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After 14 years of writing a national newsletter, M&A TODAY, published by Business Brokerage Press, Russ Robb has published a 400+ page book that in one volume captures the entire process of selling middle market businesses (With Sales Ranging From $5 Million to $100 Million) from the intermediary’s point of view. The book contains examples of the proposal letter, the confidentiality agreement, the fee agreement, the term sheet, the letter of intent, the purchase & sale agreement, etc.
REASON FOR GOING UPMARKET
A national progression of growing one’s brokerage business by selling companies to companies instead of selling companies to individuals. Going upmarket is more profitable for you the intermediary, more selective in contacting buyers, but conversely it takes more knowledge by the intermediary… hence the necessity of this book.
REASON COMPANIES ARE FOR SALE
The short answer is “death, divorce and despair.” The all encompassing short answer is the following:
Having worked for a valuation firm in the past, I was dismayed to view the appraisal mostly based on the objective financial numbers without consideration for proprietary products or services, market share, customer concentration, cyclical or seasonality, management depth, financial systems, value drivers, outdated machinery and equipment (M&E), supporting sales growth, etc.
Naturally, most sellers want all cash at closing, but it is estimated that only one-third of middle market transactions are structured that way. In many deals, the structure is more important than the price, so if a seller is inflexible on structure, it can be a major obstacle and most likely a deal breaker.
Another way to analyze whether to be flexible with the structure of the transaction is to look at the alternatives. Suppose the owner were to receive offers by the same buyer as follows, which should he accept?
$5.0 million for the acquirer’s stock
$4.5 million (half in earnout; half in unsecured notes)
$4.0 million (half in cash; half non compete
$3.5 million (all cash but hefty escrow accounts
and tight representations and warranties)
$3.0 million (all cash, no escrow accounts, no
representations and warranties, and deal close
in 60 days).
As a seller, the seller will be faced with a decision on a risk/reward basis: the higher the risk, the higher the reward. There is no correct answer; it depends on the individual seller. A seller could charge the buyer proportionally more for the C corporation if it is an asset sale by the seller keeping the liabilities. The buyer usually will want to acquire the company’s assets, not its stock, in order to avoid prior liabilities and to be able to mark up the assets to fair market value for depreciation purposes
It is sadly ironic that while buyers often conduct extensive due diligence on the seller, seldom does the seller conduct thorough due diligence on the buyer. Many deals are aborted along the way, yet there are red flags that the seller should notice with the buyer and use to reevaluate whether or not to go forward with the transaction.
Red Flags for Sellers
Red Flags for Buyers