Selecting a well-qualified acquisition advisory team could make a lot of dollars and cents
by George Spilka
Is the time to sell your company approaching? If so, you must ask yourself how to execute this task, particularly if you haven't done this before.
Your major challenge will be finding the most talented acquisition advisory firm to guide you through the process. It will advise you in all phases of the transaction, and its expertise can add 10 percent to 15 percent to the transaction price. Only the acquisition advisory firm will be involved in all phases of the process.
The acquisition advisory firm, however, is only part of the advisory team you need. A corporate finance attorney and a tax specialist in merger and acquisition-related business is also needed. The corporate finance attorney should be a specialist who is familiar with the most recent developments in legal strategies relating to mergers and acquisitions. This will protect you from post-closing litigation.
There have been many deals where post-closing legal surprises have caused unsuspecting owners to lose a majority, if not all, of their transaction price because of a weak Definitive Purchase Agreement. The tax specialist will provide advice on the impact of various deal structures on your corporate and personal tax situation.
Your advisory team must work effectively together under the leadership of the acquisition advisory firm. This is essential because the negotiating process is very adversarial. All team members must be pulling in the same direction.
Acquisition process phases
The process can be separated into five distinct phases:
-- Plan and time of sale.
-- Determine the expected transaction price (valuation).
-- Prepare the Memorandum of Information.
-- Execute a search for an acquirer.
-- Negotiate and close the deal.
Under the plan and time of sale phase, the company's business and business foundation must be reviewed in-depth.
All factors that contribute to and define the company's niche and future profitability must be evaluated for their impact on a transaction price. These factors transcend historical financial results and are the reasons that companies in the same industry sell for vastly different multiples of earnings. It must also be determined if the company's present business foundation is capable of generating the maximum attainable transaction price.
In determining the value of a company, the important thing is not the consistency or the level of past profits.
A transaction price is established based on the expected future earnings and the risk in achieving those earnings. The determination of projected earnings and the related risks to their attainment are dependent on the strength of the company's business foundation.
It is critical that the acquisition advisory firm understands how an acquirer makes these judgments.
The Memorandum of Information combines information and sales documents. It must be prepared in a manner that establishes credibility with an acquirer.
The strengths of the company's business foundation must be captured in order for a selling owner to obtain a premium price.
In executing the search for an acquirer, the first step is developing a search plan to locate both domestic and foreign acquirers who bring synergy to the transaction.
Synergy between companies produces a higher level of expected future earnings and a premium acquisition price. Proper screening of an acquirer must be made to assure the propriety of their intentions and the independent verification of their financial capabilities.
Extreme care should be taken during all the steps of the search and negotiations to protect the confidentiality of the sale. Extreme care and thorough screening should be made before talking to a company's customers, suppliers or competitors. My philosophy is to avoid these types of acquirers in almost all situations.
Negotiating and closing the deal encompasses the process from the receipt of an acquirer's initial offer through the closing of a transaction. It includes all negotiations and strategic considerations leading to the execution of a Definitive Purchase Agreement and ancillary documents.
When a price has been agreed upon with a prospective acquirer, a Letter of Intent is usually executed. This document summarizes the basic financial considerations surrounding the sale. It forms the basis for drafting the Definitive Purchase Agreement and ancillary documents.
The normal time from the Letter of Intent to the closing of a transaction is usually 40 to 60 days.
This is part of a paper written by George Spilka, president of George Spilka and Associates, a Pittsburgh-based merger and acquisition consulting firm. For more information, contact Spilka at 4068 Mt. Royal Blvd., Suite 220, Allison Park, PA 15101, 412/486-8189.