Mergers and Acquisitions For Dummies (32 page)
Read Mergers and Acquisitions For Dummies Online
Authors: Bill Snow
Seller: Knowing who's buying you
Seller's target list is a bit different than Buyer's target list due to one key aspect: Seller's main concern is Buyer's ability to close a deal. In other words, does Buyer have the dough?
That's not to say you as Seller should be blasé about who buys the company. Even though you're selling, you likely still have some sentimental or financial stake in the company's success. Here are a few points to consider when listing targets:
Can the new owner continue the company's successful operation?
If a selling owner plans to stick around for a period of time as an employee â especially if she plans to accept some kind of
contingent payment
(an earn-out, a note, or stock, for example), as part of the sale â she wants to make sure the company continues to be successful in order to increase the likelihood of collecting that contingent payment.
Does the target have a history of taking care of an acquisition's current employees?
Most Sellers (especially those who are retiring) want their companies to continue to be successful for the sake of the employees. Does your potential Buyer's record show a history of integrating existing staff into operations or canning everyone and starting over with its own people?
How will the new ownership affect the company's legacy?
Even if you aren't sticking around post-transaction, you probably want to see your company continue as a going concern.
If you're selling a company with losses, look for a
strategic Buyer
(a company seeking to fold another company into its operations). Financial Buyers (such as private equity firms) aren't likely to be interested in a money-losing enterprise.
Expanding and winnowing the list
Because contacting every company in this world and beyond doesn't make much sense (those interstellar telecom charges will kill you), you need to make sure you have the right type and number of targets on your list.
You do this by initially making the target list larger than it needs to be. To create the initial target list, take all the targets on your and your advisors' shortlists and then expand that list by applying your search criteria. Really dig in by dive-bombing online research sites (see the appendix for some site examples). If a company is obviously not a fit, discard it, but if you're not sure whether a company should be included in the initial target list, leave it in. The idea of this step is to err on the side of too wide a fit. If the company isn't a right fit, you weed it out in the next phase.
The initial target list will be larger than the final target list. Having 200 to 300 targets on the initial list isn't unheard of, nor is that a bad thing. Having an initial target list of that size increases the odds that you'll have a strong final list after you winnow it down.
After you've created your initial target list, you want to review that list with your team and reduce it to a reasonably sized final list. See the following section for more on determining what the length of this final list should be.
To prepare for this review, have someone who works for you print up as much information about the targets as possible, including pertinent reports found from online research sites. These reports contain contact info, URLs, financial info, employee counts, and brief descriptions of the companies. Next, you want to further torture the person by having him go through and print the Web sites of the target companies. If you want to save a forest and someone's sanity, use a projector and a computer to review the Web sites. However, and with apologies to environmentalists, printing copies of reports so everyone can have quick access to the financials is still probably the best bet.
Usually, a junior executive or some other low-level creature does the target list research because it's rather tedious and time-consuming work. Don't let this delegation make light of the importance of the research, though. Without a good target list of Buyers or Sellers, your M&A dreams stand a very good chance of being dashed. Take this duty very seriously; if you aren't doing it yourself, entrust the right person. Alternately, you can also hire an investment banking firm to take care of it.
During the review, the idea is to assess each company and talk about what it does, its financial situation, its history of doing deals, and whether it's a suitable target. This process is a pain. It's a bit like going to the dentist: It's no fun, but it's ultimately a good thing. Doing this review as a group is important. You need the feedback and the ability to rapidly bounce ideas off each other. I don't recommend conference calls for this rap session; get the group together in one room.
Reviewing the initial target list will likely take half a day. At the end of this process, you should have a manageable final target list that's shed of all the tweeners, borderline cases, or whatever term you want to use for “almost, but not quite.”
Hold on to all those “rejected” targets. If your A-list targets don't yield what you're looking for, you can review the previously rejected targets and consider adding them into the mix.
Capping the list: How many (and which) companies to include
It takes only one. That's the phrase of the day. It takes only one Buyer or Seller to close your deal. That said, you need to consider the odds of successfully closing a deal when your target list amounts to a random sample of one. Those odds are poor.
The folly of seeking the perfect company to buy
Buyers need to take care not to overdefine their acquisition targets. As Buyer, don't match your search criteria to the absolute perfect company; you won't find it. Focus is important, of course, but being too narrow in your search criteria limits your ability to find suitable targets.
Years ago, I worked with a company whose executives were quite proud of their very thoughtful and narrow search criteria. They were seeking companies with revenues between $10 million and $20 million, revenue growth of at least 10 percent per year, EBITDA of at least 15 percent, and no customer concentrations. The targets' industry also needed to be highly fragmented with the potential for further acquisitions. Plus, Seller needed to be highly motivated and willing to sell for a low price, accept an asset deal, and stay on board to continue to run the business.
I pointed out that this hypothetical target sounded like a great company, and I asked them a simple question: Why would the owner of a perfect company be willing to accept a low price?
The odds of finding such a narrowly defined business are extremely low, so Buyers should temper their desire to narrow the search criteria with the reality that a search needs a large enough universe of targets to be successful.
Even if you do manage to develop a deal with that one suitor, the terms would likely be less than ideal, especially if you're the Seller. After all, how can you talk to other Buyers about a better deal if you're only talking to one prospective Buyer?
