Table of Contents
About the Author xxi
Acknowledgments xxiii
Foreword xxv
Preface: A Profession xxvii
A Career in Middle Market Investment Banking xxvii
The Origins of a Deal Junkie xxvii
The Deal Junkie Arrives (Almost) xxviii
Why Another M&A Book? xxix
My Intended Audience xxx
Happy Families xxxi
Disclaimers, Apologies, and Modest Lies xxxiii
Chapter 1 The Middle Market Is Different! 1
Business Process Innovation, Growth Spurts, Regulatory Imperatives, and Capital 1
Not “Mom-and-Pop” Businesses 3
The Upper Market 4
What Exactly Is the Middle Market? 5
Does Size (Alone) Matter? 6
Brokers and Investment Bankers Servicing the Three Markets 7
Chapter Highlights 7
Notes 9
Chapter 2 Drivers of Middle Market Activity and the Sellers 11
Liquidity and Umbrella Drinks 11
Baby Boomers 11
Technology and the Information Age 12
It’s Not Your Father’s M&A World, Either 13
The Glass Ceiling that Sometimes Drives Transactions 14
Big Fish and Little Fish 14
Chapter Highlights 14
Note 15
Chapter 3 Finding—and Understanding—Buyers in the Middle Market 17
Scared Money 17
Understanding Buyer and Investor Types 18
Identifying Potential Buyers 29
Which Door to Open to the Buyers? 32
Chapter Highlights 34
Note 34
Chapter 4 Preparing a Middle Market Business for Sale and Running the Business while Selling It 35
Three Periods to Prepare to Sell a Middle Market Business 37
Litigation 43
Summing Up 44
Chapter Highlights 44
Note 45
Chapter 5 Rewarding and Retaining Key Staff in Connection with a Business Sale: Blackmail or Justice? 47
Overview 47
Key Employee Rewards in General 49
Timing Reward Payments 50
Timing Tax Issues in Rewarding Key Employees 51
The Importance of Clarity and Documentation—Avoiding Vague Promises 51
When to Negotiate Noncompete and Nonintervention Agreements with Key Employees 52
Being Alert to Potential Problems When Promises Made Are Not Consistent with the Duties and/or Influence of Key Employees 53
A Way to Avoid Key Employee Problems in the First Place 54
The Special Problems of Absentee Owners 54
Wrap-Up 55
Chapter Highlights 56
Chapter 6 Crystal Balls and Timing the Sale of a Middle Market Business 57
Bubbles, Cycles, and Business Values 58
Other Timing Opportunities—Roll-Ups 62
Chapter Highlights 63
Notes 64
Chapter 7 The Confidential Information Memorandum 65
The Acquisition Profile 66
Confidential Information Memoranda—Overview 66
Clients and Confidential Information Memoranda: An Intense Collaboration 66
Financial Statements in the Confidential Information Memorandum 74
Chapter Highlights 78
Notes 80
Chapter 8 Confidentiality While Doing the Deal 81
Confidentiality in General 82
Employees and Confidentiality: Two Approaches 83
The Investment Banker and Confidentiality: Communications between Banker and Client; Preventing Premature Disclosure 84
The Executive Summary and Confidentiality 85
Web Site Business-for-Sale Listings 85
Nondisclosure Agreements 86
Securities Laws and Confidentiality 88
Chapter Highlights 88
Chapter 9 Middle Market Investment Bankers and Intermediaries 93
The Telecom Deal 95
Using Professional Investment Banking Assistance and In-House Teams 95
Choosing the Right Investment Bank 100
Chapter Highlights 106
Note 107
Chapter 10 The External M&A Team, and Using the Team Correctly 109
The External M&A Team 110
Using the Team Properly and Sequencing the Professionals; Separating the Tasks and Single Negotiators 113
Chapter Highlights 116
Note 117
Chapter 11 Anyone Can Do M&A—Right? 119
Anybody Can Do This? 119
The Deal the Client Never Got 121
Experience and M&A 122
Chapter Highlights 123
Chapter 12 Two Types of Auctions: The Informal Auction and the Controlled Auction 125
Auctions in General 125
Document Rooms and Sequencing in the Controlled and Effective Auctions 127
Effective Auctions: A Summary 128
The Need for Auctions: What a Buyer Will Not Tell a Seller; How the Seller Finds Out; Is This Really Fair? 130
Chapter Highlights 133
Chapter 13 Financial Services Agreements, Estimating Professional Fees, and the Importance of Integrity around Large Sums of Money 135
Financial Services Agreements, Broadly Considered 135
Lawyers and Investment Banking Financial Services Agreement Reviews 136
