What exactly is an Offering Memorandum and What role does it play in M&A? 

What Is an Offering Memorandum?

An Offering Memorandum (“OM”) or Confidential Information Memorandum (“CIM”) is a document that informs interested parties about the details of an investment opportunity, like a private placement of securities or a sale of a company. The OM serves as a comprehensive disclosure document that outlines the pertinent information related to the investment. An Offering memorandum is essential for providing potential investors with the information they need to make informed investment decisions and for ensuring compliance with securities regulations. The content of an offering memorandum may vary depending on whether it is written to attract investors for a private placement or potential buyers for a company.

Potential buyers should find that the OM outlines all of the basic information about the seller’s company, especially the unique selling points. It usually includes items such as a company's financial statements, management biographies, a detailed description of the business operations, and more. It is drafted by an M&A advisory firm or investment banker on behalf of the business owners and used in a sell-side engagement to market a business to prospective buyers.

Purpose of the Offering Memorandum in M&A

The Offering Memorandum serves to provide prospective buyers with information regarding the company for sale, enabling them to evaluate the investment opportunity and determine whether they wish to pursue the acquisition. An M&A firm is responsible for finding and reaching out to potential buyers for a company that is up for sale. During the initial contact, the M&A firm only provides limited information about the company to avoid disseminating confidential information. If the buyer expresses interest in learning more about the company, the M&A advisor will share the OM only after the buyer signs an NDA (non-disclosure agreement).

The Offering Memorandum is the best way to share essential information about the company for sale with buyers. The OM is designed to tell a story about the business and the narrative must be carefully tailored to pique the interest of the audience. The OM should present the company to potential buyers accurately, professionally, and positively. The M&A advisor will create an OM that highlights the company's strengths and provides necessary information for potential buyers to evaluate the business. When reading the OM, investors should gain a clear understanding of the company's operations, offerings, and investment potential.

The Offering Memorandum is one of the crucial documents during M&A process that helps sellers showcase their attractive aspects and set the stage for maximizing their value during negotiations. It also plays an essential role in streamlining the sales process by organizing and gathering key information that the buyer may request during the due diligence process later. A well-crafted Offering Memorandum can effectively communicate the seller’s strengths and highlight its potential, ultimately increasing its chances of a successful sale.

The Offering Memorandum also presents a professional touch to the seller. Businesses that appear disorganized or unprofessional in their field of operation may struggle to secure investor commitment. The act of presenting a memorandum demonstrates a level of seriousness and professionalism within the business.

Content of the Offering Memorandum

A quality Offering Memorandum will give insight into the business and share basic information such as the company’s location, ownership, customers, employees, financials, etc. The content is important for potential investors as it provides valuable insights into the company and highlights opportunities for growth and increased profitability. Buyers rely on the content to make informed decisions about investing in a company and its potential for success.

The offering memorandum will contain detailed information about the company’s unique value proposition, informing buyers of how it could be a good investment. It will provide an in-depth analysis of the company’s history, performance, and financial projections. Additionally, the OM will describe the rationale behind the sale of the company so buyers can understand why the seller would want to exit. This document is extremely important as it allows sellers to generate interest in buyers, helping them understand the company's potential.

Offering Memorandums need to be highly detailed to share critical information with buyers, but they must not be weighed down with too many technological details. Buyers do not want to be bothered with reading a large document that is filled with unessential technical information. To keep the interest of potential buyers, the OM needs to be succinct and address their various concerns.

The following list are items usually included in an offering memorandum:

• Confidentiality Disclosure
• Financial Advisor Information
• Guidelines for Purchasers
• Executive Summary
• Rationale for Sale
• Investment Considerations
• Company Details and Operations
• Photos
• Market Analysis
• Organization Chart
• Employee Information
• Financial Statements and Analysis

Safeguarding Confidential Information

Ensuring confidentiality during M&A is crucial as news of a potential sale can be harmful to the business. Once the offering memorandum is completed and the M&A advisor has reviewed it with the seller it is ready to be shared with the M&A firm’s exclusive list of business buyers. Although buyers will execute a Non-Disclosure Agreement (“NDA”) to receive the offering memorandum, it is important not to give out confidential information that could be used by competitors. Highly confidential information should only be shared with the buyer during due diligence after an LOI is executed and should not be included in the Offering Memorandum. It is important to have potential buyers sign a Non-Disclosure Agreement before they receive the Offering Memorandum as it helps to protect the seller because the buyer is agreeing to keep the information, they receive about the company confidential. The Offering Memorandum should include a copyright notice and a note stating that the reader is subject to the terms and conditions of the NDA.

Balancing Positive and Negative Aspects

It is important to highlight the aspects of the company to interest buyers. However, it is just as important not to leave out negative aspects of the company because the information in the offering memorandum should be accurate and truthful. All information in the OM needs to be accurate and verifiable because it is unethical to knowingly make misrepresentations about the company to buyers. Furthermore, buyers will lose interest if they discover hidden problems further down the line. Being transparent and including both the good and the bad in the OM will demonstrate that the seller is trustworthy and communicates to the buyer that there will not be any surprises later on.

