Abstracts for Middle-Level Marketing for Mergers & Acquisitions

K. Texler for Author/Client

3/11/22

 

Chapter 7— Practice Management

 

Keywords: mergers, acquisitions, advisors, marketing, middle market, contractual agreements, fees, valuation, confidentiality, licensure, brokerages, investment banking, middle market, 

 

In this chapter, we will discuss the evolution of mergers and acquisitions practices. Originally begun as divisions of accounting, legal, business brokerages, and investment banking-related firms and operations, today’s most sustainable M&A advisory practices serve the middle market with methods that align closely with sellers and buyers.  Engaging an M&A advisor is often a one-time, long-term event without the client realizing the extent of the scope of services that is possible. Therefore, marketing M&A services are best done by building brand awareness and cultivating trusted relationships with prospective clients. This chapter is dedicated to revealing the critical ways of building a connection with clients including the importance of quality networking, being a thought leader and expert in the field, and understanding how to protect both sides with limitations and boundaries. Additional considerations in this chapter include best marketing practices, guiding the client through setting attainable goals, bringing awareness of legal ramifications, delineating contractual agreements, and presenting transparent fee schedules. An important portion of this chapter shows M&A advisors how to position their practice and consult with clients to demystify processes such as valuation. This chapter closes with the parameters of confidentiality that include identification of the parties, the scope of work, and licensure. 

 

Chapter 8 – Sell-Side Representation and Process

 

Keywords: mergers, acquisitions, advisor, divestiture, valuation, industry research, strategies, tactics, EBITDA, indication of interest, deal structure, term sheets, earnouts, buyer financing, deferred payment terms, due diligence, deferred payment, recapitulation, allocation of risks

 

Mergers and acquisitions transactions in the middle market require no public disclosure, making any analysis of available data harder to discern. This chapter discusses the necessity of M&A advisors to understand the steps they must take on behalf of clients considering the sale or transition out of their business. The ten steps listed in this chapter prepare the reader how to navigate the sale or divestiture of a closely held or private company. The initial step for an advisor is to identify and share valuable information with their client factually, such as presenting both beneficial options and potential pitfalls. This portion of the chapter emphasizes how to research and properly present valuations in a way that the client understands, including all necessary clarifications of translation types. Step two discusses data and information research that uncovers any concerns that need to be taken into account. In step three, performing industry research and how to initially position the business with up-front disclosure of both attractive and potentially detrimental aspects is presented. This step is important to begin to set strategies and tactics. The Marketing Book portion of this chapter is the fourth step, teaching the subsets of the process, including preparation, seller motivation, specific EBITDA, and balance sheet presentations. Creating the persona of the uniqueness of the business to create exclusivity and excitement among buyers is shared in step five, and step six discusses the corresponding link of making sure parties have confidence in being treated fairly. The seventh step, buyer interest and translation structure, covers term sheets, indication of interest (IoI), deal structures, deferred payment terms, buyer financing, earnouts, and legal provisions. Due diligence is the topic of the eighth step, discussing the concept of acquisition and recapitulation, and step nine covers definitive agreements, with a focus on typical documents drafted when mergers and acquisitions occur. Finally, in step ten, readers gain tips on making sure that the deal closes on time by looking for any last-minute changes that could delay the process. This step educates the reader about common deal-killers, price and valuation changes, terms and conditions changes, third-party challenges, allocation of risks, and additional hold-ups so they can be prepared for any situation that should arise.

 

Chapter 12 – Financial Analysis

Keywords: financial transactions, balance sheets, working capital, EBITDA, capital expenditures, depreciation, balance sheet, cash flow, private compliance, taxable income, profit, normalization

 

In this chapter, extracting how to identify the real financial performance of a company as it relates to M&A and financing transactions are discussed. We will cover financial reporting, balance sheets, working capital, EBITDA, and motivation. Since private businesses do not have GAAP reporting requirements, there are others ways of performing evaluations, depending upon size, industry, and motivation of the owners.  This chapter discusses how financial reporting can be affected by negative adjustments (reduction of EBITDA) with considerations such as capital expenditures and examination of potential depreciation items. Also covered in this chapter is balance sheet analysis, which examines items such as impact value, finance ability, and cash to the seller–especially in regards to working capital. Since motivation can vary due to the nature of privately held business, this chapter explains how owners typically maintain financial reporting to meet cash-flow objectives, satisfy leaders, and other private compliance purposes to minimize taxable income. This means that due to unique financial motivations, it’s important to normalize towards a common basis for comparison. Finally, this chapter delves into aspects of EBITDA that affect the adjustments necessary in the evaluation of profit, both positively and negatively, to arrive at a normalized EBITDA. The end of this chapter discusses positive adjustments, separated working capital accounts, current liabilities, intangible assets, debt, and financial analysis for buyers. 

 

Chapter 14 – Deal Structure

Keywords: legal considerations, regulatory considerations, third-party consent, tax structure, section 388(h)(10), section 721, F reorganization, mergers, strategic rationale, valuation modeling.

