Completing the Deal: An Inside Look at Mergers, Acquisitions and Raising Capital

By Matt Andersen

A must-read for all middle market company leaders

In Completing the Deal, investment banker, founder, and author Matt Andersen brings us a must-read for all middle market company leaders. The wisdom found in this book comes from decades of experience, accomplishments, and the lessons Matt has learned along the way, and it is built on foundational principles of capital raising and M&A transactions. In this valuable book, Mr. Andersen shares the wealth of knowledge he’s gleaned from operating with middle market businesses and their unique challenges and opportunities in the capital markets.

• Language: English
• Publisher: Greenleaf Book Group
• Release date: Jan 9, 2024
• ISBN: 9781632996923

Book preview

PREFACE

During my years as an investment banker and advisor, I have spent a lot of time working for companies that utilized capital to grow organically, acquire other businesses, and sometimes both. Capital raising, growth, acquisitions, and liquidity are some of the most challenging yet rewarding projects an entrepreneur can experience, and I have been fortunate to accompany many business leaders on these journeys.

After 24 years in the business, closing over $5 billion in securities, debt, and mergers and acquisitions (M&A), there have been many lessons. Some were learned the easy way; some not so much. I’ve been a part of more than 150 securities, debt, restructuring, and M&A transactions and observed more than twice that. Having witnessed so many of these transactions, it seems like one should be able to point to an exact process to follow—a formula that would always result in a successful result, whatever the desired outcome. If only.

In all of the mergers and acquisitions my firm and I have participated in, and as I’ve advised countless CEOs and boards, there are no guarantees of a successful outcome. There are no completely predictable outcomes, and there are complexities in every situation, with every scenario different and every outcome unique. There are also valuable variables with valued opinions—the people involved in growing, shaping, and evolving the company each with individual needs, interests, and goals.

At the beginning of many new client relationships, when the ink is still drying on our engagement terms and intros are still being made, we have a kickoff meeting to start our new client-advisor relationship. It’s then that I hear, What is the likelihood of success for this deal? In nine out of every ten meetings with new clients, we hear this question, in so many words. And I’ll tell you what we tell them.

My answer is, No deal is the same; each takes on a life of its own during the process. We can point to things we know work well, and things we know don’t. However, the variables in the process far outweigh the fixed elements.

Don’t get me wrong—it’s not a bad question. It’s one most people would probably ask as well. This book is meant to highlight options, strategies, and proven concepts that we’ve seen work to improve your odds of completing the right transaction.

The answer is always, No deal is the same. No business is exactly like another, no matter how many similarities. You’ll see this with even some of the most well-known coffee chains in the world. What might work 100 percent of the time on one side of the street may only work 50 percent of the time on the other, or even less—even with the same products, service, and process. You get the picture.

While there is no silver bullet or easy button for success, there are approaches and steps to get you 90 percent of the way there. After years of transactions, I started to see patterns and repetition and began to take note of what works and what does not work. At Westlake Securities, our Investment Banking firm in Texas, we utilize these experiences to formulate strategies to help clients think through some of the issues that come with growing, exiting, or buying a company—strategies that will be shared with you in these pages.

This book was written so readers like you can benefit from my experience and hopefully not have to learn the hard way. You’ll have to tailor my advice to your own circumstances, but what you’ll read in this book may save you many needless headaches and give you an advantage in the face of new opportunities and challenging situations.

This book is meant to be a practical companion to CEOs, entrepreneurs, and board members who want to see their companies through these various scenarios to prosper and achieve greater success. However, it is not meant to be a DIY book, but rather a helpful guide along the way of a professional transactional process. The real-life stories and day-to-day occurrences included in this book offer practical Main Street advice—advice for navigating various situations, for attracting Wall Street-caliber capital, and most importantly, making advantageous deals.

The goal of this book is to help better prepare you for big strategic questions, discussions, and decisions. Does your company stay the same? Does it grow exponentially? Should it bring on capital? Should you sell? Once you decide what to do, how do you effectively begin that process?

INTRODUCTION

Let’s start from the beginning and take a foundational look at business operations that succeed. To operate any company you need four things.

First, you need customers. Who is buying your product or service? In consumer markets, people will buy your product either because they need to, such as food and clothing, or because they want to, such as a wide-screen TV or a powerboat. If your customers are other businesses, they aren’t buying something because they want to, but because they have a problem for which you have the solution—new software, a piece of equipment, or an innovative strategy.

Second, you need a product or service to sell. Customers will buy it from you because it solves a problem. Your product must be of high quality and sold at a fair price.

