The mergers and acquisitions (M&A) sales process begins with the preparation of a thorough Offering Memorandum (OM). This critical document provides the framework for profiling a company and positioning it for sale.

An effective OM requires collaboration between the Sellers and the M&A advisor to capture the essence of the business. These conversations will include:

• Company overview – history, who we are, what we do
• Define the core business – processes, technologies
• Strengths and weaknesses – success factors, opportunities, challenges, shortcomings
• Description of the industry & competition – market analysis
• Financial and/or contractual obligations
• Description of the work force – key executives/managers, backgrounds, personnel
• Major contracts and customers
• Normalized and recast financial statements – including original statements prepared by an independent CPA

A properly prepared OM should summarize essential business information with the intent to engage numerous prospective buyers in a negotiated sale of the business. The OM will serve as the backbone of the negotiations process; providing a clear and detailed story, ensuring a successful transaction.

There are four types of valuations used to understand middle market transactions and helpful with succession planning:

• Fair market value, hypothetical concepts, most commonly used in estate, income and gift tax planning or litigation support.
• Preliminary estimate of value in the market-place; will include strategic values recently paid in an industry.
• Investment value, value particular to potential buyers.
• Final transaction value, actual value paid in a closing transaction.

The use of a valuation may be the catalysts for business owners to operate their companies in the most value-enhancing manner. In the future, the market may be over-crowded with companies for sale; the opportunity to create significant owner-value should begin immediately. Experienced investment bankers should be able to advise sellers as to general price ranges, and identify positive and negative value drivers so as to maximize the final transaction value of the business.

Lackadaisical buyers or “Tire Kickers” waste everyone’s time and money and should be avoided whenever possible. These casual buyers may be curious but lack the commitment to close, lack the resources to make an acquisition, have the resources but unsure of the type of business, looking for a deal but far below market value, or just plain snooping with no intention of acquiring a business at all.

With the assistance of an experienced M&A Team, sellers can be certain that potential buyers will be vetted for their commitment to close. On the front end of a deal, potential buyers should:

• Define their criteria for a purchase decision
• Identify their sources of funding
• When would they like to close the deal?
• Are there any deal-breakers?
• Other companies under consideration?

A committed buyer or ideal prospect knows exactly what they want, should be able to give specific reasons for the acquisition, can run the business effectively, has the financial capacity to acquire, and is willing to sign a non-disclosure agreement.

Currently, in the M&A community, discussions regarding the purchase price of a target company are most often expressed as a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization). If EBITDA is the benchmark, what is the justification for such a wide range of transaction multiples from 3-4-5 to 8-9-10 in the same or different industries? It is particularly important that buyers and sellers understand the concept of actual free-cash flow. The most accepted measure of free-cash flow is EBITDA less Capital Expenditures (EBITDA-CAPEX).

When considering an acquisition, the analysis of CAPEX is essential. CAPEX may be separated into two categories:

• Immediate expenditures required to bring the operating assets into good working order; and
• Ongoing annual, recurring reinvestments for existing operations or for revenue and earnings growth.

The choice of multiple(s) depends on the nature of the business. Service companies normally require very little capital re-investment, and as such, EBIT (Earnings Before Interest & Taxes) is an appropriate cash flow metric. For capital intensive businesses, EBITDA-CAPEX is more appropriate, since it accounts for the necessary capital reinvestment to maintain and grow the business.

Nearly every M&A Advisor would agree that confidentiality is the foundation upon which successful transactions are built. Confidentiality is paramount throughout the M&A transaction process, but this is especially true when it concerns:

• the seller’s employees
• the seller’s customers and vendors
• the seller’s competitors and the public
• public companies and the possibility of insider information

Middle Market business owners vary in their employee disclosure approach. Some choose to refrain from disclosing any information to employees; confiding only with trusted advisors. Whereas other owners may control the disclosure; dictating the dialogue with the intent of alleviating employee concerns.

A comprehensive nondisclosure and/or confidentiality agreement should be designed in a manner that prevents a seller’s business from being harmed by disclosing to outside parties the actual name of the company, the financial and business details of the company (typically outlined in the Confidentiality Information Memorandum), and especially, the “proprietary juice” that differentiates the company from its competitors.

Often downplayed as a formality of doing business, confidentiality should be addressed by buyers and sellers and their respective M&A teams early in the transaction process.