One of the major advantages of using a skilled, experienced M&A advisor is the quality of the presentation that they will make on your behalf to buyers. If you use an M&A firm to represent you, their demonstration of your opportunity will typically be found in two critical documents:
Each of these documents plays a key role in marketing efforts on your behalf. The CBP is a 1- to 2-page teaser that highlights the key areas of your business that buyers will find attractive. Most CBPs include a summary of your historical and projected income statement, typically three years of history and five years of projections. A paragraph or two describing your business is also included, along with a brief description of your future growth possibilities. In addition, most dealmakers will also briefly highlight the important off-balances sheet assets your company has that specific buyers will find attractive – without disclosing the name of the business obviously.
The goal of the CBP? To grab the attention of professional buyers, folks that look at 500-1,000 opportunities each year and have a limited time frame to analyze prospects and possibilities.
These individuals like to see information presented in a standard format so that they can literally, within a few minutes, decide if your business is something that they want to look at in more depth. The creation of the CBP is a real challenge because taking reams and reams of information that you have provided and distilling it down to something that highlights the most important facts takes skill and experience.
The second document, the OM, is only sent to prospects who have reviewed the CBP, indicated an interest in looking at more information, are approved by you, and sign a Confidentiality Agreement (CA). This last point cannot be over-emphasized.
If you are NOT using professionals to negotiate with buyers, then you need to have an attorney familiar with M&A draft an ironclad CA on your behalf. Do not send detailed information about your business to any buyer who is not willing to sign your CA. Even if you know the prospect well and trust him/her, protect your business from confidentiality breaches by having all interested parties sign your CA.
Once your dealmaker has the CA in hand and you have approved the target, the OM is sent. It is a fairly lengthy detailed document and is usually comprised of the following key segments:
The length of this document can vary from 40-60 pages or more depending on how complex your business is and the level of documentation needed in order to alleviate buyer concerns regarding the risk of your opportunity. And that is why the OM needs to be absolutely accurate in its detail. The OM is used as the backbone to start the eventual due diligence process and any inaccuracies, especially relating to your financials, can have a huge impact on your transaction both in terms of valuation and deal structure.
One of the key aspects of this transparency is the “base year.” This generally is the 12-month period your business is in whilst you are in market. It is perhaps the most important year of your entire financials because it is this number that buyers will most closely scrutinize during due diligence. If you are projecting revenue growth of 10% and gross margin improvement by 5% during the base year, it is vital that you be on track to do so during due diligence.
There is nothing more damaging to a deal than for your deal maker to have to disclose to a buyer that not only are you not on track to reach your projected revenue target in the base year but your margins are not in line as well. This issue calls into question your entire five-year forecast and obviously is a determining factor in what the buyer will ultimately pay for your business (and how the structure of the deal is determined as well).
Quite often if the base year projections are being missed (even if the “miss” can be explained), many buyers will structure the transaction to include an “earn-out” whereby key metrics in terms of revenue and/or earnings are met over a 1- to 3-year time frame (or even longer) and where you are often required to stay with the new company and ensure that these benchmarks are reached. Obviously if they are not achieved, even if the reasons are beyond your control, the ultimate dollar value paid to you for your business could be drastically reduced.
So avoid this situation if possible by projecting a realistic base year for the company. Doing so will save you potential headaches and heartaches later. All too often we have to counsel a client to balance their base year expectations with the reality that if the company has been growing at a compound annual rate of 5% over the past many years, that suddenly projecting 20% growth in the base year will probably do more harm than good for the transaction value. Realism is the key and reflects again, the importance of creating a very accurate OM and CBP.
This also points out how critical it is to listen to the advice of your M&A advisor. Unless you have sold a business before, you will have no idea of how buyers will look at your company and how that view will impact the offers you receive. Your dealmaker knows what to expect because, assuming if they are like Generational Equity dealmakers, they have dozens of years of experience dealing with and negotiating with professional buyers. Heeding their input on the process, especially as it relates to the quality of your documentation, is vital.
Ultimately this is why buyers we deal with really like looking at Generational Equity clients: Our process ensures that by the time an OM gets to them, it is fully vetted, accurate, and complete. Before we approach any buyers, we conduct a full business valuation on all clients, which feeds directly into our OM creation and also ensures that the client has realistic expectations of the business’ value.
By Carl Doerksen, Director of Corporate Development at Generational Equity.
© 2021 Generational Equity, LLC. All Rights Reserved.
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.Michael J Polarek, President, Paragon Packaging
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.Jay Dinnison, Owner of Sharpe Mixers
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!Andy Graham, Vice President, Modern Heating & Plumbing
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.Karen S. Williams, CFO, BW Manufacturing
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Terry D. Wickman, President, Keytroller
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!Eric Erlandson, Owner, Action Fastenings, Inc.
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”Karen S. Williams, CFO, BW Manufacturing
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.Andy Graham, Vice President, Modern Heating & Plumbing
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.Robert Evans, President and CEO of Mealtracker Dietary Software
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.Terry D. Wickman, President, Keytroller
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.Michael J Polarek, President, Paragon Packaging
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.Jay Dinnison, Owner of Sharpe Mixers
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.Pete L.
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.Robert Evans, President and CEO of Mealtracker Dietary Software
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.Shenille Engelhart, Owner – CLS Technology
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.Larry Moore, Owner, A Company Portable Restrooms
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
We thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.Bryan D. Horn, Owner, Over Under Clothing
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