Mergers and Acquisitions For Dummies (42 page)

Keeping the Cat in the Bag: Advice for Buyers

As I note earlier in the chapter, a confidentiality agreement is a serious and real legal document, and a Buyer who signs a CA should take every precaution to speak only with those who need to know about the business and are covered by the CA. The following sections give you some guidelines on who you can talk to and how to discuss sensitive information without letting the whole county know.

Involving employees and advisors

Generally, a confidentiality agreement allows the signers to speak with employees and advisors about the transaction. The CA specifically delineates these people by job title or function (not by name).

In the CA, relevant employees are usually designated with a line such as

“Employees who have a legitimate need to know in order to evaluate a possible transaction are permitted to review materials.”

The language for advisors typically goes something like the following:

“Independent accountants, investment bankers, or other professionals (collectively, ‘Buyer's Advisors') may be retained for the sole purpose of assisting Buyer in determining the feasibility of entering into a transaction.”

The Buyer must inform any employee or advisor that that person is bound by the terms of the confidentiality agreement.

Discussing the deal in public

I'm constantly amazed at what I overhear in restaurants, on airplanes, in elevators, and other places where people gather. I constantly overhear people talking about lawsuits, tax cases, criminal cases, health problems, their troubled kids, and of course, M&A transactions. More often than not, these conversations use the actual names of the individuals or the companies involved!

Of course, yapping about such sensitive information is a no-no. You never know who's sitting at the table next to you. That professional intently working the crossword puzzle (in ink, thank you) while awaiting his soup may be getting an earful of private, confidential, and sensitive conversation. It happens.

Instead of using specific names, I strongly suggest M&A deal-makers take a wiseguy approach to talking about sensitive material. Watch
Goodfellas
or
The Sopranos
for guidance. Here's an example of this cloak-and-dagger approach:

Deal-maker 1: “Did you talk to that guy about that thing? You know, our friend in Columbus, did you take care of that thing with that guy?”

Deal-maker 2: “Oh, yeah, don't worry, he won't be a problem anymore. I took care of it; we had a real nice chat the other day.”

See how that works? Liberal use of “that guy,” “our friend,” and “that thing” goes a long way to help keep things under wraps. If you need to clarify, mention the city (“our friend in Seattle”) or mention the type of business (“that guy in the apparel distribution business in Lexington”).

Chapter 8

Creating and Reviewing an Offering Document

In This Chapter

Taking an overview of the offering document

Relaying company info

Noting financial numbers

T
he
offering document,
also known as the confidential offering memorandum (COM), the information package (IP), and the deal book, is the main sales document in the mergers and acquisitions process. More commonly, it's simply called
the book.
Everything a Buyer needs to make an offer (not close a deal) is in the book.

In this chapter, I introduce you to the who, what, when, and how of the offering document. In case you're wondering about the where, that's up to you! Write it where you're most comfortable.

The Offering Document in a Nutshell

The offering document is the deal book, the almanac of fact, the atlas of numbers. The offering document is the bible of the company. As with any written document, it becomes dogma. In other words . . . it's kind of important. Take care to draft a complete, honest, and accurate offering document.

The Seller writes the offering document (or, as is often more accurate, the Seller's advisors do). Writing an offering document is a time-consuming process, so Sellers need to make sure the book-writing takes priority in their daily activities.

If advisors are handling the task, an employee (usually the CFO or some other high-ranking finance person) makes sure to provide the author(s) with all the necessary information. From the time all the necessary information is gathered, a well-written offering document should take 60 days to write.

Buyers don't need to write an offering document. However, unless the company is well known and/or has a very detailed Web site, Buyer may want to prepare a quick one- or two-page overview of his company and
investment thesis
(a description of the types of companies he wants to acquire as well as his rationale for why those acquisitions make sense).

A well-written offering document spells out the value proposition for the Buyer. It includes an in-depth review of the company's operations, finances, sales, marketing, customers, employees, facilities, and more. This collective information should be sufficient for an interested Buyer to make an offer for the company. (See Chapter 9 for more on how a Buyer makes that offer.)