Engaging M&A Advisors

The Offering Memorandum should be prepared by a well-experienced M&A advisor. A professional and experienced M&A advisory team will have expertise in structuring deals, negotiating terms, and understanding market dynamics. They are skilled at crafting compelling Offering Memorandums that highlight the unique selling points of a business while also addressing potential buyer concerns in a balanced manner. By engaging an M&A advisor, the seller can ensure that the Offering Memorandum conveys all the information a buyer will need to make an appealing offer. Additionally, M&A advisors have an extensive network of potential buyers and can target the right buyers for the particular company. Their involvement ensures that the selling process is managed professionally and efficiently, leading to a better valuation and smoother transaction execution. Overall, M&A advisors are invaluable in navigating the complexities of selling a business, making their engagement a crucial element in achieving a successful sale.

Conclusion

The Offering Memorandum plays a pivotal role, serving as a linchpin that not only introduces the company for sale to potential buyers but also strategically positions it for optimal valuation and interest. This document, crafted with care by seasoned M&A advisors, transcends being merely informative; it is a narrative that encapsulates the essence, potential, and vision of the business, designed to resonate with and captivate potential investors.

Written by Xueying (Gil) He

03 April 2024

Versailles Group, Ltd.

Versailles Group is a 37-year-old boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987. 

More information on Versailles Group, Ltd. can be found at  www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President - Versailles Group, Ltd.

+617-449-3325

The Importance of Planning and Preparing to Exit 

Business owners need to plan and prepare for the inevitable exit, and they must start planning well in advance of their anticipated exit date. There are many motivations for business owners to exit including a desire to retire, health or financial issues, a strategic sale, or an interest in starting a new venture. Some entrepreneurs start their businesses with the intention to exit quickly and aim to make a high-growth venture easily sellable. For others, growing their company is a labor of love, and exiting is not top of mind. The procrastination of exit planning can cause complications for both the future of business owner and their company.

Planning for an exit early can ensure a smooth and lucrative exit. Positioning a company for a lucrative exit will take advanced planning from the business owner. They will need to adequately prepare themselves and their company in addition to utilizing a trusted M&A advisor to achieve a high valuation and execute the exit plan. This blog will discuss when to start planning for an exit, factors to consider in an exit plan, and how to prepare for the exit.

When should I start planning my exit?

It is crucial to start planning your exit strategy as early as possible. A business owner should start thinking about their exit as soon as they start their company because they can gradually plan for their exit as the company grows. While the exact timeline may vary depending on the type of business and personal circumstances, it is never too early to consider different exit options. Waiting too long to plan an exit can lead to unfavorable outcomes. It's important to start planning early to maximize the value of the company and ensure the business owner can have a smooth transition exiting the business.

There is not one ideal exit because every exit plan should be extremely personalized and tailored to the unique goals and aspirations of each business owner. Some business owners may envision passing their company down to family members or trusted employees, while others may opt for a planned dissolution or seek a buyer for their business. However, for those considering a sale of their company, meticulous exit planning becomes even more essential, especially if they have specific sale or value targets in mind.

One popular option for an exit plan is handing over the company to someone else, whether it be a family member or a key employee. Unfortunately, many owners make the mistake of assuming their children or designated successors will seamlessly step into their shoes without actively involving them in the exit planning process. This mistake can cause a multitude of problems including the owner being caught by surprise when their chosen successor declines to take over the business. Thus, business owners must engage their intended successors in the exit planning process from the outset. By including them in discussions and seeking their input, owners can gain valuable insights into their successors' desires, capabilities, and readiness to assume leadership roles. This proactive approach not only fosters alignment and transparency but also minimizes the risk of last-minute surprises or rushed decisions when it's time to pass the torch. Ultimately, communication and collaboration between current and future leadership are essential for ensuring a smooth and successful transition of ownership.

Selling a company either to an inside or outside buyer is a popular exit plan among business owners. These business owners should start envisioning what they want the sale of their company to look like and incorporate that vision into their exit plan. When selling a business, there are many ways to structure the transaction, and business owners need to consider what structure, or structures align best with their goals. An M&A advisor can guide business owners through various transaction structures and their nuances to help the business owner make an informed decision when approaching the sale of their company.

All business owners need to be aware that they will often have to stay at their company for a designated period of time to help with the transition post-transaction. Often, business owners overlook this transition period when planning for their exit. When building an exit plan and exit timeline, the business owner needs to not only consider the time it will take to launch the company and find a buyer but also the possibility of a transition period. Business owners should be prepared to be involved in the transition of leadership and should not be shocked when they are not able to immediately walk away post-transaction. Additionally, business owners need to think about the target valuation for their company when they exit.

Business owners who plan for the eventual sale of their business are more likely to achieve their desired valuation. By starting the exit planning process early, owners have the opportunity to strategically improve and expand their business in order to achieve the desired valuation. These improvements could include optimizing operations, diversifying revenue streams, strengthening market position, etc. With careful planning and execution, owners can effectively position their company to appeal to buyer interest ultimately reaching a higher valuation, thus increasing their chances of a successful and profitable sale.

