Contents. xxxi. xxviii. xxv xxvii. xxxiii. Disclaimers, Apologies, and Modest Lies

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1 Contents About the Author Acknowledgments Foreword Preface: A Profession A Career in Middle Market Investment Banking The Origins of a Deal Junkie The Deal Junkie Arrives (Almost) Why Another M&A Book? My Intended Audience Happy Families Disclaimers, Apologies, and Modest Lies xxi xxiii xxv xxvii xxvii xxvii xxviii xxix xxx xxxi xxxiii CHAPTER 1 The Middle Market Is Different! 1 Business Process Innovation, Growth Spurts, Regulatory Imperatives, and Capital 1 Not Mom-and-Pop Businesses 3 The Upper Market 4 What Exactly Is the Middle Market? 5 Does Size (Alone) Matter? 6 Brokers and Investment Bankers Servicing the Three Markets 7 Chapter Highlights 7 Notes 9 ix

2 x Contents CHAPTER 2 Drivers of Middle Market Activity and the Sellers 11 Liquidity and Umbrella Drinks 11 Baby Boomers 11 Technology and the Information Age 12 It s Not Your Father s M&A World, Either 13 The Glass Ceiling that Sometimes Drives Transactions 14 Big Fish and Little Fish 14 Chapter Highlights 14 Note 15 CHAPTER 3 Finding and Understanding Buyers in the Middle Market 17 Scared Money 17 Understanding Buyer and Investor Types 18 Identifying Potential Buyers 29 Which Door to Open to the Buyers? 32 Chapter Highlights 34 Note 34 CHAPTER 4 Preparing a Middle Market Business for Sale and Running the Business while Selling It 35 Three Periods to Prepare to Sell a Middle Market Business 37 Litigation 43 Summing Up 44 Chapter Highlights 44 Note 45 CHAPTER 5 Rewarding and Retaining Key Staff in Connection with a Business Sale: Blackmail or Justice? 47 Overview 47 Key Employee Rewards in General 49 Timing Reward Payments 50 Timing Tax Issues in Rewarding Key Employees 51 The Importance of Clarity and Documentation Avoiding Vague Promises 51

3 Contents xi When to Negotiate Noncompete and Nonintervention Agreements with Key Employees 52 Being Alert to Potential Problems When Promises Made Are Not Consistent with the Duties and/or Influence of Key Employees 53 A Way to Avoid Key Employee Problems in the First Place 54 The Special Problems of Absentee Owners 54 Wrap-Up 55 Chapter Highlights 56 CHAPTER 6 Crystal Balls and Timing the Sale of a Middle Market Business 57 Bubbles, Cycles, and Business Values 58 Other Timing Opportunities Roll-Ups 62 Chapter Highlights 63 Notes 64 CHAPTER 7 The Confidential Information Memorandum 65 The Acquisition Profile 66 Confidential Information Memoranda Overview 66 Clients and Confidential Information Memoranda: An Intense Collaboration 66 Financial Statements in the Confidential Information Memorandum 74 Chapter Highlights 78 Notes 80 CHAPTER 8 Confidentiality While Doing the Deal 81 Confidentiality in General 82 Employees and Confidentiality: Two Approaches 83 The Investment Banker and Confidentiality: Communications between Banker and Client; Preventing Premature Disclosure 84 The Executive Summary and Confidentiality 85 Web Site Business-for-Sale Listings 85 Nondisclosure Agreements 86

4 xii Contents Securities Laws and Confidentiality 88 Chapter Highlights 88 CHAPTER 9 Middle Market Investment Bankers and Intermediaries 93 The Telecom Deal 95 Using Professional Investment Banking Assistance and In-House Teams 95 Choosing the Right Investment Bank 100 Chapter Highlights 106 Note 107 CHAPTER 10 The External M&A Team, and Using the Team Correctly 109 The External M&A Team 110 Using the Team Properly and Sequencing the Professionals; Separating the Tasks and Single Negotiators 113 Chapter Highlights 116 Note 117 CHAPTER 11 Anyone Can Do M&A Right? 119 Anybody Can Do This? 119 The Deal the Client Never Got 121 Experience and M&A 122 Chapter Highlights 123 CHAPTER 12 Two Types of Auctions: The Informal Auction and the Controlled Auction 125 Auctions in General 125 Document Rooms and Sequencing in the Controlled and Effective Auctions 127 Effective Auctions: A Summary 128 The Need for Auctions: What a Buyer Will Not Tell a Seller; How the Seller Finds Out; Is This Really Fair? 130 Chapter Highlights 133

