How to Evaluate the M&A Deal Offered

After Seller gets over the disappointing shock of a low M&A bid or anticlimactic relief of an acceptable range, the next step is to read the actual indication of interest document. The indication should contain the other important elements of the offer, including the amount of the company Buyer proposes to buy and what kind of deal she’s looking for.

The percentage of the company Buyer wants to buy can be divided in to two camps: control and non-control.

Most (but not all) Buyers prefer to make control acquisitions, which means Buyer acquires enough of the company to have control over it (either by buying more than 50 percent of the company or by changing the company’s operating agreement to give Buyer control over the entity). In this case, if Seller stays on board as president, the new owner has the ability to fire Seller.

The indication should also define whether Buyer wants a stock or asset deal. Most Sellers prefer asset deals due to preferential tax treatment; most Buyers prefer stock deals due to preferential treatment of successor liabilities.

The indication doesn’t need detail on the structure of the deal: how much of the proceeds will be cash at closing, a note, an earn-out, and so on. However, a Buyer who expects to pay cash at closing and doesn’t anticipate using an earn-out or Seller note should mention that in the indication.

Regardless of whether the offer is control or non-control or stock or asset, the most important question is whether it matches Seller’s expectation as laid out in the offering document. If the Seller wants to sell 100 percent of the business, is Buyer offering to buy 100 percent? Are Buyer and Seller on the same page on deal structure?

Buyer should submit an indication based on what she can support. However, Buyer should still submit an offer even if it doesn’t appear to meet Seller’s expectations. You never know; it may be close enough to what Seller is seeking.

Sellers should be on the watch for indications with a financing contingency. This phrase is legalese for “We don’t have the money yet; we hope to find it after we strike a deal.” Sellers should call the bluff and have the Buyer remove “financing contingency.”

Similarly, if you’re selling to a private equity (PE) firm, the word to beware of is committed funds. The firm has to ask for these funds from investors. What you want to see instead is the phrase under management, which indicates the fund actually has possession of the funds.

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