Many business owners intend to depend on the money from the sale of their company for retirement. For these individuals, it's crucial to figure out how much money you need to support their desired retirement lifestyle. By setting a clear financial target, business owners can plan their exit strategy accordingly, whether it involves maximizing the sale price, structuring the deal for tax efficiency, or implementing wealth preservation strategies post-transaction. Planning for retirement alongside the exit strategy ensures that business owners are fully prepared to transition into the next phase of their lives with confidence and financial stability.

It is important to start planning an exit strategy as early as possible while building a company. Considering different exit options from the beginning allows business owners to gradually tailor their exit strategy as their business grows. The timeline for exit planning may vary depending on individual circumstances, but starting the process sooner rather than later is crucial to avoid unfavorable outcomes and ensure a smooth transition. To craft a successful exit plan, the business owner needs to personalize it according to their unique goals and aspirations. Whether a business owner plans to pass the company down to family members, sell to an outside buyer, or opt for a planned dissolution, meticulous planning is essential, especially if you aim for a sale with specific valuation targets in mind.

How to Prepare for an Exit?

As the business owner nears their desired exit date, meticulous preparation becomes imperative to ensure an efficient execution of their exit plan. An essential aspect of this preparation involves considering the individuals who may be affected by the exit, including employees, suppliers, customers, and family members. Recognizing the potential impact on these individuals, business owners should initiate internal conversations within their company to proactively address concerns and prepare for the transition.

Internally, fostering open dialogue and transparent communication is key to mitigating any uncertainties or apprehensions surrounding the impending exit. Employees may be concerned about job security or changes in company culture, while suppliers and customers may seek assurances about continuity of service or product delivery. Moreover, involving family members in discussions about the exit ensures alignment of expectations and facilitates a seamless transition of ownership or leadership.

These conversations will be different depending on what exit strategy the business owner has chosen. If the owner plans to sell their company, it is crucial to maintain discretion. Only individuals with a legitimate need to know, such as key employees who are directly involved in the transition process or trusted advisors, should be informed of their intention to sell the company. It is essential to limit the dissemination of this information to maintain confidentiality to prevent negatively affecting a possible transaction.

Maintaining confidentiality surrounding the sale is critical for ensuring a successful transaction and maximizing valuation. For example, if customers learn that the owner is planning to sell the company, they may become anxious about how it could affect them and decide to take their business somewhere else. This could lead to a significant decline in the company's revenues, making it difficult to find interested buyers and achieve a high valuation for the company. Ultimately, confidentiality is key as broadcasting the possible sale of the company to anyone could ruin the chances of completing a successful transaction.

Internally, transparency remains essential, albeit within a limited circle of trusted individuals who play a pivotal role in executing the exit strategy. This may include key management personnel tasked with facilitating the transition, legal and financial advisors providing strategic guidance, and succession candidates being groomed for leadership roles. By selectively sharing information with those directly involved in the exit process, business owners can uphold confidentiality while ensuring necessary preparations are made to facilitate a seamless transition.

As business owners prepare to sell their company, hiring an M&A advisor becomes essential for achieving a successful exit at a high valuation. Early discussions with M&A advisors are crucial to prepare for the exit adequately. These advisors bring specialized knowledge and experience, guiding owners through market trends, valuation methodologies, and deal structuring. They streamline the process by conducting due diligence, identifying risks, and preparing documentation. Initiating conversations early allows for goal alignment and strategic planning, ensuring a smooth and lucrative exit.

As part of the exit preparation process, one crucial step is to gather and prepare the financial statements for the company. Over the years, accounting practices may have become neglected, resulting in disorganized and messy financial records. The business owner must allocate time and resources to rectify any discrepancies and ensure accuracy. During this time the business owner should thoroughly review the company's financial records, including income statements, balance sheets, and cash flow statements. This may involve reconciling accounts and identifying and correcting errors. At this time, business owners should separate any personal expenses from company expenses. Removing personal expenses from the company’s financials is generally a good practice but it will also help make the company’s bottom line look better to buyers.

It's crucial to organize clear and concise financial statements, as they serve as important documentation during discussions with M&A advisors and potential buyers. A well-prepared set of financial statements will instill confidence about the company's financial health in buyers and help to facilitate transparency, which can expedite the due diligence process.

Additionally, business owners should assess the organizational structure and operational processes to identify any areas that may require adjustment or reinforcement in anticipation of the exit. This could involve delegating responsibilities, documenting critical procedures, or implementing succession plans to ensure business continuity post-exit. By proactively addressing the impact of the exit on various stakeholders and operations, business owners can mitigate potential disruptions and pave the way for a successful transition.

