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Mergers and acquisitions from A to Z: strategic and practical guidance for small- and middle-market downloaders Mergers, acquisitions, and corporate restructurings. Aug 12, Audiobook Mergers and Acquisitions from A to Z Any device Download here: medical-site.info?book= View Andrew J. Sherman Mergers and Acquisitions from A to medical-site.info from MBA at Delhi Technological University. MERGERS & ACQUISITIONS FROM A TO.
Read more. Mergers and acquisitions basics. Mergers and acquisitions. Mergers and Acquisitions. Acquisitions and Mergers. Mergers, acquisitions, and corporate restructurings. Mergers, Acquisitions and Corporate Restructuring.
Mergers and Acquisitions Express Exec. Mergers and Acquisitions: Business Strategies for Accountants. Advances in Mergers and Acquisitions, Volume 5.
Mergers, Acquisitions, and Corporate Restructurings, 3rd Edition. Mergers and Acquisitions in the Machinery Industry. Intellectual Property Assets in Mergers and Acquisitions. Value Creation in Mergers, Acquisitions, and Alliances. Mergers and Acquisitions Basics: The audit may also uncover certain sloppy or self-interested business practices that should be changed before you sell the company. This strategic reengineering will help build value and remove unnecessary clutter from the financial statements and operations.
Showing the potential for better long-term performance could earn you a higher selling price, as well as assist the downloader in raising capital needed to implement the transaction.
STEP 6: Preparing the Offering Memorandum The sixth step in the preparation process is to identify a marketing strategy to attract prospective downloaders.
These initial materials are often referred to as the offering memorandum. This offering memoran- dum should include the following information: However, the company must be presented accurately with a fair portrayal of the problems and challenges that the com- pany faces.
STEP 7: Getting the House in Order A key step before marketing the company is ensuring that the busi- ness is truly ready for sale. Once the process is started, all questions are fair game and the state of affairs will be available for full review. Once the process is started, things move very quickly and there is rarely time for housekeeping matters during a transaction process. STEP 8: The Game Plan Once the transaction preparation is complete, the process can be managed any number of ways.
A major decision at this stage is in determining how closely the process should match a formal auction. A formal auction typically is based upon sending standardized com- pany materials to a large audience, providing the targets with spe- cific dates of management meetings and timing for which offers are due. This formal process can lead to very positive results; however, no downloader likes an auction.
A less formal approach, however, can yield similar if not better results to an auction. In this approach the investment banker coor- dinates more informally with identified downloaders, and ensures that all of the target downloaders are contacted simultaneously. In addition, each of the targets is examined more closely for strategic fit, and often the communication and marketing materials are tailored to under- score the strategic rationale of the proposed transaction. There are multiple benefits to this approach.
First, each downloader is different, and providing a tailored message may be better received. A likely downloader may review a large number of potential deals even if few are done , and helping the evaluator come to the proper conclu- sion can be best accomplished in more focused communication. Second, for each pairing of downloader and seller, there are different synergies to be had. If a seller truly wants to maximize the value obtained from the downloader, then understanding the synergies available is critical and necessary.
Finally, investment bankers typically have interacted with many of the target downloaders in the past. As such, a less structured process allows the investment banker the opportunity to solicit more candid, direct feedback about the proposed transac- tion—feedback that is typically not available when the process is more structured. The last option for running a merger and acquisition process is to the have the CEO of the company contact the targets directly.
This is rarely the best option, largely due to the challenge of price negotiations. An intermediary can preserve the good working rela- tionship between two CEOs, despite differences in price expecta- tions.
When two CEOs are working together directly, however, price can become an emotional and personal roadblock to produc- tive discussions. To maximize the selling price, however, you must To properly reengineer and reposition the com- pany for sale, hard decisions need to be made, and certain key fi- nancial ratios need to be analyzed in critical areas, such as cost management, inventory turnover, growth rates, profitability, and risk mitigation techniques.
But before turning to Chapter 3, take a look at a few of the common preparation mistakes sellers make in getting ready to sell their company: Timing is everything.
If you seem too anxious to sell, downloaders will take advantage of your impa- tience. If you sit on the sidelines too long, the window of opportu- nity in the market cycle to obtain a top selling price may pass you by. Again, timing is critical. If you tell key employees, vendors, or customers that you are consid- ering a sale too early in the process, they may abandon your rela- tionship in anticipation of losing their jobs, their customer or supplier, or from a general fear of the unknown.
Key employees, fearful of losing their jobs, may not want to chance relying on an unknown downloader to honor their salaries or benefits. It is critical that their interests are aligned with the seller and that they work hard and stay focused on getting to the closing table. Vendors and customers will want to protect their interests, too. Yet these key employees and strategic relation- ships may be items of value in the sale; the downloader may count on their being around after closing the deal.
