Module 8 Flashcards
What are the 7 components of the Auction Time Line?
1) Teaser / NDA
2) Confidential Information memorandum / Prelim Due Diligence
3) Expression of Interest
4) Detailed Diligence / Management Meetings
5) Letter of Intent
6) Exclusivity / Binding Offer / Definitive Agreements
7) Close
What is a CIM and what is included in a CIM?
CIM is a Confidential information Memorandum. The CIM is a package that a potential buyer receives after signing an NDA including detailed information that highlights company background, ownership info and structure, product offerings and business segment descriptions, depth of managerial experience and workforce, growth opportunities, company specific information, market position and competitive performance with projections and SWOT analysis, and etc.
What does a CIM typically not include? What are they missing?
They are more of “marketing” packages than anything else, and they do not usually provide enough information to assess high level risks and metifs of an opportunity to form a position on attractiveness of a company. They may not highlight key risks and do not provide total picture with downsides. They are used to get to the EOI step of the auction process.
What is an EOI and what is highlighted within?
EOI stands for Expression of Interest and they are requested by vendors and Investment banks to guage prelim interest. They typically are non-binding and contain key terms of the deal including Purchase price and consideration, due diligence requirements, key assumptions, expected timeline to close a deal, and other deal specific information such as principal conditions.
What is the difference between an LOI and an EOI?
LOIs are generally expected to be more informed offers compared to an EOI and as such the proposed purchase price communicated in an LOI is well thought out and not usually contingent on underlying assumptions as purchasers would normally validate necessary assumptions during the detailed diligence phase.
What are 5 Indicators during General Negotiating to be mindful of?
1) Ability to Deviate from the stated time line - understand sellers motivations
2) Reception to exclusivity - if obtained early = seller is motivated to transact and improves investors negotiating stance
3) Direct Correspondence with Management - critical element of due diligence
4) Accommodation to Due Diligence Requests - overly accommodating = desperation
5) Direction from the Vendor - the more onerous the instructions, the more the vendor is assuming control of the process.
What specific Strategies are employed within CIM distribution?
1) Queries are duplicated amongst senior staff members and junior staff members. This makes it possible to identify inconsistent messages as it relates to competitive environment or motivations
2) Obtaining channels to discuss business directly with management - as private investors hope to develop strong rapport with management to show they are the preferred party to work with
3) Obtain answers to very detailed queries that will require input of company management - providing increased access to management and other info prior to EOI bid
What tactics / strategies are employed through the EOI stage?
1) Provide a range of values with the high end enticing the seller
2) Communicate comfort and knowledge of the niche industry to signal quick closing process
3) provide detailed breakdown of due diligence procedures and time line to give seller comfort of quick close and risk reduction
4) acknowledge vendor concerns but remain vague on topics that can be negotiated later in the process (key purchase terms, assumptions, % of equity to be acquired, etc.)
5) identify management teams objectives and emphasize ability to fulfill objectives within EOI
What rationale for reduced bids can be used after the due diligence process?
1) declining TTM EBITDA during due diligence period
2) historical cashflows are non-recurring
3) Revenue and EBITDA growth driven by price changes vs. volume demand
4) Foreign exchange normalization adjustments related to revenues, costs, etc.
5) Low Cash Flow conversion from high working cap intensity
6) Scalability and growth limited by capacity constraints
7) Stength and competence of senior management team
8) Lack of KPI tracking decreases ability to project long-term growth
What 3 Things can potential investors do to stand out from competition?
1) Leverage Advisors - hire advisors to request information to avoid contention between buyers and sellers
2) Industry Expertise - Investors can benefit from bringing in industry experts along to management presentations
3) Understand Vendor Objectives - Face to face exposure provides unique opportunity to gain sense for what selling party will be receptive to if valuation needs to be revisited
What are 5 Key considerations during the LOI Stage?
1) Communicate realistic timeline processes
2) Provide comfort to selling party as to funds access
3) Valuation should be more refined and quoted
4) Commence negotiations with exclusivity to provide meaningful Purchase Price & working Cap Adjustment
5) Exemplify management part. kickers obtainable
What 5 requirements are finalized with exclusivity?
1) Tax Structuring
2) Lender Financing
3) Negotiating purchase agreement and shareholder agreement terms
4) Completing final price negotiations as necessary with capital adjustments
5) Finalize proposed management incentive plan or earn-out structures / vendor financing
