Mergers and Acquisitions For Dummies (21 page)

What to Tell Employees and When

Informing employees that a company is in the process of being sold is a tricky proposition. If employees find out about a potential sale that doesn't eventually occur, the management/ownership may lose face in the employees' eyes. Worse, employees may begin to leave because they think, correctly or not, that the company is in some sort of trouble. A failed sale process can become a self-fulfilling prophecy of doom for an otherwise-healthy company. For some thoughts on what to say to employees after the deal closes, see Chapter 17.

Keep news of a sale process confidential

Simply put, the greater the number of people (even employees) who know about a pending business sale, the greater the chance someone will inadvertently spill the beans to someone else, who will mention it to someone else, who will talk about it in a public place where anyone can overhear.

The first concern is a competitor learning of the sale process. A competitor may use knowledge of a business sale as leverage to steal clients by spooking the clients into questioning the company's future. The second concern is gossip among employees. In the absence of fact and communication, people can be extremely creative as they attempt to fill in the blanks with some sort of guesswork. Ambiguity is never a friend to business.

Never lie

If an employee asks if the company is for sale, don't lie and say, “No, absolutely not.” A better option is to simply say the company is exploring bringing in a financial partner to help take it to the next level. That's a true statement.

A staggered release

If a business is going through a sale process, certain employees need to know about the business sale at different times. The owner doesn't need to inform everyone at the same time. The controller (or similar accounting employee) should be taken aside and told of the sale process. Because financial documents are one of the main items collected during the sale process, accounting employees usually figure it out on their own. However, talking with the controller ahead of the process reduces the odds that she tells other employees. Other than accounting employees, the remaining employees should be told about the potential sale on a need-to-know basis. If at all possible, tell the employees after the deal has closed.

Part II

Taking the First Steps to Buy or Sell a Company

In this part . . .

P
art II examines the steps necessary to start the deal-making process. One of the first orders of business for Buyers is to make sure the necessary capital is available. Because M&A can be a complex activity, Buyers and Sellers alike need advisors to help advance and close the deal, so I devote a chapter to helping you assemble your team. And because it takes two to do the M&A tango, I show you how the sides can find each other in the first place!

Chapter 4

Financing M&A Deals

In This Chapter

Getting a handle on financing and debt basics

Tuning in to types of investors and deals

Digging into EBITDA

Covering Buyers' return metrics

Working out a deal on a troubled company

B
efore discussions between Buyer and Seller heat up — and possibly burn out due to lack of planning — Buyers need to line up their financing for acquisitions, and Sellers should ascertain Buyers' ability to actually come up with the dough.

In this chapter I explore the various methods that help Buyers finance the acquisition of companies, including where Buyers get the necessary capital, what exactly they're buying, and what those transactions look like.

Exploring Financing Options

To many, buying a company means an exchange of cash: Seller gets some dough, and Buyer gets the company. This transaction implicitly states that the payment is currency, to be paid now, and the price is fixed. Although that's one way to finance a deal, it's not the be-all and end-all of M&A transactions. Timing, currency, and even the amount of payment all affect a deal's financing.

Although cash, especially the all-time favorite “cash at closing” variety, is the preferred payment, it's not the only way to pay for a company. A better word for what Buyer pays Seller for the company is
consideration.
Consideration can be anything that a Seller is willing to accept in exchange for the ownership of her company, such as land, another company, or, yes, cash (be that dollars, pounds, Romanian leu, or whatever). Basically, consideration is anything of value (or, more accurately, anything that someone considers valuable). Heck, if Seller accepts a pizza, some seashells, and small island in the Caribbean as consideration for her company, that's a deal, too!

Traditionally, the consideration used in M&A transactions consists of some combination of cash, stock, notes, and contingent payments (head to Chap-ter 12 for more on noncash payment options). For example, say a deal has a valuation of $15 million. Buyer may not actually be paying Seller $15 million cash at closing. Instead, the consideration may look like the following:

$5 million cash at closing

$5 million in a three-year note at 10 percent

$3 million in stock in the acquiring company

Up to $2 million in an earn-out, with the amount actually received based on acquired company achieving certain results

This setup is just one example of virtually limitless permutations of structuring a deal.

Consideration is limited only by your imagination, which is why creativity is so important during the deal-making process. I'm a firm believer that Buyer and Seller can almost always find a mutually beneficial transaction. Think of it as turning knobs on a stereo: You have a virtually infinite number of ways to twist a multitude of knobs. The following sections lay out a few such options.

Buyers, don't provide Sellers with your financials, even if they ask. Instead, offer some sort of proof of your ability to complete a transaction. A letter from Buyer's senior leader expressing support for Buyer's acquisition strategy goes a long way on this front.

Buyer uses his own cash

The most obvious source of capital is for Buyer to use his own money. The benefits are obvious: a Buyer using his own money has total control over the situation. A third-party lender usually institutes hoops for the Buyer to jump through; using his own money removes those external limitations.

The downside is that money isn't a bottomless pit, and a company putting money into an illiquid asset such as an acquisition ties up that capital such that the money can't go toward other important expenses such as payroll and other operating expenses.

Using his own capital to finance 100 percent of an acquisition also means the Buyer is assuming 100 percent of the risk. Bringing in outside capital helps Buyer spread the risk.

Many Sellers incorrectly assume that Buyers are using their own money, and worse, that Buyers have an endless stream of money they're willing and happy to throw around with little or no planning. Mentally spending someone else's money like this is one of the biggest errors anyone can make. Being carefree with someone else's wallet is easy, but think about how you'd feel if someone told you, “You have money; just pay more.”