As business owners approach their planned exit timeline, it is essential to prepare meticulously to ensure a smooth execution of their exit strategy. This involves taking into account the concerns of stakeholders such as employees, suppliers, customers, and family members through internal dialogues within the company, which should address any concerns transparently. To maintain discretion and optimize valuation while planning to sell the company, confidentiality is crucial, requiring limited disclosure. Open communication among key personnel, advisors, and succession candidates ensures confidentiality while preparing for a seamless transition. At the same time, organizing financial statements, reviewing records, and separating personal expenses from company finances enhances accuracy and attractiveness to potential buyers, expediting due diligence. Assessing the organizational structure and processes is also crucial in identifying areas needing adjustment for post-exit continuity. This ensures a successful transition with minimal disruptions.

The Role of the M&A Advisor

Business owners should not hesitate to contact an M&A advisor as they work towards planning and preparing for an exit. Working with an M&A advisor early in the exit planning process is beneficial because the business owner can rely on the advisor for guidance during any stage of their exit planning journey. An M&A professional possesses the expertise and insights that will ensure business owners are properly prepared to exit their company. M&A advisors offer a fresh perspective about the viability of different exit options, as well as provide new ideas and innovative strategies. Business owners can leverage an M&A advisor’s objective viewpoint to formulate and execute an exit strategy with clarity and confidence. Whether a business owner is in the early stages of contemplating an exit strategy or well into the process of preparing and executing their plan, an M&A advisor can provide valuable assistance that significantly enhances their chances of achieving their desired outcome.

M&A advisors support business owners throughout the entire exit journey. Business owners should view their M&A advisor as a partner that will help them overcome obstacles, maximize efficiency, and achieve a high valuation by handling the complexities of a transaction. Engaging with an M&A advisor is a strategic investment in the success of the exit process, as they act as advocates for their clients, working tirelessly to ensure their interests are safeguarded and their objectives are met.

Final Thoughts

Planning and preparation are crucial for a successful exit that secures the future of the company that the business owner worked hard to build. Initiating the exit planning process early is important, allowing business owners to tailor their strategies to align with their unique goals and circumstances, ensuring a smooth transition. Thorough preparation, including organizing financial statements, reviewing records, and assessing operational processes, enhances the company's attractiveness to potential buyers and expedites due diligence. Whether a business owner is in the early stages of contemplating an exit strategy or well into the process of preparing and executing their plan, an M&A advisor can provide valuable assistance that significantly enhances their chances of achieving their desired outcome. By prioritizing early planning, transparent communication, confidentiality, and thorough preparation, business owners can navigate their exit with confidence, paving the way for a successful transition and the realization of their desired outcomes.

Written by Brigitte Grava

21 March 2024

Versailles Group, Ltd.

Versailles Group is a 37-year-old boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987. 

More information on Versailles Group, Ltd. can be found at  www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President - Versailles Group, Ltd.

+617-449-3325

What exactly is an LOI and how does it play a crucial role in M&A transactions?

Definition 

A letter of intent (“LOI”) is a written expression, usually from buyers, that documents the buyer’s proposed price and terms including transaction structure, timeline, due diligence, confidentiality, exclusivity, etc. In many cases, the LOI is the first document negotiated between the buyer and seller.

Common Misconceptions

The LOI is the most misunderstood document by first-time sellers. Many think that it is a contract between the buyer and the seller. The LOI is a document that signifies acceptance and interest, similar to nodding your head. In other words, the LOI documents the intentions of the buyer and seller to complete a transaction. Sellers should be aware that there might be tricks hidden within the LOI like misleading language and concealed contingencies that require the expertise of both an M&A advisor and an attorney to identify and provide guidance on. 

Binding vs. Non-Binding Nature

Typically, this document is non-binding and most LOIs clearly state that it is non-binding. Rarely, an LOI will contain a provision stating it's binding; however, it might be difficult to enforce a binding LOI as the nature of this document is non-binding. While the LOI is non-binding, all LOIs contain certain provisions that are binding, e.g., confidentiality, exclusivity, expenses, jurisdiction, etc. These binding provisions must be followed and, if not could result in the deterioration of the transaction and possible legal action if they are not. 

When a buyer is interested in purchasing a business, a typical first step is for a buyer to make an offer for the business via an LOI. Upon receipt of an LOI, a seller will consult their M&A advisor, attorney, and possibly other professionals to develop a response strategy. Most of the time, the seller will respond, via their M&A advisor, with a counteroffer which leads to the negotiation of the LOI’s terms by the buyer and seller. After negotiations are concluded and both parties settle on agreed terms, the next step is for the seller and buyer to execute the LOI. 

The signed LOI documents the buyer’s proposed purchase price and terms including transaction structure, timeline, due diligence, confidentiality, exclusivity, etc. Sometimes, the LOI is also called a Memorandum of Understanding (“MOU”), Indication of Interest (“IOI”), or a Term Sheet. Once the LOI is signed, due diligence begins, during which the buyer confirms the condition of the business. Before signing the LOI, the seller should confirm the buyer’s ability to complete the deal. This would involve the seller ensuring the buyer has the funds or capability to raise the funds to complete the purchase. 

