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Mergers and Acquisitions Explained: A Crash Course on M&A - YouTube
Channel: Brett Cenkus
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Hi everyone, today we're going to talk
about mergers and acquisitions. We're
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gonna do the 101, sort of the intro level
course in five or six or ten minutes,
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we'll see where it goes. So we're gonna
talk about what it is, why people do it,
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who are the players in the space. Mergers
and acquisitions 101 coming right up, but
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first a couple minutes about me. My name
is Brett Cenkus, I am a business
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attorney and I am the Startup Shepherd.
My law practice, which is most of what I
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do, I help clients with business matters
so my clients are all businesses, they're
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never consumers. I help with capital
raising, I help with contract drafting
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and negotiations, partner and founder
structuring and disputes, and mergers and
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acquisitions. So that's a good lead-in,
let's get into it.
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So M&A stands for merger and
acquisition and it's nothing more than
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companies buying and selling each other.
So company A wants to sell out; the
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owners of company A, they're tired of the
business they want to move on and sip
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cocktails on the beach forever, so they
go and find a buyer for the business.
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That's what falls under the umbrella of
M & A. There's different types of deal
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structures, so fundamentally all these
things I'll describe, well all three of the
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main ones are sales of businesses, but
you could sell the assets of the
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business, which is a whole list of
computers, desks, people, files and records
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and contracts like boom buyer buy it and
you transfer all that stuff to the buyer
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kind of individually. It's still
ultimately the whole operation; people
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hear assets sale and they think it's just a
piece of a business or something, it can
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be the whole thing but it's done via its
assets. Another type is a stock or equity
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sale and in that case, right, if you buy
my business computers and files and
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customers all that sort of stuff, if you
buy that and I don't transfer you the
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individual assets, you could buy the
equity interests, like the stock or LLC
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interests or whatever partnership
interests and then you just sort of step
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into my shoes if you will. You're not
transferred all the individual assets,
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you're just taking over ownership of
this entity that holds this container
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that holds all the assets and the third
major type is a merger and so mergers
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are the least common of
the structures, I would say; they show up
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a lot at the higher end of the market,
public companies merge for a couple main
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reasons that mergers are often driven by
complex tax considerations that show up
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in bigger deals or make sense to worry
about in bigger deals or the ease of
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combining two companies, it's kind of a
simple way to do it actually. Sounds
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complex and the drivers of a merger are
complex, but the paperwork itself like
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the actual process of merging what
happens is company one comes together
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with company two they come together and
one of them just disappears; it's this
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magical thing that happens by operation
of law, one's just left standing and
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there could be multiple
companies involved in things but it's
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pretty seamless and then all of a sudden
all the assets and stuff that were in
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this and the assets and stuff that were
in the other business are just together.
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Now, they don't show up a lot in the
lower parts of the market so a lot of my
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practice is in the mainstream part of
the market, which is sales of up to a
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couple million bucks and then the lower
middle market--the middle markets pretty
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broad range from a couple million up
into the hundreds of millions, but the
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lower middle market I would define as 2
million to 50 million--so I kind of play
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in that lower part of the space I've
done billion-dollar deals but when I was at
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a big law firm charging a whole lot of
money and have huge, huge deal teams.
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Today it's me and a couple others who are
contract attorneys who work for me; the
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deals I do would be more around a couple
million dollars, five million, ten million
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that kind of thing. So the mergers aren't
a big part of that. You see a lot more
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asset sales at the very low end of the
market Main Street and then stock sales
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starts to start to come in and again
it's not driven by the dollars at stake
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it's driven by other things; if you do
assets or stock or merge but it does
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tend to kind of group at different
points in the market. I have another
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video if you want to check out about
more about these types of deal
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structures for M&A, so asset sales and
stock sales and mergers and why you
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might use one or the other and pros and
cons and what sellers usually like, what
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buyers usually like. So that's sort of deal
structures and that's defining the
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market, you know Main Street or middle
market, middle market you know upper, upper,
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upper end,
which is a past life for me. And let's
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talk a little bit about you know so why
people do it. So sellers might want to
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take some chips off the table and they
could be sick, could be sick of the
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business, could just think it doesn't
look like a good business going forward.