Large Sums of Money and Odd Behaviors 137
Success or Contingent Fees Formulas (The Lehman Variations) 140
How Transaction Value Is Measured 142
Retainers (Commitment Fees) 147
Basic Contract Period 148
Trailer Periods 149
Breakup Fees 149
Carve-Outs and Approaches to Carve-Outs 150
Compensation to the Investment Banker in Warrants, Options, or Other Equity 151
Integrity and Investment Banking and Large Sums of Money 152
Bankers Fees Paid at Settlement—More about Large Sums of Money 153
Clients’ Overall Estimate of Professional Fees for a Typical Engagement 155
Chapter Highlights 155
Notes 164
Chapter 14 Investment Banking Representation on the Buy Side 165
The Buy Side 166
Buy- versus Sales-Side Representation 167
Buy-Side Fees 168
It’s All in the Planning 169
How Many Targets at One Time? 171
The Platform Philosophy versus the Financial Approach to Acquisitions 171
Who on the Buy Side Should Negotiate? 172
Orchestration (or Art) versus Science 173
Who Does the Investment Banker Represent? Possible Conflicts of Interest in Buy-Side Representation 174
Chapter Highlights 175
Chapter 15 The Letter of Intent: The Most Critical Document? 177
Content and Precedents of a Good Letter of Intent 178
The Buyer/Seller Advantage Curve 178
Preliminary versus Confirmatory Due Diligence 179
Exclusivity, Confidentiality, and the Letter of Intent 179
Affirmative Response Clauses 180
Weaknesses and Opportunities—Disclosure and Accuracy of Preliminary Due-Diligence Data 181
The “Honey, I Did the Deal” Rule Thoroughness of Business Terms 182
Use of Subtlety and the Effect of Precise Words in Letters of Intent: What the Definition of “Is” Is 183
Negotiating Protocol and the Letter of Intent 184
The Reverse Letter of Intent 185
LOIs from the Buy Side Point of View 185
Chapter Highlights 186
Chapter 16 Some Thoughts on the Psychology of M&A Negotiations 187
A Few Preliminary Thoughts on Negotiation 188
Preparation 188
Clients and Negotiation 189
Politicians and Honesty 189
Honesty and Integrity Are Still the Best Policies Making a Friend 190
Dangers of Written Argument 191
Every Deal Dies a Thousand Deaths 193
The End of the Middle Part of an M&A Negotiation Just Before the Letter of Intent 205
The Difficult or Unreasonable Negotiator 207
One Last Thought on Negotiations: A Confession 207
Chapter Highlights 208
Notes 209
Chapter 17 Initial Meetings with Buyers, Pricing the Company, and Pacing the Negotiations 211
Strange Role Reversals and First Meetings 212
Encourage All Offers, No Matter How Low . . . Getting Them into the Tent 217
The Truth, the Whole (?) Truth, and Nothing but the Truth 217
Timing, Sequencing, and Pacing the Deal while Pricing the Company 218
Chapter Highlights 219
Note 219
Chapter 18 Consideration and Deal Structure 221
It’s the Terms, Not the Price, Stupid! 221
Consideration and Consideration Types 222
Deal Structure 223
Frequently Offered Consideration Types—Overall 224
In Summary: Weighing and Comparing Offers 227
Recommending Against Deal Consideration 228
For Buyers: Creative Uses of Consideration as a Deal making Device 229
Stock and When It Is Priced 229
A Final Thought on Consideration Mixes 230
Chapter Highlights 230
Notes 231
Chapter 19 Earnouts 233
Why Earnouts Are Dreaded but Very Frequently a Deal Component 234
Whose Earnings Are These Anyway? 235
Avoid Confusion: Understand the Differences between Two Types of Earnouts 236
Elements of Negotiation in a Comfort (True) Earnout 237
When an Earnout Is Simply Frosting on the Cake 242
Earnouts and Taxes 242
Chapter Highlights 243
Chapter 20 The Proof Phase, or the Final Days 247
Confirmatory Due Diligence 247
The Definitive Agreement 248
The Final Days: Investment Bankers and Attorneys 250
The Critical Importance of Speed in the Final Days 250
The Closing and the Surprise at Closing 251
Chapter Highlights 253
Notes 254
Chapter 21 After the Nuptials: Postmerger and Acquisition Failures 255
A Brief Honeymoon, Perhaps; A Successful Marriage, Less Frequently 256
Chapter Highlights 259
Note 259
Chapter 22 Does a Sales-Side Client Need an Appraisal before Going to Market? 261
Four Basic M&A Marketplace Valuation Contexts 263
Formal versus Preliminary Valuation in the Marketplace 264
