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Already have a buyer? Why even use an investment banker?

John Wagner

Our investment bank will often get a call from a company that has just been approached by an acquirer. The selling company asks for our advice on pricing the deal, and for help with due diligence, documentation, and closing.

Traditionally, it is the investment banker’s role to seek out the buyer—through the process of writing the Confidential Informational Memorandum (CIM) and outreach to a list of appropriate buyers. But often a company that hasn’t even offered itself for sale gets a phone call to see if they are interested in selling. And that’s what happened here.

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What possible role can the investment banker play at that point in the process? Lots!

Here’s how: After the investment banker has gotten financial statements organized and written the CIM, probably our most-important role is to advise on the value of the company for sale and the structure of the deal, especially to guard against “over-leveraging” of you, the seller.

With this seller, the acquirer was offering a multiple of EBITDA on the previous fiscal year’s performance. For ease of math, say it was 6X $2 million, for a total enterprise value of $12 million. The seller was inclined to take it. After all, who turns up their noses at $12 million?

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We said, “Wait just one minute!”

You see, the fiscal year had ended three plus months prior, and the seller had put up solid numbers in the interim time. Our staff CPA immediately did a comparison of the 6X EBITDA for 1) last fiscal year, 2) last calendar year, and 3) Trailing Twelve Months (TTM), looking for the scenario to bring the highest deal value, since we knew the acquirer’s multiple was 6X. We quickly found an additional $200,000 in acceptable EBITDA with just a slight adjustment to the operative EBITDA examination period. With the deal going off at 6X, finding that $200k lifted the company’s value by $1.2 million, a premium that more than paid our success fee twice over.

Then we asked to see the balance  sheet. Turns out, our client was sitting on a pile of cash or cash equivalents; over $1 million dollars. But the acquirer’s offer did not make clear it was a cash-free/debt-free deal. In a cash-free/debt-free deal, the seller gets to keep cash or cash equivalents. But that needs to be spelled out. Lacking that clarity, the buyer could have argued for claiming the cash or cash equivalents or a portion of them. We advised that the cash-free/debt-free deal structure be explicit in the Asset Purchase Agreement (APA).

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Then there was the seller leverage. The acquirer was asking that the seller loan them part of the money to make the purchase. Crazy as that sounds, it’s very common: A seller note. However, the interest, terms and duration of the note had to be negotiated, since they were overly onerous of the seller. We got that done too.

After getting the price higher, the cash reclaimed, and the seller note negotiated, we then went to work on two more essential parts of any deal: 1) Red-lining the APA, adding seller protections, and 2) Calculating the working capital peg, to make sure the seller wasn’t leaving too much in the cash draw.

Finally, we served as a buffer between our client and the seller. The reason for that is crucial to preserving deal value. Here’s why: Acquirers often want to talk directly with sellers and, for lack of a better term, sweet talk them with their vision for the company, how well they will treat the employees and protect the brand. Without being disingenuous, these gestures are often sincere, but it’s the investment banker’s unsentimental take on the deal that will ward off any softening on sales price that might come as a result of these conversations. Because, well, let’s face it—at day’s end, it’s not about the vision, it’s about the money.

With all of that settled, we moved ahead with traditional due diligence management, trouble-shooting document requests, and managing third parties that are often involved, such as outside accounting firms.

Besides all that—and the resulting seven-figure lift in purchase price—who ever needs the services of an investment banker when they already have a buyer on the line? Maybe everyone.

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