

This is also a good opportunity to gain a deeper understanding of the management team, their goals, and plans to meet these goals.

If all has gone well and both parties are satisfied with the information they have received thus far, now is the time for the private equity firm to express its intent to acquire in a formal letter.

There are many moving parts at this stage, and the teams are working hard to close the deal. PE firms will work with legal and deal advisory teams to ensure that everything goes through smoothly.

In this stage, a third party will act as an extra set of eyes. The job of the quality of earnings report is to analyze the various elements of the income statements, including categorizing expenses.

The third-party wants to know if the earnings are one-time or regular, fixed or variable, and to what extent they might be expected to continue. Understanding this will help understand the quality of the top and bottom line, revenue, and earnings.

If the quality of earnings does not uncover anything unexpected and the earnings are of acceptable quality, that means moving on to approval and a final, binding offer. Once (or if) this is accepted, purchase agreements must now be drafted and signed.

As all transactions face different challenges, there may be various final steps to close a deal. Much of what is required at this stage is legal and administrative tasks. There is now also the task of onboarding any new employees if needed.

A final agreement will be drafted and signed with all the necessary due diligence, conditions, warranties, valuation, price of purchase, etc.

Something that Private Equity firms often utilize when they buy companies, has implications for both sellers and buyers. In rollover equity, the seller invests part of the proceeds of the sale of his or her company with the buyer. In a private equity transaction, the seller invests part of the proceeds from the sale into the PE firm's entity that is acquiring the company. For example, suppose the owner of a profitable and growing company sells his company to a PE firm for $30 million. The PE firm gives the seller the opportunity to roll 15% of the sale proceeds ‒ in this case, $4.5 million ‒ into the acquiring company. The seller pockets $30 million, and by rolling that 15%, the seller now has a 15% stake in the PE-owned company.

Investing part of the proceeds this way has many potential advantages for the seller. Rollover equity can be a great deal for the seller, particularly if they want to stay involved in the business. The rolled equity makes the seller a minority owner, so it keeps the seller involved in the company. Because the seller is no longer a majority owner, it reduces personal risks because "All of your eggs are no longer in one basket." Rollover equity can also have tax advantages because it can be structured as a tax-free rollover where the proceeds that are rolled are not taxable until the acquired company is sold in the future.

Perhaps most attractive, rollover equity offers the seller a "second bite of the apple" ‒ the opportunity to realize additional returns when the buyer later sells the acquired company at an increased valuation. For example, suppose after five years, the PE firm sells the acquired company for $150 million. The seller's 15% stake now puts an additional $22.5 million into his or her pocket. For the buyer, rollover equity means less cash that they need to provide to close the deal.

Typically, in a rollover equity scenario, the CEO of the selling company is given the option of rolling equity into the new entity. However, some of the seller's executive management team, who are also shareholders, are going to be active in running the new business; the buyer may also offer them the option of rolling equity.

Rollover equity is a negotiable part of an M&A agreement. In any event, it is in both the seller's and buyer's interest to be flexible and agree on an arrangement that gives both sides a fair and equitable amount of benefit.

Non-Compete: All future equity-holders of Buyer would sign a rolling, two-year non-competition agreement with Buyer. The two-year non-competition period would begin on the date that the equity [1] holder no longer holds equity in the Buyer. Additionally, all material Shareholders would be expected to sign a five-year non-competition and non-solicitation agreement, with such a restricted period beginning on the date of the Transaction, as part of the Purchase Agreement.

Cash in Bank: it is standard practice for sellers to retain any cash in the business at the time of sale. This includes physical petty cash funds along with money in checking or savings accounts.

Net Working Capital: Net Working Capital = Current Assets (excluding cash) minus Current Liabilities (excluding debt). In most M&A transactions, the target company is acquired on a cash-free, debt-free basis. This means the seller keeps the cash in the business and must pay off any debt upon closing.

Working capital is a key factor to focus on during your sale. Unfortunately, it is often misunderstood by sellers and even their professional advisors. Even worse, it's often not addressed until the very last minute. Buyers will be expecting you to deliver the company with enough working capital to operate the business. As transaction sizes increase over $5 million, companies are commonly sold with enough working capital (including cash, AR, AP, inventory, etc.) to continue to operate the business. Think of it as having to sell your car with "gas in the tank." Usually, this is a no-winner, no-loser, and no negative net effect to you, the seller. Terry can explain this aspect better than I can.

The current benefit of Trailing Twelve Months (TTM). If a business owner is entertaining selling your company, most financial statements are prepared for a calendar year (Jan. 1 to Dec. 31). A path to obtaining the valuation boost for strong ongoing earnings is a trailing twelve-month earnings calculation, also known as "TTM."

TTM is a widely accepted metric in the mergers and acquisitions sector since it reflects actual performance over the last twelve months. By using TTM and insisting that sellers get multiple earnings on current sales, not those from a year ago, TTM can help sellers receive the highest possible value for their business at the time of sale.

By presenting TTM to a potential acquirer, you are essentially showing them the results of your last 12 months of performance but not your official calendar year. Instead, TTM - EBITDA, per se, is a rolling fiscal year that ends on the last day of every previous month. Simply put, TTM rewards you for sellers for the latest earnings performance.