If you wait too long and disclose your news at the last minute, employees may feel resentment for If there are relationships that will not carry over to the new owner, shed these ghost employees and family members. They should follow you out the door once the deal is secured. Very few downloaders will want to own a company that still has remaining shareholders who may present legal or operational risks. In seeking out po- tential downloaders, look for those who may have a vested interest in acquiring control of the company, such as key customers, employ- ees, or vendors.
Your credibility is on the line—a loss of trust by the potential downloader usually means that he will walk away from the deal. Other Considerations for the Seller The Importance of Recasting Since privately owned companies often tend to keep reported profits—and thus tax obligations—as low as possible, financial re- casting is a crucial element in understanding the real earnings his- tory and future profit potential of your business.
Since downloaders are interested in the real earnings of a business, recasting shows how your business would look if its philosophy matched that of a public corporation, in which earnings and profits are maximized. As part of the offering memorandum, you should recast your financial statements for the preceding three years. For example, adjust the salaries and benefits to prevailing market levels, eliminate personal Recasting presents the financial his- tory of your business in a way that downloaders can understand.
Selling the Pro Forma The price that a downloader may be willing to pay depends on the quality and reasonableness of the profit projections you are able to demon- strate and substantiate. The profit and loss statement, balance sheet, cash flow, and working capital requirements are developed and pro- jected for each year over a five-year planning period.
This establishes the primary economic return to the downloader for his acquisition investment. Prequalifying Your downloader It is critical to prequalify the potential downloaders, especially if you con- template a continuing business relationship after closing the deal. Thus, the downloader must demonstrate the ability to meet one or more pre-closing conditions, such as availability of financing, a viable business plan for post-closing operations especially if the seller will be receiving part of its consideration in the form of an earn-out , or a demonstration that the post-closing efficiencies or synergies are bona fide.
A year-old seller already planning her next venture may have different goals and needs from a year-old seller whose triplets are seniors in high school, or a year-old seller who is finally ready for retirement and life as a philanthropist and patriarch. It is also critical that the proper estate planning techniques, trusts and other tools are recommended by the right advi- sors in order to maximize wealth, protect assets and mini- mize tax liabilities far enough ahead of the proposed transaction that adequate time is left to put these docu- ments and structures in place in a manner which will prevent them from being set aside or disregarded down the road.
This approach, together with the low inter- est rates and large pools of available capital, has created a very ac- tive market in mergers and acquisitions. Our domestic market has clearly experienced major industry consolidation via acquisitions and roll-up strategies. Notwithstanding all of the excitement, the download of an existing business is a complex and challenging task. downloading a company for the right price is both an art and a science. Experienced downloaders and their advisors often develop a sixth sense, an instinct, a gut feel for the potential problems and opportunities inside a company that is for sale.
They use these instincts to mitigate risk and to uncover hidden intangible assets. Assembling the Team Every downloader needs to develop an internal working team, as well as a set of experienced external advisors, such as lawyers, accountants, investment bankers, valuation experts, and in some cases insurance The internal work team should in- clude representatives from the finance, sales and marketing, strate- gic planning, and operations departments.
To successfully acquire companies and enhance shareholder value, there must be cohesive thinking and constant communication among team members. For middle-market compa- nies, the chief executive officer is typically the quarterback of the acquisition team but it can be someone appointed by the CEO.
The quarterback must clearly define both the responsibilities and the au- thority of each team member, including who speaks on behalf of the downloader, who contacts prospective sellers, who negotiates with the selected sellers, and so forth. All parameters of operations must be clearly set. One key decision with respect to assembling the team is whether to use an investment banker to find and evaluate targets, or whether the deal flow will be generated internally through screening, net- working and industry contacts.
In many cases, the sellers or at least those who have declared their businesses eligible for sale may have hired intermediaries.
In addition, an investment bank will likely have resources and access to information unavailable to the company. Finally, an investment bank can provide invaluable coun- sel on valuation and negotiation. The potential of saving several mil- lion dollars or more through smart bargaining almost always justifies the existence of valuation and negotiation expertise. The achievement of certain corporate goals and objectives may involve the external acquisition of assets and resources needed for growth, a step that may be more efficient than internal expan A growing company considering an acquisition should always begin with an acquisition plan, which identifies the specific objec- tives of a transaction and the criteria to be applied in analyzing potential target companies.
The acquisition plan also identifies the value-added efficiencies and cost savings that will result from the proposed transaction and answers the fundamental question: The heart of the plan identifies the targeted industries and lists the criteria for evaluating candidates within these targeted indus- tries.
Why is planning a key part of any acquisition strategy? For the same reason that synergy is a key consideration in mergers and acquisition. If a downloader pays exactly what the business is worth on a stand-alone basis, then any benefit obtained from the planned changes i. Simply, if a company is worth more to a downloader than a seller, then there is reason to do a deal where both parties win. STEP 1: Identify Your Objectives The first step in developing an effective acquisition plan is to iden- tify key objectives.
