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MidMarket Corporate Finance Q&A Series: Part 2

Second in the Series

How Does It Really Work? Understanding a Term Sheet for Acquisition or Investment

The focus here is on middle market businesses (under $100 million in revenue) owned by the founder, family and management.




Why should business owners inform themselves about how deal term sheets and letters of intent work?

  • Transactions involving your company or by suppliers or customers have consequences and it is better to be well briefed.
  • Whether you are the issuer or recipient, what you know ahead of time determines how your best interests are protected.
  • Increasing sophistication and market efficiency trends make this a basic requirement for operating at your best.

What is the real purpose of these documents?

  • It has become routine for prospective buyers-lenders-investors to be expected to provide written outlines for proposed deals.
  • Being selected or making that choice is increasingly dependent upon detailed clarification of price and terms to gain control of process.
  • The discipline of advance scrutiny of intent and boundaries ultimately benefits the party at most risk for completion.

Why all the fuss if these outlines are non-binding for the parties?

  • The substance of a term sheet or LOI reflects the seriousness of both parties to proceed with intent to complete the transaction.
  • To put competitive bidders and other attractive proposals at bay is not taken lightly and reputation on performance is significant.
  • Most non-binding documents have some binding provisions which matter to responsible principals.

What are the most important items to make clear in a term sheet for any type of deal?

  • Valuation plays into every situation because the equity value of the enterprises as targets or issuers-borrowers is relevant.
  • Clarity for the current value of an acquisition target or equity issuer or the basis for a credit facility is core to everything in negotiations.
  • The conditions to completion of confirmatory due diligence and actual closing must be realistically understood by business owners.

Why is deal structure for any proposed Acquisition or Investment transaction so important

  • How the deal is defined for tax purposes and who-gets-what in the end is what really matters, so you should know what that is.
  • The drafting party usually knows more about the relevant market and “playing the deal-game” than the seller-issuer-borrower.
  • Being aware of how the other party is motivated is essential for the business owner to protect their interests.

Why does it seem that there is always something that causes big problems in getting to the finish line to close deals?

  • Most non-sponsor controlled owners either knowingly or unconsciously downplay business risks and stubbornly refuse to be realistic.
  • Professional owners (private equity funds) get better results because they anticipate issues and take action to resolve roadblocks.
  • Human nature is a simple reality and can be improved upon through the involvement of a knowledgeable advocate.

What can be done to avoid costly delays and broken deals in this highly competitive market?

  • Be tougher on yourself than you admit is needed; even that will be only the first step to actually being ready to complete any deal.
  • Demand that your advisors be realistic rather than provide lip-service to your preconceived opinions.
  • Be curious, learn more; understand the other party better and work through the inevitable problems to prevail for what you believe.

What other topics will MidMarket address in this Q&A series?

  • Details and nuances on company valuation and deal structuring for sale, buying another business, issuing equity or borrowing capital.
  • Negotiation considerations to protect your interests in any type of corporate finance deal.
  • Tips for avoiding mistakes and disappointment in competitive deal contests.