Third, you need mechanisms with which to make your products and sell them. This is your business. It includes yourself, your employees, and your board members, as well as physical tools, such as your software, consumable product, factory, retail store, website, and supply chain.

Finally, after you’ve got customers, products or services to sell, and mechanisms with which to make your products and sell them, you need a platform for the exchange/transaction. As the purpose of every company is to be engaged in commerce (which in our modern era means the exchange of money), the ultimate goal is to earn, through sales of your product or service to your customers, more money than it costs to create and operate the company. If you keep earning more than you spend, your business is growing. Sounds simple and straightforward enough. Dream. Plan. Execute. Sell. Grow.

Now what?

This is where we typically enter the picture. Let’s say Company X has been developed by its founder and leader, Clyde, who’s done an incredible job of tripling the business in ten years. He’s organically grown the business tenfold, with little outside help, and is thinking, What now? What’s that next level of growth and how do we get there?

Clyde considers his options. Should he raise capital—acquire an infusion of capital from some external source? Should he merge with, acquire, or sell to another firm to create a bigger company? Having successfully grown the business for many years, and since it’s privately owned, Clyde will eventually need to start thinking about an exit plan. At what point or level of success might he want to sell the company? Clyde could sell, take the capital, retire to a desirable location, and focus on hobbies. Or he could reinvest capital into a new company and take it to the next level of growth before selling.

In 2002, when Elon Musk sold PayPal to eBay for $1.5 billion, he took the $180 million he received from the sale and invested it into SpaceX ($100 million), Tesla ($70 million), and SolarCity ($10 million). In early 2021, Tesla was worth $830 billion, and Elon Musk ranked number seven on the Forbes 400 list of the wealthiest people in the world. Not too bad—even if later events saw part of his fortune melt away.

Some exit strategies aren’t exits at all. In Japan, there’s been a strong tradition of family ownership for generations. The oldest family business in the world is a Japanese hot springs resort hotel, Nishiyama Onsen Keiunkan, in Hayakawa, Yamanashi Prefecture, Japan. Founded in 705 CE by Fujiwara Mahito, for over 1,300 years it has been continuously operated by 52 generations of the same family, including adopted heirs.

You probably don’t foresee your company staying in your family for 13 centuries—but it’s nice to know it’s possible.

Back to Clyde. He’s successfully grown the business and kept enough cash flow to cover the essentials—equipment, transportation, employees, etc. But as he looks to further grow, what if he wants to expand his product portfolio? Where is that capital coming from? What does the cash flow cycle look like? Given that the cash flow cycle often takes months—or years, in some cases—to get the targeted return on investment, there could be times when no cash flow is being generated from the company; instead, cash flow is being reinvested to produce services or products at higher levels. If the growth is significant and the cash flow cycle is too long or the growth plan hits a hiccup, the company can die of capital starvation.

Many founders want to exponentially expand their business to meet a significant projected increase in demand. Then it’s like starting all over again—they need to find capital, invest it, and then collect the return of their investment over a multiyear period.

Like everything else your company needs, if you need to get capital from the outside, it will come at a price. If you borrow money, you’ll need to pay it back with interest. If you accept an equity investment in your company, then the investor becomes a part owner and is entitled to a share of a portion of the company if, for example, it is sold or later recapitalized.

This book is about business financing—the types of capital, the cost and complexity of it, and how to prepare and manage an exit. It’s written for company owners and other stakeholders who aren’t experts in finance. You can hire experts to assist you, but you must be conversant in the language and business of finance. It’s part of the CEO job description to understand your company’s options, the benefits and drawbacks, and be able to recognize when the advice you’re getting is sound. After all, it’s your money, your company, and no one will care about it as much as you do.

HOW THIS BOOK IS ORGANIZED

We start with the basics and work our way through, step by step. The first chapter delves into the concept of capital and where you can find it, from banks to crowdsourcing services. We then discuss in chapter 2 how you can apply the cash you’ve sourced—the various types and uses of capital, such as senior debt, junior debt, and equity. Each strategy has its advantages and disadvantages, and when you consult with your financial advisors, you need to be up to speed on what they might recommend to you.

In chapter 3, we cover mergers and acquisitions and, not surprisingly, how to arrive at an accurate valuation. To give you a solid understanding of the potential benefits and pitfalls, we’ll unravel knotty subjects, including timing, terms and conditions, auctions, and how to select an investment bank. We’ll also discuss roll-up mergers and acquisition strategies.

In chapter 4, we talk about the deal—which leads up to the moment you sign on the dotted line. Here’s where the rubber meets the road,