Although the reasons for considering growth through acquisition will vary from industry to industry and from company to company, certain strategic advantages provided by an acquisition should be considered. The downloader may seek to acquire another company in order to: For example, Adobe recently announced the acquisition of Macromedia, a transaction that would provide Adobe access to the mobile telephony market.
Adobe sought access to mo- bile carriers for years. Both companies benefit from the diversification that the combined prod- uct portfolios bring. Shareholders, un- like companies, can easily diversify by downloading alternative stocks— Top managers may be ready for retirement, or a key manager may have recently died, leaving the business with certain underuti- lized assets that can be exploited by an acquiring company.
Sometimes it is more efficient to fill these gaps through an acquisition rather than attempt to build the departments internally. It may be cheaper to ac- quire companies already doing business in a target market than to establish market diversification from scratch.
The target company may be available at a distressed price, which tends to pique the interest of growing companies even if they are not necessarily looking for ac- quisition candidates. In essence, the statement of the objectives should be a reality check, answering the key questions: STEP 2: Draft the Plan The next step is to draft the acquisition plan.
One of the key goals of the acquisition plan is to clearly define the characteristics of an ideal target. The field is initially narrowed by choosing acquisitions as a growth strategy over alternatives such as franchising or strategic alliances. It is narrowed again by target- ing the industry from which a company will be chosen.
And it is narrowed further by developing criteria to screen the possible can- didates. This narrowing process, in most cases, will yield a small but viable field of attractive candidates that can be approached. Other benefits to having a well-prepared acquisition plan are: The acquisition plan will also identify: Each downloader will have a different tolerance level; some want and prefer the cost savings of downloading a fixer-upper com- pany while others prefer the company to be pretty much intact.
Applying the Criteria: How to Narrow the Field Once all of the pertinent issues listed above have been addressed in the acquisition plan, it should be relatively easy to define the selec- tion criteria and screen the candidates. The more typical criteria include some of the following: Rather, the downloader must be ready to mix and match—accept compromise in some areas.
But be careful not to overlook too many warts, lest you end up with a deal that you will regret later. Again, the goal is to compare the acquisition objectives to the strengths and weaknesses of each seller. The qualita- tive and quantitative screening criteria suggested here will help the downloading team ensure that the right candidates are selected.
They are intended to filter out the wrong deals and mitigate the chances of post-closing regrets and problems. Develop acquisition objectives. Analyze projected economic and financial gains to be achieved by the acquisition. Assemble an acquisition team managers, attorneys, ac- countants, and investment bankers and begin the search for acquisitions candidates. Conduct due diligence analysis of prime candidates.
Conduct initial negotiations and valuation of the se- lected target. Select the structure of the transaction. Identify sources of financing for the transaction. Conduct detailed bidding and negotiations.
Obtain all shareholder and third-party consents and ap- provals. Structure the legal documents. Prepare for the closing. Hold the closing. Take care of post-closing tasks and responsibilities. Implement the integration of the two entities. In these cases, the owner of the company must be approached subtly by a senior member of the downloading team and gently informed that the target is of long-run interest to the potential downloader. Explain why the target company is a compelling fit with the downloader.
This will let the prospective seller know that you are a credible downloader and that you have given serious consideration to the idea of acquiring his or her company. Request a meeting in order to discuss strategic fit, and alter- natives for how the two companies can establish a more formal rela- tionship. Broach the concept of a formal structural relationship i.
Maintain contact after the meeting, even if the owner insists the company is not for sale. Call periodically and maintain a level of positive communication. Sometimes it takes years for owners to reach a decision to sell—and while you are not going to sit idly by, some companies may always be good acquisition targets. When, and if, your candidate expresses interest, you will want to act quickly and establish momentum.
Your goal is to get the information you need to determine a preliminary price and to structure a letter of intent that outlines the key points of the proposed acquisition. Most managers will not believe that you intend to keep them all. Be prepared to answer the following questions: Establish an incentive bonus plan tied to realistic, attainable goals. Provide employee contracts to key members of the manage- ment team.
Explain any potential structural changes with care and clarity, ensuring that a history of good communication, equity, and trust is established. We find that a well- defined acquisition plan and the rigorous analysis of whether a po- tential target meets the criteria will help accomplish that goal. Fol- lowing the steps set forth in this chapter is a great roadmap to use, as will the letter of intent and due diligence processes discussed in Chapters 4 and 5. After the completion of the pre-sale review, the next step involves the preparation and negotiation of an interim agreement, which will guide and govern the conduct of the parties up until closing.
