The Inner Workings of a Deal: Tips for a Successful Transaction

For those of us in the merger and acquisition or “deal” business, buying and selling companies is second nature.  We live through transaction after transaction, buying and selling companies as routinely as middle market businesses provide their own products or services.

But, in most cases, the people involved in the middle market companies we buy and sell go through the merger and acquisition process only one time.  Most entrepreneurs and business owners don’t know what to expect from the sale of their company.  Consequently, many times, out of ignorance, middle market business owners do themselves a grand disservice by failing to plan well for the biggest deal of their lives.

Over the next few months, I’ll be walking through the deal process step by step so you can be educated as to what a transaction will look and feel like.  I’ll be looking at the inner workings of a middle market deal, and providing tips so that you can be successful when you are ready to pull the trigger on your transaction.

I’ll be dividing this series into nine articles:

Part I – Introduction and Goals

Part II – Preparation

Part III – Hiring an Intermediary

Part IV – Marketing Your Company

Part V – Early Discussions and Indications of Interest

Part VI – Management Meetings, Deeper Dives, and Letters of Intent

Part VII – Due Diligence

Part VIII – The “Docs”

Part IX – Closing and Post-Closing

PART I: Introduction and Goals

 What is a Deal?

Merger and acquisition deals can take a variety of forms depending on the goals and needs of the buyer, the seller and the amount of the target company that is acquired by a buyer.

There are three general types of transactions:  (a) the acquirer buys all of the target company, (b) the acquirer buys a majority, but not all of the target company, and (c) the acquirer buys a minority of the target company.

The most known of these is the first, where the acquirer buys the entire target.  This is the sort of transaction that is frequently read about on the front page of the Wall Street Journal (e.g., Facebook buys WhatsApp, Comcast buys Time Warner Cable, or Exxon buys Mobil Oil).  A full buyout is also the type of transaction that is most common when a middle market company is acquired by a strategic buyer (most often, a larger competitor or a complementary business).

The others are more common to the middle market, but aren’t seen as often in large cap transactions.

Majority, but not complete buyouts are typical of private equity acquisitions.  Private equity firms are most often interested in companies where management continues seamlessly downstream of a transaction, so these transactions frequently include a continued ownership stake by the founder or the management team.

Minority acquisitions are common to the world of venture capital, where a company needs to raise cash to grow, but where there is no intent by anyone to change the management team or the ownership group over the short term.  While these sorts of deals are very similar to full or majority acquisitions, they don’t occur very often in the context of middle market M&A deals.

Goals

The first, and most important step to take is to analyze your own goals for wanting a transaction and deciding what type of deal you should be aiming for.  This step is crucial because it will define how you prepare for the transaction and how to best structure the company for a successful sale.

Generally, business owners in the middle market have one of two entirely different reasons for wanting to sell.  The first is the more obvious in a country seeing an aging baby-boomer population, and that is retirement.  The second is that the company has reached constraints in its growth and that it needs a partner to help remove those constraints in order for the company to continue growing.  These limitations can include: the inability to raise capital, a lack of skills and/or infrastructure, or an unwillingness to take additional risk.  Since many middle market companies grow from the heart, soul, and wallet of an individual entrepreneur, there is often a transition that takes place at some point in the growth of a successful middle market company to bridge the company from individual ownership to a more institutional company.

Depending on whether your goal is one of these reasons or some combination of the two (partners of unequal ages, family transitions, etc.), you’ll want to carefully think through what you are trying to accomplish with a transaction.

Takeaways

 When you first start thinking about a sale of your company, try to identify what you are trying to accomplish.  Are you looking to retire?  Take chips off the table?  Accelerate growth?  Restructure the Ownership of the company?  Each of these goals will require slightly different paths forward.

Part II - Preparation

Michael Jan 2014 crop 1 [1]Michael Schwerdtfeger is a managing director at Chapman Associates. Michael and his team are focused on providing exceptional results through sell-side mergers and acquisitions advisement to entrepreneurs and business owners exclusively. Michael leverages his 20 years of diverse experience handling complex business transactions to help guide his middle-market clients to the best possible deal outcomes.

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