Skip to main content

Our investment bank often receives a call from a company that has just been approached by an acquirer. The selling company requests our advice on pricing the transaction and assistance with due diligence, documentation and closing.

Traditionally, it has been the role of the investment banker to source the buyer, through the process of drafting the Confidential Information Memorandum (CIM) and raising awareness of a list of suitable buyers. But often a business that hasn’t even offered to sell receives a phone call asking if they are interested in selling. And that’s what happened here.

What role can the investment banker play at this stage of the process? Many !

Here’s how: Once the investment banker has organized the financial statements and drafted the CIM, our most important role is probably to advise on the assess of the business for sale and the structure of the transaction, in particular to guard against “over-indebtedness” on your part, the seller.

With this seller, the acquirer offered an EBITDA multiple on the performance of the previous financial year. To simplify the math, let’s say it was 6 X $2 million, for a total enterprise value of $12 million. The seller was inclined to take it. After all, who cares about $12 million?

We said, “Just wait a minute!

You see, the fiscal year had ended over three months prior, and the seller had released strong numbers in the meantime. Our CPA staff immediately compared 6X EBITDA for 1) the last fiscal year, 2) the last calendar year and 3) the last twelve months (TTM), looking for the scenario that would bring the highest transaction value, since we knew the buyer. multiple was 6X. We quickly found an additional $200,000 in acceptable EBITDA with just a slight adjustment to the operating EBITDA review period. With the deal closed at 6X, finding that $200,000 increased the value of the business by $1.2 million, a bonus that more than doubled our success fee.

Then we asked to see the balance sheet. It turns out that our client was sitting on a pile of cash or cash equivalents; over $1 million. But the buyer’s offer didn’t make it clear that it was a cash-and-debt-free deal. In a cashless and debt-free transaction, the seller may retain cash or cash equivalents. But this needs to be clarified. Absent this clarity, the buyer could have pleaded to claim the cash or cash equivalents or a portion thereof. We advised that the structure of the cashless/debtless deal be explicit in the asset purchase agreement (APA).

Then there was seller leverage. The buyer asked the seller to lend him some of the money to make the purchase. As crazy as it sounds, it’s very common: A note from the seller. However, the interest, terms and duration of the note had to be negotiated, as they were too onerous for the seller. We did too.

After raising the price, recouping the money, and negotiating the seller’s note, we then got to work on two other essential parts of any transaction: 1) Redlining the APA, adding seller protections, and 2) Calculating the anchoring working capital. , to make sure the seller didn’t leave too much money in the draw.

Finally, we acted as a buffer between our client and the seller. The reason is crucial to preserve the value of the transaction. Here’s why: Acquirers often want to speak directly with sellers and, for lack of a better term, speak kindly to them about their vision for the business, how they’ll treat employees and protect the brand. Without being dishonest, these gestures are often sincere, but it is the investment banker’s unsentimental view of the deal that will ward off any softening of the sale price that may result from these conversations. Because, well, let’s face it, at the end of the day, it’s not about the vision, it’s about the money.

With all of that settled, we moved on to traditional due diligence management, troubleshooting document requests, and managing third parties often involved, such as external accounting firms.

On top of all that – and the resulting seven-figure increase in purchase price – who ever needs the services of an investment banker when they already have an online buyer? Maybe everyone.