Mergers and Acquisitions For Dummies (31 page)

Clearly deciding who does what helps ensure your side follows through with its promises, which is important for maintaining credibility with the other side.

Don't fall into the trap of communicating only by e-mail.
E-mail is a wonderful tool and should be utilized, but because it's a passive form of communication, it may not be the best method to communicate. It's certainly an easy solution to
call reluctance
especially when a particularly difficult bit of information needs to be conveyed or when a delicate question needs to be asked, but in those situations, my million-dollar advice is always the same: Pick up the phone and have a conversation.

The problem with e-mail is that it doesn't pick up on nuance or read the other side and adjust its tone or delivery. E-mail can be abrupt, and the reader may interpret unintended harshness in an otherwise innocuous note. As a result, e-mail can inadvertently derail a process. When negotiations have bogged down and both sides are merely sending e-mails back and forth, it's time to get on the horn.

Following up a conversation with an e-mail is a perfectly acceptable method to memorialize the conversation. Delicate conversations should be handled in person or by phone, but the nuts and bolts of a deal are often best hammered out through e-mail. This way, you have a record of what the other side said or agreed to.

Getting Your Banker Involved

The decision to sell a business means the owner eventually has to tell his banker of the transaction or pending transaction. The first step is to review the loan covenants for any guidance as to when the bank needs notification. Barring any specific requirements (such as Seller alerting the bank when he hires an intermediary to sell the business), the right time to make the announcement often depends on whether the company in good financial health. If the company is in good shape, the announcement of a possible sale probably won't trigger any warning signs in the banker's eyes, so Seller can sensibly wait until he's accepted an offer from Buyer (usually in the form of a signed letter of intent, or LOI, which I cover in Chapter 13).

The banker's main concern in a business sale is the loss of the credit; the new owner probably has its own banking relationships. Although such a loss is unfortunate for the banker, that shouldn't be Seller's concern. As harsh as it may sound, the guiding principle in this situation is, “Don't let someone else's problem become your problem.”

If a company is challenged, the news of a potential sale can cause the banker to get nervous about the company's prospects, and by proxy, the credit extended to the company. As Seller, you should speak with the banker in a very frank and honest manner. Selling a troubled company actually means the banker has a better chance of being repaid than if the company were to simply shut down. Remind a nervous banker that calling the company's loan right now will kill the company; giving the company some time to conclude a deal will result in the bank getting its dough.

Don't panic if a nervous banker calls the loan in the wake of learning about the potential sales transaction. Talk to the banker. Ask for an extension or a waiver, but don't let the calls from the banker go unanswered.

Chapter 6

Finding and Contacting Buyers or Sellers

In This Chapter

Creating Buyer and Seller lists

Navigating the phone labyrinths of large companies successfully

Dealing with people who can't help you

A
ny acquisition or sales process depends on having an appropriate target list. Not having enough targets lowers the odds of a successful closing; having too many makes it an unwieldy process. Selling a company is probably the only time a sales call is easy; buying a company is a trickier affair. Business owners get tons of buy offers, so as a Buyer, standing out from the crowd can be difficult. Luckily, knowing whom to talk to, how to get to that person, and what to say when you do can make a world of difference.

In this chapter, I introduce you to the target list — specifically, how to create one and then use it to make contact with potential Buyers or Sellers. I also show you how to avoid wasting time on the phone with people who can't help you.

Creating a Target List

Before you can have a conversation about selling your company or acquiring someone else's company, you need to have someone to speak to! It's one of those crazy things about mergers and acquisitions. If you want to find a Buyer or Seller, you have to seek it out, and that starts with a
target list
(list of potential deal partners).

Getting started

Creating a target list starts with basic brainstorming of any and all companies that you would like to buy, merge with, or be bought by. As with any brainstorming session, no idea is a bad idea. Even if you think of a company that isn't a right fit, merely mentioning that company may cue your memory (or someone else's memory) of another type of company that is a suitable fit. Consider this your shortlist.

The most obvious targets include competitors, but vendors and customers may also make suitable M&A targets. You need to weigh the relative merits and risks of contacting competitors, vendors, and clients; every situation is different, so working with an experienced M&A advisor, who also probably has a shortlist of possible targets, is so important. (Head to Chapter 5 for more on picking advisors.)

Spending time on the Internet is important. You can learn a lot about a company by reviewing its Web site and searching for news articles. I also recommend using proprietary databases to conduct research. A couple of my favorites include CapitalIQ (
www.capitaliq.com
) and OneSource (
www.onesource.com
).

After you complete the basic brainstorming, you're ready to compile a target list.

Buyer: Considering what kind of business you want

For Buyers, the job begins by defining the “whats” of the target:

What type of business do you want to acquire?
A product extension?A new product or service? Entrée to new markets? A competitor? Chapter 2 helps you answer this question.

What's the revenue range?
What revenue level does the target need to be worthwhile? How much is too much or too little?

What are your earnings requirements?
Does an acquisition need to be
accretive to
(increase) your company's earnings per share, or are you willing to acquire a money-losing company?

What are you willing to pay?
Are you prepared to pay a premium or are you strictly a bargain-basement Buyer?

What do you want ownership/management to do after the deal is done?
Do you want or need the target's higher-ups to stay on board and continue to run the business? Or do you prefer to replace them with your own team?

Where do you want or need the acquisition located?
Okay, this one isn't really a “what,” but it's still an important consideration. Does the target's location matter to you? Do you intend to keep the acquisition at its current location or fold its operations into your existing locations?

None of these questions has a right answer. The right answer is whatever constitutes the right fit based on your specific needs as Buyer.

Accretive is mostly on the minds of public companies. If a public company has earnings per share of 25 cents, the acquiring company probably won't pay a price for an acquisition that erodes that earnings per share amount. For Sellers, pay attention to who is buying you. If you're asking a public company to pay a purchase price that isn't accretive (dilutive, in other words), the company probably won't be able to agree to your demands.