1. technology and computing
2. software
3. databases

Table of Contents Chapter One: How to Find Great Targets to Buy .................................. 4 Chapter Two: Materials You Need to Be Creditable ............................. 6 Chapter Three: Faint Hearts Never Find Great Targets ......................... 8 Chapter Four: “Back‐of‐the‐Envelope” Business Evaluation ............... 10 Chapter Five: Conference Call Power ................................................. 11 Chapter Six: Preliminary Due Diligence .............................................. 13 Chapter Seven: Indication of Interest & Letter of Intent .................... 14 Chapter Eight: The Face‐to‐Face Meeting .......................................... 15 Chapter Nine: Complete Due Diligence .............................................. 17 Chapter Ten: Finding Senior Debt, Subordinated Debt & Equity Capital ............................................................................................... 18 Chapter Eleven: Definitive Contracts ................................................ 20 Chapter Twelve: Acquisition Integration .......................................... 23 Chapter Thirteen: Conclusion ........................................................... 24 2
Exhibit List Exhibit One: Lead Form ..................................................................... 25 Exhibit Two: Due Diligence List .......................................................... 29 Exhibit Three: Indication of Interest .................................................. 41 Exhibit Four: Letter of Intent ............................................................. 44 3
CHAPTER ONE How to Find Great Targets to Buy
Most buyers believe that they know everyone in their industry. They think that because they have had many years of involvement within the industry, attended trade shows and belong to trade associations, that they know the entire marketplace. For almost every buyer, that is just not true. The way to build an acquisition program is to merge together the two dominant data bases in the world. Those two databases are Dunn & Bradstreet’s Hoover’s database and Database America’s. The Hoover’s database comes from hundreds of thousands of credit reports at Dunn & Bradstreet. Since Hoover’s is the elite version of Dunn & Bradstreet, those reports are examined with extra care, more so than the usual quick report done by Dunn & Bradstreet. Database America takes the 7500 Yellow Pages that are published in the United States and makes 14 billion phone calls asking companies to complete comprehensive information. With Dunn & Bradstreet’s Hoover’s Division coming at the top of the market, and Database America’s coming at the bottom, one can build a database which will list 95% of all the potential targets. Information is readily available with an 8 digit SIC code, sales volume, CEO’s name, etc. and represents an extraordinarily good start in building a database that goes above and beyond the perception of, “I know everybody in my field.” Buyers are amazed when they learn that, although they thought there were a few hundred good “widget” companies in their field, there are actually a few thousand. Names emerge that were previously unknown. Some buyers are even shocked to find out that a particular company is bigger than previously assumed. It is very hard to compete with thousands of people building a database with your personal first hand knowledge. That just doesn’t compute. At our investment bank we have taken this a bit further. We have conducted almost a hundred thousand interviews with potential sellers and have built the 4
only tele‐profile of this kind anywhere in the world. We are capable of going into our historical database and finding information, not only about the company and what they do, but their perceptions and needs as far as selling. The cherry on the sundae is that we have also built a database of a hundred thousand email addresses and fax numbers of the CEOs of potential sellers. So, at the press of a button, after selection of SIC code, sales volume, location, etc., we can open up an immediate dialogue. And if the above is insufficient, we are pleased that we are one of the most aggressive members of the Association of Corporate Growth (ACG). This association is made up of all the significant players in the mergers field. If you do not belong to ACG, you do not belong in the mergers industry. Having the greatest deal flow in this association, and the private email address and fax number of every member, we are seeking out targets on that list. The members, whom have made more than $200 billion in transactions, find out who is selling what and who knows who is selling what. It is a very powerful resource. So, if you are going to be in the mergers business, you must build a database. You do not want to miss a single opportunity. The above described process is how an investment banker builds a database and why a leading investment banker is necessary in the mix, no matter how smart the buyer is or how much experience he or she has had in their industry. 5
CHAPTER TWO Materials You Need to be Creditable
If your name is Coca Cola, Revlon or DuPont, you do not need an acquisitions brochure. Everyone knows who you are and you have a 10K Report or 10Q Report that tells your story in a hundred pages, which is much more than anyone wants to read, so opening up a dialogue on behalf of DuPont, Coca Cola or Revlon is easy. Since this writer has represented Blackstone, the largest private equity firm in the world, opening up a dialogue is easy. Blackstone is a household name in private equity and their legendary feats are famous in the mergers world. These types of dialogues always go easy. When we represent a nice distributor out of Philadelphia, Pennsylvania with sales of $100 million a year, a very clever construction company from Connecticut with $70 million in sales, a swimming pool product manufacturer in California with sales of $20 million or even a private equity fund that is not a household word, we need to put together documents that motivate the seller to talk and position you, the buyer, in the most positive light. The necessary documents are as follows: 1. Acquisition Profile: This is not your brochure or your web page. It is pointed specifically at inducing a seller to be confident in opening up a dialogue with you and your company and providing you with the confidential data to make an educated decision. That profile will include, amongst other things, a short history of your company, the products and services you offer, background on your key executives, your financial strength including bank references, acquisitions that you have completed, if applicable, acquisition criteria, your vision for the future, basic terms of the merger (like Warren Buffett, we believe you should tell people the terms first and the price separately), as well as information that will help you impress potential sellers, i.e. awards, patents, industry association memberships, directorships, etc. 2. Web Site Marketing: You need to take your acquisition criteria profile, as described above, and other relevant information and add it to your web 6
site. An addition of a button onto your web site saying, “If Interested in Exploring the Selling of Your Company, Click Here” would be helpful as well. This must be designed with your webmaster. It must have some nice techniques associated with it, such as the addition of flash enabled pages. You must remember that in the world we live in today, no matter who you are people will be looking at your web page. Being very specific with acquisition goals, targets, objectives and background information signals to sellers that you are serious and not casual about acquiring companies. 3. Acquisition Criteria Sheet: Every significant buyer publishes an acquisition criteria sheet which includes: a.
b.
c.
d.
e.
f.
g.
h.
i.
