Digital agency · M&a

Good models or contracts for small M&A transactions?

Anthony Miller

December 17th, 2014

Right now, our billables are higher and their team would just be 2 guys. Unsure how to structure. Also, I was also thinking of just keeping them as a vendor partner until they've proven themselves. Would welcome any experience in this area.

Kyle Redinger Founder at LandStriker

December 17th, 2014

Anthony -

Here is a simple way to think about it:

The process usually would start with a term sheet describing the transaction. Once those terms are agreed upon, it may be best to share them with an attorney, so they can draft them into a letter of intent that spells out those terms in more concrete detail. You would then enter into an exclusive period with the buyer where the buyer conducts additional diligence. After 30 to 90 days, the transaction would close and initial payments would change hands.

There is a formal legal process for an acquisition, so it would behoove you to hire an attorney. You can get pretty far with a term sheet before you hire an attorney. During diligence, you typically negotiate the purchase agreement which is a much longer and more complicated document. 

Remember it's always in the seller's interest to maximize the details of the transaction prior to conducting diligence. 

A typical term sheet may have the following terms:

- Price
- Payment Terms (stock, cash, dividends)
- Treatment of working capital
- Incentive Payments
- Employment Agreements/ Non-Competes
- Treatment of Liabilities, Warranties and Representations
- Anything else relevant to your transaction

Here is a link to a standard form agreement for a LOI.


Importantly, every transaction is unique and complications always arise. There are different ways to acquire companies (asset transactions, stock transactions, etc) and tax impacts are also relevant. I'd recommend you find someone with experience in the area.

Alternately, you may sell something more simple like your customer list and sign a non-compete and employment agreement with the acquirer to simplify the legal issues.

Hope that helps.

Best, Kyle



Anonymous

December 17th, 2014

Hey Anthony:

Sounds like you need an advisor for this, just because details will be super important. Discuss may be too vague or unclear to get the results you want.


Jean Poh Founder & CEO, Swoonery

December 17th, 2014

Hi Anthony,

I would advise caution when using a form M&A agreement.  There are many issues in an acquisition depending on the nature of your business, your motives, as well as what aspect of the target's company you deem valuable.  Without knowing anything about your business or the target's if it involves digital agency, you may have licensing and/or IP issues to contend with.  The most important part of an M&A transaction is going to be the diligence.  You're going to want to make sure the target's contracts, financials, patents/licenses, etc. are looked over to make sure the company you are buying is clean and/or you protect yourself with the necessary provisions in the acquisition document.  How integral is this target to your business and what is your motive for the acquisition?  If you just want to add the two guys to your team, maybe the acquisition is not the best approach.  However, if its is software, technology, clients that are valuable to you, I would suggest biting the bullet and allowing a firm to do the diligence and transaction for you as you want to make sure you indeed are acquiring what it is that you deem valuable without any liabilities or debt that would end up weakening your business.  

You should definitely keep them as some sort of service provider until they prove valuable and then weigh your motives for an acquisition against the legal fees attributed.  Hope that is helpful, feel free to ask follow up questions.

Best,
JZP

Richard Titus CEO/COO, senior executive and experienced board director

December 18th, 2014

hi - I've done 3 of these deals in my life and am now advising on a 4th.  Good points above: 

Key things to consider in valuation: 
1 - People: are they good, will they stay do you like them do they like you. Think of this like dating, but more intimate and higher risk. 
2 - Clients - how long can you rely on the income they are bringing to the table
3 - Brand - what will the merger do to your brands, 

When I merged Tag Media with Razorfish in 1998 it was accretive to both brands. My company (tag) was small but strong. Razorfish was unknown oh the west coast. I was given autonomy, capital & really loved the culture & the people. 

a few years ago a friend sold his agency on the East coast to a large consulting firm. He lasted 90 days and only because the silenced him with a non-disparagement.  2 years later there was NO value received by the buyer and actually the seller started another firm which is now crushing it. 

Think about how you put the people together. Then the clients then the brands.  The rest is noise.

Daniel Bertram Chief Executive Officer (CEO) at EconoPureā„¢ Water Systems

December 17th, 2014

If you can give me details, I'm sure I can help.