It Takes Two… How to Sell your Company to an Institutional Buyer By: Nicholas J. Malino Tango Equity, Inc. Copyright Warning This document is the property of Tango Equity, Inc. Any infringement on our copyright interests will be prosecuted in U S Federal Court where a fine up to a maximum of US$100,000 statutory damages plus our court costs and attorneys' fees will be levied. 2 Tango Equity Table of Contents Introduction..................................................................................................................................... 5 Chapter 1 About Buyers............................................................................................................... 7 Strategic Buyers.......................................................................................................................... 7 Tactical Buyers ........................................................................................................................... 9 Financial Buyers ....................................................................................................................... 11 Summary of Chapter One ......................................................................................................... 17 Chapter 2 Why this May be the Best Time to Sell .................................................................... 18 The Magic of Leveraging.......................................................................................................... 22 Chapter 3 Intermediaries and What They Do ............................................................................ 25 The Services.............................................................................................................................. 26 The Documents ......................................................................................................................... 26 The Blind Summary.................................................................................................................. 26 The Short Executive Summary ................................................................................................. 29 Fees ........................................................................................................................................... 29 Discounting the Future and Its Relation to Purchase Price....................................................... 31 Exclusivity ................................................................................................................................ 32 Sample Definitions in a Listing Agreement.............................................................................. 33 How Intermediaries Operate..................................................................................................... 33 The International Competitors .................................................................................................. 34 The Independent Middle Market Specialty Firms .................................................................... 34 The Main Street Business Brokers............................................................................................ 35 Chapter 4 The M&A Process..................................................................................................... 37 Overview of the M&A Process................................................................................................. 37 The Decision to Sell.................................................................................................................. 38 Getting the Company Prepared for Sale ................................................................................... 38 Use an Intermediary or Do it Yourself ..................................................................................... 41 The Documents ......................................................................................................................... 45 Sidebar: Separating Due Diligence from Initial Assessment................................................... 50 The Letter of Intent ................................................................................................................... 51 Responding to the Letter of Intent ............................................................................................ 61 Due Diligence ........................................................................................................................... 72 Field Due Diligence .................................................................................................................. 74 Internal Primary Source Verification........................................................................................ 76 External Primary Source Verification....................................................................................... 78 Case Study – Due Diligence Diligence..................................................................................... 79 Secured Debt............................................................................................................................. 79 Data Reduction.......................................................................................................................... 83 Financial Analysis..................................................................................................................... 85 Chapter 5 Fundamentals of Valuation ....................................................................................... 86 Value and Purchase Price.......................................................................................................... 86 Valuation Methods.................................................................................................................... 87 Discounted future earnings method .......................................................................................... 87 Comparable Multiples............................................................................................................... 90 Revenue Multiples .................................................................................................................... 91 A Comparison of the Methods.................................................................................................. 96 Tango Equity 3 Asset Based Methods................................................................................................................ 97 Chapter 6 Deal Structure............................................................................................................ 99 The Asset Transaction............................................................................................................... 99 The Stock Transaction .............................................................................................................. 99 Forms of Consideration........................................................................................................... 101 The Asset Sale and Purchase Agreement................................................................................ 102 Chapter 7 The Basics of Financial Statements ........................................................................ 105 The Income Statement ............................................................................................................ 106 Balance Sheet.......................................................................................................................... 110 Statements of Cash Flow ........................................................................................................ 113 Chapter 8 Summary of Tango’s Approach .............................................................................. 115 Start with the Buyers............................................................................................................... 115 Relevant Offering Memoranda ............................................................................................... 117 Selective Engagements ........................................................................................................... 117 Shift Some of the Financial Burden from the Seller to the Buyer.......................................... 117 The Tango Advantage – The 2% Solution.............................................................................. 118 Advantages to Sellers.............................................................................................................. 118 Advantages to Buyers ............................................................................................................. 120 Conclusion .............................................................................................................................. 122 Index of Appendices and Exhibits .............................................................................................. 123 Exhibit A-1 – Due Diligence Documentation......................................................................... 124 Exhibit A-2 - Buyer’s Detailed Due Diligence Checklist..................................................... 125 Appendix B-1 –Short Blind Summary #1............................................................................... 167 Appendix B-2 Short Blind Summary #2................................................................................. 168 Appendix B-3 – Short Blind Summary #3.............................................................................