One of the challenges that the LOI presents for a seller is the buyer’s valuation of the business.  Some buyers include an outsize valuation to entice the seller to accept. Once the buyer “locks up” the deal and the transaction progresses, they then will lean on complicated language in the LOI or use excuses like unreasonable working capital provisions to negotiate the valuation down. In other cases, the buyer will mention unsaid assumptions about performance expectations, etc. to lower the valuation. The price agreed upon in the LOI will almost always be negotiated throughout the entire duration of the transaction, so the seller needs to be aware of the buyer's incentives and tactics to drive the valuation down. Most importantly, the seller should rely on their trusted M&A advisor to help them achieve the purchase price they deserve for their business. 

Business owners who sell their business without an M&A advisor almost always regret it and end up unsatisfied with the sale. When reviewing an LOI, sellers should always ask their M&A advisors about a buyer’s reputation and ability to complete the transaction. An experienced M&A advisor has the knowledge and tools to be able to evaluate if the buyer is capable of completing the transaction at the agreed-upon value and if they will be fair in the negotiations. 

The seller should always ask buyers directly about how they arrived at their valuation, which is often some multiple of revenue or EBITDA. When a buyer provides little information about the valuation, it may be inferred that the buyer is inexperienced, uncertain, or hesitant about the transaction. Alternatively, the buyer’s behavior could indicate that they are attempting to think of ways to reduce the valuation.

Although LOIs set expectations for buyers and sellers regarding the final terms, it is important to note that LOIs are non-binding as the terms of the transaction may change during the due diligence phase. The terms can change as the buyer discovers new facts about the selling company. Therefore, LOIs are not to be confused with a definitive purchase agreement which is binding between the two parties. The purchase agreement is negotiated and signed after the buyer completes due diligence and both buyer and seller have agreed on all of the terms and conditions related to the transaction.

Although an LOI contains terms that are still negotiable, any changes made to the agreed-upon terms will need to be justified. During the diligence process, the buyer will start to double and triple-check all the seller’s details. As the terms have some flexibility, the two sides can begin negotiations on any sticking points and figure out how to keep the transaction moving towards a closing. It is one of the M&A advisor’s responsibilities to facilitate the buyer’s diligence. This includes reassuring the buyer if some items do not meet the buyer’s expectations and being prepared to negotiate proposed changes to the original LOI terms. 

At Versailles Group, it has been our experience that many sellers view LOIs as binding contracts although they are not.  To reiterate, LOIs are not contracts or binding contracts thus, if a transaction is going to be completed, both sides need to be conscious of the need for fair and reasonable negotiations throughout the duration of a transaction. 

While most of the terms in an LOI are non-binding, this important document may also contain some legally binding provisions, such as exclusivity, confidentiality, etc. It is worth noting that the terms of the LOI are subject to any confidentiality agreement previously entered into by the parties. If there is no prior agreement on confidentiality, the LOI may include confidentiality provisions such that any information shared between the parties will be held in confidence and not disclosed. In other cases, the LOI will contain stricter confidentiality provisions to protect the seller while disclosing much more data during the due diligence phase.

Exclusivity is one of the common binding terms in an LOI and is always demanded by buyers. The exclusivity provision prevents the seller from negotiating or seeking offers from other potential buyers during a specified period. This provision protects the buyer from losing the acquisition to another buyer during the due diligence phase. The buyer wants to have the protection that exclusivity grants as they will need to invest a significant amount of time and money into the diligence phase. The exclusivity period is a crucial term and often determines the timeline for the due diligence process and negotiation of agreements. However, the parties can agree to extend the exclusivity period if needed. M&A advisors know when and how to extend the exclusivity provision. 

Signing the LOI with an exclusivity period takes the company off the market, which means the seller should be sure to do due diligence on the buyer’s financial ability before signing. The deal will not close if the buyer cannot pay the purchase price. Thus, it can sometimes be advantageous to accept a lower price from a financially capable buyer as opposed to a higher price from a potentially financially unstable buyer. An M&A advisor will provide guidance and expertise in evaluating the risks and benefits of different buyers’ reputations, transaction timelines, and purchase prices. Thus, allowing the seller can be confident in their decision to engage with a specific buyer. 

For buyers and sellers, the initial presentation of an LOI and subsequent negotiations is akin to a “dance” between the two parties. This dance is a give-and-take between the buyer and seller and can be challenging due to the length of the exclusivity period. For buyers, the challenge is handling sellers who might play hard to get by offering a very brief exclusivity period because they have other suitors lined up. The buyer will contemplate if it is worth rushing through the due diligence phase and spending hundreds of thousands of dollars to avoid losing the potential acquisition.  

On the other hand, a buyer who casually issues an LOI but then asks for a lengthy 120-day or longer exclusivity period could scare sellers away. Sellers must be aware that a lengthy due diligence period means the company is off the market for a long time. This can be problematic for the seller because if the buyer withdraws after a lengthy due diligence phase, they may need to “relaunch” the company for sale as other potential buyers may have already moved on. Simultaneously, sellers are not keen on exceedingly long due diligence processes as they do not have a clear commitment from the buyer as the LOI is not binding. In these circumstances, an experienced M&A advisor will be able to navigate these complex challenges to mitigate risk and achieve an optimal outcome.

