The uses of business valuations are almost unlimited: buy/sell agreements, fairness opinions, purchase price allocations, estate planning, gift taxes, charitable contributions, shareholder transactions, Employee Stock Option Plans (ESOPs), solvency and insolvency opinions, collateral valuations, litigation support, etc.

When selling one’s business, clarifying the seller’s goals and measuring those goals’ financial needs with the proceeds from selling the business may be determined by a valuation of the business. The impartial sell-side valuation may determine the need for the owner’s further preparation of the company for sale or give the “green light” to proceed with the sale of the company.

The business buyer in most acquisitions attempts to acquire companies at a price no greater than its “fair market value.” The buy-side valuation of a “target” company may result in a quick decision to proceed with the acquisition or move to a new “target.”

The valuation analyst uses two types of engagements, a Valuation or a Calculation, to estimate a company’s value. The analysts may render his conclusions in a verbal or written report; a valuation report communicates results in a conclusion of value; and, a calculation report communicates results in a calculation of value.

It has long been recognized in the Merger & Acquisition market that “having only one buyer is the same as having no buyers.” For the seller of a business, having multiple buyers is an absolute requirement to maximize the sales value of an owner’s business. But just how does the M&A Professional bring multiple buyers to a sales transaction?

The M&A Specialist will develop a Confidential Information Memorandum (CIM) designed to engender competition among potential buyers. The CIM reflects sales and marketing strategies to efficiently, effectively and confidentially attract “Qualified Buyers” from two major groups:

• Financial Buyers – typically identified as investors interested in the return they can achieve by buying a business.
• Strategic Buyer – traditionally in the same business or industry as the seller.

These groups may include:

• Private Equity Firms, who generally raise capital, invest with various strategies in operating companies and attempt to maximize returns in accordance with various criteria.
• Operating Companies, who are in the same business or industry seeking new markets, products and services.
• Individuals with the resources to invest and are willing to examine different types of businesses or industries.

The distinctions between financial and strategic buyers may be numerous and significant; however, persistence may be the most important quality your professional possesses to develop multiple “Qualified Buyers” for the sale of your company.

In acquisitions, a Letter of Intent, or LOI, is a document that outlines the key business terms the buyer and seller agree to, which later become the basis for all agreements and documents that legally bind a business sale.

Common clauses in the LOI should include who the buyer and seller are, purchase price, structure of the deal, payment terms, owner financing, allocation of purchase price, seller’s continuing role, the extent and timing of due diligence, determination and life of escrows, length of the exclusionary period, closing costs responsibility, retention of key employees, terms of a non-compete and closing date.

The seller normally prefers as much detail as possible in the LOI and a short exclusionary period. The buyer, however, will want to wait until after due diligence to lock in terms and conditions, and will want the seller’s business off the market as long as possible. The seller has maximum leverage over the buyer just prior to signing the LOI. Immediately after the LOI is signed, negotiating leverage shifts to the buyer.

The LOI is a negotiated document and will involve time and expense for both parties. The introductory handshakes of buyer and seller are stressed under the tough negotiations of drafting an LOI.

The buyer’s due diligence process deals with the legal, financial and strategic reviews of all of the seller’s documents, contractual relationships, operating history and organizational structure. Due diligence is a process and a test of the value proposition underlying the transaction to insure that the buyer’s company meets the expectations created before the signing of the Letter of Intent.

Effective due diligence and planning starts with a standard comprehensive due diligence checklist; however, it must include the buyer developing questions regarding issues and problems pertaining to the seller’s business. The buyer must identify the potential risk in the acquiring company and investigate.

The due diligence work is divided between two efforts:

1. Financial and strategic due diligence focuses on the confirmation of past financial performance of the seller; synergies and economies of scale to be achieved by the acquisition; integration of the human and financial resources of the two companies; and collection of information necessary for financing deals.
2. Legal due diligence focuses on the legal issues and problems that may serve as impediments to the transaction; how the transaction should be structured; and the contents of the transaction documents, representations and warranties.

Sometimes the best deals you make are the ones you don’t make.