Mergers and acquisitions for dummies pdf free download

On a massive scale and in a very short period of time, hundreds of thousands of businesses have shuttered or cut back their operations significantly, millions of workers have been laid off or furloughed, consumer spending has been drastically reduced, supply chains have been disrupted, and demand for oil and other energy sources has plummeted.

As in past financial and economic crises, uncertainties in the business and capital markets have already contributed to buyers delaying or cutting back on their acquisition plans. These include deal terms themselves, new due diligence issues that have arisen, the manner in which due diligence is conducted, the availability, pricing and other terms of deal financing, and the time it will take to obtain necessary regulatory and other third-party approvals for transactions.

Global mergers and acquisitions have already plummeted as result of the coronavirus crisis, and by the end of March had reached a near standstill. Among other things, executives of companies that would typically have been strategic buyers have been forced to redirect the focus and energy of their teams toward the immediate health of their own companies and away from longer term goals that include pursuing growth through acquisition strategies. The financial world set a record in for mergers and acquisitions.

The author has an explanation for this persistent failure and offers a way forward. Acquirers, he notes, tend to look at acquisitions as a way of obtaining value for themselves—access to a new market or capability. The trouble is, if you spot a valuable asset or capability in a company, others will too, and the value will be lost in a bidding war.

But if you have something that will make the acquisition more competitive, the picture changes. Are you a business owner, investor, venture capitalist, or member of a private equity firm looking to grow your business by getting involved in a merger with, or acquisition of, another company? Are you looking for a plain-English guide to how mergers and acquisitions can affect your investments? Look no further. Plus, you'll get expert advice on identifying targets, business valuation, doing due diligence, closing the purchase agreement, and integrating new employees and new ways of doing business.

Mergers and Acquisitions For Dummies. Well, maybe stock, maybe something else. This kind of investment makes the most sense when the company has publicly traded stock and the stock has a large-enough average daily volume to make the investment liquid. This way, if the company goes under, the investor gets repaid before equity holders, but she also has the option to covert her debt into to stock in the event the company goes public.

Why structure the deal this way? In the world of accounting, debt holders are higher up on the food chain that stock owners. On the other hand, if the company is wildly successful, turning the debt into stock can be quite lucrative. As you may guess, Sellers tend to prefer the non-control investments, while Buyers prefer control investments.

The control investor has greater recourse to change management and affect the direction of the company. The non-control investor simply goes along for the ride, with little or no recourse to exit the investment.

Diversifying assets: Take some chips off the table Many business owners have nearly all their wealth tied up in their companies, so their finances are in serious jeopardy if the company fails. Selling a piece of the company to an investor allows an owner to create liquidity in an otherwise illiquid holding. This maneuver is called a recap short for recapitalization. In other words, the investor may also be willing to pony up more money to invest in the business or pay for acquisitions.

Bringing in an outside investor to buy out a partner Partners are a great way to build a business: One person deals with one area, such as sales, and the other handles another say, the back-office administration and accounting.

The downside to having partners is that they sometimes stop seeing eye to eye, and one of them needs to leave the business. For a closely held business, this situation can be a problem; the partner who wants to stay may not have the money to buy out the partner who wants to leave. Bringing in an outside investor is a way to solve this problem. This section tips you off to some areas to look at before you sell or even decide to sell so that you can avoid common pitfalls.

If Seller is unable to institute operational improvements prior to a sale process, she should inform Buyer where he can make additional improvements. At a minimum, Buyer will view the suggested list of improvements as a sign of goodwill, thus increasing the odds of a successful closing. Clean up the balance sheet One of the biggest obstacles to getting a deal done is a messy balance sheet. Repeat after me: Accounting is your friend.

One of the key figures on a balance sheet is the current ratio, or the difference between current assets and current liabilities. Anything labeled current on the balance sheet is essentially the same thing as cash. So what are these cash or almost-cash items? To fix up your balance sheet in preparation for a sale, follow these steps: 1.