The industry segment in which you are seeking. The specificity of that segment by SIC code. Sales volume criteria. EBITDA criteria. Balance sheet criteria Growth, or lack thereof, criteria. Geographic criteria. The willingness of current management to stay on. The willingness, or lack thereof, to purchase real estate as part of a package. j. Other information that is unique to the particular acquirer. 4. Utilization of Visual Aids: Visual aids will help impress someone in your industry. This could be a copy of speeches that you have made about mergers and acquisitions, documentation of awards won, articles published about your company or your own personal curriculum vitae. You want to do whatever it takes to put together a package that, when the seller gets it he can see that this is a serious package and therefore must be serious people. Remember, you may think that you are a big shot; we might think you are a big shot; but companies doing a few hundred millions of dollars in sales or less just don’t have the same credibility as a multi‐billion dollar company. 7
CHAPTER THREE Faint Hearts Never Find Great Targets
The greatest flaw that client acquisition programs have is the unfamiliarity and un‐comfortableness in cold calling. If your idea of a mergers program is to call a handful of people that you met at a trade association or trade show or if you think that you can rely upon a handful of miscellaneous, straight commission business brokers or investment bankers then you are in for a rude awakening. Once you have created the perfect database, as described in Chapter One, and put together the materials listed in Chapter Two, you need to make ice cold calls to people. Let’s just say for argument’s sake that, at the end of an aggressive acquisitions search, there are just 150 targets in your list of candidates. You may be amazed to know that it will take close to 2,000 calls to those 150 targets to get 90% of them to come to the phone and give you a yes, no or maybe, as to whether they wish to be sold. At our company, we train 40 people every day, starting at 8:25a.m. to do this. We make a million and a half phone calls a year. These are highly compensated, highly motivated investment bankers who have a singular mission, and that is to uncover sellers who truly want to sell. Not only are they skilled in reaching people who are not reachable, but they are capable of determining general interest before they disclose your name. Unless you have done hundreds of acquisitions, you’re probably unaware that the people whom you approach and provide your name to delight in attending cocktail parties and country club outings saying how their company rejected your offer to sell because they would never sell to your company. What that does is poison the chance of making other acquisitions. It, also, creates an atmosphere of, “He will buy anybody, or is desperate.” Our people will not disclose your name unless someone tells us that they are deadly serious. That name is disclosed in the second phone call to avoid the possibility of someone rejecting you before they even understand the process. This author has written “In Search of Sales Excellence,” “The Encyclopedia of Telemarketing,” and “The 50 Greatest Sales Techniques Ever Developed.” There 8
are very few things that this author is an expert in, but sales, particularly telephone sales, certainly are an area of expertise for not only him, but for the dozens of people who work for him. Unless you contemplate making thousands of calls or hire and train someone to do just that, make a million and a half phone calls a year. This is your Achilles heel. Certainly you will be able to stumble upon someone at a trade show or trade association meeting, but that is like dating someone who accidentally came into your life. For this author, preference leans toward personally interviewing every single female candidate who I wish to date, never tell her who I am and then when she says I’m really serious about dating, open up a dialogue. The difference, I think, is in an occasional date or a bevy of beauties so motivated and so desirable that I do not waste my time for a moment. Our marketing people do not just find out if people want to sell, they prepare a comprehensive report (See Exhibit 1). You will see that there are a dozen and a half questions that we ask. We are not satisfied to make teleconferences with people who say I might be interested, they need to tell us, loud and clear. That is because it takes a motivated seller, not a casual seller. Sellers don’t endure this frustrating process unless they are committed to it. So now, here is what have we done: Created a comprehensive database, created magnificent materials and prospected aggressively to bring to the top, a handful of extremely serious sellers. Here is the next very important step; the “back‐of‐
the‐envelope” business evaluation. 9
CHAPTER FOUR “Back‐of‐the‐Envelope” Business Evaluation
Once a Vice‐President, one of your CEOs or someone like yourself endure the challenging cold call process and have obtained the interest level of someone who really wants to sell, the next person who comes to the phone is someone at a very senior level. We call this person a “deals person”. He or she is not only capable of being charming and representing your interests properly, but is capable of coming up with a “back‐of‐the‐envelope” purchase price and of dealing with any objections they may have, i.e. “I never heard of your company,” “I want a higher price,” “I have to talk to my partners,” “Call me back after the holidays,” “I want to check you out first,” etc. “I have to say that our deals people are some the best in the world. All the deals people train together starting at 7:45a.m. every day without exception. All offices are linked together. The giants are getting weak, and we are the leader in the middle market and I’m proud to say that. I also need to say to you that unless you are willing to endure dozens of protracted conversations, this is a service that is better left to an investment banker who can say wonderful things about you without sounding like he’s bragging. If you were to say those things it would sound like puffery. When we say it, it sounds like admiration.” And so this Senior Vice‐President or other key employee on your staff should arrange a conference call for you so that you do not waste your time tilting at windmills like Don Quixote. 10
CHAPTER FIVE Conference Call Power
Alright, so now what have we done? We have built a comprehensive and complete database, created materials that establish credibility, fought our way through to prospects by way of 100 or more calls. A deals person, who is experienced at being able to do appraisals on the fly, has come up with a value for a business that is consistent with the perceived value for the seller. No delusional people allowed here please. Now, enter the dragon. A conference call is arranged. We’ve established your credibility. You have comprehensive information about the seller and can now assume that 50% of those conference calls or more will result in extremely serious negotiations. Prior to this conference call, the buyer and your deals person have agreed on price range, terms, seriousness, process, etc. This call is probably going to go very well. Your advisor, investment banker or Vice‐President acts as master of ceremonies. He simply says: “Mr. (Last Name), we are going to talk about buying companies in some detail as an introduction to supplement your knowledge. We are going to ask you to do the same thing as a potential seller and then we will open up the dialogue. The estimated time of this call is only thirty minutes to an hour and at the end we will both be able to make a decision as to whether this is a transaction we would like to pursue.” We are going to assume that you, as the CEO, Founder, President or major shareholder in the company are pretty articulate. However, we are also going to train you a little bit as to what you should be saying and how you should present yourself. Even though we or your advisor will be there as master of ceremony, it doesn’t hurt to make a really good presentation. Bruce Pennington said, “You will never get a second chance to make a first impression.” 11
At the end of this dialogue, ask both parties if this is a transaction they would like to pursue. Assuming the seller wants to pursue it and you, the buyer, want to pursue it, the next step is to create a preliminary due diligence list. 12
CHAPTER SIX Preliminary Due Diligence
In the mergers field, contrary to most people’s thinking, meetings never happen until there is a complete meeting of the minds. Meetings tend to be anticlimactic. People know the price in advance. Buyers know this is a transaction that they think they would like to do, if those criterion are not met then no meeting should take place. The next step is the creation of a preliminary due diligence list (See Exhibit 2). There may be certain items that are significant particularly to you. Some are standard, such as historical financial statements, tax returns, product and service listings, backlog, if applicable, etc. Some are particular to the industry. As a buyer, you and your advisor review the due diligence responses and make the determination if the preliminary estimate of purchase price is now correct, too high or too low. Invariably, once you review the early stages of due diligence before a meeting, you or your advisor will go back to the seller and ask a few questions, i.e. How come sales declined in 2010? Why did you have litigation in 2007? What happened with the company you purchased in 2008? What are your projections for 2013? This is just the first stage of due diligence. It’s the amount of investment that you are willing to make to at least invest in a meeting. You don’t conduct due diligence that is so expensive that you misuse your resources. You want to just justify a meeting. But we are not done yet. Before we are going to let you have a meeting or before you should have a meeting, there is one more step to do. 13
CHAPTER SEVEN Indication of Interest & Letter of Intent
Professionals in the mergers field have learned the hard way that flying around the country for “chemistry meetings” to see if we all like each other is a total and absolute waste of time. We need the seller to agree, in principle, to all the terms of the deal before we will attend the meeting. Why would you fly from New York to Chicago to see a seller who you believe is worth $5 million and is worth really worth $8 million? Why would you drive from Connecticut to the heart of New York City to meet with a seller who wants an all‐cash transaction and your terms are 60/40 (60% cash and 40% notes)? Why would you meet with a seller whose partner doesn’t attend that meeting and isn’t equally committed to the sale? The list can go on with reasons why you should not have a meeting until you have a signed Indication of Interest (See Exhibit 3). An Indication of Interest is a non‐binding letter executed by the buyer and the seller that has a potential overview and principles of the sale. No Indication of Interest, no meeting. If you don’t have better things to do with your time, we, as an advisor certainly do and to keep your costs realistic, we do not go to meetings, no matter how passionate the reason is unless there is a meeting of the minds as it relates to terms, continuity of the owners, etc. 14
CHAPTER EIGHT The Face‐to‐Face Meeting
No matter how successful the internet is, no matter how skillful you are on the telephone, no matter how good your instincts are, it seems that, somehow, in every first face‐to‐face meeting, the logic of the proposition tends to get better or worse; it never stays the same. You cannot tour someone’s facility over the phone. You cannot totally understand how someone purports their life with a telephone or video conferencing. You do not get a feel of someone’s facility by looking at glossy pictures when you are exchanging information, so this face‐to‐
face meeting is particularly important. This meeting should be a half‐day. It should be choreographed out like a symphony. Your advisor should, again, be the master of ceremonies and establish an agenda in advance. A sample agenda is as follows: 1. Further background on both the buyer and the seller. 2. A tour of the facilities. 3. If appropriate, meeting with other executives in the company. 4. Question and answer session. 5. Determine if this is a process that both parties would like to pursue. The customary here is that if this is something you want to do, you would engage in the creation of a Letter of Intent. A Letter of Intent, which has some binding provisions in it (See Exhibit 4), is the key to a locked‐in period, in which the seller agrees to not speak to any competing buyers. We live in a new world where you get to make your own rules if you are really good at what you do. So we try to put some very strong provisions in the Letters of Intent. We don’t always get what we are asking for, but we get more than half of the requested items most of the time. An example of a provision we include is what is called a “break‐up provision.” This provision simply states to the seller that if you tended the amount of money described in the Letter of Intent, in a fair and reasonable contract, to the seller and he fails to close this transaction because of personal desires, then we are owed (X Dollars). If we put in a seller 15
