M&A stands for merger and acquisition and it’s nothing more than companies buying and selling each other. Let’s say that company A wants to sell out. The owners of company A are tired of the business. They want to move on and sip cocktails on the beach forever, so they go and find a buyer for the business. That’s what falls under the umbrella of M&A. There’s different types of deal structures, but fundamentally all of the things I’ll describe, all three of the main ones are sales of businesses.
You could sell the assets of the business, which is a whole list of computers, desks, people, files and records and contracts- it’s like boom! The buyers buy it and you transfer all that stuff to the buyer individually. It’s still ultimately the whole operation. People hear assets sale and they think it’s just a piece of a business or something. It can be the whole thing but [the deal is] done via its assets.
Stock or Equity Sales
Another type is a stock or equity sale. In that case, if you buy my business computers and files and customers, all that sort of stuff, if you buy that and I don’t transfer you the individual assets, you could buy the equity interests, like the stock or LLC interests or whatever partnership interests and then you just sort of step into my shoes if you will. You’re not transferred all the individual assets, you’re just taking over ownership of this entity that holds this container, that holds all the assets.
The third major type is a merger and mergers are the least common of the structures. I would say that they show up a lot at the higher end of the market. Public companies merge for a couple main reasons. Mergers are often driven by complex tax considerations that show up in bigger deals or make sense to worry about in bigger deals. It could also be just the ease of combining two companies – it’s a simple way to do it actually. It sounds complex and the drivers of a merger are complex, but the paperwork itself, the actual process of merging, isn’t. What happens is company A comes together with company B, and when they conjoin one of them just disappears. It’s this magical thing that happens by operation of law where one’s just left standing. There could be multiple companies involved in a merger but it’s pretty seamless. All of a sudden, all the assets and stuff that were in this business and the assets and stuff that were in the other business are just together.
Where in the market do mergers and acquisitions happen?
Now, they don’t show up a lot in the lower parts of the market. A lot of my practice is in the mainstream part of the market, which is sales of up to a couple million bucks. Then the lower middle market is a pretty broad range from a couple million up into the hundreds of millions. The lower middle market I would define as 2 million to 50 million. I now play in that lower part of the space, but I’ve done billion-dollar deals when I was at a big law firm charging a whole lot of money and had huge, huge deal teams. Today it’s me and a couple others who are contract attorneys who work for me. The deals I do would be more around a couple million dollars, five million, ten million, that kind of thing. The mergers aren’t a big part of that. You see a lot more asset sales at the very low end of the market (main street) and then stock sales start to start to come in. Again, it’s not driven by the dollars at stake, it’s driven by other things.
Asset, stock and merger deals tend to group at different points in the market. If you want to check out more about these types of deal structures for M&A, asset sales and stock sales and mergers and why you might use one or the other, check out this video. Let’s talk a little bit about why people do it.
Sellers might want to take some chips off the table and they could be sick of the business and think it doesn’t look like a good business going forward. Fundamentally, the way deals get done is some seller is valuing continuing to be in this situation less than the buyer who comes in and wants to buy it. Again, sellers want to take chips off the table. Maybe they feel like it’s hard to compete at the size they are. For example, I’ve got a client who’s doing that right now. We’re going through a deal where he’s just thinking that his business has gotten much, much harder. It’s really a world of haves and have-nots where there’s not much room for a little player. He’s a relatively little player in that mix and he’s thinking that he has to do a deal or there may not be a future for him in a couple years, which is absolutely possible.
On the buyer side, fundamentally to grow your business you have to decide between buying something and growing organically. Growing organically is the term, where instead of buying another business you just launch another business or division or something similar. A buyer who wants to get into a new market, where it’s tough to break into, might just view it as easier to buy their way right in. Google, Facebook, they’re big acquirers; they buy their way into markets. Facebook bought WhatsApp and why did they do that? There was no revenue for WhatsApp at the time and Facebook was looking to buy technology companies. They just wanted to get going quick and they’re willing to pay something like a billion bucks for that. There are reasons why this happens, and they tend to be around the speed of starting, complexity of building something out, and barriers to entry where it’s hard to get in if the network’s already built. Picture something like a Facebook. I don’t care who you are, but you shouldn’t be trying to compete with Facebook today. If you were Amazon or Apple, you might be inclined to buy them because there are strong reasons to want to buy rather than build out an entirely new social network.
Business Brokers, Investment Bankers, and Corporate Lawyers
Let’s talk about the players in M&A. In my part of the market I see business brokers and investment bankers. They fundamentally do the same thing in the world. The business brokers are what you’ll see in the mainstream part of the market and the investment bankers come in a little bit higher up. Again, fundamentally they do the same thing. They’re the ones who market the company. By the way, if you’re looking to sell your company I’m happy to talk to you. You probably want to figure out who can help you find buyers and that’s not what I do as a corporate lawyer.
