M&A Process Oct 2015

Jordan,Knauff & CompanyINVESTMENT BANKERS

The M&A Process:Selling a Business

October 2015


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Agenda Intro Quick market update Preparing for a sale The M&A sale process Thoughts on valuation


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Bill Snow Managing Director, Jordan,

Knauff & Company• Middle market ($10M to $300M)

investment banking firm Author of Mergers &

Acquisitions For Dummies 26 years experience

– Lots of errors, no trials


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M&A: Fall2015 Crazy time - Plenty-o-demand • Thank you Federal Reserve, you crazy bubble

maker you Supply is the problem• Tons of dough chasing precious little supply =

valuations through the roof• Anecdotally speaking – buyers losing out after

bidding 7X, 8X even higher What do with proceeds? • Iffy market returns• ZIRP = “what the heck do I do with the pile of

money I’d get from selling my business?” Taxes• Everyone cites as big factor, it’s not• Lower better (of course) but if people want to do a

deal, they’ll do it Multiples – a function of many

things • Buyer want/need, Ahab, strategic fit, seller

desperation


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Preparing For a Sale Owner…make thyself

expendable (p 40) Fix up the balance sheet

(pp 35-6)• Pay down debt (p 37)• Inventory should be saleable (p

36)• Improve AR collections (p 36)

Cut dead weight (p 38) Increase sales (p 39) The add-back machine (pp 146-7)


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Avoid Serial for BreakfastYou can do things in parallel fashion!• Time is now to begin planning• Avoid “run business/sell business/do

something with dough” With a little help from your friends (pp 79-88)• Wealth Manager - first stop (pp 83-

84)• Lawyer - deal guy, not contract guy,

not a litigation guy (pp 86-7)• Accountant (p 87-8)• Investment banker (p 84-6)

Set the chain of command (pp 43 & 92) Outside advisors and insiders (p 90)


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Know Your Process!

The Generally Accepted……Bill Snow Infused…

…12-Step M&A Process!


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Step 1: The Target List (pp 46 & 95-101) Universe of Suspects• 200 to 300

Winnowed down to a list of prospects • Approximately 100

Collaborative Process• Investment banker does the heavy lifting

All prospects approved by Seller• No need to constantly run back to Seller


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Step 2: Contact! (pp 46 & 102-18) Broad auction vs. negotiated transaction The alchemy of phone and email Getting past screeners Buyers want to be contacted• But don’t over play it• Beware the Ides of Hyperbole


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Step 3: The Teaser (pp 47 & 121-24) Anonymous executive

summary• Overview of the business

- does not expose company identity

• Summary financial info Just enough info to

“tease” recipient• “I wanna learn more!”

Selling a business is sensitive• May be harmful to Seller if competitors learn of the

pending transaction, however, competitors may be the right fit – be careful!


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Step 4: Confidentiality (pp 47 & 124-29) If Buyer wants to learn more• Sign a Confidentiality Agreement (CA)

Buyer is legally required to NOT… • Reveal confidential info• Contact Seller• Even mention discussions are ongoing!

Is Buyer harmed by divulging he’s buying?• It doesn’t

Tip: attach the CA to the teaser


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Step 5: The “Book” (pp 47-8 & 131-53) Many names• CIM, COM, Information Package• Digital (watermark provides

level of security) Huge amount of info• Narrative (history, products,

sales & marketing, employees)• Financial info• Assets, facilities

Enough to make an offer Staggered release• Customer names, asset detail,

other info, not released (yet)


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Step 6: Indication of Interest (pp 48 & 155-61) Written document• Valuation range• Non-binding

Warning!• Do not grant exclusivity at this

point!• Do not proceed to a meeting

without knowing what a Buyer is prepared to pay


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Step 7: Management Meeting (pp 48 & 163-72) “Wizard of Oz” moment• 2D to 3D, B&W to color

Seller provides update since book was published• Primarily financial, sales

guidance• Any other pertinent updates Facilities visit• May or may not be important• Seller may want to conduct meeting on neutral ground

The all important Q&A session• Do both sides play well in the sandbox? Chemistry?