break‐up provision, we will close the transaction more than 90% of the time. If we do not put that verbiage in, we close the transaction about 70% of the time. I think logic is crystal clear. Just an example of why you want to have a highly experienced advisor. It does not matter if you do five to ten transactions a year. You are still only working in your industry. Your best practices are limited to your best industry. When a mergers company does billions of dollars in sales, even if they are slow on their feet, they still are carrying their best practices to their other clients. 16
CHAPTER NINE Complete Due Diligence
We discussed the due diligence process in an earlier chapter; now it becomes more intense. Someone who is about to write a check for $2 million, $20 million or $100 million are fully within their rights to know everything, without exception, about this prospect. The due diligence is divided into four basic categories: 1. Financial 2. Legal 3. Human Resources 4. Environmental Each stage of due diligence can be a quagmire if you do not do it properly. Finding out that one’s backlog is overstated, one’s receivables are uncollectible or that one’s payables are understated is a nonstarter for an acquisition in most cases. If one does not do UCC‐1 searches for litigation, including an in‐depth federal, state and county search, then you run the risk of being burned by a prospect who has misrepresented themselves as far as what their qualities are as a seller. Depending upon the nature of the transaction that you are positing, you need to understand human resources. A while back, a transaction that we were working on was reduced in price because the seller was paying some of those people in cash and had a huge overhang as far as federal rules that they had violated in not reporting that cash. Finally, environmental due diligence is critical. States like New Jersey have gone as far as requiring the approval of every acquisition in regards to its environmental conformity. 17
CHAPTER TEN Finding Senior Debt, Subordinated Debt & Equity Capital
Now that everything is great with due diligence, you want to get this transaction done but you need to put together the financing necessary to do it. We do not care how strong your finances are, you probably have opportunity areas that you haven’t thought of. Let me give an example: Private equity people have learned the hard way that you do not cross guarantee your acquisitions. You set up a shell company and that negates the need for your personal guarantees. You may not believe it if you have not done a lot of these transactions but you are going to get your bank, if you have a solid company, to lend to you two to two and a half years of the cash flow of the seller target with the shell corporation executing the contract with no personal guarantees and probably interest only for the first year or two. This is called cash flow lending. The majority of smaller companies doing acquisitions have one credit line with their bank. In most cases, the bank has a blanket UCC‐1 against everything and has one hand on your throat as far as what you can and cannot do. Every acquisition should stand on its own merit. There should be no cross guarantees and no personal guarantees. You need to use the cash flow of the target to provide financing. You may have a solid balance sheet, but, in the acquisitions business, the more leverage you get, the better it is. As a practical matter, no bank will lend you money on an acquisition unless they have a 200% coverage ratio. That means that for every dollar required for interest and amortization, on average, will have $2 or more of predicted cash flow. For that reason, banks are motivated to do this. Now you may be, based on your size, only a candidate for asset based financing which, of course, requires an advance versus receivables, inventory and to a lesser extent real estate and equipment. This author has been an advisor to Congress Financial, who was the second largest asset based lender in North America and acquired by Wachovia, as well as known for writing the Worldwide Competitive Analysis Plan for C.I.T. The thinking of asset based lenders is something he knows intimately and unless it is an extremely weak company, this author can get all the asset based financing you want and require under the most advantageous terms. 18
That is not the end of financing. There are also mezzanine lenders who, while expensive, help fill in the gap. These lenders are also called “sub debt” or subordinated debt lenders. There are also venture capital firms that will finance transactions, private equity firms that will partner up with you, angel investors who will put up equity money and, most importantly, there are sellers who have to now take some paper back. Again, if there are nine guys competing for an acquisition and the company has the cure for cancer, I suspect it’s going to be an all cash sale. However, if there is another nice company in your industry in which there is not a feeding frenzy to buy the company, then you can assume that there will be an opportunity here for seller financing. This author’s company will be involved in financing billions of dollars of transactions in the coming year. We are going to show you when to do it, how to do it, how to negotiate it and where to find it. Again if you are working in 100 industries then you are bound to have a lot more contacts than even a very strong company working in one or a small handful of industries. 19
CHAPTER ELEVEN Definitive Contracts
So you have agreed to go forward. The due diligence was great. You have the money. Now it is time to create a definitive contract that is even‐handed and, as well as one that protects your interests. This is one of the greatest wastes of all expenses in the mergers field. Some people are used to paying $100,000 or $200,000 to a law firm to create what is largely in their word processor, in an asset sale or in a stock sale. Ninety‐nine percent of what is in one’s word processor is the basis for a transaction and then the business points are dropped in. First, there are some really good law firms in North America and we understand this. The majority of law firms, however, have no understanding of mergers and acquisitions law. They do five or ten transactions a year. It is divided amongst ten or fifteen different partners and everyone postures that they are an expert when in fact they are really not. We will help you find an expert. Doing as many transactions as we do, we have been down the pike with most people. We know that, for example, Vince Capone at Reed Smith really has his act together. He is an attorney and a CPA. We also know that John Doe is a rude and not very knowledgeable with this type of law and will probably screw up the transaction. To keep everyone honest, we created an engagement letter with the attorneys. The engagement letter caps their fee at a certain level. It builds in an abort provision so then, if the transaction falls apart, they will still be liable for one‐third to one‐half of their fee. It builds in a limitation as to who can work on this transaction. Have you ever come into a room and seen the partner, two associates and a paralegal and you say wow, what a nice team! Then you remember that is costing you $1,500 an hour. We will not permit that. The fact that we give out millions of dollars of legal assignments, in general, people do not try to swindle or take advantage of the company. The lawyers tend to be pretty honest because they know they are going to want the next job. They 20
will not do the things that we say are inappropriate and not loyal to you as a buyer. We will do those things that make sense. The critical terms in a definitive contract are: 1. Representations and Warranties. These are the things that the seller has to promise. The broader the representations and warranties are, the more protection you have. The fewer representations and warranties, the less protection you have. There is always a dance here. Our suggestion is put in broad, but not preposterous, representations and warranties. You will save money from being wasted on nonsensical negotiations between attorneys which can go on endlessly. 2. ESCROW. Every mergers agreement, other than the business terms, provides for certain critical issues. Number one is an ESCROW. No matter how nice people are, occasionally they have misrepresented themselves unintentionally and once in a blue moon they misrepresent themselves intentionally. So to that extent, every deal has an ESCROW. How much will it be? That depends. It could be 5%, 10% or more in a less clean transaction. Any seller’s attorney worth his salt will ask for a basket. The basket is a modest amount of money. If found out after the transaction to be owed to you by the seller that you won’t look for. How much will the basket be? That depends, but in general it is about 0.5% to 1%. 3. CAP. Every transaction has a CAP. A CAP is the most that you can get back from a seller in case there is some major problem. In the case of fraud, the CAP is 100% plus legal fees. In case of non‐fraud, it is an open issue and there is no market for this. It is based upon each individual circumstance. It can be a tenth of the transaction or all of the transaction. Forget the nonsense and wordsmithing that goes on endlessly. The bottom line is you put it into business terms, write an even handed agreement, provide for risks, warranties, ESCROW, a basket and CAP and life goes forward. There is a very famous equity fund that has been around for fifty years in Chicago, Illinois. They use a 13‐page agreement and budget no money for legal fees other than a quick overview at the end for a few thousand dollars and they have had no 21
litigation and no problems. At the other end of the spectrum, there are some buyers who think it is OK to spend a half million dollars per transaction, regardless of the size of the transaction. You choose how much money you want to squander on attorneys. We think the money should be circumscribed at a realistic level. 22
CHAPTER TWELVE Acquisition Integration
The transaction is completed. The money has been wired to the seller. The papers are signed and you have acquired, what you believe, a very exciting seller. You are not done yet. You need to integrate this sellers business into yours. You need an integration program that in great detail provides exactly what will happen from the minute after you make that acquisition to the first couple of years. For instance, the day after the transaction, every employee should be herded into a hotel auditorium and be told the good news. That the company has acquired new owner partners that the owners are staying on board with the company and, most importantly, that all, or majority, of their jobs are safe. Recently when Wells Fargo bought Wachovia, more than 10,000 people were laid off. Honesty is the best policy after the acquisition. You need to provide for the elimination of redundant expenses. Those expenses might be facilities, people or certain departments that are vulnerable like the accounting department, the sales department and those who manage warehouses, M.I.S. departments, etc. In general, one of the benefits that you and the buyer get is the elimination of redundant expenses which get swept under your corporate overhead. Sometimes, this elimination can be as extreme as dropping someone’s entire facility into your facility, thus reducing 90% of the payroll and finding that the entire gross margin falls down to the pretax line. 23
CHAPTER THIRTEEN Conclusion
So where have we gone with this book. We have showed you how to build a perfect database. We have shared with you the materials necessary to be a serious buyer. We have given you insights on how a sensational investment banker can make thousands of cold calls, freeing you up to deal with the top, ideal prospects you are seeking. We have informed you on how a Senior Vice‐
President can evaluate the net worth of a company over the phone and do so in as little as fifteen minutes, how you can then participate in conference calls and not waste your valuable time with nonsensical sellers who have delusions of grandeur on price or are solely conducting a fishing expedition being curious as to how the whole process works. We have discussed the powers that Indication of Interest Letter and Letters of Intent have and how they make a transaction clear before you waste too much time on it. We focused on due diligence which allows you to have an in‐depth understanding of everything about a business. Due diligence divides itself into preliminary and complete due diligence. We’ve covered financing and all the other options that exist. Finally, we went over definitive contracts. It is important to cover yourself, but not make it the Encyclopedia Britannica. We also spoke about the need to integrate this acquisition, bringing it in, in such a way that you get the maximum benefit, don’t demoralize people and take advantages of economies of scale. Once you have done all of the above you are on you way to achieving fame and fortune in the mergers field. 24
EXHIBIT ONE:
Lead Form
Date Taken:
Appointment Day:
Lead Taken by:
Date:
Time:
Type of Lead:
Notes:
Introductory Statement:
Let me if I may give you a bit of background about our company and then if I
may ask you just a few questions to see if there’s a fit between our companies.
