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Anatomy Of An M&A Deal

Anatomy Of An M&A Deal. Build Target List/Make Contact Send/Receive “Teaser” Execute NDA Send/Receive “Book” Execute LOI (“Indicative Bid”) Negotiate & Draft PSA Negotiate & Draft Escrow Pre-Closing Adjustments & Close Post-Closing Integration. Anatomy Of An EIN Deal.

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Anatomy Of An M&A Deal

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  1. Anatomy Of An M&A Deal Build Target List/Make Contact Send/Receive “Teaser” Execute NDA Send/Receive “Book” Execute LOI (“Indicative Bid”) Negotiate & Draft PSA Negotiate & Draft Escrow Pre-Closing Adjustments & Close Post-Closing Integration

  2. Anatomy Of An EIN Deal Build Deal Flow Pitch The 3 x 3 x 3 Negotiate Your Deal (NDA?) Sign Equity Agreement Implement The Fix Monthly Fee Exit

  3. Notes From The Field Faster Is Better Negotiation Is Key LOI Based Multiple Clear Financial Warts Recast Financials Build Bench Strength Systems/Documentation

  4. THINGS TO KNOW ABOUT EQUITY DEALSOne in ten preliminary discussions leads to a signed LOI60% of signed LOIs actually closeDue diligence typically costs $25k whether the deal closes or not2/3 of closed transactions produce expected value

  5. This is a numbers game

  6. Deal Flow

  7. Where To Get Deals • Networking Groups • Toastmasters • Chamber Commerce • Live Conferences • Angel Funds (AIN) • VC Firms • Business Plan Comps • SBDCs • Ad Agencies • Trade Shows • Attorneys • CPAs • Business Appraisers • Bankers • Real estate Brokers • M & A Firms • MeetUp • LinkedIn

  8. Where To Get Deals • Pink Sheet Companies • PR Firms • Press Releases • WSJ/IBD/FT/Barrons • Craigslist • Gust • Caplink • Industry/Trade Pubs • Inc. 500 List • Local Paper (Biz Opps) • Business Brokers • Online Forums • Church • Magazines • YPO • BK Filings • Vistage • CEO Roundtable

  9. Your M & A TeamInvestment BankerIndustry ExpertFinance ExpertAttorneyCPACVE

  10. Structuring Your Equity DealStep 1: Define What You Will Provide

  11. Structuring Your Equity DealStep 2: Define What You Will Receive

  12. Structuring Your Equity DealStep 3: Create Triggering Events

  13. Structuring Your Equity DealStep 4: Define The Comp Structure

  14. Structuring Your Equity DealStep 5: Grant Yourself Access To Financial Info

  15. Structuring Your Equity DealStep 6: Plan Your Exit

  16. Structuring Your Equity DealDecide What Type Of Entity To Use For Your Deal(s)

  17. LOI Terms

  18. LOI Terms • Price • Form of Purchase • Structure Of Purchase • Mgmt Contracts • Closing Costs • Due Diligence • Reps/Warranties • Broker Fees • Timeline for Closing • Insurance • Standstill • Break-Up Fee • Earnings Disposition • Pre-Closing Access • “Special” Disclosures • Confidentiality • Seller’s Role Post-Close • Non-Compete

  19. Negotiating The LOIBuyers pay more in asset sale than stock saleExclude items from sale to reduce PP (e.g. AR, FFE, RE)Payment Terms

  20. Items Needed To Draft LOI • Financial Statements • Shareholder List • Key Manager List • Incentive Comp Plans • ESOPs • List Of All Contracts • List of Major Customers • Key Person Ins. Policies • List of A/R • Add-backs For Non-Customary Expenses • RE & FFE Appraisals • Inventory WIP Breakdown • Capital Exp. Over Past 5 Years • Anticipated Cap Exps. • Copies of Loan Docs • Holder Buy/Sells

  21. Preparing For SaleStart Preparing For Sale The Day You Buy

  22. 3 Critical Management FunctionsCOOCFOCMO

  23. Employee Retention PoliciesBonus Pool On SalePhantom Equity PlanEquity Option PlanEquity Sale Plan

  24. Create Written Policies & Procedures

  25. Policies & Procedures • Roles & Responsibilities • Recurring Mgmt. Meetings • Bus Dev Strategies • Marketing Methods • Sales reporting, quotas & commissions • Bidding, estimating, contract review & approval • Project management process and responsibilities • Product development, QC and delivery • Customer Services and warranties • Billing, AR, discounts, credits, returns, refunds and special orders

  26. Policies & Procedures • Purchasing and PO approval process • Shipping & Receiving • Cash management • Business hours/holidays • Equipment operations, maintenance & repair • Computer operations & security • Email, web usage, website postings • Process for collecting changes to P&P manual, usually best done on a wiki

  27. Recasting Financial StatementsFamily Member BenefitsSalaries To ChildrenAuto & Club Expenses

  28. Recasting Financial StatementsYour Salary & BenefitsInvestment IncomeGains/Losses From Sales Of Business Assets

  29. Increasing ValuationShow Revenue Growth Over Time (15% CAGR)

  30. Increasing ValuationIncrease Total Annual Revenue (Bigger Is Better).5x – 1x

  31. Increasing ValuationIncrease EBITDA4X – 10X

  32. Increasing ValuationDocumented History of Meeting Projections

  33. Increasing ValuationIncrease Current AssetsCurrent Ratio 2.0 Or >

  34. Increasing ValuationEliminate Contingent Liabilities

  35. Increasing ValuationStabilize Customer RelationshipsLong-Term Ks

  36. Increasing ValuationImprove Customer RetentionDocument History of Repeat Customers

  37. Increasing ValuationIncrease Contracts BacklogUn-invoiced Balance KsDivided By Average Monthly Revenue. Ideally 6 Months or More Backlog

  38. Increasing ValuationFill Your Business Pipeline With 3x or > Annual Revenue

  39. Increasing ValuationGet Company Certifications

  40. Increasing ValuationBe The Direct Contractor With Clients

  41. Increasing ValuationBuild Your Brand

  42. Increasing ValuationFocus On High-Profit, High Barrier To Entry Niches

  43. Increasing ValuationDevelop “Bench Strength”

  44. Remove Financial Warts • Unreconciled Balances • Uncollectible ARs • Excessive Write-Offs • Overdue APs • Unrecognized APs • Non-transferable Licenses • Clouded Title To Key Productive Assets • Owner Asset Use • Personal Property Owned By Company • Loans To Owners • Unprotected IP • Unrecognized Liabilities • Expiring/NT Leases • Pending Lawsuits • Unfunded Retirement • Unfunded Warranties

  45. Remove Financial Warts • Lack of Budget • Lack of Spending Controls • Dependence On Few Clients For Revenue • Contracts Losing $ • Understated Cost to Complete Fixed $ Jobs • No Bottom-Up Projections • No Month-By-Month Accuracy Audits • Low Margins & Earnings • Hockey Stick Pro Formas

  46. Valuation MethodsPratt’s Stats (https://www.bvresources.com) BIZ Miner (https://www.bvresources.com) BIZ Comps (https://www.bvresources.com)

  47. EXAMPLES

  48. Valuation Methods – Comps(Precedent Transaction Analysis)Select the Universe of CompsLocate necessary financial infoSpread key statistics, ratios and trading multiplesBenchmark comp companiesDetermine valuation

  49. Valuation Methods – DiscountedFuture Cash FlowsStudy target and determine performance driversProject free cash flowCalculate weighted average cost of capitalDetermine terminal valueCalculate present value and determine valuation

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