Collect your receivables. Buyers check to see whether Sellers are diligent about this collection at least, they should. If the terms are net 30 that is, money is due within 30 days , as a Seller you should be collecting those receivables within that time frame. Slow collections on receivables may mean Buyer has to obtain a revolver loan, a loan designed to help companies with fluctuations in cash flow.

Buyer will likely assume your working capital, namely receivables and payables, as part of a transaction. Buyer will probably want all the receivables but may make you grant a discount on overdue accounts. Make sure inventory is all saleable. If you have obsolete or slow-moving inventory, talk to your accountant about how best to write off this inventory.

If you want more information about the wonderful world of accounting, check out Accounting For Dummies, 4th Edition, by John A. Tracy, CPA Wiley. Or you can talk to your accountant. Pay off debt Another hurdle in selling a company is taking care of your long-term debt. Although Buyer can assume the long-term debt of an acquired company, Buyer will probably simply deduct the amount of debt from the proceeds of the sale. For all practical purposes, if Buyer assumes the debt, Seller is retiring that debt at closing.

Ask whether the lender would accept a percentage of the amount owed 60, 70, 80, or whatever within a certain time period such as 45 days and then consider the debt paid in full if you meet those new terms.

Tell the lender that if you fail to meet the terms of this new agreement, your deal reverts to the original percent. If the lender agrees to this gambit, be sure to memorialize the agreement in writing. These distinctions are important because they affect the taxation of the business.

An LLC and an S-corporation allow for a single layer of taxation, which means the government taxes a sale of assets once, most likely at the prevailing capital gains rate.

The Seller of a C-corporation, on the other hand, gets hit with two layers of taxation. First, she pays on the proceeds of the sale at the corporation level, and then when the remainder of those proceeds is distributed to the shareholders, the shareholders also pay tax, most likely at the capital gains rate. This double-whammy means the shareholders of a C-corporation many be looking at receiving less than 50 percent of the gross proceeds.

Sellers should speak with their tax advisors prior to pursuing a business sale and set a plan well in advance of the decision to sell. But starting early enough is key: When converting from a C- corporation to an S-corporation, you may need a full decade before the full benefit accrues.

An able advisor can provide you with a structure for a deal that minimizes your tax burden. One way is to reduce and eliminate wasteful expenditures, and because the largest expense of most businesses is personnel, you may have to make some difficult decisions. Make a determination of what personnel you need to run the business and simply execute on that decision. If some staffers are on the edge, give them a chance to improve. Set realistic goals and give them the tools to succeed. My experience has been people respond to this challenge in one of two ways: Either they step up and improve their performance to a tolerable level or they quit.

Either option is a suitable outcome. The profitability of your company improves when revenues increase and expenses stay the same. Set the stage for long-term success. Closely held businesses often utilize a different version, colloquially called FAAP, or family accepted accounting principles.

If the business is audited by the IRS, those expenses may be disallowed and the owners may face penalties. In addition to owner expenses, you may have other add backs to account for, including one-time expenses such as severance, a lawsuit settlement, or a once-in-a- lifetime capital investment for example, buying equipment with an extremely long useful life.

The rule of thumb when analyzing whether an expense is one time is simple: What are the odds of this expense happening again?

Owner, make thyself expendable Companies with the greatest value to Buyers are those companies where ownership is completely, totally, and utterly replaceable.

Heck, the thought of being utterly replaceable is spiky for almost anybody! Here are a couple ways you can make yourself replaceable as an owner: Train other managers to run the company without you. Empower them to make decisions, and trust them to work independently and make their own decisions. Design and implement systems that remove any ad hoc decision- making systems. Exploring Typical Reasons to Acquire Since time immemorial, mankind has grown through acquisitions.

Granted, those early acquisitions were really conquests, but in recent years, empire-building has focused on acquiring companies. As I note in Chapter 1, an acquisition allows a company to skip the growth stage and buy existing sales and profits.