Continue without pausing or asking permission.
• We are the leading private investment bank in America serving the
middle market.
• In 2010 we have projected to do several billion dollars in sales.
• We own many companies in this field including: US Equity, Southeast
Equity, The RTA Private Equity Fund, Consolidated Capital and
Carnegie Financial.
• We’ve been in business for almost a quarter of a century and located in
the same building since 1991.
• Since the closing of Lehman Brothers, Bear Stearns, Merrill Lynch’s fire
sale and Goldman Sachs becoming a bank, we’ve positioned ourselves as
the leader in the middle market.
Your presentation must be 100% honest. Is the sale of your business something
of interest to you?
Let me if I may ask you just a few questions to see if there’s a fit between our
companies.
Company:
TO Box
Street Address:
City:
State:
Zip:
Contact Name:
Title:
Phone Number:
Fax Number:
Cell Number:
Ext.
Web Address:
Email Address:
25
Fees
Earnings
Price
Serious
Initials______
1.
Are you the MAJORITY owner of the Company?
(If not, ask who the majority owner is)
1a.
1b.
1c.
1d.
What percentage do you own?
Who are the other owners and what percentage do they own?
How do they feel about selling?
In our Chairman’s book he says that it takes not only a great buyer
but it takes a very serious seller to make a marriage. May I ask what
is driving your decision to at least explore the possible sale of your
company?
1e. If you hear you called me I didn’t call you.
Answer: I understand that but if this is not a topic of serious interest
to you I will be misusing your very valuable time.
2.
Have you attended any seminars in the past about selling your business?
2a.
2b.
2c.
2d.
What was your reaction to that seminar?
Did you become a client?
If yes what happened?
If no why not?
3.
Other that speaking with us today, what other steps have you taken in the
last few years to sell your business?
4.
Have you had any serious buyer conversations in the last two years?
4a. If yes, what was the outcome of those conversations?
5.
Have you had an appraisal done on your business in the last few years?
5a.
5b.
5c.
5d.
6.
If yes what was the value?
When was it done?
Who did it?
How much did it cost?
Are you currently being represented by an investment banker or business
broker in the sale of your company or are you free to choose an advisor in
this area at this time?
26
7.
What are the most important products or services your company offers?
8.
Are you familiar with the fees involved in selling a business?
What you need to have prepared are 2 documents prior to sale, an
independent evaluation, which includes a recast of your earnings and a 10
page research profile on your business. Here is why these documents are
required: First, you want to show your company as profitable as it really is,
to attain the best price. Second, no serious buyer will ever pay a fair price
without looking at these documents first. Regardless which investment
banking firm you retain, you will spend between $19,000 and $24,000 prior
to the sale to get these documents prepared.
Is that fee acceptable to you?
Sir, if we choose to work together the fees will be due and payable in the
next weeks.
9.
Do you own real estate as part of the business?
8a. Net Value: (Appraised value – mortgage)
10. No. of Employees:
11. What was your sales volume in 2009?
12. What is your projection for sales volume in 2010?
13. If you were trying to show the highest profit possible and not worried about
paying taxes, what percentage pre-tax profit would you have shown in 2009?
14. What percentage pre-tax profit do you project for 2010?
15. Is there a psychological price you have in mind that relates to selling your
business that would be at a minimum acceptable to you?
16. How much in bank debt do you currently have?
27
17. By the way would you be interested in the alternative to selling in having us
raise money for you as we project we will be raising more than a billion
dollars in equity and debt capital in the next year?
Tie down
We’re very good about keeping our conference calls with our Chairman. He
is meticulous in his follow up. If for any reason you need to change the
appointment my name is _____________ you may call me at 954-586-1000.
If you’re running late please let me know. Please don’t embarrass me
though you’ll be talking to my boss’ boss and I want to be sure that the
conversation goes smoothly. How do you keep your calendar? Do you
want to put this into a computer, personal assistant or just write it down.
18. Comments: (Please give me a solid paragraph of what you think about this
lead and any insights you may have gotten.)
Questions
Before we wrap up today are there any questions I can answer for you that might
be helpful?
28
EXHIBIT TWO:
Due Diligence Request List
DUE DILIGENCE REQUEST LIST
Please provide each applicable document or item of information requested and indicate
its status by using one of the codes indicated below. As used herein, the term
“Company” means Scan Specialists, U.S.A., and the term “products” includes without
limitation all service offerings, and programs provided by the Company. We have
attempted to avoid redundancy. Nevertheless, if a document or item of information
provided relates to two or more sections on this due diligence checklist, please label each
document or item of information with both section numbers and make a cross reference
notation beside the sections on the copy of the due diligence checklist returned with the
documents or information placed in the data room. If a document or item is sent as an
electronic file, please save the file with the reference number as the leading part of its
name. For example: " 1.1 – Predecessor Companies.pdf ".
Status Codes: "E"
= Enclosed
"N" = None exists
"NA" = Not Applicable
1.
CORPORATE ORGANIZATION AND CAPITAL STRUCTURE
______1.1
A list of any predecessor corporations of the Company and all subsidiaries
of the Company (including an indication as to which are material
subsidiaries).
______1.2
Charter documents and by-laws for the Company and any predecessor
with all amendments to date, including certificates of designation.
______1.3
All minutes of meetings and written consents of the boards of
directors/managers/members (including board committees) and securities
holders of the Company, current through the last board of directors
meeting.
______1.4
Certificate of Good Standing from Secretary of State of state of
incorporation.
______1.5
Tax certificates from state(s) of incorporation and each state in which the
Company is
authorized to transact business. Authorization by the State to be taxed
under subchapter S election.
______1.6
Copies of current certification of authority to do business as a foreign
corporation in all states where such certification is required. Also, a
29
schedule of all jurisdictions in which operations or properties of the
Company require them to qualify as a foreign corporation, indicating
jurisdictions in which such qualification has already been secured.
______1.7
Policy and Procedure Manuals for the Company.
______1.8
Copies of governmental (federal, state, local) approvals, authorizations,
permits, franchises, certificates, registrations, concessions, exemptions,
etc., required in order for the company to conduct its business.
______1.9
All option, warrant, subscription, voting, voting trust, registration and
other agreements to which the Company is a party or to which any
securities of the Company are subject.
______1.10
Copies of any and all documents restricting the issuance or resale of any
of the Company's assets or capital stock, including "buy sell" agreements,
rights of first refusal, first offer or similar preferential rights.
______1.11
List of current securities holders, including name, number of interests
held, consideration paid and date(s) the shares were issued or acquired.
______1.12
Any other agreements relating to the purchase or sale by the Company of
any of its securities, including any underwriting agreement, distribution
agreements and indentures.
______1.13
All reports filed with any state authority (e.g., corporate annual reports,
report of issuance of stock, etc.) during the last 3 years.
______1.14
List of directors and officers of the Company.
______1.15
List of all loans or other arrangements (including guaranty and
indemnification arrangements) between the Company and its officers,
securities holders, directors, managers and employees.
______1.16
List of all interests which the Company's officers, directors or
stockholders may have in customer or vendor businesses.
