Introduction

In every job — whether it be sales, managing retail establishments, raising capital, crunching numbers, writing, working with venture capitalists, creating online ventures, or working investment banking deals (I’ve done all these, by the way) — you quickly discover that you need a whole new set of rules, lingo, conventions, and nomenclature. And more often than not, what you need to know to excel at your job can be distilled into just a few salient points. If you’re lucky, you bump into a wise old sage who, upon experiencing your questioning, utterly confused face, and dispirited body language, simply says, “Forget all that other stuff; here’s what you really need to know.” Enter Mergers & Acquisitions For Dummies, an inside look at the process of buying and selling companies.

Although companies change hands every day, buying and selling can mean many things and take many forms. Who or what is the Buyer or Seller? What kind of transaction is it? How will the Buyer finance the deal, and what does the Seller receive? These are only a few of the considerations in any given mergers and acquisitions (M&A) deal. It’s so confusing!

As a result, business owners, some of the main participants in M&A, are often completely befuddled when the time comes to sell their businesses or make acquisitions. They don’t know anything about M&A because they’ve been focused on their own businesses and not on the business of buying and selling companies.

That’s why I wrote this book — to serve as your wise old sage as you jump into the wild M&A world.

About This Book

Although the M&A process, like any sales process, involves a step-by-step approach, I’ve written this book so you can simply refer to whatever section you need to read. Scan the index and table of contents and then go directly to the information you need.

When a Buyer and Seller are negotiating a deal, they’re on opposite sides of the table. The Buyer wants to get the best (that is, lowest) price, and the Seller wants to get the best (that is, highest) price. This book isn’t slanted one way or another. It’s not pro-Buyer or pro-Seller. Deals get done only when Buyer and Seller find common ground and agree to price and terms.

During the M&A process, many of the steps and techniques I discuss in this book apply to Buyers, Sellers, or both. I highly recommend Sellers read the Buyers’ information and vice versa. My hope is that this book provides some insights for both sides by helping each side see things from the other’s perspective. Understanding the other side’s motivation and rationale is key to getting a deal done. If you know what the other side is seeking or why she’s asking for something in a particular way, you’re in a better position to provide an answer that helps move the deal to a close. And closing deals, ladies and gentlemen, is what M&A is all about.

Conventions Used in This Book

I use a few conventions throughout this book to help make it more accessible:

I format new words in italic and accompany them with definitions.

Bold text highlights the active parts of numbered steps and signals the keywords in bulleted lists.

Web sites appear in monofont. In some cases, Web addresses may have broken over more than one line during the book’s printing. Just type the address exactly as you see it; I haven’t added any characters to mark the line break.

Because “mergers and acquisitions” is kind of an unwieldy phrase, I often use the abbreviation “M&A.” You see it in the field all the time anyway, so why not use it here?

One challenge in this book is that two distinct yet related groups of people (Buyers and Sellers) may read this title. When I use “Buyer,” I’m referring to the individual or executives in a company seeking to acquire another company. When I use “Seller,” I’m referring to the owner of a company or the owner’s representatives (executives or advisors). I also use “you” to address you, dear reader, directly, even though the text in question may not apply to your specific situation. In those cases, I clearly alert you to whether I’m talking about Buyers or Sellers.

What You’re Not to Read

My goal for this book was to write an easy-to-read, introductory look at the world of mergers and acquisitions. At times, however, some of the text may be a bit technical and in-depth, so turned those parts into sidebars (those shaded gray boxes) or marked them with a Technical Stuff icon. You don’t need to read those parts unless you really, really, really, really want to know more.

Foolish Assumptions

I assume you bought this book for any number of reasons:

You’re a business owner or executive of a middle market or lower middle market company and are interested in selling a division, subsidiary, or entire company.

You’re an executive of a company and are interested in acquiring middle market or lower middle market companies.

You’re a business student who is interested in discovering more about mergers and acquisitions.

You know a lot about your specific business but little or nothing about the business of buying or selling businesses.

You may be asking yourself, “Why the specific delineation of middle market and lower middle market companies?” Those two market segments, defined roughly as companies of $250 million to $1 billion in revenue (middle market) and $20 million to $250 million in revenue (lower middle market), are often overlooked by larger banks. The deals aren’t as large, the companies aren’t as famous or “sexy,” and when you have a plethora of top-tier MBA grads all clamoring to make a million bucks a year, the smaller fees from these smaller deals just aren’t of interest.

Although the lower middle market deals aren’t front-page headline blockbusters, the fact is the middle market and lower middle market are comprised of many more companies than the Fortune 500, which, when you think about it, is exactly 500 companies. The owners and executives of many, if not most, lower middle market companies are wholly unfamiliar with the business of selling a business and are therefore the perfect audience for this book. But although middle market and lower middle market company execs may be this book’s target audience, the information here is applicable for just about any kind of business sale transaction.

How This Book Is Organized

I organized Mergers & Acquisitions For Dummies in five essential parts. These parts cover the main facets of doing deals, from an introduction to the basics to the courting process to the documents and meetings involved to integrating Buyer and Seller.

Part I: Mergers & Acquisitions 101

Part I gives you the lowdown on M&A’s foundations. Chapter 1 introduces you to some of the basic building blocks in the M&A world: words, phrases, decorum, players and their motivations, and generally accepted steps to buying and selling companies. Chapter 2 analyzes the rationale and motivations of Buyers and Sellers so that you can better understand the folks on the other side of the table (and maybe get some insight into your own goals as well). In Chapter 3, I provide an outline of the generally accepted M&A process; you have a much better chance of making a successful deal when you know what steps to follow.

