"The Deal"
Constructing a Sale or Acquisition

 By Arthur C. Withrow II, Janas Associates.
Reprinted with permission from Compoundings, Vol. 52, No. 1, January 2002

The sale or acquisition of any company ("the Deal") has always been a complex process. Deals have become even more complex recently with the economic downturn. During the economic boom of the nineties, transactions tended to include a significant cash component. Now, earnouts, seller financing, and deferred payment of non-competition covenants are common deal components.

Company Valuation

Valuations are based on multiples, a term that refers to the factor by which Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), as recast, or Free Cash Flow (FCF) are multiplied to determine the Enterprise Value (Fair Market Value) of the company. FCF is determined by deducting Maintenance CapEx, the average annual capital investment required to maintain the current business level, by a factor which has tended to be in a five or six times range.

Acquirers

Acquirers must take a proactive role to identify and purchase other companies. Successful purchases by such acquirers most frequently occur when the acquirer hires an intermediary to undertake an active search. Most of the companies that are acquired from an industry candidate search were not actively for sale when they were initially contacted directly by a buyer's representative. They often become a sale candidate when approached by a "non-intimidating" professional intermediary.

Sellers

Maximizing the sale price of a company requires planning. The earlier an Exit Strategy is planned, the more opportunity to optimize the structure of the deal and maximize sale price. When an intermediary knows your industry intimately and prepares a detailed sale document, it is possible to orchestrate an auction, which tends to maximize value.

The selling of your company or acquiring of another are two of the most important activities in your business career. This being true - be prepared: learn about the subject and be sure of the logic of your plans.

Arthur C. Withrow II is Chief Executive Officer of Janas Associates. Janas Associates serves its clients in the areas of mergers and acquisitions, corporate finance, organizational consulting, and strategic planning. Their headquarters are located at 201 S. Lake Avenue, Suite 416, Pasadena, CA 91101-4804 and can be reached at 626-432-7000.