______1.17
All materials distributed to securities holders or the board of
directors/managers/ members of the Company during the past 3 years.
______1.18
All prospectuses, offering circulars, private placement memoranda, or
information prepared and used by the Company in anticipation of a
transaction. Documents should be provided whether or not an actual
transaction was consummated as a result of the prepared prospectuses,
offering circulars, private placement memoranda or information.
______1.19
A list of parties, if any, whose consent to the transaction contemplated by
this list will be required, with copies of relevant documents.
30
2.
MARKETING
______2.1
Copies of all sales and marketing programs and campaigns, by region for
the last 3 years.
______2.2
Most recent monthly sales reports (current month and preceding 12
months), used to measure sales cycle, pipeline and other key metrics
relating to company sales productivity.
______2.3
All current brochures and sales materials describing the Company's
services. The URLs for all websites maintained by or on behalf of the
Company, and the websites of partners offering the Company’s services.
______2.4
All market literature, studies, research reports, etc.
______2.5
Summary of sales by line of business and by sales channel, during the last
three years.
______2.6
Gross margin and profitability analysis by line of business and customer
during the last three years.
______2.7
Description of pricing policy and policy on discounts.
______2.8
Sales commission plans, if any.
______2.9
Press releases issued and news reports published during the last three
years regarding the Company.
______2.10
List of competitors including all significant national and regional
competitors, with competitive matrices showing relative strengths and
weaknesses and all known sales and profit information by competitor
regarding the competitive product lines. Include the URLs for their
websites and if publicly traded, their ticker symbol.
______2.11
Results of customer satisfaction surveys, if any.
______2.12
Business plan (past five years) containing relevant service, marketing and
financial assumptions.
______2.13
Description of new business proposals, including new service
developments and sales trends per business line and customer.
______2.14
Metrics relating to profitability by office location, by customer, and by
line of business.
31
3.
OPERATIONS
______3.1
List of all agreements and/or relationships with referring, reviewing, or
consulting doctors or medical professionals.
______3.2
List of historical patient recruitment rates by event and location.
______3.3
Staff utilization rates.
4.
EMPLOYEES AND LABOR RELATIONS
______4.1
Company organizational charts.
______4.2
List and copies of material relationships existing between Company and
any officer, or any of their affiliates.
______4.3
Complete list of all employees describing location, job position, tenure
and compensation. This list should include all contract employees and
consultants whether used for the Company’s administrative functions or as
a placement at a client.
______4.4
All employment contracts or letters of understanding entered into by the
Company setting forth terms and conditions of employment or
engagement for each individual, including any supplements, extensions or
amendments thereto. If such agreements do not exist or are incomplete,
also provide a detailed statement of the current compensation, benefits,
perquisites and other agreements, for each officer and director of the
Company. This request includes restrictive covenants and non-compete
agreements entered into with current or former employees. This request
includes a description of all verbal or non-written agreements that have
affected payroll.
______4.5
All consulting agreements and other independent contractor agreements.
This request includes any contracts with agencies providing temporary or
contract employees, and any other entity with whom the Company might
be deemed a joint employer.
______4.6
Copies of all employee handbooks, personnel policy manuals or any other
documents setting forth all terms and conditions of employment and
personnel policies and procedures.
______4.7
All loans or guarantees with employees entered into by the Company.
______4.8
Copies of all workers' compensation claims alleged against the Company
within the last three years, including those that are currently pending (or
anticipated to be filed), including claims history and information
concerning administration.
32
______4.9
Copy of all workers’ compensation policies. For states that do not require
or permit the use of workers compensation insurance, a copy of either (i)
documentation to demonstrate proper enrollment in the state’s workers
compensation system, or (ii) documentation to demonstrate that the
Company is not covered by the state’s workers compensation system
(including any required notices).
______4.10
All unemployment claims currently pending against the Company,
including claims history and information concerning administration.
Please include a list of any recently discharged employees who might be
eligible for unemployment benefits but who have not yet filed such claims
against the Company.
______4.11
All Company payroll tax returns.
______4.12
Copies of all charges or complaints against the Company filed with or by
the NLRB, EEOC, OFCCP, OSHA, U.S. Department of Labor, and any
other federal, state or local agency dealing with any form of employment
discrimination or employment matter (excluding unemployment
compensation and workers' compensation claims) within the past three
years, together with documents showing the disposition or percent status
of such matters. To the extent that the Company is aware of possible
charges or complaints that have not yet been filed, please provide an
explanation of the conduct underlying the potential filings.
______4.13
Copies of all complaints against the Company filed in the past three years
(or if still pending, whenever filed) in any state or federal court regarding
any employment matter under federal or state law, together with any
documents showing the disposition or present status of such matters.
______4.14
I 9 immigration forms, if applicable.
______4.15
A list of pending grievance or other actions relating thereto.
______4.16
Employee and contractor turnover statistics by quarter and function for the
three prior years.
______4.17
A copy of the materials presented to a new hire of the Company for
information or for agreement regarding any term or condition of their
employment and a copy of the materials presented to any existing
employee, officer or contractor of the Company for information or
agreement regarding any term or condition of their employment.
______4.18
A copy of all client policies and procedures that are applicable to the
employees or contractors of the Company while working for the client.
5.
EMPLOYEE BENEFITS AND SEVERANCE
______5.1
List of all employee benefit plans (including any pension benefit,
multiemployer, severance, deferred compensation, bonus, 401(k), stock
33
option, phantom, medical, disability, salary continuation, termination
benefit, retirement or welfare plan and any other plans providing benefits
for services rendered to the Company or any of its affiliates) affecting
employees, directors, retirees, former employees or consultants of or
independent contractors to the Company or any of its affiliates (or the
dependents or beneficiaries thereof). For the last three years, provide, by
plan and by month, the aggregate employer and aggregate employee
contributions to such plan and specify all unfunded obligations.
______5.2
Copies of any and all:
______a. Plan documents and all amendments.
______b. Summary plan descriptions.
______c. Trust agreements relating to any plan and all amendments.
______d. Form 5500s, including any related schedules or attachments, for each
plan for the 3 most recent plan years.
______e. Any actuarial report for each plan for the 3 most recent plan years.
______f. Most recent IRS determination letter for each qualified plan, including
any terminated qualified plan.
______g. Collective bargaining agreements, including those relating to
multiemployer plans, side letters and other agreements with any labor
organization. Description of current status of discussions with respect to
any expired or imminently expiring union contracts.
______h. List and detail of any governmental audits or investigations of any plan.
______i. Each policy of insurance, together with any descriptive booklet for each
such policy, and of any documents showing terms of participation in any
health maintenance organization.
______j. Evidence of compliance with COBRA (offering the right to continue to
participate in group insurance plans), the Family and Medical Leave Act
and the Americans with Disabilities Act in connection with any plan.
______k. Any ruling, letter or notice issued by the IRS, the DOL, the PBGC or
any other governmental authority with respect to any plan.
______l. A description of any excise taxes, fines and penalties imposed or paid in
connection with any plan.
______5.3
Detailed information regarding post retirement benefits offered by the
Company, including all materials given to current or past employees or
retirees.
______5.4
A valuation of accrued liabilities under any existing severance, vacation
pay or any unfunded executive compensation plan or arrangement.
______5.5
For any unfunded plans, the most recent Department of Labor filing.
6.
CONTRACTS and FINANCIAL
______6.1
All contracts, agreements and arrangements between the Company and
customers/clients, whenever executed and whether or not currently in
effect, including a description of any oral agreements, and any other
34
material documents and correspondence relating to such contracts,
agreements and arrangements.
______6.2
All material sale, agency, supply, distribution, management, service,
warehousing, and advertising contracts to which the Company is a party.
This includes any agreements with any account receivables factoring
companies.
______6.3
All material contracts between the Company and any government or quasi
government agency, any correspondence related thereto and any
correspondence between the Company and any government or quasigovernment agency related to entering into future contracts or
relationships.
______6.4
All other agreements material to the operation of the Company’s business
which are not otherwise requested herein.
______6.5
All joint venture and partnership agreements to which the Company is a
party.
______6.6
Copies of all purchase, sale or merger agreements for acquisitions or
dispositions of real property, stock, securities, assets or business
operations by the Company (i) during the past 10 years, or (ii) prior to
such 10 year period if any covenants, indemnities, representations or
warranties still survive.
______6.7
Copies of any guarantees issued by the Company.