Go to a business broker if you’re selling a business worth about a million dollars and they will decide whether or not they think they can get the business sold and we’ll put together a seller’s memorandum, which might also be called the confidential information memorandum. It’s a book for a small company that’s maybe something like a two hundred-thousand-dollar retail shop. It might be just a two or three pager about the business. Sometimes they’ll do something called the teaser, which is just meant to show people a surface level of the business, without disclosing who the seller is. So, there could be a teaser and then there’s the book, or the offering materials. On a bigger deal, when the investment bankers do a book it can be 60 pages of stuff, modeling out what’s going on and taking the financials and recasting them. The teaser, if you use it, would be the something to take a look at decide whether or not you’re interested and then they’d get the potential buyer to sign a non-disclosure agreement to see the rest of it. But they’ll put together that book, then they’ll help market the company. Business brokers are a lot like real estate agents. They’ll go out and they’ll list the business for sale on a lot of websites like BizBuySell. The investment bankers don’t really think of themselves as having listings.
Investment bankers usually sell to other companies. The bankers spend more time curating a list of potential buyers and contacting those potential buyers. Sometimes they’ll run something called an auction, which is a process where they get the potential buyers to come line up, take a look at everything, and ultimately submit offers. There’s a process to it but fundamentally they both are engaged to sell your business and they’re both sometimes gonna take some upfront money. Almost always a good portion of it could be six or seven or ten percent but it depends on the size of the deal. Investment banking at the higher levels will have a lower percentage, but they’re gonna take a commission for getting the deal done. Then there’s corporate lawyers or business lawyers of which is what I do.
Corporate lawyers don’t litigate which means that they don’t go to court usually. Some corporate lawyers can but we mainly do stuff with contracts and relationships in transactions and an M&A deal is a transaction. There’s parties coming together, a buyer and a seller, just like any other transaction. We do the documentation to put together the purchase agreement. We can help with due diligence, which is the process of kicking the tires, making sure that you as a buyer are getting what you think you’re buying. We give advice around that to sellers on how to structure deals and all the associated risks. We talk a lot in these purchase agreements about liabilities and risk – things like cap rates. Basically, caps are put in place if the seller sells the business and misleads the buyer, it’s kind of an insurance policy. The seller could be liable no matter what. The seller could sell the business and the next day something could go wrong and the seller had no idea. With the document we put together, the purchase agreement, we’ll talk about what happens then and have some specific procedures in place. We spend a lot of time on that and other nuances of the deal like how to assign the assets, things like that. That’s my stuff and it really is around documentation. You almost always see, in any sort of any transaction, corporate lawyers on each side negotiating the deal terms and taking that deal from the air and putting it on paper and to make it clear to everyone later on.
The lower end of the market you might see business appraisers be involved. To figure out value at the higher end of the market, everything is negotiated so it doesn’t have to be an appraisal. If the buyer on a deal is getting financing, a bank might order an appraisal. Bigger deals usually don’t get appraised like that.
New investors decide whether or not they’re gonna fund a deal like that. Accountants are involved sometimes and there’s tax advisers and things like that. Occasionally there’s consultants around for various reasons. There could be integration consultants on a much bigger deal with lots of personnel, lots of contracts, lots of IT systems, CRM systems and stuff like that that needs to be integrated. You can have a lot of people and money around how to integrate the companies. Some of that might be human resources and softer stuff about people and performance plans and some of it might be harder stuff like IT and the big four. Some of the M&A practices do consulting and marketing of the company and others do integration, which is a big piece.
So, those are the big players in M&A. Business brokers, investment bankers, they do the same thing. Corporate lawyers, accountants, tax advisers, general consultants who help with integration and so forth are all part of this space. It’s considered a very sexy space, that said it gets routine sometimes. It’s fun and interesting but fundamentally it’s a transaction that people are excited about that’s changing their life. Main Street deals are pretty easy, straightforward deals for the most part, but for me, buyers and sellers are a big deal. They’re changing their life! It is a lot of fun, even if it’s not on the front page of The Wall Street Journal.
That’s pretty much it, right? What does M&A mean? Who are the players? Why are people doing it? I’ve got other videos talking about M&A if you want to learn more and you can check them out here. If you’ve never bought a company, if you’re thinking about buying a company, if you’ve bought companies and you didn’t use a corporate lawyer I’m really curious to hear about it. Which ones you think add a lot of value and which ones don’t? Hearing some of your war stories is always fun. Thanks for reading.