Although there are certain valid legal arguments against the exe- cution of any type of interim document, especially since some courts have interpreted them to be binding legal documents even if one or more of the parties did not initially intend to be bound , it has been my experience that a Letter of Intent, which includes a set of binding terms and nonbinding terms as a roadmap for the transaction, is a necessary step in virtually all mergers and acquisi- tion transactions.
I have found that most parties prefer the organi- zational framework and psychological comfort of knowing that there is some type of written document in place before proceeding It is also criti- cal to deal with as many of the potential due diligence problems or surprises at this early stage as possible. The ability to resolve prob- lems that may derail a transaction is much stronger at the outset of the deal before each party has incurred significant expenses and becomes more entrenched in their position.
In addition to creating a framework for any potential deal with the prospective downloader, an LOI letter of intent is a catalyzing event in most deals. In a normal process, the investment banker strives to keep the potential downloaders on a common timeframe.
However, the first LOI drives the timing of the process, and furthermore, provides a solid framework for more specific price negotiations. Finally, if the LOI received is at an acceptable price, the investment banker can now be more aggressive in price negotiations with the other interested parties. There is no event that allows the banker to create an auction more than an LOI, and as such, it is a tool that is welcomed, care- fully managed, and ultimately used to obtain more value for the seller.
There are many different styles of drafting Letters of Intent, which vary from law firm to law firm and business lawyer to busi- ness lawyer.
These styles usually fall into one of three categories: In most cases the hybrid format, which contains both binding and non-binding Impor- tant since may be long delay before sales agreement is ex- ecuted. Important to state whether or not letter of intent is meant to constitute enforceable agreement. Although formally executed by the downloader and the seller, a Letter of Intent is often considered an agreement in principle.
As a result, the parties should be very clear as to whether the Letter of Intent is a binding preliminary contract or merely a memorandum from which a more definitive legal document may be drafted upon com- pletion of due diligence. Regardless of the legal implications in- volved, however, by executing a Letter of Intent, the parties make a psychological commitment to the transaction and provide a road- map for expediting more formal negotiations. In addition, a well- drafted Letter of Intent will provide an overview of matters which require further discussion and consideration, such as the exact pur- chase price.
Although an exact and final download price cannot real Proposed Terms As you can see from the sample Letter of Intent in Exhibit , the first section addresses certain key deal terms such as price and method of payment, but these terms are usually nonbinding so that the parties have an opportunity to complete the due diligence and analysis and have room for further negotiation, depending on the specific problems uncovered during the investigative process.
Binding Terms The sample Letter of Intent in Exhibit also includes certain binding terms which will not be subject to further negotiation. These are certain issues that at least one side, and usually both sides, will want to ensure are binding, regardless of whether the deal is actually consummated.
These include: Before wasting too much time or money, the downloader will want to know that the seller has the power and authority to close the deal. The seller in particular, and in general both parties, will want to ensure that all information Prospective Seller SellCo, Inc. Dear Ms. Prospective Seller: These principal terms are subject to the execution and delivery by the Parties of a definitive Stock download Agreement and other documents related to these transactions.
Section II of this Letter Agreement contains a number of covenants by the Parties, which shall be legally binding upon the execution of this Letter Agree- ment by the Parties. The binding terms in Section II below are enforceable against the Parties, regardless of whether or not the aforementioned agreements are executed or the reasons for nonexecution.
Stock download. Employment Agreements. Closing and Documentation. The Parties intend that a closing of the agreements shall occur on or before , , at a time and place that is mutually acceptable to the Parties.
BCI or its representatives will prepare and revise the initial and subsequent drafts of the necessary agreements. Refundable Deposit. All sums paid hereunder shall be deductible from the download price to be continues In the event that BCI does not complete the download of the Shares, the sums payable hereunder shall be re- ferred to BCI less to be retained by the Seller for its expenses, with interest at the rate of 1.
Due Diligence. No Material Changes. No-Shop Provision. The Company agrees that, from and after the execution of this Letter Agreement until the termination of the Binding Terms in accor- dance with Paragraph 12 below, the Company will not initiate or conclude, through its Representatives or otherwise, any negotiations with any corporation, person or other entity regarding the sale of all or substantially all of the assets or the Shares of the Company.
The Company will immediately notify the other Parties regarding any such contact described above.
Lock-Up Provision. The Company agrees that, from and after the execution of this Letter Agreement until a the consummation of the transactions contem- plated in Section I and the execution of definitive agreements thereby, or b in the event that definitive agreements are not executed, until the repayment of all amounts advanced hereunder, plus accrued interest, that without the prior writ- ten approval of BCI and subject to any anti-dilution provisions imposed hereun- der, x no shares of any currently issued Common Stock of the Company shall be issued, sold, transferred or assigned to any party; y no such shares of Com- mon Stock shall be pledged as security, hypothecated, or in any other way en- cumbered; and z the Company shall issue no additional shares of capital stock of any class, whether now or hereafter authorized.