For this reason and those in the following sections, a company may choose to buy other companies instead of relying on organic growth. Make more money Make no mistake: The pursuit of money is a main reason for making acquisitions. Making more money is a noble pursuit. Gain access to new products and new markets Acquiring a company with a similar product allows the acquirer to increase its share of the market.

Being a larger player in an industry can have benefits, such as the ability to negotiate better prices or terms from suppliers and vendors, increase awareness to customers larger companies typically are better known than small companies , and raise prices.

Implement vertical integration Vertical integration means buying a supplier or an end user of your product. An ice cream manufacturer that buys a dairy farm is vertically integrated. The downside is that the acquired company may service other competitors. If that dairy farm also supplies other ice cream manufacturers, those competitors may balk at buying from their rival.

This situation is a channel conflict. And you thought that was when you and your spouse argue over what program to watch! Economies of scale simply means that as a company grows larger, the fixed expenses stay the same or increase far more slowly than the top line revenue.

Therefore, the larger the company becomes, the more profitable it becomes. If Company A is killing a Company B in the marketplace, Company B may determine simply buying Company A is the best way to make the competition go away.

Successfully acquiring other companies takes some planning and preparation; I cover the vital considerations in this section. Does the target need to have a minimum profitability level, and if so, what is it? Are you willing to consider acquiring a money-losing operation? Should the acquired company be a product extension or a new product? Should the acquisition allow you to vertically integrate? These are only a few of the possible questions to consider when choosing a potential acquisition.

No, really, be honest. How is it? Companies able to successfully do deals have strong cash positions and little or no debt. Working capital should be positive, and the current ration should be at or above the industry norm. Have the money lined up Have your sources of cash ready to go before you begin the acquisition process. Also, reputations travel because people talk. A Buyer unable to close a deal because of a lack of forethought sullies its reputation.

Following this chain of command at all times helps the acquisition process go smoothly and efficiently by eliminating poor communication and duplicate steps. All requests and questions go through this one person to prevent poor communication, duplicated steps, and a frustrated Seller.

Buying a Company from a PE Firm In some situations, you may consider acquiring a company from a private equity PE firm, a pool of money that buys companies with the intention of reselling them later for a sizable profit.

PE firms can be very motivated Sellers. After all, buying and selling companies is their industry. Head to Chapter 4 for the lowdown on PE firms. The following sections offer some considerations to keep in mind as you look at dealing with a PE firm. PE firms also hear the constant ticking of the internal rate of return IRR , one of the key metrics they like to flaunt when raising capital.

Does the company fit with your goals? This question is pretty basic, of course, but as Buyer, take care when evaluating the fit of a portfolio company with your company. Decide whether a potential earnings hit matters to your company. Consider also whether the acquired company will eventually be able to generate higher earnings for the entire firm if earnings take an initial hit. Is the company actually an integrated set of other companies?

PE firms often cobble together multiple companies into one integrated firm. This setup is perfectly fine, and PE firms often do a wonderful job of integrating, but you need to be wary of just how well organized formerly disparate companies have been integrated.

How long has an integrated company been operating since the last acquisition? Waiting awhile at least a year to make sure these formerly independent companies are operating as a cohesive unit is a good idea. But believe it or not, the buying and selling of companies has a clearly defined process. To be a successful Buyer or Seller, you need to understand how that process works so that you can think many steps ahead and plan accordingly — just like a chess game, but without the checkered board.

I also look at the constantly changing power balance between Buyer and Seller in a deal and provide suggestions on preserving as much power as possible in less-than-ideal circumstances. Take Note! A good deal of planning occurs before Buyer or Seller can undertake the process of buying or selling a business, let alone successfully close a deal.

The key points are to disseminate information in a timely, orderly, and appropriate manner and to close mutually beneficial deals. To keep the process moving along, Seller needs to create a line in the sand by instilling due dates. The first due date will be for indications of interest. Buyers will almost always be late in submitting their indications, so Sellers are wise to allow for a little padding of time. Step 1: Compile a target list If ownership decides to sell or make acquisitions following discussions with advisors, family, friends, and management, the process begins by identifying prospective Buyers or Sellers.