______6.8
Copies of any and all installment purchase agreements involving the
Company.
______6.9
Copies of all contracts giving any person a right of first refusal or similar
preferential right to acquire or purchase any assets of the Company.
______6.10
All documents material to any contingent and/or earn-out payments to be
made by the Company.
______6.11
Any leases relating to a substantial amount of real and personal property to
which the Company is a lessor or lessee.
______6.12
List of Company's top twenty customers for each line of business for the
previous three (3) years, with annual revenues and gross margins.
______6.13
List of any equipment or property that is leased and copies of lease
agreements.
______6.14
Description of any outside services used including complete name of
service and contact name with telephone number.
35
______6.15
List of all suppliers of material goods, materials or services to the
Company; copies of any agreement (oral or written) with suppliers of
outside services.
______6.16
Description of business processes for each entity including revenue
recognition, cash collection, operating data collection, cost of sales, bill
payment, etc.
______6.17
Details of cost-cutting measures, both those contemplated and those
already achieved.
______6.18
List of standard monthly or periodic reconciliations performed.
______6.19
Copies of financial statements for current year to date and last three
years by month.
______6.20
Copy of audited financials statement and auditors report for last 3 years.
______6.21
Auditor's letters to management on internal accounting controls and
procedures for the last five fiscal years.
______6.22
Capital expenditure report – three years historical and one year projected.
______6.23
Forecasted proforma financial statements for each of the next twenty four
months.
______6.24
Summary/listing of accounts receivable by customer at FYE of the
immediately preceding fiscal year, and the most recent month-end.
______6.25
Aging schedules for accounts receivable for the last two years by quarter
and month.
______6.26
Detail on receivable, warranty, environmental or other reserves.
______6.27
Any documents relating to material write-downs or write-offs other than
the normal course of business.
______6.28
Summary/listing of current outstanding accounts payable with aging and
description of any disputed amounts relating thereto.
______6.29
Description and schedule of all contingent liabilities.
______6.30
Breakdown of G&A expenses for the last two years.
______6.31
Bank loan agreements, letters of credit, guarantees and all documents
pertaining to debt obligations of the Company, including, without
limitation, instruments that may be outstanding after closing.
______6.32
Schedule of bank accounts and authorized signatures with respect to each
account.
36
______6.33
A description of all changes in accounting methods or principles during
the last three fiscal years.
______6.34
Goodwill amortization schedule.
______6.35
Intercompany liabilities schedule.
______6.36
Tax v. Book Basis of Assets:
- Accounts Payable and Accrued Liabilities Schedule
- Plant, Property and Equipment Cost Basis, Accumulated Depreciation
and Remaining Basis (Book and Tax)
- Tax Basis Information: Tax v. Book Depreciation (summary of
significant timing and permanent differences between book and tax
bases).
______6.37
Schedule of Tax Credits and Carry Forwards (net operating losses, capital
losses, built-in losses, foreign tax credits, etc.) Include limitations on
utilization of such carry forwards and/or expiration dates.
______6.38
Inventory valuation including listing of inventory by product line and
location and book-to-physical adjustments for the past two years.
______6.39
Detailed listing of any operating expenses not presently charged to
Company which would be incurred by the Company after the proposed
acquisition.
7.
TAX AND REGULATORY MATTERS
______7.1
All federal and state income tax returns filed by the Company and all
communications between the Company and the Internal Revenue Service,
including audits, notices of assessment and reports of revenue agents, with
respect to matters raised by the IRS in the course of any audits.
______7.2
Closing letters and other material tax assessment documents involving the
Company, and descriptions of any pending issues or open matters with
federal, state or local tax authorities involving the Company.
______7.3
All other reports and applications filed with, significant correspondence
with, and transcripts of any significant proceedings before, any federal,
state, local or foreign regulatory agencies and self regulatory authorities
and all material governmental permits, licenses, etc. issued to the
Company and a description of their status.
______7.4
Copies of any regulatory notices, reports, citations or requests received by
the Company.
______7.5
Any material federal state, local and foreign governmental regulatory
compliance filings.
37
______7.6
8.
All communications with federal, state, local and foreign governmental
regulatory agencies.
LITIGATION
______8.1
List of all pending or threatened litigation, arbitration and/or government
or administrative proceedings or investigations involving or affecting the
Company or any officer or director thereof (or any employee benefit plan
or any fiduciary thereof). Such list should include the nature of the claim,
the relief sought, any insurers for such claim, the counsel handling the
claim and the current status of each matter.
______8.2
Correspondence of the Company concerning any material dispute with
suppliers, competitors, contractors or customers.
______8.3
List of any inquiries from governmental agencies received by the
Company concerning potential violations of laws, rules or regulations
pending and for the most recent five years.
______8.4
Consent decrees, injunctions and other orders having a continuing effect
on the Company or its operations.
______8.5
List of all litigation or proceedings involving or affecting the Company
which have been settled, resolved or decided in the last 5 years, including
final outcome of the litigation or proceedings.
______8.6
Settlement agreements under which the Company has any continuing
obligation.
______8.7
Attorneys' responses to audit inquiries for the last five years.
______8.8
Copies of any regulatory notices, reports, citations or requests received by
the Company.
9.
INSURANCE
______9.1
Schedule of all insurance coverage on the Company’s real or personal
property, operation, personnel or any other aspect of the Company’s
business; and recent determinations, if any, of the adequacy of the
Company’s insurance coverage.
______9.2
Schedule of all insurance coverage on the Company’s employees or
directors including amount of annual premiums and terms of coverage.
______9.3
Loss experience for the last three years for property, general liability,
business interruption, workers compensation, product liability and any
other insurance coverage.
10.
INTELLECTUAL PROPERTY RIGHTS
38
______10.1
List of all trademarks, service marks, trade names and copyrights.
______10.2
Copies of secrecy, non-competition and/or invention agreements.
______10.3
Copies of all licenses, franchises, marketing agreement and know-how and
technical assistance agreements. Royalty schedule for all intellectual
property licensed by or to the Company.
______10.4
List of patents and trademarks with their expiration dates; copies of issued
patents and trademarks and pending patent and trademark applications
with correspondence with US PTO and other issuing authorities.
11.
SOFTWARE AND TECHNOLOGY
______11.1
Description of current website, process of regular updates to the website
and related databases supporting the website.
______11.2
Description of intranet / extranet, communication to employees /
contractors
______11.3
Description of document management / back-up systems and related
processes
______11.4
Copy of any technology roadmap for the next 2 years including any
software upgrades, website enhancements, etc
______11.5
Description of any software currently used in the operation of the business
and any automation employed to accomplish business processes; include
copies of licenses and summary of material terms of licenses.
______11.6
Technology review of website, billing software, internal network
configuration, communication with remote services, document
management and storage, software licenses
12.
PROPERTIES AND OTHER ASSETS
______12.1
List of the locations and size of the Company’s facilities in all states or
other jurisdictions in which the Company carries on a material amount of
business or employees are located.
______12.2
All material liens, claims, mortgages and encumbrances on real or
personal property of the Company. Also, a comprehensive list of such real
and personal property.
______12.3
All deeds to real property of the Company, and other documents, other
than leases, representing interests in real property owned by the Company.
______12.4
All owner title policies and copies of exceptions listed in such policies.
39
______12.5
Unrecorded Agreements affecting property use.
______12.6 Evidence of Utilities (Availability/Capacity)
______a. Electricity
______b. Gas
______c. Water
______d. Sanitary Sewer
______e. Telephone
______12.7
Plans and Specifications
______12.8
Existing ADA Studies; Soil Reports; Engineering Reports
______12.9
Zoning Compliance Letters
______12.10 Confirmation of Compliance with ADA
______12.11 Confirmation of Parking Requirements
______12.12 Warranties and Guarantees
______12.13 Service Manuals
______12.14 As built surveys.
______12.15 Financing Statement Search Reports.
______12.16 List of any other material assets.
13.
ENVIRONMENTAL
______13.1
All environmental or safety studies or reports prepared by, for or in the
possession of the Company, including any environmental compliance
audits, environmental insurance investigations, and any studies of the
subsurface or hydrogeological region underneath any facilities or sites
owned, operated or leased by the Company, including any studies or
reports obtained in conjunction with the purchase, sale or ownership of
any facilities or sites.
______13.2
All environmental regulatory matters, reports, citations, or requests
involving the Company.