Prior to Closing, neither Party nor any of their Representa- tives shall make any public statement or issue any press releases regarding the agreements, the proposed transactions described herein or this Letter Agreement without the prior written consent of the other Party, except as such disclosure may be required by law.
If the law requires such disclosure, the disclosing party shall notify the other Party in advance and furnish to the other Party a copy of the proposed disclosure. Notwithstanding the foregoing, the Parties acknowl- edge that certain disclosures regarding the agreements, the proposed transac BCI and its employees, affiliates and associates will a treat all information re- ceived from the Company confidentially, b not disclose such information to third parties without the prior written consent of the Company, except as such disclosure may be required by law, d not use such information for any purpose other than the consideration of the matters contemplated by this Letter of Intent, including related due diligence, and d return to the Company any such infor- mation if this Letter Agreement terminates pursuant to Paragraph 12 below.
Break-Up Fee. Effective Date. The foregoing obligations of the Parties under Section II of this Letter Agreement shall be effective as of the date of execution by the Com- pany, and shall terminate upon the completion of the transactions contemplated in Section I above or, if such transactions are not completed, then at such time as all of the obligations under this Section II have been satisfied, unless otherwise extended by all of the Parties or specifically extended by the terms of the forego- ing provisions; provided, however, that such termination shall not relieve the Parties of liability for the breach of any obligation occurring prior to such termi- nation.
Please indicate your agreement to the Binding Terms set forth in Section II above by executing and returning a copy of this letter to the undersigned no later than close of business on , Following receipt, we will instruct legal counsel to prepare the agreements contemplated herein.
The Binding Terms shall become binding on the Company upon the advance of deposit pur- suant to Paragraph 4 and the execution of Promissory Note in consideration therefore. SellCo, Inc. Prospective Seller, President Dated: The downloader will want to ensure that the seller and its advisors will fully cooperate in the due dili- gence process.
The seller may want a reciprocal clause to protect against its own expenses if the downloader walks away or defaults on a preliminary obligation or condition to closing, such as an inability to raise acquisition capital. The downloader may want a period of exclusivity where it has the confidence of knowing that the seller is not entertaining any other offers. Refundable vs. In some cases the seller will request a deposit or option fee and the parties must determine to what extent, if at all, this deposit will be refund- able and under what conditions.
There are often timing problems with this provision which can be difficult to resolve. For example, the downloader will want the deposit to remain percent refundable if the seller is being uncooperative, or at least until the downloader and its team complete the initial round of due diligence to ensure that there are no major problems discovered which might cause them to walk away from the deal.
The seller will want to set a limit on the due diligence and review period at which point the downloader forfeits all or a part of its deposit. The end result is often a progressive downward scale of refundability as the due diligence and the deal overall reach various checkpoints towards closing. To the extent that the downloader forfeits some or all of the deposit, and the deal never closes, the downloader may want to negotiate an eventual full or partial refundability if the seller finds an alternative downloader within a certain period of time, such as days.
Perhaps among the most challenging issue faced by sellers is the decision as to who is told what, when From a human capital management perspective, if team members are told too soon then it may be hard to keep them from running out the door due to uncertainty , and if they are told too late it may lead to resentment and frustration. If the communication of the possible sale is mishandled, then the employees may get the message that their jobs are unimportant or in jeopardy, or both.
Supervisory personnel should be briefed first, and all of their questions should be answered so that they can in- form their subordinates. After the closing, it is imperative that the top management of the acquiring company meet with the employees of the target company to discuss their post-closing roles, compen- sation and benefits.
If there will be job cuts, discuss the methods as to how this will be determined and whether any training, resume writing skills or outplacement services will be offered. It is often the case that the Letter of Intent will provide that it is subject to the definitive documents, such as the download Agreement, and that those defini- tive documents will address certain key matters or include certain key sections, such as covenants, indemnification, representations and warranties, and key conditions for closing.
Both parties will want to articulate a set of conditions or circumstances stating that they will not be bound to proceed with the transaction if certain contingencies are not met, or if events subsequently happen after the execution of the Letter of Intent such as third party approvals, regulatory permission or re- lated potential barriers to closing. Be sure to articulate these condi- tions clearly so that there are no surprises down the road. The downloader usually wants some protection that the general state of the company that he or she sees today will be there tomorrow.
Thus, the seller will be obligated to operate its business in the ordinary course and that assets, customers and employees will not start disappearing from the premises, equipment left in disrepair, new customers not pur- sued, bonuses magically declared, personal expenses paid the night before and other steps which will deplete the value of the company If these things do occur, then the parties should anticipate a mechanism for adjusting the price based on the relating valuation of the lost contracts, relationships or human resources.