The key word here is prospective; these businesses may or may not be interested in doing a deal. You begin to make that determination in the following steps. Chapter 6 provides a much deeper dive into the process of researching, compiling, and culling a list of targets. For a successful acquisition or sale campaign, I strongly recommend having at least 75 prospects, and preferably more than Having a small universe of prospects simply lowers the odds of finding the right deal, but a list of many more than targets gets untenable.

Some people prefer a passive approach e-mails or letters , while others prefer a more assertive approach phone calls. I prefer making calls when contacting Buyers believe me, most of them are literally sitting by the phone waiting for a Seller to call.

Contacting Sellers is far trickier. Check out Chapter 6 for more on contacting Buyers and Sellers. Avoid hyperbole at all costs. Step 3: Send or receive a teaser or executive summary If Buyer wants to learn more about the company for sale, Seller will forward a teaser to Buyer. The teaser sometimes called the blind teaser is an anonymous document that provides just enough nonconfidential information to pique the interest of Buyer.

As the name implies, the teaser is designed to tease Buyer into a frenzied state of wanting to know more. These documents are the doorway that leads to the other steps in the process. Chapter 8 provides a lot more information on these documents.

Step 4: Execute a confidentiality agreement If, after reading the teaser discussed in the preceding section , Buyer is interested in learning more about Seller, the two parties often execute a confidentiality agreement CA. Chapter 7 offers a detailed look at all the ins and outs of confidentiality. Step 5: Send or review the confidential information memorandum If the confidentiality issue in the preceding section is socked away and settled, Seller provides Buyer with a boatload of information, usually in the form of a book known as an offering document, deal book, or some similar title.

The offering document provides a huge amount of informational about Seller: financials, customer info, employee info, products, marketing, operations, legal, real estate and fixed assets, and more. The offering document should provide sufficient information for Buyer to make an initial offer.

I cover offering documents further in Chapter 8. Step 6: Solicit or submit an indication of interest If the Buyer reviews the offering document see the preceding section and is interested in pursuing a deal, Buyer indicates that interest in the aptly named indication of interest IOI. An IOI provides a valuation range not a specific price Buyer would consider paying for the company, as well as some other basic info estimated closing date, source of funds, basic composition of the purchase price, and so on.

See Chapter 9 for more. Seller conducts the meeting, which provides a financial update as well as updates to any other issues that may be pertinent for Buyer, such as new customers, lost customers, new hires, new product launches, litigation, and so on.

Chapter 10 gives you the lowdown on these meetings. The LOI is a nonbinding document that forms the basis of the final deal. It contains a specific purchase price rather than a range and provides the steps needed to close the deal. The LOI usually includes an exclusivity clause, which means Seller can no longer negotiate with other Buyers.

Flip to Chapter 13 for details on making and receiving offers. Exclusivity is an enormous issue! Grant it carefully. These days, the due diligence info is usually provided in a secure, online data room. Step Draft the purchase agreement If due diligence see the preceding section is progressing reasonably well, the parties draft a purchase agreement. The lawyers for Buyer and Seller work out the details of the purchase agreement; see Chapter 15 for more.

When drafting the purchase agreement, make sure the lawyers hammer out the legal details and only the legal details. All of the business particulars should be handled by the investment bankers. Lawyers should never, ever, upon pain of death, negotiate a single business term!

Business and legal issues are two separate worlds and each should be handled by the appropriate party. After all the documents are signed, the money is wired to the appropriate parties, and the deal is done! Chapter 16 provides more info on closing. See Chapters 17 and 18 for more on how to do just that. One of the benefits of successful deal-making is the money, the wealth creation, and the self- actualization that comes from success. But more than that, successfully doing deals means creating wealth and opportunities for others.