I like to think of an offering document as a road map to value. Sure, Seller's intent is to maximize the price Buyer pays for the company, but Buyer is only going to pay a price that makes sense from his view. Seller has to show Buyer where Buyer can realize value. And of course, Buyer has to confirm that value proposition! (Chapter 12 offers more info on valuation.)

Don't include an asking price in the offering document. You want the other side to make the first move. If you as a Seller provide an asking price, you've merely set the maximum price. Buyers probably won't be willing to pay more. Worse, if you give one price to Buyer A and Buyer B ends up paying more, Buyer A will rightfully be upset because Seller provided information that turned out to be moot.

Despite the fact that Buyers do far less work regarding the offering document — they just have to read it — few Buyers do actually go through it. Some Buyers (and I mean decision-makers) do actually read it closely, but many others merely scan the document and have a junior team member do the actual reading and provide a synopsis, quite often verbally during a meeting.

So why write a document most people don't read?

First, writing an offering document often becomes an introspective journey for a Seller. The exercise reveals details about his company, the operations, what works, what can be done better, and what should not be tried again. In creating a roadmap of value for a Buyer, the Seller is able to understand his company, market, and industry.

In fact, during many of the sales processes that I've run, the Seller almost always remarks that although the exercise of compiling the book was a pain, it was ultimately worthwhile because he learned about his company. More than one has said, “If I knew then what I know now, this company would be bigger and better.”

Second, even though Buyers often don't spend much time with the book prior to management meetings, they refer to it constantly as they craft offers. The offering document becomes a reference guide for the Buyer. The Buyer flips back and forth searching for specific bits of information as he contemplates what offer makes sense.

The following sections detail what goes into an offering document. The order that I list the offering document's contents in isn't set in stone. Don't worry about following my list exactly; instead, just make sure your offering document addresses each of these areas.

Compiling the Executive Summary

Put your brain in the way-back machine and think about what your high school English teacher told you about writing a theme paper: Start big, narrow your focus, introduce the thesis, prove the thesis, and conclude by widening narrative. Your offering document should begin with an executive summary that follows that same rhythm. The
executive summary
is the big picture overview of the offering document. It includes the thesis, Seller's rationale for seeking a deal, and some thoughts on the type of transaction Seller would find agreeable. The following sections delve into those parts.

The thesis

The
thesis
is your central argument — the value proposition for Buyer and the aspect of the deal you want to tout. When you're selling a business, you need to have a thesis; you can't maximize value in a transaction unless you provide Buyer with specific examples of the value she can gain. Seller's thesis should be Buyer's opportunity.

Highly profitable companies are often best sold based on multiples of EBITDA; the industry standard magic number is five times (5X) EBITDA. (Head to Chapter 12 for more on multiples and valuation.) It's the easiest valuation technique for Buyer to understand (and obtain financing for).

In the following sections, you find some common examples of different possible theses. Take a look-see, think about your specific situation, and then consider what may be the best thesis to extract the most value for both you and Buyer.

You don't need to limit yourself to a single thesis; feel free to pick and choose more than one.

EBITDA thesis

EBITDA is probably the most common investment thesis. Actually, EBITDA is a de facto default setting in the brains for most business people; you can say it's hardwired into their brains, and for good reason.

EBITDA is a measure of profitability, and profits are the ultimate measure of a company. Bank loans are often based on EBITDA; maintaining a certain level of EBITDA is a condition of a loan. The business world is just plain mad for all things EBITDA, and therefore, EBITDA is simply a generally accepted business convention.

EBITDA theses come in a few flavors. They're all similar because they use EBITDA as a basis for valuation, but they differ in the timing for the measurement of EBITDA.

Most recent complete year:
In many cases, the valuation is based on the most recent year's EBITDA. This method produces a static number; because deals take months to complete, Buyer may want to obtain financial updates to make sure the company suddenly doesn't take a nose dive in terms of profits. However, the most recent complete year EBITDA can provide the basis for an offer.

Trailing 12 month (TTM):
This thesis is based on the EBITDA for the
trailing
(most recent) 12 months; the valuation isn't static like the most recent complete year figures, so it may fluctuate up or down depending on the continuing performance of the company.