The parties may want to place certain restrictions on the content and timing of any press releases or public announcements of the transaction and in some cases may need to follow SEC guidelines. If either are or both of the parties to the transaction are publicly traded, then the general rule is that once the essential terms of the transaction are agreed to in principle, such as through the execution a Letter of Intent, there must be a public announcement.
The timing and content of this announcement must be weighed carefully by the parties, including an analysis as to how the announcement will affect the price of the stock. This task should be accomplished well before the due diligence discussed in Chapter 5 begins. The primary purpose of the schedule is to outline all of the events that must occur and documents that must be prepared prior to the closing date and beyond. Once all tasks have been identified and assigned, along with a realis- tic timetable established for completion, then a firm closing time and date can be preliminarily determined.
Naturally, the exact list of legal documents which must be pre- pared and the specific tasks to be outlined in the Work Schedule will vary from transaction to transaction, usually depending on the specific facts and circumstances of each deal, such as: A sample Work Schedule for an asset download transaction, which is not intended to be overly complex or comprehensive, is shown in Exhibit Naturally, the board of the seller wants to be able to represent that it is being paid a fair price, and the board of the downloader wants to represent to its shareholders that it is not using company resources to overpay for a transaction.
If the downloader intends to pay a price that is well above current market conditions, then it better be prepared to justify and defend the reasons for the higher valuation. But fairness opinion practices have come under scrutiny as poor analysis, conflicts of interest, and a lack of due diligence to support the opinions began to surface.
Some boards have tried to correct previously flawed practices by making sure that: The process for selecting the firm to draft the fairness opin- ion should be competitive and well-documented and all potential conflicts avoided. Due diligence is not just a process, it is also a reality test—a test of whether the factors driving the deal and making it look attractive to the parties are real or illusory. Due diligence is not a quest to find the deal breakers but a test of the value proposition underlying the transaction to make sure that the inside of the house is as attractive as the outside.
It is also important to understand that in a post-Sarbanes-Oxley world, due diligence is typically wider and deeper in its scope than ever before, especially if the prospective downloader is a public company or a company with plans to go public within the next 18 months.
To the The due diligence work is usually divided between two working teams: Throughout the process, both teams compare notes on open issues and potential risks and prob- lems.
The legal due diligence focuses on the potential legal issues and problems that may serve as impediments to the transaction, as well as sheds light on how the transaction documents should be structured. The business due diligence focuses on the strategic and financial issues in the transaction, such as confirmation of the past financial performance of the seller; integration of the human and financial resources of the two companies; confirmation of the op- erating, production, and distribution synergies and economies of scale to be achieved by the acquisition; and the gathering of infor- mation necessary for financing the transaction.
Overall, the due diligence process, when done properly, can be tedious, frustrating, time consuming, and expensive. Yet it is a nec- essary prerequisite to a well-planned acquisition, and it can be quite informative and revealing in its analysis of the target company and its measures of the costs and risks associated with the transaction. downloaders should expect sellers to become defensive, evasive, and im- patient during the due diligence phase of the transaction.
Eventually, the seller is likely to give an ultimatum to the prospective downloader: Like any audit, a diligence process is designed to answer the important Information will slip through the cracks, which is precisely why broad representations, warranties, liability holdbacks, and indemni- fication provisions should be structured into the final download agreement.
These provisions protect the downloader, while the seller negotiates for carve-outs e. The nature and scope of these provisions are likely to be hotly contested in the negotiations.
The specific issues and problems will vary based on the size of the seller, the nature of its business and the number of years that the seller or its predecessors have been in business. Be sure the seller has clear title to these assets and that they are conveyed without claims, liens and encum- brances.
There is a wide variety of employment or labor law issues or liabilities that may be lurking just below the surface which will not be uncovered unless the right questions are asked. Questions designed to uncover If the seller has recently made a substantial workforce reduction or if you as the downloader are planning post-closing layoffs , then the requirements of the Worker Adjustment and Retraining Notification Act WARN must have been met.
The requirements of WARN include mini- mum notice requirements of 60 days prior to wide scale terminations. Effective due diligence is both an art and a science.
The art is the style and experience to know which questions to ask and how and when to ask them.
The science of due diligence is in the preparation of comprehen- sive and customized checklists of the specific questions to be pre- sented to the seller, in maintaining a methodical system for organizing and analyzing the documents and data provided by the seller, and in quantitatively assessing the risks raised by those prob- lems discovered in the process.
The due diligence process is designed first to detect the existence of the obligation and second to identify any defaults or problems in connection with these obligations that will affect the downloader after closing. The best way for the downloader to ensure that virtually no stone re- mains unturned is with effective due diligence preparation and plan- ning. Make sure there is a capability fit.