A consummate deal-maker expands the economy as she improves her personal balance sheet. The best deals, where both sides make money, come from the value creation of hard work and ingenuity and the hardnosed ability to negotiate mutually beneficial deals. An auction is a business sale process where a group of Buyers makes their final and best bids and the company goes to the best bid.

So what does best bid mean? For example, say Seller is examining two bids. Which is the better deal? But depending on the situation, the second bid, although lower, may make more sense; perhaps Seller is willing to forgo a higher potential price for the certainty of more cash today.

A negotiated sale still has elements of an auction numerous participants making bids , but a negotiated sale involves a lot more hand-holding of the Seller. Which process is better depends on the situation. An auction usually works best for larger, well-known companies.

In these cases, Buyer may be willing to pay a premium for a famous company. A negotiated sale works best for smaller companies or companies with losses or thin profits. Some Buyers shy away from auctions. Although an auction can be a great way to sell a company, the auction may result in an unintended consequence: no bids!

Anyone who has worked a sales job has probably dreamed about being on the other side: the buyer, the person who seemingly has all the power. Buyers, after all, are the ones who pick and choose. They get to interview numerous possible vendors and pick the one that delivers the best combination of price, quality, and, often, the intangibles of an interpersonal connection. But in mergers and acquisitions, that scenario gets flipped on its head.

The following sections look at each of these positions. Simply put, quality companies with critical mass are in demand. For more on what that means, see the nearby sidebar. Suffice it to say that after a company gets above a certain revenue level and especially a certain profit level, Buyers of all shapes and sizes start chasing it. Selling is typically easier than trying to make acquisitions, but selling a company is fraught with challenges, difficulties, ups and downs, and sheer white-knuckle poker playing.

For more on actually navigating a sale, check out Chapter Although definitions vary from Buyer to Buyer, critical mass simply means a company that has size, scale, and scope. They have more company to go around!

An unprofitable company with enough revenue may even have value to the right Buyer. Companies with large-enough profits will always be in vogue with Buyers. Selling products or services into the executive ranks is often a coveted level of access, and companies that lack that sophistication may be willing to pay a premium for it.

In fact, a solid brand and reputation can help an otherwise troubled company generate a good price during a sale. Owners of companies are bombarded on an almost daily basis from all sorts of Buyers. Buyers are a dime a dozen. For tips on how to better entice an otherwise uninterested business owner, see Chapter 6.

Understandably, the owners and executives of these companies are extremely reluctant to talk to a competitor, let alone give up sensitive information such as revenues, profits, customer data, sales compensation, and the like. This swing in motivation, plus a little poker-esque bluffing and tell-reading, means the power balance in a deal is constantly shifting. Looking at the factors of motivation The most motivated party in a deal is the one most likely to cede power to the other side to make sure the deal goes through.

But what exactly provides this motivation? Several factors: Interest: The side that has the most interest in doing a deal probably has the least power because that party will be most willing to compromise in order to get a deal done. Desperation often indicates an impending business failure, thus greatly increasing the willingness of the owner to accept a deal, any deal.

Boredom: A business owner who is bored and wants to move on to something else can unwittingly become a highly motivated Seller. Broadcasting that boredom to potential Buyers puts those Buyers in a huge power position. Time: Time is the wild card in the motivation game. A Seller who wants or needs to do a deal right now will likely cede power to Buyer.

Conversely, the longer the process takes, the more the power may flow back to Seller because Buyer becomes the one who has invested time and money and increasingly needs to get the deal across the finish line. Buyer and Seller have to retain advisers. Buyers are most often guilty of overspending. The more money a side spends during the process, the greater the odds are that that side will want to get a deal, any deal, across the finish line.

No one wants to spend money and have nothing to show for it. Understanding who has power Typically, Seller has a lot of power early in the process. As the party being courted, Seller controls whether meetings occur and whether information is exchanged. One way Buyers can get more power early in the process is by submitting a pre- emptive bid, making a bid before other Buyers have made their bids and knocking out all other possible suitors.