5 Contents xiii CHAPTER 13 Financial Services Agreements, Estimating Professional Fees, and the Importance of Integrity around Large Sums of Money 135 Financial Services Agreements, Broadly Considered 135 Lawyers and Investment Banking Financial Services Agreement Reviews 136 Large Sums of Money and Odd Behaviors 137 Success or Contingent Fees Formulas (The Lehman Variations) 140 How Transaction Value Is Measured 142 Retainers (Commitment Fees) 147 Basic Contract Period 148 Trailer Periods 149 Breakup Fees 149 Carve-Outs and Approaches to Carve-Outs 150 Compensation to the Investment Banker in Warrants, Options, or Other Equity 151 Integrity and Investment Banking and Large Sums of Money 152 Bankers Fees Paid at Settlement More about Large Sums of Money 153 Clients Overall Estimate of Professional Fees for a Typical Engagement 155 Chapter Highlights 155 Notes 164 CHAPTER 14 Investment Banking Representation on the Buy Side 165 The Buy Side 166 Buy- versus Sales-Side Representation 167 Buy-Side Fees 168 It s All in the Planning 169 How Many Targets at One Time? 171 The Platform Philosophy versus the Financial Approach to Acquisitions 171 Who on the Buy Side Should Negotiate? 172 Orchestration (or Art) versus Science 173

6 xiv Contents Who Does the Investment Banker Represent? Possible Conflicts of Interest in Buy-Side Representation 174 Chapter Highlights 175 CHAPTER 15 The Letter of Intent: The Most Critical Document? 177 Content and Precedents of a Good Letter of Intent 178 The Buyer/Seller Advantage Curve 178 Preliminary versus Confirmatory Due Diligence 179 Exclusivity, Confidentiality, and the Letter of Intent 179 Affirmative Response Clauses 180 Weaknesses and Opportunities Disclosure and Accuracy of Preliminary Due-Diligence Data 181 The Honey, I Did the Deal Rule... Thoroughness of Business Terms 182 Use of Subtlety and the Effect of Precise Words in Letters of Intent: What the Definition of Is Is 183 Negotiating Protocol and the Letter of Intent 184 The Reverse Letter of Intent 185 LOIs from the Buy Side Point of View 185 Chapter Highlights 186 CHAPTER 16 Some Thoughts on the Psychology of M&A Negotiations 187 A Few Preliminary Thoughts on Negotiation 188 Preparation 188 Clients and Negotiation 189 Politicians and Honesty 189 HonestyandIntegrityAreStilltheBestPolicies... Making a Friend 190 Dangers of Written Argument 191 Every Deal Dies a Thousand Deaths 193 The End of the Middle Part of an M&A Negotiation... Just Before the Letter of Intent 205 The Difficult or Unreasonable Negotiator 207 One Last Thought on Negotiations: A Confession 207 Chapter Highlights 208 Notes 209

7 Contents xv CHAPTER 17 Initial Meetings with Buyers, Pricing the Company, and Pacing the Negotiations 211 Strange Role Reversals and First Meetings 212 Encourage All Offers, No Matter How Low... Getting Them into the Tent 217 The Truth, the Whole (?) Truth, and Nothing but the Truth 217 Timing, Sequencing, and Pacing the Deal while Pricing the Company 218 Chapter Highlights 219 Note 219 CHAPTER 18 Consideration and Deal Structure 221 It s the Terms, Not the Price, Stupid! 221 Consideration and Consideration Types 222 Deal Structure 223 Frequently Offered Consideration Types Overall 224 In Summary: Weighing and Comparing Offers 227 Recommending Against Deal Consideration 228 For Buyers: Creative Uses of Consideration as a Deal making Device 229 Stock and When It Is Priced 229 A Final Thought on Consideration Mixes 230 Chapter Highlights 230 Notes 231 CHAPTER 19 Earnouts 233 Why Earnouts Are Dreaded but Very Frequently a Deal Component 234 Whose Earnings Are These Anyway? 235 Avoid Confusion: Understand the Differences between Two Types of Earnouts 236 Elements of Negotiation in a Comfort (True) Earnout 237 When an Earnout Is Simply Frosting on the Cake 242 Earnouts and Taxes 242 Chapter Highlights 243

8 xvi Contents CHAPTER 20 The Proof Phase, or the Final Days 247 Confirmatory Due Diligence 247 The Definitive Agreement 248 The Final Days: Investment Bankers and Attorneys 250 The Critical Importance of Speed in the Final Days 250 The Closing and the Surprise at Closing 251 Chapter Highlights 253 Notes 254 CHAPTER 21 After the Nuptials: Postmerger and Acquisition Failures 255 A Brief Honeymoon, Perhaps; A Successful Marriage, Less Frequently 256 Chapter Highlights 259 Note 259 CHAPTER 22 Does a Sales-Side Client Need an Appraisal before Going to Market? 261 Four Basic M&A Marketplace Valuation Contexts 263 Formal versus Preliminary Valuation in the Marketplace 264 Investment and Dynamic Value 265 The Answer 265 Appraisal Costs 266 A Preliminary Valuation in the Marketplace 266 Chapter Highlights 268 Notes 268 CHAPTER 23 The Rules of Five and Ten and the Super Rule of Five in M&A Valuation 271 A Foundation for the Valuation of Middle Market Businesses 272 The Rules of Five and Ten, Cocktail Party Conversation, and... Quick Calculations 273 Two Bell Curves 273 The Super Rule of Five 275

