Index
Absentee owners
Accountants
attestation levels
fees
and financial due diligence
financial statements, preparation of
importance of
negotiations, role in
role of
tax advice
Accounting methods
Acquisition Profile
Adjustments to purchase price
Affirmative response clause
Amortization, as part of EBITDA
Angel investors
Antitrust legislation
Appraisals. See Valuation
Arbitrage and pricing multiples
Asset acquisitions
escrow agreements
tax consequences
Asset Purchase Agreement. See Definitive Purchase Agreement
Assets
and balance sheet normalization
financing assets
fixed operating assets, normalizing
hidden values
non-operational
operating
real estate. See Real estate valuation
Attorneys
fees
legal due diligence
review of Financial Services Agreement
role of
selecting
tax counsel, need for
as team leader
Auctions
buyer attitudes toward
effect of
formal (controlled) auction
and investment value
and Letter of Intent (LOI)
need for
negotiated (effective/informal) auctions
benefits of
buy-side representation
document rooms, use of
and due diligence
earnest money deposits and breakup fees
Auctions (Continued)
and multiple buyers
overview
pace of negotiations
platform versus financial approach
steps
and Super Rule of Five
and synergies
and valuation
overview
and pricing
and valuation
Baby boomers
Balance sheets
conventions
and Letter of Intent
liabilities
and Mom-and-Pop businesses
net worth targets
non-operational assets other than cash
normalization
operating in the normal course of business
targets
and transaction value
working capital
Basis, stepped-up
Best efforts offerings
Boca Raton shops
Book. See Confidential Information Memorandum (CIM)
Breakup fees
Bubbles
Bucket shops
Buckets (baskets)
Business brokers
Business life cycle
Business process innovation
Business recapitalization
Buy-side representation
client issues
conflicts of interest
and creative deal structure
and discounted future earnings method of valuation
fees
infrequency of
investment value
and Letter of Intent
negotiations
and number of targets to introduce
planning
platform versus financial approach to acquisitions
sales-side representation compared
and Super Rule of Five
valuation of targets, art versus science
Buyers
approaching
and auction process. See Auctions
creative uses of consideration
identifying potential buyers
initial meeting
management and issues with earnouts
post-closing changes in attitude
problems with
and public company divestitures
remorse
representing. See Buy-side representation
and sense of urgency
single buyer and problems with negotiations
types, need for understanding
types of
C corporations
Capital
availability of and merger activity
expenditures
hedge funds
private equity groups
working capital
Capital gains
Capital markets
angels (real and “wannabe” angels)
availability of capital and merger activity
business recapitalization transactions
commercial banks
credit unions
early-stage venture capital. See Venture capitalists
economic development programs
employee stock ownership plans
export/import bank financing
factors
federal government insurance programs
friends, fools, and family (three “Fs”)
industrial revenue bonds
industry stakeouts
initial public offerings. See Initial public offerings (IPOs)
leasing programs
management buyouts
merchant bank sponsors
mergers and acquisitions
mezzanine financing
non-bank banks
overview
PIPEs (private investments in public equities)
project finance
public shell reverse mergers
Regulation D private placements
Regulation S offerings
SBA programs
secondary public offerings
Small Business Innovative Research Programs
SPACs (special purpose acquisition corporations)
sweat equity
thrifts and mutual savings banks
Capitalization rate
Carve-outs
Cash as consideration
Cash flow as part of EBIT and EBITDA calculations
Charitable remainder trusts (CRTs)
Clients
advising client to reject deal
assisting
buy-side. See Buy-side representation
collaboration with
confidentiality
difficult clients
end runs
and fee reductions
intake management
and negotiations
Closings. See also Post-closing transactions
Cohen, Herb
Commercial banks
Commitment fees (retainers)
Compensation
incentive compensation (earnout) . See also Earnouts
tax consequences
Confidential Information Memorandum (CIM)
as agenda for sale of business
collaboration with client
contents of
distribution of and securities laws
and due diligence
financial statements in
functions of
length of
overview
packaging and positioning of business
Confidential Information Memorandum (CIM) (Continued)
terminology
and weaknesses in seller’s business
Confidentiality
and Acquisition Profile
agreement, sample
and auctions