Investment and Dynamic Value 265
The Answer 265
Appraisal Costs 266
A Preliminary Valuation in the Marketplace 266
Chapter Highlights 268
Notes 268
Chapter 23 The Rules of Five and Ten and the Super Rule of Five in M&A Valuation 271
A Foundation for the Valuation of Middle Market Businesses 272
The Rules of Five and Ten, Cocktail Party Conversation, and Quick Calculations 273
Two Bell Curves 273
The Super Rule of Five 275
The Greater Fool Theory (Buyer Beware) 278
Chapter Highlights 279
Notes 279
Chapter 24 An Introduction to the Basic Art and Science of Valuation (Sales-Side versus Buy-Side) as Applied to M&A Transactions, and Flavors of EBITDA Explained 281
So How Much Is It Worth? Valuation 101 282
Valuing Economic Assets in General and Business in Particular 283
M&A and EBIT(DA) 284
Another Approach to Valuation: The Discounted Future Earnings (DFE) Method versus Multiples 287
Chapter Highlights 290
Notes 291
Chapter 25 A Brief Discussion of Multiples and Multiple Realities 293
Multiples in General 294
Risk and Multiples 295
Derivative Multiples versus Actual Deal-Driving Multiples 295
Public Market versus Private Market Multiples 296
Arbitrage and Roll-Ups: A Practical Example of Public versus Private Company Valuation and Multiples 297
Chapter Highlights 298
Notes 299
Chapter 26 Qualitative Values Inherent in the Target Company 301
Quantitative and Qualitative Valuation 302
Two Law Firms 302
Value Drivers Go Well Beyond the Numbers 303
Obsolescence, or . . . Go into Plastics, Young Man 304
The Use of a Value Driver Analysis Contained in a Preliminary Valuation Report 306
Chapter Highlights 306
Note 306
Chapter 27 M&A Conventions and Establishing Balance Sheet Targets 307
Conventions and Their Need and Basis 307
The Balance Sheet in General 308
M&A Conventions in General 309
Entities and Businesses—Redux 310
M&A Balance Sheet Conventions, or, Who Gets the Balance Sheet? 310
Other Nonoperational Assets beside Cash 312
Establishing Targets for Deliverables, Usually the Balance Sheet—A Moment in Time 313
The Balance Sheet: At the Time of Negotiation or at the Time of Settlement? 314
Working Capital Targets on the Balance Sheet 314
Net Worth Targets on the Balance Sheet 315
Double-Counting Target Purchase Price Adjustments 316
Settlement of Differences—Truing Up 316
Operating in the Normal Course of Business 316
The Balance Sheet and Normalization 317
Chapter Highlights 318
Notes 319
Chapter 28 Special M&A and M&A Valuation Topics 321
Overview 321
Valuing Real Estate on the Balance Sheet 321
Technology Valuation: Is It a Business Yet? 324
Valuing the Nonprofitable Business 326
Valuing Rapidly Growing Businesses for Venture Capital and Similar Investments—Is This Really Valuation? 329
Chapter Highlights 335
Notes 336
Chapter 29 Common M&A Taxation Issues 337
A Brief Tax Overview 338
Entity Selection: S Corporations versus C Corporations and Asset versus Stock Deals 339
The Effect of Timing of S Corporation Elections and the Built-In Gains Tax 340
Other Transaction Structural Issues 341
Earnouts 341
The Effect of Tax Accounting Methods 342
Reorganization Deal Structures (Taking Stock) 343
Disposing of Business Interests by Gifting Prior to a Sale and Charitable Remainder Trusts 344
Divisive Reorganizations 345
Small Business Corporations 346
How Much Do Taxes Matter During the Negotiation? 346
Chapter Highlights 346
Notes 347
Chapter 30 The Business of Middle Market Investment Banking 349
What Is Investment Banking? 350
Some Ironies of the M&A Profession 351
Attention Deficit Disorder and the M&A Banker 352
People Skills 352
Entry Points to Investment Banking in General 353
Cultural Issues in Investment Banking Practices—Some Further Thoughts 358
Marketing: Half of Investment Banking Is Business Development 362
Multiple Marketing Approaches 364
Networking in General 371
Serving Clients and Executing Engagements Well 374
Securities Law Issues 376
Engagement Intake Management 378
Success in Life and M&A 379
The $10 Trillion Opportunity 380
Chapter Highlights 381
Notes 382
Chapter 31 A Postscript: The Capital Markets 385
Notes 395
Chapter 32 Another Postscript: The Unbundled Approach to Formal Valuation 397
A Bird, a Plane? 397
Notes 399
Index 401