9 Contents xvii The Greater Fool Theory (Buyer Beware) 278 Chapter Highlights 279 Notes 279 CHAPTER 24 An Introduction to the Basic Art and Science of Valuation (Sales-Side versus Buy-Side) as Applied to M&A Transactions, and Flavors of EBITDA Explained 281 So How Much Is It Worth? Valuation Valuing Economic Assets in General and Business in Particular 283 M&A and EBIT(DA) 284 Another Approach to Valuation: The Discounted Future Earnings (DFE) Method versus Multiples 287 Chapter Highlights 290 Notes 291 CHAPTER 25 A Brief Discussion of Multiples and Multiple Realities 293 Multiples in General 294 Risk and Multiples 295 Derivative Multiples versus Actual Deal-Driving Multiples 295 Public Market versus Private Market Multiples 296 Arbitrage and Roll-Ups: A Practical Example of Public versus Private Company Valuation and Multiples 297 Chapter Highlights 298 Notes 299 CHAPTER 26 Qualitative Values Inherent in the Target Company 301 Quantitative and Qualitative Valuation 302 Two Law Firms 302 Value Drivers Go Well Beyond the Numbers 303 Obsolescence,or...GointoPlastics,Young Man 304 The Use of a Value Driver Analysis Contained in a Preliminary Valuation Report 306 Chapter Highlights 306 Note 306

10 xviii Contents CHAPTER 27 M&A Conventions and Establishing Balance Sheet Targets 307 Conventions and Their Need and Basis 307 The Balance Sheet in General 308 M&A Conventions in General 309 Entities and Businesses Redux 310 M&A Balance Sheet Conventions, or, Who Gets the Balance Sheet? 310 Other Nonoperational Assets beside Cash 312 Establishing Targets for Deliverables, Usually the Balance Sheet A Moment in Time 313 The Balance Sheet: At the Time of Negotiation or at the Time of Settlement? 314 Working Capital Targets on the Balance Sheet 314 Net Worth Targets on the Balance Sheet 315 Double-Counting Target Purchase Price Adjustments 316 Settlement of Differences Truing Up 316 Operating in the Normal Course of Business 316 The Balance Sheet and Normalization 317 Chapter Highlights 318 Notes 319 CHAPTER 28 Special M&A and M&A Valuation Topics 321 Overview 321 Valuing Real Estate on the Balance Sheet 321 Technology Valuation: Is It a Business Yet? 324 Valuing the Nonprofitable Business 326 Valuing Rapidly Growing Businesses for Venture Capital and Similar Investments Is This Really Valuation? 329 Chapter Highlights 335 Notes 336 CHAPTER 29 Common M&A Taxation Issues 337 A Brief Tax Overview 338 Entity Selection: S Corporations versus C Corporations and Asset versus Stock Deals 339

11 Contents xix The Effect of Timing of S Corporation Elections and the Built-In Gains Tax 340 Other Transaction Structural Issues 341 Earnouts 341 The Effect of Tax Accounting Methods 342 Reorganization Deal Structures (Taking Stock) 343 Disposing of Business Interests by Gifting Prior to a Sale and Charitable Remainder Trusts 344 Divisive Reorganizations 345 Small Business Corporations 346 How Much Do Taxes Matter During the Negotiation? 346 Chapter Highlights 346 Notes 347 CHAPTER 30 The Business of Middle Market Investment Banking 349 What Is Investment Banking? 350 Some Ironies of the M&A Profession 351 Attention Deficit Disorder and the M&A Banker 352 People Skills 352 Entry Points to Investment Banking in General 353 Cultural Issues in Investment Banking Practices Some Further Thoughts 358 Marketing: Half of Investment Banking Is Business Development 362 Multiple Marketing Approaches 364 Networking in General 371 Serving Clients and Executing Engagements Well 374 Securities Law Issues 376 Engagement Intake Management 378 Success in Life and M&A 379 The $10 Trillion Opportunity 380 Chapter Highlights 381 Notes 382 CHAPTER 31 A Postscript: The Capital Markets 385 Notes 395

12 xx Contents CHAPTER 32 Another Postscript: The Unbundled Approach to Formal Valuation 397 A Bird, a Plane? 397 Notes 399 Index 401