confidential information memorandum. See Confidential Information Memorandum (CIM)
controlled-disclosure approach to dealing with seller’s employees
and Executive Summary
importance of
and inefficiency of Middle Market
investment banker/client communications
and Letter of Intent
non-disclosure agreements
overview
and securities laws
seller’s employees, approach to dealing with
Web site business-for-sale listings
Conflicts of interest
Conglomerates
Consideration. See also Deal structure; Price; Terms of deal
buyer creativity
cash
earnouts. See also Earnouts
and interest rates
lease agreements as part of
non-cash consideration
private company stock
promissory notes
public company stock
and time value of money
types of
typical mixes of
weighting comparative offers
Consolidators (roll-up promoters)
Contracts
consulting contracts
valuation
Conventions
balance sheet
in M&A deals, overview
need for
partial and mixed business acquisition deals
and venture capital investments
Corporate culture
Corporate development staff
Corporations
Creative destruction
Credibility. See also Honesty and integrity
Credit worthiness
Deal structure. See also Consideration; Terms of deal
buy-side representation and creativity
factors considered
and tax consequences
Debt, effect of on value
Definitive Purchase Agreement
Depreciation as part of EBITDA
Deregulation, effect of on merger activity
Discounted cash flow (DCF) method
Discounted future earnings (DFE) method
Dividends
Document Rooms
Dribble rules
Due diligence
and auctions
and Confidential Information Memorandum
confirmatory
and deposits and breakup fees
and Document Rooms
financial
legal
and Letter of Intent
operational
preliminary
Earnest money deposits
Earnings
Earnings before interest, taxes, depreciation, and amortization. See EBITDA (earnings before interest, taxes, depreciation, and amortization)
Earnings before interest and taxes. See EBIT (earnings before interest and taxes)
Earnings multiples
EBIT. See EBIT (earnings before interest and taxes)
EBITDA. See EBITDA (earnings before interest, taxes, depreciation, and amortization)
and industry bubbles
present value of future earnings
trailing
Earnouts
agreements
as bonus consideration (frosting on the cake)
and buyer’s management
collection, likelihood of
comfort earnouts (true earnouts)
fees based on
future earnings and growth rate
versus incentive compensation
metrics
and negotiations
as part of consideration
problems with
and promissory deferred payment notes
royalty-based metrics
seller’s calculations
tax consequences
true earnouts
types of
variations in terms
EBIT (earnings before interest and taxes)
and bubbles
earnings
interest expense
multiples
and normalizing financial statements
and recasting financial statements
and Super Rule of Five
taxes
and technology valuation
EBITDA (earnings before interest, taxes, depreciation, and amortization)
amortization
and bubbles
and changes in working capital
depreciation
earnings
as earnout metric
fast-growing businesses
interest expense
minus capital expenditures (EBITDA - CAPX)
multiples
and normalizing financial statements
and recasting financial statements
EBITDA (earnings before interest, taxes, depreciation, and amortization) (Continued)
and Rule of Five
and Rule of Ten
taxes
and technology valuation
Economic development programs
Economies of scale
Employee stock ownership plans (ESOPs)
Employees
confidentiality issues
key employees
Enterprise value
Entity selection and tax issues
Escrow agreements
Escrow hold-backs
Escrow set-asides
Exclusivity (non-marketing/no shop clause)
Executive Summary
Exit strategy, venture capital investing
Factors
Fair market value
versus investment value
true merger transactions
use of
Family limited partnerships (FLPs)
Fees
accountants
and attitudes toward large sums of money
attorneys
baseline transaction value
blended rates
breakup fees
business brokers
buy-side representation
carve-outs
contingent fee formulas
and earnouts
and escrow set-asides
estimates of
and failed deals
fee formulas
Lehman fee variations
reduction
retainers (commitment fees)
and size of deal
success fee formulas
and transaction value
warrants, options, and other equity
wire-transfer fee payments at closing
Financial buyers
Financial Industry Regulatory Authority (FINRA)
Financial Services Agreements (FSAs)
contract term
fee structure
and measuring transaction value
provisions of
review of by attorney
sample
trailer periods
Financial statements
audited
compiled
importanct of
normalizing
as part of Confidential Information Memorandum
prepared by accountant versus investment banker
recasting
reviewed
First Chicago method
Forensic experts
Freund, James C.