Eliminating competition is a boon for any Buyer and puts Seller in a vulnerable position. If Buyer subsequently decides against closing a deal, Seller has lost time otherwise spent talking with multiple Buyers and thus finds itself back at square one.

Even without a pre-emptive bid, the power balance swings toward Buyer when the parties sign an LOI with an exclusivity clause. At this point, Seller can no longer speak with other Buyers. Short of that, Seller should include language in the LOI that ends the exclusivity period and allows the Seller to speak with other Buyers in the event that Buyer attempts to change the price or terms of the deal. From the signing of the LOI through closing, Buyer most often calls the shots.

However, the longer the due diligence and purchase agreement drafting takes, the more the power may shift back toward Seller because Buyer is investing more and more money as the process goes on. Some Buyers, most notoriously private equity PE firms, retain advisors whom they pay after the deal closes. PE firms typically pay those bills with the proceeds from the closing.

And guess what? They have to go back to their bosses, tails between their legs, and ask for money. Bad news. The deal is no more. It has ceased to be. The deal expired and has gone to meet its maker. Can I have a couple hundred grand to pay off all the professional services firms that did all kinds of work on this deal that turned out to be all for naught?

The stronger your position, the greater your negotiating leverage. The four positions are as follows: You have a strong position and your opponent knows it. This situation is where you may need the most skill. You have the upper hand, but if you push too hard, you lose the deal or get a less-than-ideal return. In poker, if the table knows a person has a great hand, all the other players fold.

Although he wins that game, the strong hand can win bigger by downplaying his hand and keeping the other players betting for longer. Being underestimated is a great thing! Hubris is the great enemy of getting deals done, so let your opponent crow and brag. Check your ego at the door and play the simpleton. And if it ends in your favor, what do you care about what other people think? You have a weak position and your opponent knows it. This position is the danger zone. Your options are limited, and the other side is calling the shots.

In this situation, your best bet is to move as quickly as you can and close the deal. Take your lumps, lick your wounds, and move on. The longer you linger, the worse your deal may get. Time to test your poker-playing skills and bluff. Here are a few pointers: Ask questions and shut up. Let the other person talk. You may be amazed how much someone divulges when given a chance to talk. Pay attention to details. How clean and orderly is the business? Messes, clutter, water stains, burned-out bulbs, mold, and so on are often the signs of a business in decline.

The employees and ownership no longer have the pride of a well- run business, and they simply may be ready to give up. Keep an eye out for these tells those subconscious habits or mannerisms that belie your true position on your end as well.

Deals only get done if Buyer and Seller find a mutually agreeable deal. Maintaining as much power as possible when disclosing undesirable news At some point or another in a deal, you may find that you need to give the other party a piece of information that gives that party more power over you.

These suggestions can help you control all that you can. Deliver the news in a matter-of-fact manner. Although being honest is vital, how you present your information is also key. Simply say what you have to say as neutrally as possible.

An issue you think is problematic may turn out to be no big deal for the other party. However, if you phrase the news in the form of a negative editorial, you may transfer that negative vibe and thus turn a nonissue into a weapon your opponent may use against you.

Disclose everything early. If you have a disclosure to make, do it sooner rather than later. And if you think you can hide negative or bad news, remember that those kinds of skeletons usually come to light during due diligence. What to Tell Employees and When Informing employees that a company is in the process of being sold is a tricky proposition. Worse, employees may begin to leave because they think, correctly or not, that the company is in some sort of trouble.

A failed sale process can become a self-fulfilling prophecy of doom for an otherwise-healthy company. For some thoughts on what to say to employees after the deal closes, see Chapter Keep news of a sale process confidential Simply put, the greater the number of people even employees who know about a pending business sale, the greater the chance someone will inadvertently spill the beans to someone else, who will mention it to someone else, who will talk about it in a public place where anyone can overhear.

