For those of us in the merger and acquisition or “deal” business, buying and selling companies is second nature. We live through transaction after transaction, buying and selling companies as routinely as middle market businesses provide their own products or services.
But, in most cases, the people involved in the middle market companies we buy and sell go through the merger and acquisition process only one time. Most entrepreneurs and business owners don’t know what to expect from a sale of their company. Consequently, many times, out of ignorance, middle market business owners do themselves a grand disservice by failing to plan well for the biggest deal of their lives.
Merger and acquisition deals can take a variety of forms depending on the goals and needs of the buyer and the seller and the amount of the target company that is acquired by a buyer.
There are three general types of transactions: (a) the acquirer buys all of the target company, (b) the acquirer buys a majority, but not all of the target company, and (c) the acquirer buys a minority of the target company.
The most well known of these is the first, where the acquirer buys the entire target. This is the sort of transaction that is frequently read about on the front page of the Wall Street Journal (e.g., Facebook buys WhatsApp, Comcast buys Time Warner Cable, or Exxon buys Mobil Oil). A full buyout is also the type of transaction that is most common when a middle market company is acquired by a strategic buyer (most often, a larger competitor or a complementary business).
The others are more common to the middle market, but aren’t seen as often in large cap transactions.
Majority, but not complete, buyouts are typical of private equity acquisitions. Private equity firms are most often interested in companies where management continues seamlessly downstream of a transaction, so these transactions frequently include a continued ownership stake by the founder or the management team.
Minority acquisitions are common to the world of venture capital, where a company needs to raise cash to grow, but where there is no intent by anyone to change the management team or the ownership group over the short term. While these sorts of deals are very similar to full or majority acquisitions, they don’t occur very often in the context of middle market M&A deals.
This post was originally published on LinkedIn and is excerpted from Michael’s eBook: “The Inner Workings of a Deal: Tips for a Successful Transaction.”Share: