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Archives for January 2011

Business Buyer Meet Business Seller

January 25, 2011 By Ney

We have packaged the company, marketed it, screened potential buyers, received a number of offers and conducted conference calls.  Our M&A process is designed to allow the business owner / seller to able to continue running his business while we manage the flow of potential buyers.  But we can only do so much.  Now its time for the critical buyer / seller meetings.

We spent a week in a small town conducting management meetings with potential buyers.  Usually it doesn’t take an entire week, but traveling to this small town wasn’t that easy, so we had to be flexible and allow potential buyers enough time to visit with the company.  I think everyone is a little apprehensive before a visit.  The seller certainly is, as this is something that typically happens once in a lifetime and every step in the process can produce some anxiety.  I’m a little anxious because to this point I’ve been a match-maker representing the seller, so I hope I’ve done a good job and that the buyers and seller will get along.  The potential buyers at this point have put in a lot of time and effort, so they are likely a little anxious that they can make a good enough impression so that they end up with the business.

By the end of the week we knew that the visits went well.  Two of the buyers mysteriously seem to have switched personalities on the plane trip out, but not in a negative way – just in an interesting way.

So what goes on in a meeting?  Well, it depends on the type of buyer (strategic or private equity PEGs) and what the immediate concern of the buyer is, but they typically go like this:

  1. How’s the weather, the trip and your kids.
  2. The buyer usually goes first, and provides an introduction of their firm.  Sometimes strategics don’t understand the value of selling themselves, but PEGs do and will typically spend some time differentiating themselves from other PEGs. For my part, I listen and make sure that a few key points get brought up.  With PEGs I’ll make sure they address their source of funds, investment timeline, type of companies they invest in, etc.  By this time I already know the answer, but I’ll ask anyway so that they will discuss it in front of the seller. (I already know the answer because by this stage in the game I don’t want the buyer’s answer to be, “Well, I don’t have a dedicated fund or really any money at all.  I’m hoping to get a term sheet signed and then I’ll shop that around to hopefully raise money.  I’ll then be the CEO of the company because this is the only way I can get a job”.)
  3. I like the seller at this point to do a presentation, one they may do for a potential customer.  Prior to this a buyer may be focusing on financials or other hot-spots, but at this point buyers are trying to understand the full range of products, services and what makes the company special.
  4. The visit usually then drops into what the buyer is concerned about.  For a PEG it may be market size, growth opportunities or competition (In other words, can they really grow it and sell it?).  For a strategic it may be manufacturability and how the two sales forces can work together (In other words, are those strategic synergies really there?).
  5. There are usually some additional information requests that come out of the meetings, and we note these.  Sometimes critical issues come up, like the accounting numbers don’t actually add up (it happens).  Then we scramble to figure it out.

It is obvious during the entire visit that the two parties are sizing each other up.  The buyers are asking questions I’ve heard them ask before.  They don’t care so much about the answer, they just want to hear how the seller explains it.  I can tell the seller is bouncing between the monetary aspects (will I get enough?) and questions they have about employees and how the acquisition may benefit the company’s ability to sustain itself and grow.

Come to think of it, I’ve never (knock on wood) had a buyer/seller meeting turn ugly.

Filed Under: Negotiations

What is a Letter of Intent (LOI)?

January 13, 2011 By Ney

We recently negotiated the execution of a Letter of Intent (LOI) for the acquisition of our client’s company.  It is a crucial milestone on the way to a sale, but it isn’t a time for celebration.  There are still too many things to keep focused on and too many things that can still go wrong for that.  This is what the LOI really means.

First, the LOI is non-binding in terms of a deal.  There are typically a couple of binding clauses in an LOI, most notably the agreement between parties that they will keep everything confidential (“non-disclosure clause”) and the agreement by the seller that they will break off talks with all other parties (“no-shop” or “stand-still” clause) for a period to allow the buyer time to conduct due diligence.

But for the most part the LOI is non-binding and either party can back out for any reason.  It is rare for that to happen because at this point both buyer and seller have spent significant time and money in the courtship phase leading up to the LOI.  But it happens, and it can go both ways. The last time it happened to me was the seller (actually the seller’s wife) deciding at the last minute not to sell.  It was a personal decision relating to a family matter, but very frustrating nonetheless.  I had to call the buyer, who at that point had probably spent close to $50,000 on due diligence and was ready to close.

The LOI is really there to define what a deal may look like, and then allows both parties (but mainly the buyer) some time to perform due-diligence in order to verify the information presented. It is also used as a roadmap for the attorneys when they craft the final purchase agreement.  It is important for an LOI to have enough detail so there isn’t a lot of negotiating left. There is always going to be some negotiating, but you really don’t want to have to deal with something so major that it impacts all aspects of the deal.

The obvious items, price and structure, are pretty hard to leave out, but we’ve seen some other basic items overlooked.

For example, here are some common items that are contained in the LOI that should be have some detail:

  1. If there is a seller note, the LOI should contain what the terms of the note are and what, if any, security is on the note. If it isn’t a straight note (for example, balloons, partial payments, etc.) then a payment schedule as an exhibit can be helpful. (Hmm, was that 2013 balloon payment at the beginning or end of 2013?)
  2. If there is an earnout (future performance based compensation), then there should be detail on how that is actually earned.  If there is any confusion at all, examples can be included to show how any formulas would actually work.
  3. Unless the seller is going away immediately, which is very rare, there should be detail on future compensation for the seller.
  4. Often we do deals that include continued ownership for the seller and the structure to make that happen (stock buy back agreements, etc.) can be complex, and in that case it should be clear what that ownership is.  A new ownership table (“cap table”) as an exhibit can be helpful to include in the LOI.

Each LOI is different, and is based on the concerns of both buyer and seller.  For example, if we have a seller that says, “I’m concerned the buyer will mess with the compensation structure of my top sales person during my earnout period”.  Then we might go to the buyer and ask that a clause be added that states the buyer will provide an employment agreement to this employee that sets the compensation.  You can do this after an LOI and before close, but it is usually easier to get in the LOI.

While due diligence is going on, attorneys will take boilerpate purchase agreements, promissory notes, etc., and modify them to include terms in the LOI.  A 2-4 page LOI can’t possibly include all details of an acquisition or investment, so there are still points and issues to resolve, and these usually are resolved quickly and amicably.  There are usually a few that are a little more challenging, but at that point buyer and seller are usually able to compromise on a solution.

Filed Under: Negotiations Tagged With: Letter of Intent, LOI

2011 – New Compass Point Website

January 2, 2011 By Ney

We decided to update the website and start a dedicated blog, instead of just the national blog we write for AllBusiness.com.

Filed Under: Uncategorized

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