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I mean fundamentally the way deals get
done is some seller is valuing
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continuing to be in this situation less
than the buyer who comes in and wants to
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buy it, right so sellers want to take
chips off the table. Maybe they feel like
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it's hard to compete at the size they
are--I've got a client who's doing that,
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we're going through a deal right now,
where he's just thinking you know it's
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this business is just gotten much, much
harder, it's really a world of haves and
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have-nots there's not much room for sort
of a little player and he's a relatively
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little player in that mix and he's
thinking I got to do a deal or there may
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not be a future for me in a couple years
that sort of thing is possible. On the
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buyer side, fundamentally to grow your
business you have to decide between
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buying something and growing organically
is the term, where instead of buying
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another business you just launch another
business or division or something like
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that but a buyer who wants to get into a
new market, where it's tough to break
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into that market or type of customer
maybe to get in with a certain type of
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customer when they haven't been able to
inroads with or you know break into a
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new space start a new product line
things of this nature might view it as
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easier just to buy their way in right.
Google, Facebook they're big acquirers;
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they buy their way into markets right.
Facebook bought whatsapp; why did they do
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that? There was no revenue I think at the
time and but they're looking to buy
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technology and the user base and just
get going quick and they're willing to
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pay something like a billion bucks for
that. So their reasons and they tend to
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be around speed of starting, complexity
of building something out, barriers to
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entry maybe it's hard to get in if the
network's already built, something like a
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Facebook look I don't care who you are
but you shouldn't probably be trying to
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compete with Facebook today, but if you
were Amazon or Apple or something you
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might be inclined to buy them, I mean
you can't buy facebook at this point
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they're so big, but the point being there
are reasons to want to buy rather than
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then build let's talk about the players
in M&A. In my part of the market I
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see business brokers and I see
investment bankers and they
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fundamentally do the same thing in the
world. The business brokers are what
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you'll see in the mainstream part of the
market and the bankers come in a little
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bit higher up. Fundamentally they do the
same thing;
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they're the ones who market the company.
So if you're looking to sell company I'm
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probably not your first phone call,
though I'm happy to talk to you and feel
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free to make it, probably want to figure
out who can help me find buyers and
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that's not what I do as a corporate
lawyer. Go to a business broker if you're
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selling a business worth about a million
dollars; they will decide whether or not
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they think they can get the business
sold and we'll put together a seller's
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memorandum, which might also be called
the confidential information memorandum
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or it's a book you know in a small
company of like a two hundred thousand
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dollar retail shop might be just a
two or three pager about the business.
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Sometimes they'll do something called
the teaser, which is just meant to show
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people who haven't really just a sort of
a surface level, without disclosing who
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the seller is, what the general
opportunity is. So there could be a
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teaser and then there's the book or the
offering materials and on a bigger deal,
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when the investment bankers do a book it
can be 60 pages of stuff, you know
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modeling out what's going on and taking
the financials and recasting them so the
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teaser, if you use it, would be the
something to take a look at decide
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whether or not you're interested and
then they'd get the potential buyer to
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sign a non-disclosure agreement to see
the rest of it. But they'll put together
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the brokers or the bankers that book,
then they'll help market the company
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they do a lot like business brokers are a
lot like real estate agents; they'll go
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out and they'll list the business for
sale on a lot of websites, BizBuySell.com
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is a big one. The investment
bankers don't really think of themselves
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as having listings and a lot of their
deals, because they're not bought by
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individuals the brokers are selling to
other individuals who have some money,
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came into some money and inheritance and
they want to buy themselves a job or buy
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into a business. The investment bankers
have larger deals, those deals don't sell
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the individuals they sell to other
companies. So the bankers spent more time
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curating a list of potential buyers,
contacting those potential buyers.