The exclusivity provision plays a significant role in understanding the LOI paradox. Both parties are expected to have trust in each other, guided solely by the brief outlines of the agreement presented in the LOI. Trust between the parties can be difficult to establish at first and will develop over time. The shared experiences of working through the due diligence period and continued negotiation of the terms of the LOI emphasize the delicate balance required as both parties navigate toward a closing. 

After negotiating the terms of the LOI with the assistance of an M&A advisor, it is critical to thoroughly review the LOI with an attorney before signing. The seller should also get advice from their CPA as to the financial structure to mitigate the tax impact. After the execution of the LOI, the sellers need to continue to seek advice and rely on their M&A advisor throughout the whole process. Most importantly, sellers should be careful not to focus only on the proposed sales price as many factors affect how good or bad the deal is for the seller.

Written by Xueying (Gil) He

13 March 2024

Versailles Group, Ltd.

Versailles Group is a 37-year-old boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987. 

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President - Versailles Group, Ltd.

+617-449-3325

There are five different types of mergers and the purpose of this blog is to describe these in more detail.  This writing is not meant to be a comprehensive description of each, but rather an introduction.

A merger is an agreement that unites two existing companies into one new company.  Generally, mergers are done to expand a company's reach, expand into new market segments, or to gain market share. Most of the time, mergers and acquisitions are done for either offensive or defensive reasons.

The Five Basic Types of Mergers

A famous example of a horizontal merger was the merger between HP (Hewlett-Packard) and Compaq in 2011.  The successful merger created a global technology leader valued at over US$87 billion.

Example:  Walt Disney acquired Pixar Animation Studios for US$7.4 billion in 2006.  Pixar was an innovative animation studio and had talented people.  Walt Disney was a mass media and entertainment company.  By combining forces, they created a very powerful company in their industry.

A good example was RBC Centura’s merger with Eagle Bancshares Inc. in 2002.  This market-extension merger helped RBC with its growing operations in the North American market.

An example of a product-extension merger would be the merger between Mobilink Telecom Inc. and Broadcom.  The two companies both operate in the electronics industry and the resulting merger allowed the companies to combine technologies and extend their market reach.

5.  Conglomerate Merger: A merger between companies in unrelated business activities, e.g., a clothing company buying a software company. In other words, two totally different businesses.  These types of mergers are also further defined as:

• Pure Conglomerate: In this case, the two companies have nothing in common. An excellent example of a Pure Conglomerate merger was the creation of W.R. Grace a specialty chemicals and industrial business that went on to buy over 150 different businesses, including retail outlets (Herman's Sporting Goods, Channel, Handy Dan, Angels, Diana, Sheplers), food chains (Del Taco, Coco's, Moonraker, Plankhouse, Houlihan's Old Place), coal, oil and natural gas (Booker Drilling, TRG, Homco & A-1 Bit & Tool, Davison cracking catalysts), construction (Zonolite insulation), graphic arts (Letterflex printing systems), chemicals (Dartak emulsion polymers, Evans sulfur compounds), agriculture (phosphate and nitrogen-based fertilizers), and hospital products (Vestal disinfectants).
  
  
• Mixed conglomerate: Mixed conglomerate mergers are ones where the two companies that are merging with each other have the goal of gaining access to a wider market and client base or expanding the range of products and services that are being provided by the respective companies. A possible example of this might be a merger of Bank of America and Starbucks, which would broaden both companies’ customer bases and product ranges.  To some extent, Capital One is already pursuing this strategy via its cafes.

Listed below is a table that summarizes the different types of mergers.

Written by He (Henry) Wang

2 April 2020

Versailles Group, Ltd.

Versailles Group is a 37-year-old boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987. 

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President - Versailles Group, Ltd.

+617-449-3325

Market Price - When To Accept An Offer

Versus When To Walk Away

Sellers always want to know whether they are being offered a fair value for their company, or if they should just walk away from a potential sale.  Typically, one considers general valuation ranges for a business based on multiples of the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization).  The multiple will be specific to the type of business being sold and its growth projections.  While these multiples may be helpful at first, the true market price of the company is discovered once the bids from perspective buyers are compiled.  Clients are often surprised by how close in value the offers are, but it’s because that value range is the market price.  Selling a business is a simple example of supply and demand; the buyer’s bids find the equilibrium.

When should I accept a bid? 

Accept a bid that comes in at market price as defined by the offers that are received.  One trap that sellers fall into is that after the bids are compiled, they decide their business is worth more.  While it is always preferable to receive a higher value, sellers must be realistic and honest with themselves about price.  When selling anything, there’s always a maximum value that can be obtained.  There is no such thing as a dumb buyer that will pay an outlandish amount.

The next key mistake is when the seller decides to hold onto their business, believing that all the potential buyers are wrong about the company’s value.  These individuals convince themselves they can keep growing the business and sell it for more in one to three years.  Anything can happen in a year or two, and in this scenario M&A is very much like gambling—it’s better to just quit while you’re ahead.  Most companies are not going to have high growth rates forever, and eventually the financial projections will not look as promising.  Selling a business now while it’s stable is more realistic than expecting a higher value in a few years when the circumstances, including the economy may be very different.  And, if there are any “hiccups” with the business, e.g., the loss of a large customer, the business may not even be saleable.  The risk of holding is enormous; especially when one considers that most company owners have a majority of their net worth in the business.