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Step 8: Letter of Intent (LOI) (pp 48 & 199-210) Firm offer• Specific valuation• Steps to close• Still non-binding

Exclusivity• Probably will be granted by

Seller How will Buyer finance

transaction? Pick the “best” one


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Step 9: Due Diligence (pp 49 & 211-27) Open the kimono time• My publisher hated that

phrase Full disclosure• Contracts, financials,

employee info, etc• Customer data, recipes,

formulas, trade secrets, software code, etc. should be among the last info provided


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Step 9: Due Diligence, cont. (pp 49 & 211-27) Cavalcade of consultants• Auditors (earnings tests, inventory)• Lawyers• Sundry (marketing, database, IT,

environmental)• Consultants to consultants

Secure online data room• Central repository, Security

(watermark)• Seller controls the process of what

information is shared…and when


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Step 10: Purchase Agreement (pp 49 & 229-42) Final document• Binding (at last!)

First draft can often frame the discussion• Buyer usually provides first draft

(no law against Seller trying to)• Keep it fair (one sided documents

slow down the process) Drafted in parallel with due diligence Beware of redline ping-pong• Pick up the phone


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Step 11: Closing (p 49 & 245-52) Flow of funds

statement Sign this and sign

that Closing should be a

mere formality• All work should be

done prior to closing


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Step 12: Post Closing Stuff (pp 49-50 & 253-60) Collecting final

payments• Earn outs, notes,

etc Integration

issues Continued

involvement• Employment or

consulting


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Understanding the M&A Process means… You will be prepared• You’ll know what comes next instead of being surprised

You will control the proceedings• Proactive vs. reactive

You will frame the discussion• The other side will be responding to you

You get to define the value proposition• The other side isn’t going to make your case


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Valuation is a complex mathematical formula… That largely depends upon what side I’m representing

What is it?• How is it determined?• What enhances it?• What hurts it?


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Valuation #1

In the eyes of many business owners, Valuation =

[Range of Multiples] X EBITDA


© Jordan, Knauff & Company. Proprietary and Confidential. 24

Valuation #1 is simple, straightforward…

Timing of payments– Is Seller getting paid at close? Over time?

Form of consideration – Cash at closing– Contingent payments are at risk of retrade by Buyer Stock in the acquiring company? Seller note – in other words, is Seller financing the transaction? Lowers net

present value Earn out – Performance risk

Working capital adjustment– AR/AP– Inventory

Stock vs. Asset– Does it really make a difference? Talk with your tax advisor

…and often not the full story


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Valuation #2For many investment banking

creatures, Valuation =

{[Range of Multiples] X adjusted EBITDA} + cash – debt +/- working capital adjustment



Valuation #2 – Investment Bankers

“Add Backs” are expenses that will go away after a change of ownership or one time only expenses that won’t be incurred again. – Adjustments to Owner’s Compensation Might also include payroll taxes and benefits– Severance and lawsuit settlement– Personal expenses - FAAP The Clubs (country, hunting, health, etc.) Car expenses Family members Travel, meals, entertainment– Rent Are your facilities owned or leased? Are you paying over/under or at market rates?

Working Capital – “Normal is expected” – Any issues with AR/AP, inventory?

Get to Adjusted EBITDA by Adding Back Expenses


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Valuation #3In a more complete understanding,

Valuation =

{[Range of Multiples + enhancers - detractors] X adjusted EBITDA} +

cash – debt +/- working capital adjustment



Valuation #3Enhancers to ValuationGrowthProfitsManagement teamCustomer relationships– “Long & Strong”– No concentrations

Non-competes with sales forceUnique expertise– Intellectual Property (patents, trade

secrets)– Sales/marketing approach

Use of TechnologyPhysical plant/offices/files– Organized?– Clean and tidy?

Detractors to Valuation

Management– Lack of bench strength/managers

about to retire– Lack of succession plan

Market is declining/out of favorCustomers– Concentration– Financial weakness

Lack of non-competes with sales forcePoor labor/union relationsUnproductive employeesDirty, unorganized facility/offices


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What can the owner do? Tout enhancers Fix or address the detractors• Bad financials? - start now• Market decline? - time is not your friend, act now• Customer concentration/weakness - find new or stronger ones!• Union/labor relations - tricky, need long term plan• Lack of non completes - tricky, need to offer something• Senior staff ready to retire - groom young ones or hire new ones • Unkempt/deteriorating physical plant - clean it up, fix it, or throw

it out!


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Thank you for listeningContact info:

Bill SnowManaging DirectorJordan, Knauff & Company312-254-5904200 W. Madison StSuite 980Chicago, IL [email protected]

mailto:[email protected]

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M&A Process Oct 2015