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Sometimes they'll run something called
an auction, which is a process where they
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get the potential buyers to come kind of
line up, take a look at everything, submit
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offers you know there's a process to it
but fundamentally they both are engaged
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to sell your business and they're both
gonna take sometimes some upfront money,
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almost always a good portion could be
six or seven or ten percent depends on
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the size of the deal, investment banking at the
higher levels will be lower, but they're
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gonna take a commission for getting the
deal done. Then there's corporate lawyers
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or business lawyers of which I am one.
Corporate lawyers don't litigate, they
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don't go to court usually, some can but
you know we do stuff with contracts and
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relationships in transactions and an M&A
deal is a transaction; there's parties
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coming together, a buyer and a seller. We
do the documentation to put together the
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purchase agreement. We can help with due
diligence, which is the process of
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kicking the tires, making sure that you
as a buyer are getting what you think
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you're buying. We give advice around that
to sellers, how to structure deals, risks,
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we talk a lot in these purchase
agreements about liabilities and risk
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and is it capped, you know there's things
called caps on what uh if the seller
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sells the business and misleads the
buyer, well the seller could be liable
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no matter what. But the seller could sell
the business and the next day something
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could go wrong and the seller had no
idea, the document we put together, the
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purchase agreement we'll talk about what
happens then, we spend a lot of time on
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that. How to assign the assets, things
like that. So that's my stuff, it really
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is around documentation so you almost
always see, in any sort of any
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transaction 10, 20, 50 million, I mean
it's possible they just meet each other
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and they just do a deal but almost
always will be corporate lawyers on each
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side negotiating the deal terms and
taking that deal from the you know, from
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the air and putting it on paper and to
make it clear to everyone later on. The
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lower end of the market you might see
business appraisers be involved. At the
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higher end of, you know to kind of figure
out value, now it's all negotiated so
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there doesn't have to be an appraisal. If
the buyer on a deal is
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getting financing a bank might order an
appraisal; bigger deals that's not,
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those don't get appraised like that. New
investors decide whether or not they're
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gonna fund a deal like that. Accountants
are involved sometimes, there's tax
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advisers and things like that and then
occasionally there's consultants around
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it for various reasons; there could
be integration consultants on a much
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bigger deal with lots of personnel, lots
of contracts, lots of IT systems, CRM
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systems, stuff like that that needs to be
integrated. You can have a lot around how
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do we integrate these companies and some
of that might be human resources, it
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might be kind of, you know soft stuff
about people and performance plans and
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some of it might be, you know hard like
things that are more like IT and the big
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four, I don't the big three now, whatever
the ever declining number of like big
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accounting, accountancies have have a
practice around M&A and some of it is
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sort of that investment banker kind of
thing actually. Some of the M&A practices
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do that consulting and marketing of the
company and others do integration is a
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big piece. So those are the big players
in M&A; business brokers, investment bankers
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they do the same thing, corporate lawyers,
accountants, tax advisers, general
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consultants who help with integration
and so forth. So it's a very sort of sexy
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space, that said you know gets kind of
routine sometimes, I mean it's fun it's
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interesting, it's fundamentally a
transaction that people are excited about, it's
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changing their life. So that's all great
but small and Main Street sort of deals
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are pretty kind of easy, straightforward
deals for the most part, but for for me I
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mean having done a lot of it but buyers
and sellers that's a big deal, they're
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changing you know their life so it is it's a lot of fun, even if it's not on the
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front page of The Wall Street Journal.
That's pretty much it, right? What does M&A mean?
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Who are the players? Why are
people doing it?
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I've got other videos to talk about M&A
so we'd love to hear from you, if you've
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never bought a company, if you're
thinking about buying a company, if you
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bought companies and you didn't use a
corporate lawyer and a guy called me
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who's doing a nine million dollar deal
and he's going to DIY it which is
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interesting, but I'm really curious like
if you run into the players and which
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ones you think add a lot of value and
which ones don't or hearing some of your
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war stories are always fun. So feel free
to drop me a line or put a comment
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in. Thanks for listening today.
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