All in all, if most of the bids are around the same number, it is advisable to accept an offer and move on.  Business owners must understand that there is a good chance these bids are the highest value they may ever see for their company.  Blockbuster Video and the music CD business are excellent examples of why business owners should act sooner rather than later.

When should I walk away?  

Sellers who are not using an M&A advisor should generally be more cautious when accepting a bid.  True market value can only be determined by receiving a number of offers or at least testing the market on a worldwide basis.  Individuals attempting to do a deal on their own may not be entirely happy with the offers they have received, which may be the result of only having reached out to a limited number of buyers.  It’s unlikely that a small pool of prospective buyers would reflect the true market price for a business.  If you feel uneasy about the bids and have not had a professional explore all possible options on your behalf, you should strongly consider whether the offer is worth taking.  When selling a company, the seller should be confident that he or she has been in touch with every possible buyer and that to the extent possible, an auction has been established.  Anything short of that might portray an offer that is below market value.

Versailles Group, Ltd.

Versailles Group is a 30-year-old boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987. 

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President - Versailles Group, Ltd.

+617-449-3325

4 December 2016 

Value and the sale of your business

When considering the sale of a business, it is very easy for a business owner to be uncertain or even pessimistic about its value.  This is definitely a mistake, particularly because it can cause a potential seller to miss out on possible opportunities.

It may be ironic that I founded an M&A boutique firm to help people sell businesses; however, my own father, when I was young, who owned a small chain of variety stores, decided to close the business rather than sell it.  He sincerely believed that no buyers would be interested.  Mind you, he didn’t test that theory; however, he thought he was right.

A business owner should never assume that his or her business is too small to be of interest to a large company.  It is important to remember that there is a difference between the financial value as portrayed by the financial statements and the market value.  The market value includes more than just how much the company is worth monetarily.  It includes the value of intangible assets for example, the customer base, distribution network, location, having a unique service or product, long term and loyal customers, name recognition, etc. These factors go way beyond the balance sheet and income statement.  These and other factors always contribute to a company’s value but are not always easily quantifiable.

Additionally, just because a company has modest financial results does not mean it will not sell.  Buyers will look at the future of the company and make an assessment of its potential.  This is especially true when the economy is in a down cycle.  It is also important for the seller to accurately analyze the business’ true financial position, marketability, and potential.  A good M&A advisor will know how to do this quickly and accurately.

For a company with modest financial results, it is important not to oversell the company as buyers may pull out if they feel the current financial results are unsustainable or the revenue and profit projections are unrealistic.  When pursuing the sale of a company, one must strike a balance between underselling the company and overselling it and scaring off or losing potential buyers during the sales process.  Once again, a good M&A advisor can help strike the necessary balance.  The advisor can also provide value-added by finding the “right” buyer who will understand the value and potential of the company for sale.

Versailles Group is a 30-year-old boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987. 

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President - Versailles Group, Ltd.

+617-449-3325

M&A - An Effective Tool To Enhance Growth

Mergers and acquisitions are an effective and efficient substitute for R&D for companies that need help combating shrinking market share or stagnant growth. In some cases, companies are confronted with fierce competition from startups and utilize M&A as a way to “outsource” R&D and leave the risk of innovation to startups that tend to excel at R&D. Many of these companies are skipping R&D almost entirely by acquiring other companies. This trend is true in almost all industries and many of the transactions are cross-border.

The chart below depicts the top three sectors for cross-border M&A.

In recent months, Samsung has been actively involved in M&A deal making as a way to instantly build up its capabilities in emerging technologies such as mobile payments, cloud-based services, and artificial intelligence.

Samsung’s planned purchase of U.S. autoparts supplier Harman International Industries Inc. for US$8 billion in an all-cash deal that instantly makes Samsung a major player in the world of automotive technology. It’s an excellent example of a company that is using M&A to expand. This deal will be South Korean smartphone maker’s biggest acquisition in history.

M&A in general and cross-border M&A in particular, is a well-proven way to enhance shareholder value, either by acquisitions or divestitures. While most of the press is focused on the large transactions, middle-market companies can also utilize this “tool” to make defensive or offensive acquisitions or divest businesses that no longer fit the company’s strategy.

The chart below demonstrates the growth of cross-border M&A deals from Q2 2016 to Q3 2016.

Versailles Group is a 30-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures.  Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million.  Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987.  

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President

+617-449-3325

November 25, 2016

The importance of M&A As a Tool to Adapt to Changing Business Environments

To succeed in the current business environment companies will need to develop a keen sense of agility to grapple with the slow and uncertain economy, political risks, the threat from new entrants with more creative and efficient business models, etc.  It is widely recognized by CEOs that to respond to today’s marketplace organic growth is far from enough because most transformational technologies are outside the core competency of the average organization.  According to KPMG, CEOs are pursuing a range of activities in search of growth, which are listed below.  For each activity, the percentage indicates what percentage of CEOs will think about that particular action.