Friends, fools, and family (three “Fs”) as source of capital
Generally accepted accounting principles (GAAP)
Gifts
Global economy
Gross margin as earnout metric
Guideline public company method
Hedge funds
Historical background of mergers and acquisitions
Honesty and integrity
Horizontal mergers
Hostile takeovers
Income tax consequences. See also Tax consequences
Indemnification
Individual buyers
Industrial revenue bonds
Industry stakeouts
Information Memorandum. See Confidential Information Memorandum (CIM)
Initial public offerings (IPOs)
Installment notes
Interest
Internal Revenue Code (IRC). See also Tax consequences
C corporations
reorganizations (Alphabet Section)
S corporations
section 368, tax-deferred merger transactions
section 1045, qualified small business exclusion of gain on sale of stock
section 355 (Morris Trust), tax-deferred distribution of assets
section 338(h)(10) election
International deals
Investees
Investment banks and bankers
advising client to reject deal
and business terms
buyers, representing. See Buy-side representation
characteristics of
client assistance
client intake management
conflicts of interest
cultural issues
discounted future earnings method, use of
fees
Financial Services Agreements. See Financial Services Agreements (FSAs)
and identifying potential buyers
industry specialists
and initial meeting location
investment banking described
listening, importance of
marketing and business development
matchmaker myth
as mediator when represented both sides
and Middle Market deals
networking
as part of external team. See also Professional advisors
preliminary valuation by
profession entry points
reputation
retainers
role of
securities law issues
selecting
size of
success, tips for
Investment banks and bankers (Continued)
teams of professionals
and $10-trillion opportunity
time spent on deal
and Upper Market companies
valuation expertise
Investment value
and accounting principles
and auctions
and bubbles
building
buyer’s calculations
fair market value compared
and financial approach buyers
maximizing for seller
and pricing issues
versus seller’s value
subjective nature of
and valuations
walkaway price and creative deal terms
Investors
Junk bond financing
Key employees
and absentee owners
avoiding problems with
non-compete and non-intervention agreements
overview
reaction to sale
rewards
and unwritten promises
Large companies (Upper Market). See Upper Market (large companies)
Lease agreements
Leasing programs
Letter of Intent (LOI)
affirmative response clause
and auctions
and balance of power
and balance sheet targets
buy-side perspective
and confidentiality
contents of
disclosure of business weaknesses
drafting process and negotiations
and due diligence
exclusivity (non-marketing/no shop clause)
exclusivity period, activity during
importance of
language usage
negotiations
nonbinding
reverse Letter of Intent
and sequence of events
thoroughness of business terms
Leveraged buyouts
Liquidity
as driver of M&A activity
public companies
and venture capital strategy
and weighting comparative offers
Litigation, effect of on sale
Lock-up agreements
Management buyouts
Mapping approach to identifying potential buyers
Merchant bank sponsors
Mergers and acquisitions (M&A), generally
failure rate
historical background
process
Mezzanine financing
Middle Market, generally
Minority interests
Mom-and-Pop businesses
Monopolies
Multiples. See also EBIT (earnings before interest and taxes); EBITDA (earnings before interest, taxes, depreciation, and amortization); Rule of Five
derivative
overview
public versus private market
and real estate valuation
revenue
and risk
National Association of Securities Dealers (NASD)
Negotiations
as an art
buy-side representation
buyers and sellers, direct communication
and clients
concessions
credibility
and deal-killers
detachment as attribute
and earnouts
and effective/informal/negotiated auctions. See also Auctions
goals, presenting
honesty and integrity
late entry into
lead negotiator, need for
Letter of Intent
and over-analyzing and over-strategizing
pace of
and partial truths
preparation
price. See also Price
second-guessing
and tax issues
team, effective use of
terminating and reviving
timeframe for
tips for
trust, importance of
unreasonable and hostile negotiators
walking away
water torture approach
and written communications
Net worth
Non-cash consideration
Non-compete agreements
Non-disclosure agreements
Non-intervention agreements
Non-negotiable instruments
Non-strategic industry buyers
Nonprofitable businesses, valuing
Normalization
balance sheets
earnings
financial statements
fixed operating assets
Offering Memorandum. See Confidential Information Memorandum (CIM)
Offshore buyers
Options, as part of compensation
Ordinary course of business
PIPEs (private investments in public equities)
Planning, buy-side representation
Planning for sale
approaches to
and business operations
and effect of litigation
intermediate-term planning
long-term planning
short-term planning
Post-closing transactions
Post-merger and acquisition failures
Preliminary bid/proposal
Preliminary valuation. See Valuation
Present value of future earnings
discounted future earnings. See Discounted future earnings (DFE) method
technology valuation approach
Price. See also Consideration; Terms of deal
adjustments
approaches to
versus compensation
as function of negotiated auction
and investment value
offers, encouraging
price versus terms
pricing compatibility
range of values
responding to buyer’s initial query
seller’s calculation of investment value
Private companies, valuation
Private company stock as consideration
Private equity groups (PEGs)
as potential buyers
and pricing based on discounted cash flows
and rapidly growing businesses
as source of capital
valuation issues
Private investments in public equities (PIPEs)
Private placement offerings
Product lines, valuing
Professional advisors. See also Accountants; Attorneys
confidence in
failure to use team effectively
fees. See Fees
sequencing of tasks
team of
Promissory notes
Public companies
divestitures
stock as consideration
valuation
Public offerings, secondary
Public shell reverse mergers
Public stock offerings
Put options
Real estate valuation
Reconstruction cost approach, technology valuation
Regulation D private placements
Regulation S offerings
Relative value approach and measuring transaction value
Reorganizations
Representations and warranties
Research databases
Resources, lack of as driver of M&A activity (glass ceiling)
Restak, Richard, M.D.