 

In Chapter 14, the processes that continue once the Letter of Intent has been solidified are explained as they incorporate and balance the business and economic terms of the deal, tax considerations of the buyer and seller, legal considerations of the buyer and seller, and the regulatory considerations and third-party consent requirements. The ultimate goal of creating a  deal structure that is agreeable for both buyer and seller means taking the time to delineate each aspect discussed in this chapter and beyond as necessary. Once terms are fully outlined and understood, then tax structure enters the process, including assets versus stocks, section 388(h)(10) and section 721 (contribution/rollover), and F reorganization. This chapter also includes legal structure, including asset versus stock transactions, retained assets, and unwanted liabilities, and a brief description of mergers. The reader gains an in-depth understanding of an analysis of both entities, strategic rationale, valuation modeling, and cost, operational, and cultural differences. The chapter concludes with information on developing the integration plan, and deal structure/negotiations. 

 

Chapter 16 – Due Diligence

Keywords: due diligence, earnings analysis, balance sheets, ratio analysis, audited financial statements, GAAP compliance, equity structure, intellectual property, liens, environmental, social, and governance (ESG)

 

In chapter 16, the primary aspects of traditional due diligence in the merger and acquisition process are examined, including background, process, and participants. An in-depth analysis and investigation of the critical areas of an operation such as the financial, tax, legal, and operational methods have to be examined to reduce risk and is referred to as due diligence. The initial assumption of what a business is worth is part of what determines the parameters of the letter of intent; beyond that step, the buyer performs confirmatory due diligence to determine the validity of the statements in the LOI. This chapter identifies the due diligence team and describes in detail what due diligence involves. Next, the significance of the subsets of financial matters is discussed and includes quality of earnings analysis, balance sheet analysis, ratio analysis, audited financial statements, audited financial statements, GAAP compliance, tax structuring and compliance, compensation, and benefits. This chapter continues with an explanation of legal due diligence with an overview of company equity structure, major contracts, intellectual property, litigation, liens, key employees, and other risk areas. Next, because technical due diligence is very industry and case-specific, this chapter describes how the situation may involve a strategic buyer’s internal experts, or in the instance of private buyer equity investors, may necessitate outside consultants, as the firm’s investors frequently require third-party verification and assessment. Typical technical due diligence is performed with businesses operating in software, medical or IT devise manufacturing, and technical or professional services sectors. The chapter concludes with an overview of business due diligence, with sub-sets including customers, suppliers and vendors, organizational leadership, systems and processes, sales and marketing, facilities and equipment, and environmental, social and governance (ESG) considerations.

Chapter 17 – Tax Provisions Used in M&A

Keywords: stock transitions, asset transactions, installment sales, M&A provisions, C corporations, S corporations, LLC partnerships, buyer tax issues, tax structuring, forfeiture, partnership M&A, partnership doctrine, partnership gain tracking rules, corporation contributions, Section 338, reorganizations

This chapter covers an overview of basic taxation terms and rates, stock versus asset transitions, asset transaction specifics, and the buyer’s structural considerations. Chapter 17 also provides more detailed structuring techniques, including installment sales, partnership M&A provisions, and corporate M&A provisions. At the end of this chapter is a tax glossary and reference guide. The start of this chapter discusses tax fundamentals and includes information regarding C corporations, S corporations, and LLC partnerships. Then the chapter moves forward into transaction tax basics, which are divided into two primary structures: an asset sale and a stock sale. This section of the chapter includes information about asset transactions, stock transactions, a stock versus asset sale, asset transaction details, and buyer tax issues. The next portion of the chapter is about detailed tax structuring, including installment sales, risk of forfeiture, assets that quality for installment treatment, installment planning opportunities, partnership M&A, general partnership doctrine, partnership versus S corporations, partnership gain tracking rules, and purchase price allocation for partnership buyers. Corporate M&A issues round out this chapter, covering contributions to corporations, stock/asset sale election: Section 338, mergers and reorganizations, and S corporation issues, followed by the glossary and reference guide.

 

Chapter 18 – Legal Documentation

Keywords: acquisition documents, confidentiality agreement, warranties, pre and post-closing covenants, termination provisions, indemnification obligations, stock purchase, merger transaction, asset purchase.

Chapter 18 begins with the role of the attorney. In M&A, the attorney represents only one of the parties involved, not the deal itself. This chapter shows how most transactions have a pattern to the type and timing of the acquisition documents, starting with the confidentiality agreement through the final acquisition documents. The early parts of transactions see the confidentiality agreement and letter of intent generated and then move forward to the next levels which are the acquisition agreement and the structure of the deal. The acquisition agreement solidifies the deal and includes all key business terms and most importantly, puts into place the applicable representations and warranties, pre and post-closing covenants, conditions to closing and deliverables, termination provisions, and indemnification obligations. This chapter provides an overview of the two most common ways to structure an acquisition: a stock purchase/merger transaction or an asset purchase transaction. In this chapter, an overview of the two most common ways to structure an acquisition is provided: a stock purchase/merger transaction or an asset purchase transaction. Also provided are the important details of representations and warranties, with both positive and negative statements regarding the business at hand to ensure complete disclosure of issues that are pertinent to the buyer, and allocate risk between the seller and buyer after the closing. Usually, the seller will provide warranties that the buyer requests without qualifications with a buyer disclosure schedule. This chapter examines indemnifications in the case of a breach of a representation, warranty, or covenant, and also a provision for the continuation of consultants and any employees that will stay on after closing. The chapter closes with a discussion of transaction statistics that may update the information in the letter of intent based on legal provisions that are typical and customary. Although this may be part of the deal that brings up disputes regarding the interpretation of current market trends and terms, there are ways that M&A advisors help buyers and sellers settle on terms that are in line with the rest of the maket.