______13.3
A list of all pending or threatened claims, actions and litigation, whether
administrative or judicial, against the Company that involve an alleged
violation of any environmental or occupational health and safety statute or
regulation.
40
EXHIBIT THREE:
Indication of Interest Letter
December 1, 2010
(First Name) (Last Name)
(Title)
(Company Name)
(Address)
(City), (ST) (Zip)
(Phone #)
RE: Indication of Interest to Acquire Substantially All Assets of (Blank
Company):
Dear Mr. (Last Name):
We are pleased to present this Indication of Interest, whereby (Blank Company),
hereafter “WBG,” would acquire 100% of (Blank Company), hereafter the
“Company,” in the form of either an asset or stock transaction. WBG, the
Company and its shareholders would work together to determine a mutually
advantageous structure, taking into consideration the shareholders’ tax
consequences.
WBG is a Miami-Dade, Florida based buy-out firm having as its primary focus the
acquisition of successful businesses with a proven management team and a strong
track record. We have a successful thirty year history of buying, building and
managing businesses. In the past decade, we have acquired a chain of suburban
newspapers (Blank Company in (Blank City)), growing the business from 18 to 46
newspapers before selling it. Separately we acquired and built a chain of 160 retail
optical centers located in the United States. Current holdings include (Blank
Company), which started as a $19 million dollar acquisition, and is now a $270
million diversified manufacturer of friction materials and precision powdered
metal components, (Blank Company), a full service direct mail, data processing
and marketing company, (Blank Company), an international cargo handling
company, and (Blank Company), an add on acquisition to (Blank Company) and
also an international cargo handler. WBG is also in the final stages of purchasing
a branded consumer products company in the Southeastern United States.
More importantly for this transaction, WBG is an experienced healthcare and
medical investor as well as an active supporter of non-profit health care
institutions. We have been an investor in a successful medical device company
which grew substantially during our period of involvement. We are currently an
41
investor in (Blank Company), a company whose business is the funding and
technical development of cutting edge medical concepts and devices, many of
them in conjunction with the Cleveland Clinic. This past spring we sponsored a
presentation from a researcher in the United Kingdom at the world famous Milken
Global Conference related to a cure for Crohn’s disease. Our involvement is
extensive and often intensive in health care, and we look forward to discussing this
further with you, in the context of helping (Blank Company’s) future growth. We
will also choose an additional associate who most closely matches your needs in
order to assure the success of this project.
The Proposed Transaction
1) Basic Transaction: WBG would purchase 100% of the Company
recognizing that it could purchase less if management was interested in
retaining a portion of equity. In fact, in a majority of our transactions,
management tends to retain a portion, typically 10% to 20% of the
ownership, in order to share in the future progress of the business, while, at
the same time, taking the majority of their cash off of the table.
2) Proposed Purchase Price and Structure: WBG is basing its purchase price
herein on the information we have received as of the date of this letter, and
its understanding that the earnings before interest, taxes, depreciation and
amortization (“EBITDA”) is at least $9.0 million for the projected period
ending December 1, 2010 as prepared by (Blank Company). In addition,
WBG will assume all the normal course of business operating leases and
remove any personal guarantees without penalizing the purchase price. We
also understand that there is built up equity value of $10 million on the
lease of the building, but since the transaction structure would be valued
based on cash flow, the impact of that equity will not affect the purchase
price. Based on the above EBITDA, WBG would purchase the Company
for a total enterprise value of $64 million. This total valuation would
include $56 million in cash and the remaining amount from a combination
of a seller note and an earn-out. In order to determine the composition of
the remaining purchase price we would need to understand more about your
projections, growth potential and capital needs.
3) Management: It is WBG’s understanding that you would remain with the
Company for a period of at least two years and it is our hope that you
would maintain an advisory role thereafter. We would want to have
similar understandings with key members of your management team.
42
Conditions
WBG’s Indication of Interest is subject to the following conditions and terms:
1) Due Diligence: Customary due diligence regarding the Company, including
but not limited to its financial statements, confirmation of adjusted
EBITDA calculations, customer relationships, employee/subcontractor
relations, business conditions, the market which the company serves and
other such matters as would constitute customary due diligence for an
acquisition of this type.
2) Definitive Purchase Agreement: A mutually acceptable definitive purchase
agreement and satisfactory employment arrangements with the current
owners and other key personnel.
This Indication of Interest is a non-binding indication of interest and provides a
basis for further discussions. We appreciated your time on the phone last month
and hope that you will provide us the opportunity to meet with you in person
before you make any decision.
Truly
yours,
(Blank Company)
By: ____________________________
John Doe
Partner
Acknowledged and Agreed
(Blank Company)
By: __________________________________
Title: _________________________________
43
EXHIBIT FOUR:
Letter of Intent
December 1, 2010
(First Name) (Last Name)
(Title)
(Company Name)
(Address)
(City), (ST) (Zip)
(Phone #)
RE: Letter of Intent to Acquire the Assets of (Blank Company)
Dear Mr. (Last Name),
This Letter of Intent by (Blank Company), it successors or assigns (the “Company”) is
regarding proposed acquisition by the Company, through a newly formed entity
(“NewCo”), of substantially all of the assets of (Blank Company) (the “Seller”). The
transaction proposed below (the “Transaction”) is expressly subject to: (i) the satisfactory
due diligence review of the Seller by the Company, (ii) the successful negotiation,
execution and delivery of a definitive acquisition agreement, and (iii) the approval of our
members and lenders.
The Seller’s growing industry position and consistent operating history leads us to value
the company at X dollars (the “Total Valuation”) based on X times its trailing twelve
months (“TTM”) EBITDA of X dollars for the period ending June 30, 2011 after
adjusting for the appropriate add-backs of discretionary, extraordinary and nonrecurring
items (see Schedule 1 attached hereto). This valuation may be adjusted based on the
actual reviewed and adjusted TTM EBITDA to be provided by the Seller’s management
pursuant to Section 7 below and a detailed analysis of the appropriate add-backs of
discretionary, extraordinary and nonrecurring items.
It is currently contemplated by the parties that the general terms and conditions of the
Transaction will be as follows:
1.
Structure of Transaction. The Transaction will be accomplished by the
purchase of substantially all of the assets of the Seller including, but not
limited to, the rights and title to all inventory, furniture, fixtures and
equipment, plant and equipment, accounts receivable, accounts payable, loans
and other advances due, advertising, marketing and collateral materials,
intellectual property, trade names and trademarks, service marks, patents and
44
royalty agreements, processes and contracts with customers, suppliers,
contractors and consultants.
2.
Consideration
a. Cash Portion: At the close of the Transaction, the Company will pay
to the Seller an amount in cash (the “Cash Portion”) equal to X dollars
(equal to 75% of Seller’s Total Valuation). This amount assumes that
(i) as of the closing, Seller will have met the Net Working Capital
requirement (as defined below); (ii) Seller has verified its
consolidated, adjusted TTM EBITDA for the period ending June 30,
2011, based on reviewed financial statements recast to take into
consideration appropriate adjustments for discretionary, extraordinary
and nonrecurring items; and (iii) Seller will not have any debt as of the
closing other than trade account payables. “Net Working Capital” is
defined as the 1 month average of the most recent 12 full calendar
month period immediately prior to the closing of the Transaction of
current assets minus current liabilities, excluding in each case any
member related receivables or liabilities, and interest bearing debt. To
the extent the Net Working Capital as of the closing date is less than
the Net Working Capital determined in accordance with the above
definition, the purchase price will be reduced dollar for dollar. To the
extent the Net Working Capital as of the closing date is more than the
Net Working Capital determined in accordance with the above
definition, the purchase price will be increased dollar for dollar.
b. Equity Portion: In addition to the Cash Portion above, the Seller will
collectively receive a 25% equity position in NewCo, which will allow
the Seller to participate in the rapid growth of the Seller following the
Transaction. Such equity portion will be structured in a manner so that
the equity issuance in NewCo will receive favorable tax treatment to
the Seller.
3.
Capital and Management Structure of NewCo
The Company’s capital investment in NewCo will be in the form of both
preferred and common equity. Both the Company’s and the Seller’s
ownership in NewCo will be subject to dilution for any warrants issued to the
Lenders, if any, (defined in Section 6 below) and options reserved for
management.
a. Capital Structure: The capitalization structure will include cash
invested by the Company’s Lenders in an amount and on terms to
ensure that the debt and debt service are not a burden to NewCo. In
addition, the Company will invest its own cash as required by the
Lenders to satisfy the amounts required to fun the transaction as well
as the growth initiatives.
