RESOURCES

Team

Investment Banker

The first and most important selection for your acquisition team should be an investment banker. Your investment banker should help in assembling the rest of the team. Choose an investment banker who has been involved in dozens of acquisitions. It is not critical that the investment banker is associated with a large or well-known firm as much as it is important that he or she has the right background.

If possible, choose investment bankers who have invested capital in the equity of acquisitions. They should know how to underwrite and value a private company. You can also select investment bankers who have represented the buy-side of acquisitions, even though they have not invested capital in those transactions. Try not to select investment bankers who have only represented the sell-side of corporate mergers and acquisitions.

Review the background of these bankers carefully. Do not be shy, get down to the details of prospective bankers backgrounds. There are thousands of investment bankers who fit the criteria above. Do not settle for second best.

The following is a list of the areas in which your investment banker may need to have experience:

Building comprehensive financial models of the historical and future projections of companies in the context of a change of control transaction
Valuing private companies
Preparing bids in the form of letters of intent for the purchase of private companies
Negotiating the terms of purchase agreements on behalf of buyers of private companies
Preparing financing memorandums for raising capital for private companies going through a change of control transaction
Negotiating supply agreements between the sellers and buyers in change of control transactions
Negotiating the terms of financing with sources of senior debt, subordinated debt and equity
Negotiating shareholder agreements among the equity investors in a change of control transaction
Negotiating employment agreements for senior management of the target, if they are joining the combined company
Orchestrating the close of buyouts on behalf of buyers

Corporate Attorney

Selecting the right attorney and law firm is your second most important decision. Unlike the selection of an investment banker, it is important that the attorney you select is with a law firm that has the right set of capabilities.

You should select an attorney and law firm that are highly experienced in corporate transactions, preferably representing the buy side of acquisitions. The attorney should be a specialist in corporate transaction work. The law firm should have a substantial corporate transaction practice, benefits practice and environmental practice.

The following is a list of the areas in which your attorney and law firm may need to have experience:

Preparing bids in the form of letters of intent for the purchase of private companies
Negotiating the terms of purchase agreements on behalf of buyers of private companies
Negotiating supply agreements between the sellers and buyers in change of control transactions
Negotiating the terms of financing with sources of senior debt, subordinated debt and equity
Negotiating intercreditor agreements
Negotiating environmental indemnities
Negotiating shareholder agreements among the equity investors in a change of control transaction
Preparing incorporation documents for the company
Negotiating employment agreements for senior management
Orchestrating the close of buyouts on behalf of buyers

Accountant

It is important to select a reputable accounting firm that provides a wide array of services. This is because several individuals will be performing the financial due diligence. The more reputable the firm, the more weight their opinion will carry in the event of accounting disputes with the seller.

Choose an accounting firm with experience performing financial due diligence for acquisitions. The following is a list of the areas in which your accounting firm may need to have experience:

Reviewing the Target's audited financial statements and providing a "Quality of Earnings" report
Issuing reports focused on key deal issues
Advising on indemnities required in the LOI and adjustments to the Purchase Agreement
Creating partial-year sudits upon close of the transaction
Advising on a tax efficient deal structure
Analyzing employee benefits
Analyzing risk management (Insurance)
Assessing the Target's Information Technology systems (generally only larger accounting firms do this work)

Environmental Auditor

It is important to assess any environmental liabilities the target may have. When a corporation purchases the stock of another company, all of the target's liabilities transfer with the stock, including environmental liabilities. If the transaction is an asset purchase, an environmental audit becomes less of an issue, although it's still relevant.

Choose an environmental auditor with a solid reputation and whose opinion and analysis you can trust. The environmental auditor must perform an initial analysis and issue a report of his findings. If potential problems are discovered during this phase, by law another analysis must be completed.

Senior Lender

The easiest way to choose a senior lender is to distribute an information memorandum and financial model to lenders and request term sheets from them. Your investment banker will know lenders who will be interested in your type of deal and will handle the process of receiving and analyzing their term sheets.

Choose a senior lender based on the competitiveness of the terms that they are proposing. While it is important to have a relationship with your senior lender based on mutual understanding and respect, the differences between term sheets are easy to quantify. The key issues to analyze include:

Interest rate
Length of loan and maturity
Amortization schedule
Prepayment penalties
Financial covenants

Subordinated Lender

Subordinated lenders include a variety of institutions, including banks, mezzanine (another term for subordinated debt) funds, pensions, insurance companies and wealthy individuals. The process of raising subordinated funds is quite similar to raising senior loans. Potential lenders will require an information memorandum and financial model in order to do preliminary analysis and gauge their interest in the deal. They will want to meet the management team and perform the same sort of due diligence as other investors. Your investment banker should handle the process of contacting subordinated lenders and receiving and evaluating term sheets from them.

Key considerations include:

Interest rate
Warrant position (if any)
Length of loan and maturity
Amortization schedule
Prepayment penalties
Financial covenants

Equity Sponsor

The process for evaluating and choosing an equity provider is similar to choosing other sources of financing. Potential investors will require an information memorandum and financial model in order to do preliminary analysis and gauge their interest in the deal. They will want to meet the management team and perform their due diligence.

While the terms of the investment are very important, it is also important to consider the investor's ability to add value to the business. Because the investor will likely have representation on the Board of Directors, his knowledge of the industry's dynamics is very important. Also, the company may need a deep-pocketed financial partner for future growth, so you may need to evaluate the investor's appetite for tack-on investments.

You may also want to consider whether the investor has a specific timeline for exiting the investment. Equity sponsors are usually private partnerships which have raised a fund of capital from institutional investors such as insurance companies, universities, pensions, etc. Funds are often raised with a targeted five year lifetime and an internal rate of return of 30 percent or more. Because of the targeted lifetime, Sponsors often try to liquidate their investment in three to five years.