- Customer Concentration
- Could lead to a significant discount off of sale price if the selling business has one customer that accounts for 25% or more of its revenue.
- One way to bridge a valuation gap is for the seller to obtain an earn-out of a percentage of post-closing revenue attributable to that customer that is received after the closing.
- Depending on the contract with any such customer(s), the buyer will request the customer’s consent to assign the contract and business to the buyer post-closing.
- Structure
- Deals are typically structured as either an asset or equity purchase.
- An asset deal entails the buyer purchasing certain assets of the seller, but not the entire company or stock of the seller – the buyer needs to be very clear about what liabilities it is assuming from the seller, if any.
- An equity deal entails the buyer purchasing the entire company and often assuming liabilities going forward after the closing.
- Deals are typically structured as either an asset or equity purchase.
- Diligence & Data Room
- A data room is prepared with the company’s material documents, and the buyer reviews the documents and undertakes diligence on the seller (meeting its personnel, visiting its facilities, etc.).
- Audited Financials
- EBITDA is a common multiple metric for deal valuation.
- Financial buyers, such as a private equity company, typically pay less of a multiple of EBITDA than a strategic buyer.
- Intellectual Property & Technology Ownership
- Buyers should ascertain what IP and technology is critical to the seller’s business and ensure seller has ownership or rights to use and can transfer such rights to buyer.
- Debt
- Does the seller have any outstanding debt? If so, will seller pay it off at closing and is prepayment permitted?
- Assignment of Contracts
- Assignability of contracts may be required depending on the contract language and the structure of the deal (e.g., an asset deal typically requires consent to assign if the contract has an anti-assignment provision).
- Integration
- Integration is one of the key ingredients of a successful deal, and often underappreciated and commonly the one reason why many deals do not work out. The parties should ascertain in the diligence period whether they are a cultural and business fit, review business systems (e.g., IT and ERP), and develop a tentative post-closing integration plan with timeframes.
- HSR Approval
- Some deals may require federal Hart-Scott-Rodino approval if the deal dollar amount is high enough and no exceptions apply. For 2021, the current threshold requiring HSR approval is $92 million.
- Environmental Liabilities
- If assuming or buying facilities, the buyer should conduct or review Phase I environmental reports to ascertain whether there is any contamination or environmental hazards/liabilities at the site.
- Non-Competition Agreements
- Sellers may have non-competition restrictions to abide by. Some states do not permit them. To be enforceable in states that do permit them, the time, geographic scope and business scope need to be reasonable and not overly broad.
- Personal Guarantees
- Sellers may have entered into personal guarantees with their lender, landlord, or other third parties, and such guarantees may need to be replaced or terminated.
The M&A Deal Process
Timeframe: M&A transactions are typically at least a four-month process, six months is common, and eight months is...