Blueprint for acquisitions

October 1, 2004 By    

Have you ever considered what it takes to buy or sell a business? For most companies, an acquisition or sale can seem like the people involved are on a secret mission. Everything is classified and confidential, and only a select few are in the loop.

 Tamera Kovacs
Tamera Kovacs

But the merger and acquisition process is more like the creation of a skyscraper than an episode of Mission Impossible.

The process of buying or selling a business resembles an architect’s work — balanced between the analytical and the artistic. The process requires the precision of a drafting board and blueprints and the protection of hard hats.

Of course, most acquisition proceedings require a great deal of confidentiality.

In most cases, sellers don’t want employees, competitors and, most of all, customers to know they might be selling the company. And buyers don’t want anyone to learn about the acquisition because they don’t want to risk losing acquired employees, or alert their customers or competition.

Like sharks, if the competition smells a sign of change, it might attack and attempt to steal the customers you are trying to buy or sell. Your employees and customers might fear the ship is unsafe and seek a more stable environment.

Once a confidentiality agreement has been signed, the buyer will gather a significant amount of information from the seller. This will include, but may not be limited to, three years of profit and loss statements, asset listings, employees and their salaries, benefit information, customer information, operational information, supply procurement information, market information and who knows what else. YIKES!

Now do you appreciate the magnitude of that confidentiality agreement? After the buyer has reviewed and analyzed the information (usually called a business valuation), they will run financial models and determine what they can or are willing to pay for the business.

Buyers typically base their purchase price on a multiple applied to the earnings before interest, tax, depreciation and amortization (EBITDA). Obtaining the EBITDA is the analytical piece, while the multiple is definitely the art. Key drivers to increase the multiple include a growth area, high gross margins, a high percentage of company-owned tanks, high-quality gallons, good employees, good systems, good operational standards, etc. In some cases, companies are purchased based on their asset value.

Once a letter of intent has been signed, the fun begins. The letter of intent includes the purchase price, the deal structure and the parameters of the purchase and sales agreement. Nothing from this point will be linear. Attorneys, accountants, operations people, safety guys and others get involved.

The time-consuming part of the process happens when the attorneys negotiate the intricacies of the purchase and sales agreement. Typically the buyer will draft the agreement and the seller revises it. It is important to have a balanced agreement.

At the same time, the buyer will schedule due diligence — the verification process of all the information presented to date. The buyer wants to ensure that what he’s seen on paper is real. It’s just good business.

CPAs, environmental agencies, attorneys and operations personnel, for starters, will examine the details of the business valuation. YIKES again! The size of the business and the state of the information will dictate the time required for due diligence — in most cases, two to five days.

Once due diligence is finished and the purchase and sales document agreed upon, the parties schedule a date for closing. Closing is one of the most tenuous parts of the process. No one knows how the seller will react, including the seller, who might experience sellers’ remorse. It’s a life-changing event.

The closing should be a smooth event. All the documents are agreed to in advance, so all that’s required is signing the closing documents, transferring the money and popping the cork.

Get help from your CPA, attorney and other advisers who will represent you solely. Don’t pinch pennies on such an important business transaction. It will likely save you more than you spent.

Tamera Kovacs is a consultant and a member of Propane Resources’ acquisition and retail team. Kovacs can be reached at 913-262-0196 or

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