45
b. Management Structure: NewCo will be governed by a board of
managers that will include representatives from the Seller, the
Company and the Lender. All members and managers of NewCo will
enter into an organizational operating agreement in support of the
governance structure for NewCo.
c. Management Fee: The Company will receive an annual management
fee in an amount equal to the greater of X dollars or 6% of NewCo’s
EBITDA. Except for the amounts in this Section, neither the
Company, nor its affiliates will receive any other cash distributions or
payments following the close of the Transaction unless pro rata
distributions are made to all NewCo’s members.
4.
The Definitive Documents
a. Purchase Agreement: The parties agree to negotiate in good faith the
proposed terms of a definitive purchase agreement (the “Definitive
Agreement”) and any ancillary documents thereto and acknowledge
that the Definitive Agreement and such ancillary documents would
include customary reasonable representations, warranties, covenants,
closing conditions, legal opinions, indemnities, ESCROWs,
shareholder, partnership or operating agreements and noncompetition
agreements that are usual and customary for this type of transaction.
The Definitive Agreement will provide for a “cap” and “basket” on the
indemnity obligations as mutually agreed up by the parties.
b. Non-Competition: As part of the Transaction, the Seller and any other
holders of the Seller’s equity will be required to sign 5-year noncompetition agreements.
c. ESCROW: We presently expect the amount of the post-closing
ESCROW to be 5% of the Cash Portion. The ESCROW would be
held by a mutually agreeable financial institution for a period of
eighteen (18) months and any earnings on the ESCROW account will
be distributed to the party receiving the ESCROW proceeds; provided
however, that if no claim has been made as of the later of ten (10)
business days following the Company’s receipt of the Seller’s audited
financial statements or the end of the first twelve (12) months
following the closing of the Transaction, 2.5% of the Cash Portion,
plus earnings thereon will be released from the ESCROW. The
remaining 2.5% will be distributed pro rata upon the end of the 18
month period with no claims filed.
5.
Employment and Compensation. At the Company’s request, certain
members of the Seller’s management team will enter into mutually acceptable
employment or consulting agreements. The employment agreement will
46
include a five year non-competition clause beginning upon termination.
Specifically, it is anticipated that (First Name) (Last Name) will enter into a
minimum of a five-year employment and/or consulting agreement with annual
compensation and bonus to be determined commensurate with his role as
CEO.
6.
Due Diligence. Seller will provide access to the Company’s designated
agents to perform a due diligence review of all matters pertaining to the
operations of the Seller’s Company, including, but not limited to, its
employees, contractors, customers, vendors, suppliers, consultants, and
financial, contractual, legal, and any and all other matters it deems necessary
for the performance of its review. Since this Transition many have a
financing component which will be provided by one or more third party
lenders (collectively, the “Lender”), Seller will also provide access to the
Lender for the purpose of their due diligence review. The Transaction is
expressly subject to the Company’s and the Lender’s satisfactory due
diligence review, acceptance and execution of the Definitive Agreement with
NewCo and its Lenders.
7.
Review of Financials. In connection with the proposed Transaction,
promptly following execution of this Letter of Intent, the Seller at its sole
expense, will engage a mutually agreed upon regionally recognized
accounting firm to perform a quality of earnings review consisting of certain
agreed upon procedures of the Seller’s financial statements for the TTM
period ended on June 30, 2011 (the “Review”).
8.
Confidentiality. Each party hereto agrees that it will not make any public
disclosure, other than to attorneys, accountants, consultants, financial advisors
and financing sources (who will be advised of the existence of the restrictions
contained in this paragraph prior to disclosure), of the existence of this letter
or of any of its terms without first advising the other parties and obtaining the
written consent of such other parties to the proposed disclosure, unless such
disclosure is required by applicable law or regulation (including applicable
franchise laws), in which event the party contemplating disclosure will inform
the other parties of and obtain their consent to the form and content of such
disclosure, which consent will not be unreasonably withheld or delayed.
Upon request by either party, the parties will return all written material
delivered to it by the other party and will not retain any copies thereof.
9.
Exclusivity. For a period commencing on the date this letter is signed by you
and ending on the later of November 29, 2010 or 60 days after the Company
receives the Review (the “Exclusivity Period”), the Seller will negotiate
exclusively and in good faith with the Company in relation to the Transaction
and will not, directly or indirectly, whether through any officers, directors,
members, partners, employees, shareholders, affiliates, representatives or
agents or otherwise, encourage or solicit any inquiries or accept proposals by ,
or engage in any discussions or negotiations with, or furnish any non-public
information to, any person regarding alternative transactions and will
47
promptly notify the Company of the substance of any inquiry or proposal
concerning any such transaction which is received by the Seller.
10.
Ordinary Course. Seller agrees that during the Exclusivity Period, it will
conduct its business in the ordinary course consistent with past practice and
will notify the Company prior to entering into any material or extraordinary
transactions or other events outside the ordinary course. Subject to the Net
Working Capital threshold set forth in Section 2 above, Seller may distribute
cash and non-operating assets to the shareholders as they deem appropriate.
Without limiting the generality of the foregoing, the Seller will not change its
revenue recognition or bad debt policies, pricing, sales and marketing, billing,
terms and reserve policies, shipments of inventory, which will reflect normal
historical patterns.
11.
Information. During the Exclusivity Period, the Seller and its representatives
will provide the Company and its Lenders, representatives, advisors and
counsel with: (i) such information (including copies of documents) relating to
the Seller as the Company may reasonably request and (ii) access to the
books, records, facilities and personnel of the Seller and certain customers and
suppliers as the Company may reasonably request, except that no customer or
supplier will be contacted by the Company without prior express consent of
the Seller. Inquiries to the Seller or its customers, referral sources and
suppliers will only be made through the Seller or its designs. The Company
commits to make its best efforts to minimize the length and magnitude of this
due diligence period, providing it is able to review and consider the necessary
information to reach an informed opinion of the Seller.
12.
Closing. We anticipate that closing should take place on or before November
29, 2010.
13.
Material Adverse Conditions. During the Exclusivity Period, any material
adverse change shall result, at the sole and exclusive option of the Company
or the Company’s Lenders, in (i) a change in the terms and conditions of this
Transaction, or (ii) a cancellation of their commitment(s) with regard to the
Transaction. A “material adverse change,” as it refers in this paragraph shall
mean to include but not be limited to, a negative change in the interest rate, in
the economy or general business climate.
14.
Expenses. Each party will pay its own expenses in connection with the
Transaction.
15.
Finder’s Fees. Each party represents to the other that any agent, brokerage or
finder fees due in connection with the Transaction will be borne by the party
who has entered into the agreement to pay. The Seller shall be responsible for
the payment of its commission of 6% of the enterprise value to Wall Street
Private Equity Group, Inc.
48
16.
Termination. In the event a Definitive Agreement has not been executed on
or before expiration of the Exclusivity Period or it becomes apparent to either
party that they will not be able to reach agreement on a Definitive Agreement,
either party may terminate this letter by giving written notice to the other and
the terms of this letter will thereafter be of no further force or effect except for
Section 8 (Confidentiality) and 14 (Expenses).
17.
Governing Law. This letter will be governed by the internal law of the State
of Utah.
18.
Binding Effect. Except for Sections 6, 7, 8, 9, 10, 11, 13, 14, 15 and 16
which are intended to create binding obligations, it is understood that no legal
obligation or liability to close the Transaction will be created by this letter and
that the legal obligation and the liabilities of the parties to close the
Transaction are to arise only upon the duly authorized execution and delivery
of the Definitive Agreement.
If you are in agreement, in principle, with the terms and conditions of the proposal herein,
please so acknowledge by executing an original of this letter and returning it to the
Company. This letter may be executed in multiple counterparts, each of which be
deemed an original and such counterparts together will constitute on and the same
instrument. This letter is not valid if not countersigned and returned to the Company by
September 1, 2010. We have enjoyed getting to know (First Name) (Last Name) and are
excited about the opportunity to partner with the Seller and grow the business to the next
level.
Very truly yours,
The Company
By:
______________________________________
John Doe, Managing Director
The Seller
Accepted and Agreed to this
____day of _____, 2010
By:
______________________________________
John Doe, Managing Director
49