Poor communication and misunderstandings. The com- munications should be open and clear between the teams of the downloader and the seller. The process must be well- orchestrated. The focus must be on asking the right questions, not just a lot of questions.
Inadequate time devoted to tax and financial matters. The downloader must insist that its team will be treated like welcome guests, not enemies from the IRS!
Ignoring the real story behind the numbers. The downloader and its team must dig deep into the financial data and test and retest the value proposition as to whether the deal truly makes sense. The checklist should be a guideline, not a crutch. These questions will set the pace for the level of detail and adequacy of the review.
For example, I recently worked on a deal that involved the download of a hockey league in the Midwest. It was easy to prepare the standard due diligence list and draw up questions regarding corporate struc- ture and history, the status of the stadium leases, team tax returns and to question the steps that had been taken to protect the team trademarks. The more difficult task was developing a customized list. The list for this client included player and coaching con When done properly, due diligence is performed in multiple stages.
First, all the basic data are gathered and specific topics are identified. Corporate Matters A. Corporate records of the seller. Certificate of incorporation and all amendments. By-laws as amended. Minute books, including resolutions and minutes of all director and shareholder meetings. Current shareholders list certified by the corporate secretary , annual reports to shareholders, and stock transfer books.
List of all states, countries and other jurisdictions in which the seller transacts business or is qualified to do business. Applications or other filings in each state listed in 5 , above, for qualification as foreign corporation and evidence of qualification.
Locations of business offices including overseas. Financial Matters A. List of and copies of management and similar reports or memoranda relating to the material aspects of the business operations or products. Reports of independent accountants to the board of di- rectors for the preceding five 5 years.
Revolving credit and term loan agreements, indentures and other debt instruments, including, without limita- tion, all documents relating to shareholder loans. Correspondence with principal lenders to the seller.
Agreements by the seller where it has served as a guar- antor for the obligations of third parties. Federal, state and local tax returns and correspondence with federal, state and local tax officials. Federal filings regarding the Subchapter S status where applicable of the seller. Financial statements, which should be prepared in ac- cordance with Generally Accepted Accounting Princi- ples GAAP , for the past five 5 years of the seller, including: Annual audited balance sheets.
Monthly or other available balance sheet. Annual audited and monthly or other available earnings statements. Any recently prepared projections for the seller. Notes and material assumptions for all statements described in K 1 - 5 , above. Any information or documentation relating to tax as- sessments, deficiency notices, investigations, audits or settlement proposals.
Informal schedule of key management compensation listing information for at least the ten most highly compensated management employees or consultants. Projected budgets, accounts receivable reports includ- ing detailed aging report, turnover, bad debt experi- ence, and reserves and related information. Management and Employment Matters A. All employment agreements. Agreements relating to consulting, management, fi- nancial advisory services and other professional en- gagements.
Copies of all union contracts and collective bargaining agreements. Employee benefit plans and copies of literature issued to employees describing such plans , including the fol- lowing: Pension and retirement plans, including union pen- sion or retirement plans. Annual reports for pension plans, if any. Profit sharing plans. Stock option plans, including information concern- ing all options, stock appreciation rights and other stock-related benefits granted by the company.
Medical and dental plans. Insurance plans and policies, including the fol- lowing: Errors and omissions policies. Severance pay plans or programs. All other benefit or incentive plans or arrangements not covered by the foregoing, including welfare benefit plans. All current contracts agreements with or pertaining to the seller and to which directors, officers or sharehold- ers of the seller are parties, and any documents relating to any other transactions between the seller and any director, officer or shareholders, including receivables from or payables to directors, officers or shareholders.
All policy and procedures manuals of the seller con- cerning personnel; hiring and promotional practices; compliance with the Family Leave Act, etc. The name, address, phone number and personnel file of any officer or key employee who has left the seller within the past three years. Tangible and Intangible Assets of the Seller A. List of all commitments for rented or leased real and personal property, including location and address, de- scription, terms, options, termination and renewal List of all real property owned, including location and address, description of general character, easements, rights of way, encumbrances, zoning restrictions, sur- veys, mineral rights, title insurance, pending and threatened condemnation, hazardous waste pollution, etc.
List of all tangible assets. List of all liens on all real properties and material tangi- ble assets. Mortgages, deeds, title insurance policies, leases, and other agreements relating to the properties of the seller.
Real estate tax bills for the real estate of the seller. List of patents, patents pending, trademarks, trade names, copyrights, registered and proprietary Internet addresses, franchises, licenses and all other intangible assets, including registration numbers, expiration dates, employee invention agreements and policies, actual or threatened infringement actions, licensing agreements, and copies of all correspondence relating to this intel- lectual property.
Copies of any survey, appraisal, engineering or other reports as to the properties of the seller. List of assets which may be on a consignment basis or which may be the property of a given customer, such as machine dies, molds, etc.
