Wednesday, June 30, 2010

Stop Flirting and Get a D.A.T.E.: An Introduction to the M&A Mating Game

A little flirting now and then doesn’t hurt, does it? Well, yes, it can, and I’m not talking about sexual harassment lawsuits. The flirting I’m concerned with is the teasing attention that is often paid to successful human-owned business by suitors claiming an interest in buying such companies. Lawyers typically refer to the practice of buying and selling companies as M&A, Mergers and Acquisitions (though true mergers are pretty rare.)

M&A flirting happens because folks are, generally, flattered by the attention, but businesses that regularly accept the flirting of possible buyers are, at best, wasting their time, and the gossip and potential disclosure of sensitive information that accompanies flirting could easily harm the business. If you seriously want to consider a sale of your business, don’t flirt, get a D.A.T.E.

Non-Disclosure Agreement. The first step is to keep everything confidential, even the existence of discussions. A non-disclosure agreement (NDA) between you and a possible suitor does that while protecting the sensitive or confidential information that has to be disclosed in the course of any deal. An NDA can also be used to keep an unrequited suitor from luring away the key employees of the business. NDAs can be staged to offer increasing protections as discussions move from preliminary to serious. Competitors among list of prospective buyers may warrant special precautions in their NDAs.

Appraisal. How can you discuss the sale of your business if you don’t have a realistic and independent estimate of its value? Investment bankers and valuation experts that understand the M&A marketplace are good sources for a valuation; investment bankers often credit the cost the appraisal back against their sales commission if you choose to hire them. Starting the M&A process with an appraisal also allows your transaction team to answer the seller’s most critical M&A question: Will the after-tax proceeds be enough for me to retire in the style I desire (or to achieve whatever other goal the seller has for the deal)?

Team. Unless you are a serial entrepreneur who has bought and sold several companies, you have no idea what you are about to get into (and if you are a serial entrepreneur, then you know what lies ahead). You need a transaction team to assist you. Good teams produce transaction ROIs of several multiples or more in greater purchase prices, lower liability exposures, and less stress on the business owners. The team typically includes your accountant, a business transaction lawyer, and an investment banker, business broker or other transaction specialist, but can include other professionals as circumstances dictate.

Expressions of interest. No more flirting or fishing expeditions. Your transaction team will work with the prospective buyers you know, and likely many you haven’t considered, to make expressions of interest (EOI) the next step in the M&A mating game. EOIs are relatively simple, nonbinding indications of the type of transaction and price the buyer is interested in pursuing, but they help to separate the mere flirts from groups that are genuinely interested and capable of buying your company. With the field of suitors winnowed down, things get more serious. Your team can continue orchestrating the competitive auction process among the remaining buyers with the goal of reaching a letter of intent (nonbinding like the EOI, but much more detailed) with a single buyer. Assuming everything checks out in the buyer’s due diligence process and the parties are able to agree on the other important terms that go into the deal documents, the transaction leaves behind the dating process in favor of that all important M&A status: closed.

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