News & Events
The Anatomy of a Deal
ENLIGN DEAL TEAM | 06/27/2012
The following might be a subtitle for this true account of how one deal was put together: "In spite of everything, you need only one buyer - the right one!" (Although the details are factual, names and financial data are fictional.) The company (let's call it ElectroCo) has carved a niche in a billion dollar industry. It manufactures proprietary electronic products and is owned by a private equity firm that wants to sell it for liquidity reasons. At the beginning of 2001, the private equity group retained an intermediary firm (fictional name -- United Associates) to take the company to market. The goal was to have it sold by the end of the year. ElectroCo had annual sales of about $12 million, gross margins of 50 percent, an EBITDA of $1.8 million (15 percent) and a reconstructed EBITDA of $2 million. It also had been growing over the past ten years at a 10 percent rate and had always been profitable. It had a diverse customer base split about equally between end-users and OEM accounts. However, the seller wanted to set a very aggressive full price, with all-cash in a not-so-vibrant M&A market. On the plus side, however, the seller was cooperative and provided any information that United needed. It also had audited statements, conservative accounting and instant monthly statements. ElectroCo was, in addition to these factors, on the verge of getting a substantial amount of new business. In preparing to take the business to market, United Associates came up with a basic game plan. For confidentiality reasons, direct competitors were eliminated from the buyer search. Synergistic buyers were targeted-either because they served similar markets or utilized similar manufacturing methods. United also elected to contact selected private equity groups and other intermediary firms. More specifically, United planned on creating a list of 100 potential buyers. A buyer was defined as an entity that had signed a Confidentiality Agreement, had been pre-approved by the seller, and therefore, had been sent an Offering Memorandum. United anticipated 15 written Term Sheets leading to five Letters of Intent which, hopefully, would lead to the best deal. United was not sure that they could sell the business at the multiples asked by the seller. However, they succeeded, and that success was to be based on the following: Preparing a thorough and compelling Offering Memorandum and pointing out the positive future prospects. This required the complete cooperation of ElectroCo's management team.
- Developing a complete list of possible buyers both in the U.S. and abroad.
- Contacting the buyers to see if they would be interested in the company, but still maintaining confidentiality.
- Administering all of the potential buyer activity and sending the Offering Memorandum to the appropriate parties.
- Following up with all of the prospects who received the Offering memorandum and arranging tours of the facilities with the serious prospects.
- Setting time frames for expressions of interest and term sheets, and fielding questions from the serious prospects.
- Holding the deal together in spite of the tragic events of September 11th, which resulted in a two-month delay that could have been much longer.
- Making sure that complete confidentiality was maintained and making sure that any future confidentiality leaks did not occur.
- Constantly reminding ElectroCo's management to stay focused on maintaining sales and profit goals.
- Maintaining communications with both the buyers and ElectroCo's lawyers and other outside advisors.
- Management was too thin
- Since ElectroCo was a good company, the price would most likely be too high
- Buyer purchased another firm
- One potential acquirer was acquired itself
- Buying company was having its own internal problems
- Buyer wanted to move company - this was unacceptable to the seller
- Term Sheets 4
- Verbal Offers 2
- Letters of Intent 4
- A public company that wanted to grow through acquisition.
- One with a synergistic product line.
- Unlike some of the private equity groups, not totally focused on the financial aspects.
- One with an appreciation of ElectroCo's product lines, its technology and the company's potential.