Material Contracts and Obligations of the Seller A. Material download, supply and sale agreements cur- rently outstanding or projected to come to fruition within 12 months, including the following: List of all unperformed sales contracts. Consignment agreements. Research agreements. Franchise, licensing, distribution and agency agree- ments. Joint venture agreements. Agreements for the payment of receipt of license fees or royalties and royalty-free licenses.
Documentation relating to all property, liability and ca- sualty insurance policies owned by the seller, including for each policy a summary description of: Coverage 2. Policy type and number 3. Premium 5. Expiration date 6. Deductible 7. Any material changes in any of the foregoing since the inception of the seller 8. Claims made under such policies I. Contracts for the download, sale, or removal of electric- ity, gas, water, telephone, sewage, power, or any other utility service.
List of waste dumps, disposal, treatment, and storage sites. Agreements with any railroad, trucking, or any other transportation company or courier service. Letters of credit.
Copies of any special benefits under contracts or gov- ernment programs which might be in jeopardy as a re- sult of the proposed transaction e. Copies of licenses, permits and governmental approv- als applied for or issued to the seller which are required in order to operate the businesses of the seller, such This section is critical and will be one key area of the nego- tiations as discussed in Chapter Therefore, it is suggested that the downloader and its advisory team request copies of all material con- tracts and obligations of the seller and then organize them as fol- lows: Sample Responses: Current Not Required B.
Litigation and Claims—Actual and Contingent A. Opinion letter from each lawyer or law firm prosecut- ing or defending significant litigation to which the seller is a party describing such litigation.
List of settlement agreements, releases, decrees, orders or arbitration awards affecting the seller.
Description of labor relations history. Documentation regarding correspondence or proceed- ings with federal, state or local regulatory agencies. Be sure to obtain specific representations and warranties from the seller and its advisors regarding any knowledge pertaining to potential or contingent claims or litigation!
Miscellaneous A. Press releases past two years B. Resumes of all key management team members C. Press clippings past two years D. Financial analyst reports, industry, surveys, etc. Schedule of all outside advisors, consultants, etc. Schedule of long-term investments made by the seller. Standard forms download orders, sales orders, service agreements, etc. What legal steps will need to be taken to effectuate the trans- action e.
Has the appropriate corporate authority been obtained to proceed with the agreement? What key e. What antitrust problems, if any, are raised by the transac- tion? What are the significant legal problems or issues now affect- ing the seller or that are likely to affect the seller in the foreseeable future?
What potential adverse tax consequences to the downloader, seller, and their respective shareholders may be triggered by the transaction?
What are the potential post-closing risks and obligations of the downloader? To what extent should the seller be held liable for such potential liability?
What steps, if any, can be taken to reduce these potential risks or liabilities? What will it cost to implement these steps?
What are the impediments to the assignability of key tangible and intangible assets of the seller company that are desired by the downloader, such as real estate, intellectual property, favorable contracts or leases, human resources, or plant and equipment? What are the obligations and responsibilities of the downloader and seller to the creditors of the seller e. What are the obligations and responsibilities of the downloader and seller under applicable federal and state labor and employment laws e.
To what extent will employment, consulting, confidentiality, or non-competition agreements need to be created or modified in connection with the proposed transaction? In con- trast, a management downloadout by a group of industry veterans who have been with the seller over an extended period of time will proba- bly need to conduct only a minimum amount of business or stra- tegic due diligence; in this case, the focus will be on legal due diligence and assessment and assumption of risk.
These typically in- clude an undervaluation of inventory; overdue tax liabilities; inadequate management information systems; related-party trans- actions especially in small, closely held companies ; an unhealthy reliance on a few key customers or suppliers; aging accounts receiv- able; unrecorded liabilities e. Each of these problems poses different risks and costs for the acquiring company, and these risks must be weighed against the benefits to be gained from the transaction.
How would you define the market or markets in which the seller operates? What steps will you take to expedite your learning curve of trends within these markets? What third-party advisors are qualified to advise you on key trends affecting this industry? What are the factors that determine success or failure within this industry?
How does the seller stack up? What are the image Does it have a niche? What steps can be taken to enhance or reverse these trends? Virtual Data Rooms use existing computer software and Internet technology to provide a secure and on- line format for reviewing and organizing due diligence infor- mation.
The VDR also better facilitates the review of certain types of data which are easier to review online and in elec- tronic form, such as CAD drawings, video files, patent fil- ings, architectural drawings, etc. It appears so. Intra Links www. The following checklists are designed to provide the acquisition team with a starting point for analysis of the seller. They help to level the playing field in the negotiations, since the seller usually starts with greater expertise regarding its industry and its business.
Here are some examples these checklists are not intended to be exhaustive of the topic areas and specific questions that should be addressed in due diligence on a given seller: How are management functions and responsibilities dele