Retainers (commitment fees)
Return on investment (ROI)
and business valuation
and discounted future earnings method
and Mom-and-Pop businesses
and multiples
Risk assessment
Roll-ups
Royalty-based earnout metrics
Rule of Five. See also Super Rule of Five
Rule of Ten
S corporations
Sales as earnout metric
“Scared money” buyers
Securities Act private placement offerings
Securities and Exchange Commission (SEC)
dribble rules
Rule 144, 224, 225, 230
Securities laws
and confidentiality issues
and distribution of Confidential Information Memorandum (CIM)
and investment banks
Self-representation
Sellers. See also Clients
appraisals. See Valuation
initial meeting with potential buyer
investment value. See Investment value
post-closing attitudes
representations and warranties
as source of information on potential buyers
Settlement. See Closings
Sherman Act
Silo mate approach to identifying potential buyers
Small Business Administration (SBA) loan programs
Small Business Innovative Research Programs (SBIR/SBRD)
Small businesses. See C corporations; Mom-and-Pop businesses; S corporations
SPACs (special purpose acquisition corporations)
Standalone growth rate
Standalone value
Stock deals
Stock Purchase Agreement. See Definitive Purchase Agreement
Strategic industry buyers
Strategic planning. See Planning for sale
Subject matter experts
Super Rule of Five
Supply chain
Sweat equity
Synergies
and discounted future earnings method
economies of scale
overestimating and M&A failures
Super Rule of Five and synergistic growth rate
true mergers
and unprofitable businesses
Tax consequences. See also Internal Revenue Code (IRC)
accounting methods
asset acquisitions
attorney, need for
built-in gains tax
C corporations
capital gains
and charitable remainder trusts
compensation as part of deal structure
and deal structure
dividends
and earnings before taxes
earnouts
gifts and family limited partnerships
installment elections
and negotiations
ordinary income tax
overview
post-closing tax filing requirements
reorganization deal structures
rewards to key employees
S corporations
small business corporations
stepped-up basis
stock deals
Tax consequences (Continued)
tax-deferred distributions (Morris Trust)
tax-deferred stock or asset exchanges in the course of reorganizations
Tax planning
Taxes as part of EBIT and EBITDA
Technology
and life cycle of Middle Market companies
valuation
Terms of deal. See also Consideration; Deal structure
advising client to reject deal
and buyer creativity
comparative offers, weighting
importance of versus nominal price
Time value of money
and computing deposits and breakup fees
and consideration
and escrowed funds
Timeframe
final days before closing
for Middle Market deals
for negotiations
Timing sale of business
Trailer periods
Trailing earnings approach, technology valuation
Transaction value
Trust, importance of
Tunnel approach to identifying potential buyers
Ultimatum Game
Upper Market (large companies)
Valuation
appraisals
and auctions
comparable transactions
contracts
costs of
discounted cash flow method
discounted future earnings method
dynamic value
earnings multiples. See also EBIT (earnings before interest and taxes); EBITDA (earnings before interest, taxes, depreciation, and amortization)
enterprise value
experts
fair market value versus investment value
formal valuation methods versus actual value in M&A deals
guideline public company method
industry analysis
investment bank expertise
and investment value. See Investment value
long-term debt, effect of
Mom-and-Pop businesses
nonprofitable businesses
obsolescence
preliminary valuation
private companies
private equity group issues
product lines
public companies
quantitative and qualitative
rapidly growing businesses
real estate
return on investment. See Return on investment (ROI)
sanity check
standalone growth
standalone value
of targets in buy-side representation
technology
transaction value
types of
Value drivers. See also Synergies
Venture capitalists
as potential buyers
and rapidly growing businesses
as source of capital for early-stage companies
Warranties
Warrants as part of compensation
Web site Document Rooms
Widow-and-orphan shops