M&A, including minority investments, is expected to play a major role as companies search for new and valuable business solutions. Companies that are able to be proactive in terms of technological and business model disruptions will greatly enhance their chances of success, profitability, and longevity.  With regard to the US presidential election, and as Warren Buffet said, the market will move forward with either candidate who happens to get elected as President.  The country will survive and business will survive.  Succinctly, M&A will go on regardless of political uncertainty.

Versailles Group is a 30-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures.  Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million.  Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.  

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President

+617-449-3325

October 4, 2016

Global M&A: Mexico

Regarding Global M&A, Latin America has moved into the spot light for investors.  Both private equity firms and strategic buyers are realizing the potential this location holds, and as of late, Mexico has been of great interest.  Over the past few years the Mexican government has made a big push to increase investment in its country.  Mexico has specifically targeted foreign investors by working hard to address corruption, labor, and tax issues.  Additionally, laws have changed to allow Mexico’s pension funds to invest up to ten percent of their assets in private equity, which will promote economic growth.

Despite new investment, as a whole, Latin America is still struggling.  Brazil is currently in a recession, and Columbia’s GDP growth rates are low.  While these economic problems are of great concern to locals, it allows foreign investors to capitalize on both the exchange rates and discounted assets and companies.  These investors see an opportunity to buy low and sell high.  The World Bank recently announced that by 2030, fifty percent of the population in Latin America will be middle class.  This fact alone has provided investors with confidence that the economies will continue to grow and bounce back in the coming years.

Mexico is popular due to its strategic location.  Not only do the time zones correspond with the United States, but its location is unbeatable.  For firms that are looking to expand supply chains abroad, Mexico is a perfect fit.  As compared to China, producing in Mexico greatly shortens the supply chain, and is generally less expensive.  Coincidentally, China is currently experiencing an overall decline in local manufacturing.  Businesses selling to consumers in the United States are looking to keep supply chains as short as possible, and Mexico is becoming the cheapest and easiest way to do it.

Strategic buyers are not the only group interested in Mexico; private equity firms are moving in too.  The volatility in the region is attractive, especially for investors who have a longer time horizon.  Experienced investors are making purchases not bothering to worry about short term problems, but rather focusing on the long term gain.  Mexico has now surpassed Brazil as the most popular destination for private equity investment in Latin America.

All in all, over the last 10 years the focus of M&A in Latin America has changed significantly.  Argentina was previously a hot spot for deals; however, Brazil then started to gain popularity and most of the investment activity.  Brazil is still very exciting for foreign investors as they are able to buy companies at deep discounts, but now investors are also exploring Mexico.  Another country that currently presents unique investment opportunities is Chile, which may provide more stability than other Latin American countries.

Versailles Group is a 29-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures.  Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million.  Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.  

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President

+617-449-3325

August 9, 2016

M&A Deals - Failed Acquisitions

Why Do Some M&A Deals Result in Failure?

After the closing of an M&A deal, it is up to the buyer to ensure the success of the transaction. However, it’s only fair to say that not all of the work comes post-closing! In fact, the most successful buyers expend a lot of time and effort before the closing.

There are several reasons why acquisitions fail, but this generally occurs for two primary reasons. The first is that the buyer was overly optimistic about the potential synergies of a transaction. Thorough due diligence and analysis, before closing, is imperative to avoid these types of failures. Second, and this happens more than we’d like to see, the buyer is not able to competently manage the newly acquired business or underestimates the amount of time the transition will take.

When the buyer is overly optimistic about possible synergies with the target company and possible economies of scale, it can lead to a failure. Similarly, if the newly acquired company’s products or services do not grow as anticipated, there’s a chance for failure. Furthermore, if the buyer has underestimated the strength of the market competition, the amount of capital needed to grow the business, or other associated costs related to the transition of ownership or overestimated potential cost savings, it will be very difficult to ensure the success of the newly acquired company.

If the buyer is unable to properly manage the business it will almost certainly lead to a failed acquisition. The management team needs to have a strong understanding of the business being acquired. Furthermore, the acquiring company needs to make sure that it retains key management and other employees to ensure the operations run as planned. If the corporate cultures of the acquiring and acquired companies are vastly different, it can lead to poor chemistry between the employees of the two companies, which can cause tension in the workplace. This tension deteriorates the team effort and can cause financial losses.

In order to complete a successful acquisition, thorough due diligence is an absolute must. Such diligence must include a complete assessment of the buyer’s own strengths and weaknesses and a detailed analysis of the expected financial results. While there are too many conflicts of interest to have your investment banker complete the due diligence, the bankers are certainly well equipped, or should be equipped to help guide the process. A well experienced investment banker certainly knows about the potential pitfalls related to doing an acquisition and can help the buyer avoid them. When the proper diligence and analysis is done, the result is a successful acquisition.
M&A deals can be exhilarating for both the buyer and the seller, if done properly.