Part II: Taking the First Steps to Buy or Sell a Company

When you actually want to do deals, as opposed to merely thinking about doing deals, Part II gets you started on the first steps. You need money (or seashells, cigarettes, or some form of consideration that the Seller finds acceptable), and Chapter 4 offers some thoughts about financing M&A deals. Every deal-maker needs a little (well, a lot of) help, so Chapter 5 lays out the advisors you need in order to successfully buy or sell companies. M&A is really a form of dating, except with meetings, boring documents, and grueling travel. Chapter 6 provides you with colorful tips for successfully approaching Buyers or Sellers and explains why M&A is one of the few industries where selling is easier than buying.

Part III: Starting the Deal on the Right Foot

In this part, I show you how to get going on a deal. Chapter 7 quietly discusses the cloak-and-dagger world of confidentiality. Chapter 8 deals with the offering document, which is basically the story a Seller tells a Buyer about the company, as well as how to write it and what to look for when you review it. M&A requires a certain level of discretion, and that level is high! In Chapter 9, I introduce you to the form and function of the indication of interest (IOI — this field loves its initialisms) that Buyer offers Seller when Buyer’s ready to move from talking about doing a deal to providing specific thoughts on an actual deal. (What can I say? M&A loves crafting documents, too.) The next steps are the management meetings between Buyer and Seller; Chapter 10 helps you navigate these meetings, which don’t have fancy abbreviations but can be tricky.

Part IV: Firming Up the Deal

When Buyer and Seller agree to do a deal, what’s next? Part IV’s topics, that’s what! First, Buyer and Seller have to agree to terms; M&A deals involve layer upon layer of complexity that you can and should negotiate. Chapter 11 takes you to the smoke-filled back rooms where deals are made; all cigar-chomping is figurative.

Chapter 12 plows the fields of valuation for you and reaps an answer to that most nagging of questions: What the heck is this company worth?

When Buyer and Seller want to stop playing the field and get married, they move on to the letter of intent (LOI). Chapter 13 takes you through the ins and outs of this key document. Due diligence is the next key phase; it’s where Buyer and Seller confirm certain facts from the other side just to be safe. Chapter 14 fills you in on what to expect during the confirmatory due diligence phase. Chapter 15 provides insight about converting the LOI and the results of due diligence into a final, binding purchase agreement.

Part V: Closing the Deal . . . and Beyond!

Part V helps you successfully conclude the deal. In Chapter 16, you get the insider’s look at that important day. Chapter 17 details all the sordid adjustments one side or the other makes after the closing. After the deal is done and a new day has risen, Buyer and Seller must integrate and learn to live together. Integrating Buyer and Seller can be a difficult proposition that many people don’t think about, so Chapter 18 tackles this hidden issue.

Part VI: The Part of Tens

The Part of Tens is a For Dummies classic, so of course this book includes it as well. Chapter 19 clues you in to important questions to ask before signing an LOI. In Chapter 20, I warn you against mistakes that can sink a deal, and Chapter 21 offers ways to come to an agreement on valuation. I also give you an appendix full of resources such as a due diligence checklist, helpful online sources, and some sample M&A documents.

Icons Used in This Book

I use the following four icons throughout this book to help draw your attention to particularly important or salient bits of information (and let you know what bits aren’t essential):

This icon denotes info that can save you time and/or hassle as you work through a deal.

The Remember icon flags important points and concepts worth searing into your memory banks.

The text next to this icon is useful but not vital to the topic at hand; you can skip it if you’re in a hurry or just want the need-to-know information.

I use this icon to highlight potential M&A disasters you want to avoid.

Where to Go from Here

No matter your immediate interests or needs, I highly recommend reading Chapter 3, which provides an overview of the process. An understanding of the typical steps involved in a business sale can help you as you read other specific sections. From there, you can dive in and out of this book as you please.

Beyond this book, the best advice I can offer for anyone who wants to buy or sell companies or work as an advisor in the M&A industry is to get off your duff and get in the game. Books are great, and I certainly hope you find Mergers & Acquisitions For Dummies to be an extremely valuable resource, but the fact remains that the best way to learn something is to do it yourself. The only way you can truly get a handle on buying and selling companies is to actually buy and sell companies.

I’m a big believer in “ground up” learning. No, I’m not talking about deli meats; I’m talking about getting your hands dirty and learning business from the ground up. You’re going to make mistakes, but finding out what doesn’t work is the best way to learn. If you want to be successful in M&A (as a Buyer, a Seller, or an intermediary), you’re best served if you can talk from a level of actual experience. Those experiences should ideally include successfully selling a product or service, interacting with customers, hiring and firing employees, merchandising, marketing, working in human resource compliance, banking, making a payroll, filing taxes, and bookkeeping. (Mopping some floors and scrubbing a few toilets won’t kill you, either.) You don’t want to be the only one at the table who hasn’t dealt with real-world business issues and problems. Being the least-qualified person in the room is never a good thing!

One of the big ironies for the investment banking world is that most people who do what I do didn’t start their careers with the plan of being an investment banker. I’m often asked how to get into the investment banking industry. I always say the same thing: “Most of us who do this didn’t choose this career. Go do something else. Get involved in a business first, and then segue into investment banking.”

One final thought: One of the keys to M&A is accounting. If your accounting skills are suspect (or nonexistent), you need to take a class, stat! Most community colleges offer accounting classes, and you can probably audit the class instead of taking it for credit.