The first concern is a competitor learning of the sale process. The second concern is gossip among employees. In the absence of fact and communication, people can be extremely creative as they attempt to fill in the blanks with some sort of guesswork. Ambiguity is never a friend to business. A staggered release If a business is going through a sale process, certain employees need to know about the business sale at different times. The controller or similar accounting employee should be taken aside and told of the sale process.

However, talking with the controller ahead of the process reduces the odds that she tells other employees. Other than accounting employees, the remaining employees should be told about the potential sale on a need-to-know basis.

If at all possible, tell the employees after the deal has closed. Part II examines the steps necessary to start the deal-making process. One of the first orders of business for Buyers is to make sure the necessary capital is available. Exploring Financing Options To many, buying a company means an exchange of cash: Seller gets some dough, and Buyer gets the company.

This transaction implicitly states that the payment is currency, to be paid now, and the price is fixed. A better word for what Buyer pays Seller for the company is consideration.

Consideration can be anything that a Seller is willing to accept in exchange for the ownership of her company, such as land, another company, or, yes, cash be that dollars, pounds, Romanian leu, or whatever. Consideration is limited only by your imagination, which is why creativity is so important during the deal-making process.

Think of it as turning knobs on a stereo: You have a virtually infinite number of ways to twist a multitude of knobs. The following sections lay out a few such options. Instead, offer some sort of proof of your ability to complete a transaction. Buyer uses his own cash The most obvious source of capital is for Buyer to use his own money. The benefits are obvious: a Buyer using his own money has total control over the situation. A third- party lender usually institutes hoops for the Buyer to jump through; using his own money removes those external limitations.

Using his own capital to finance percent of an acquisition also means the Buyer is assuming percent of the risk. Bringing in outside capital helps Buyer spread the risk. Borrowed money comes in three basic flavors: senior debt, subordinated debt, and lines of credit. Debt, or leverage, is a double-edged sword: It can help a company diversify its risk and make an acquisition easier to swallow. But the borrowing Buyer becomes beholden to the creditor and has to jump through hoops to obtain the capital and keep from defaulting on the loan down the road.

A Buyer unable or unwilling to utilize bank sources of capital may be able to turn to a PE firm to help with the acquisition, although PE firms often exact a high price in return for using their money. A PE firm often wants a controlling interest in the entire company not just the acquisition in exchange for helping finance the deal.

If the acquisition goes wrong, the PE firm may be able to take over the entire company. Bringing a PE firm also means bringing in debt. Buyer seeks financial help from the Seller Seller financing — why would a Seller do such a thing?

A Seller willing to provide financing to a Buyer gains the benefit of being able to move on to the next phase of life — retirement, hobbies, charity work, or perhaps starting another business — while receiving consideration as the result of the sale. Although cash is always king, a Seller who wants to get out of running the business may find that extending financing in other words, accepting a promise from Buyer to pay Seller later helps achieve that goal.

Seller financing also can be a way for a Buyer and Seller to conclude a transaction where Buyer is having difficulty obtaining outside capital. Instead of paying back a third-party lender a bank, for example , Buyer pays back Seller. Seller is taking on the role of the lender. The typical forms of Seller financing include Seller note: Seller effectively loans money to the Buyer in order to help with the financing of the acquisition. Instead, Seller agrees to allow Buyer to pay a certain portion of the transaction price at some later date.

Typically, these notes earn interest, either paid on a regular schedule such as monthly, quarterly, or annually or accrued and added to the loan, thus repaid when the loan is repaid. Earn- outs may be based on top line revenues, operation profit, EBITDA, gross margin, gross profit, sales increases, and so on see Chapters 12 and 21 for possible earn-out options. If you agree to an earn-out, keep it as simple as possible. Overly complicating an earn-out is a sure recipe for a disagreement.

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Table of Contents. There is a rich and growing literature on mergers and acquisitions. The release of James C. In the two decades which followed, hostile takeovers became the norm, leading to a whole new category of books.