“Well… We shook on it the other day.” She paused to consider her own words. I could tell as she was explaining what happened that she was frustrated that she broke the first rule of business negotiations, which is especially true when financing mergers and acquisitions; If it’s not in writing, it doesn’t matter.

The two partners were looking at each other with blank stares. We’d only just begun discussing their business purchase. They, both budding entrepreneurs hoping their employer of almost ten years would be true to his word… this time.

They had told me their story of carrot after carrot being dangled over and over. Empty promises. Things said that don’t come to fruition. Timelines expired and commitments ignored. I’ve heard this story a few times; two hard working “technicians” (a term borrowed from E-Myth) being promised an equity stake in the company they’re building. The problem is that many times the employer (who, by the way, is making tons of money off their employees’ hard work) doesn’t actually come through with the equity offer. Probably why my first question was, “What do you have in writing?”

The process of financing mergers and acquisitions actually starts there. One side puts the deal in writing. Typically, this is done in a Letter of Intent which follows up a meeting or conversation in which the details of the finances are discussed. Something like, “I’ll give you some money now, some money later, and I want to see your paperwork to make sure I’m making a good deal.”

The smartly dressed female professional and her equally as professional male counterpart sat back in the big conference room chairs and considered their position; having nothing but a handshake. He fixed his glasses on his pointed nose and slowly started with a question that quickly became one of my favorites, “Matt, what would you do if you were in our shoes? I mean, I can’t imagine you haven’t heard this story before. We still see this guy. Everyday. It’s starting to affect our work because we can’t focus. So. Like, what would you do if you were us?”

Now we went over options, leverage, and the reality of their situation. There’s always options. They aren’t hostages to the situation and that’s where we started. I adjusted my suit jacket and stood up looking for my dry erase marker. As I grabbed the blue one I started to write the letters “O” and “P” on the whiteboard, I stated, “You have options. You always have options. I bet you know your options. So let’s get them on the board.” I finished writing the word OPTIONS and they helped me fill in the list. Took about 10 minutes. It was a fly over. Some of the options weren’t realistic (quitting tomorrow morning, for example.) But it’s a necessary part of the process. 

Not all deals are the same. Even deals with the same numbers aren’t the same. Not everyone’s risk tolerance, everyone’s desires, everyone’s flexibility, everyone’s background. They’re just not the same. When financing mergers and acquisitions, it comes down to the following factors:

1. What is actually being purchased? Shares, Assets, Contracts, IP, etc.
2. What is the agreed upon value of what is being purchased? 
3. Does the person or company putting the money into the deal think this value is the same as what’s been agreed upon by the buyer and the seller?
4. Does cash flow support the financing?
5. Are the buyers putting money into the deal? How financially well-off are the buyers?
6. How will the seller(s) function post closing? Is there a transition period?
7. Do the buyers have industry specific knowledge or  insider information? Have they done this type of work before or will there be a steep learning curve?

I nonchalantly swiveled the conference chair so I could put one of my feet on it. I wanted to be more casual so we could all understand the basics of this deal. I pointed at the board and let out a sigh. Quietly, I said, “You guys want to talk about these other options any more? Or, do you want to figure out the crux of this deal?” I paused, only for them to get their focus back on what I was saying and not on the dozen or so options I had written on the whiteboard. They nodded in agreement, so I continued. “The crux of this deal is leverage, timing, and financing. How you use your leverage is probably more important than the actual leverage in the first place. If you guys quit the business, your boss would be screwed. He claims that he’d sue you. Since we’re not going down that road, you gotta put those thoughts in a box and label them appropriately.” 

“Like nuclear options?” The female technician blurted out. With a smirk growing on her face, we all acknowledged that the label was silly and merely a metaphor.

“Call it what you want. But if you really want to buy this guy’s business,” I said calmly as to not give too much acknowledgement to the small sidetrack. I continued, “Then we need to be much more gentle with applying leverage. Instead of inserting force, you can show him that you’ve done your homework and ‘leveled up.‘” This is a different type of leverage. It’s literally taking ownership of financing mergers and acquisitions instead of just waiting around for the seller (who, to remind readers, is continuing to profit from their employees hard work) to come around to turning off his own financial water faucet.

“Matt. What are you talking about here? That’s why we hired you; to help us get this figured out. What do we need to do?” 

“Let’s get the basics of the deal on the whiteboard. Then, we’ll draft an LOI (Letter of Intent) and submit it to your boss with a reasonable timeline of movement.” I paused as both potential entrepreneurs were busily taking notes and jotting down thoughts.

“It’s important to remind you that the seller has little to no financial motivation to make progress on this unless he’s confident that he can turn over this business to you and you’d make him more money that way than keeping the ownership to himself and letting you two work for him forever.” I took a breath. That was a big statement. It needed to be said. We’re talking about leverage and I like to keep it real. I’ve been a part of hundreds of financing negotiations, advising sellers, buyers, and investors. I can see the transaction from all angles. It’s important to remind people of what the other side is likely thinking, what they’re motivated by, and how that plays a part in the deal. 

If things aren’t moving forward, there’s likely a lack of financial motivation to do so by one or both sides.

Financing mergers and acquisitions is tricky. Once both sides agree to basic terms (purchase price, seller/buyer commitments, due diligence needs, etc.) it’s time to consider the financing of the deal. Where’s the money coming from? 

A bank is going to have a much different process than a private investor. Banks typically only lend with significant collateral (real estate, equipment, receivables.) They’re likely going to want to do their own appraisal and the process, sometimes, takes forever. 

Conversely, a private investor (a non-institutional financial option) may want to see a much different set of qualifications. Since they’re the one putting the money into the deal, they call the shots. It’s important to fully understand all the paperwork involved, review with a trusted advisor, and ask the hard questions upfront.

If the seller is providing the financing, you’ll still want to understand the repayment terms, the process of qualifying, what’s being held as collateral, what happens in the event of a default, etc. 

Basic terms of financing mergers and acquisitions:

1. Letter of Intent (LOI) – A non-legal binding document that formally puts an offer to paper. It typically is submitted with a timeline of next steps which include the collection and review period of various documents. The seller may or may not even consider the LOI.
2. Asset Sale vs Stock Sale – Two very different types of transactions. In an asset sale, there’s a tangible list of assets that are being purchased and the seller is NOT selling the stock in their company. A stock sale is when the seller is selling the actual shares in the business which is typically viewed as being riskier by attorneys; there could be unforeseen liabilities from the government, for example, that could infringe upon the finances or operations in the business.
3. Personal Guarantee – a stand-alone document that says the person signing the deal is personally responsible for its repayment, typically regardless of the financial performance of the associated business.
4. Due Diligence – an informal process of asking, collecting, and evaluating the various items of a deal.

Where does the money come from when financing mergers and acquisitions? I get this question all the time. It can come from a bank, a private investor, the buyer, or the seller. Contact my office today if you’re considering the purchase of a business and need help financing mergers and acquisitions.