Hire an Investment Banker to Handle the Sale of a Company

GRANDAVENUECAPITALLLC

INVESTMENTBANKERS

Confidential

Hire an Investment Banker to handle the sale of a company

It's usually a bad idea for the entrepreneur selling a company to tackle the M&A market without help from an experienced M&A adviser.

Retaining experience from a licensed M&A professional investment banker who is in the business of selling companies helps ensure that business owners don't approach the sale process naively or ill-prepared. There is no “easy” business sale and there are always rough patches in the process.The savvy adviser knows how to navigate them to help secure a successful outcome for the seller. The seller is insulated from these rough patches and relies on the investment banker to do the heavy lifting, marketing the company, answering the myriad questions the many prospects will have, negotiating, arranging facility visits and endless follow-up. The seller pays for these services through a retained engagement agreement and success fee, but provided the seller has selected a qualified adviser, the return on these costs is usually very high.

The complexity and multiplicity of tasks, the immense distraction for a business owner of running their business while simultaneously trying to sell it, and the downside of going through an M&A process and coming up empty-handed, are among the key reasons to hire an investment bank.

The principal overriding reason to hire the investment banker is that a controlled confidential sale is conducted that will (hopefully) generate multiplepotential options for the business onwners. It is a primary role that the investment banker will maximize the value for the seller through competition between these interested acquirers.

M&A Advisor Fee Structures

The adviser's payout comes in the form of a contingentsuccess feeif / when the deal closes. The fee is usually based on the final price of the transaction, subject to certain terms and modifications. This so-called "success fee" is generally negotiated by the business owner and adviser when they commercialize their relationship via an engagement contract. Since the agreement generally calls for a set percentage of the value of the transaction, the investment banker has the incentive to maximize the value for the business owner.

Maximizing value doesn't always mean a higher dollar price; value often comes down to terms other than price, more favorable earn-out structures, or perhaps a partnership with an exceptionally well-regarded buyer. A good example of how price and value diverge in the eyes of a seller would include selling a majority of the business to a party who has success in the industry (either a financial or strategic acquirer). This acquirer has the potential to bring much future value to the business so the current owner, who retains a minority share now, will get a “second bite of the apple” when the balance of the business is sold. Often times, however, a 100% sale now is the owner’s desire.

In addition to a success fee, all investment banks require retainer fees--either an up-front payment or a monthly installment--while the M&A process is underway. Aside from helping pay out of pocket expenses, the retainer assures commitment by the seller.

A key element of the investment banking engagement agreement is exclusivity. The clause will be similar to:

The client will engage the investment banker on an exclusive basis for the term of this contract. The investment banker shall act on and will receive compensation on a completed Transaction with an acquirer / investor from whatever source. It is expected that the client and investment banking firm shall pool all its respective contacts and prospective investors/strategic prospects that may have a potential interest in the client and these prospects shall be contacted by the investment banker who will earn a Success Fee on a closing with same. The client will also represent and warrant that no other investment banker, broker, dealer, finder, consultant, representative or other person or entity has an interest in any compensation payable to investment banker.

Your Adviser's Role at Each Stage of the Process

Preparing the Business for Sale

Considerable work goes into making the target market-ready before the confidential acquisition memorandum is released. Clean financial information is critical. Financials of a private company must be adjusted to reflect the true ex-owner profitability.

A key factor in the investment banker’s due diligence is the preparation or restatement of the owner’s 3-5 year future business plans showing where the business is going. Companies that are put on the market generally have their financial statements audited, or at a minimum, CPA-reviewed, and further adjusted if the company traditionally has paid the owner's personal expenses or has incurred costs which are non-recurring in nature.

There must be a clear understanding of how the balance sheet connects to the income statement.Beyond the financials, the adviser will want to assure that any physical facilities or locations look well-maintained. The investment banker will inspect facilities and prepares a due diligence checklist of items to be examined and corrected if necessary.

The investment banker’s due diligence will develop a thorough understanding of the Company, its current and future business opportunities, competitive strengths and weaknesses, and specific factors that an acquirer would find valuable. As part of its due diligence, the investment banker will:

• Conduct in-depth interviews with senior management
• Identify valuable attributes Sales Candidate offers to potential acquirers
• Define the elements and financial results of the Company’s long range plan (up to 5 years out)
• Quantify the synergies, cost savings, etc., potentially achievable by strategic acquirers

The Marketing Campaign

The investment banker will prepare concise, compelling presentation materials into what is called a confidential investment or acquisition memorandum to introduce the seller’s company to key contacts. During the preparation of this document, the investment banker will:

• Develop a prospect list of financial and strategic acquirers
• Highlight competitive advantages and key attributes of the seller’s company

In the most visible portion of the process, the adviser mounts a marketing campaign choosing the route that maximizes the chances of success for the sale of the business. This process must be done in a confidential manner, since no one, other than those with a need to know, should be made aware that the company is for sale. This includes customers, suppliers, and employees; anybody who does not need to know.

The investment banker will negotiate a non-disclosure before releasing the confidential acquisition memorandum.

The marketing process may take several routes. In one route various buyers are contacted and asked to indicate interest at increasing degrees of commitment and seriousness. Another option is to develop the acquirer and allow only the very seriously interested parties to meet the shareholders and tour facilities before indications of value are offered. In this latter method, better valuation parameters are understood by the buyer. Whichever route is chosen, the investment banker will manage this process efficiently, including qualification of the buyers based on expertise, demonstration of seriousness, and capital available to close the deal.

The investment banker will conduct a multi-tiered marketing campaign on behalf of the seller with direct, personal contact with strategic buyers, direct personal contact with financial buyers and private equity groups, selected members of management (should they be identified as prospects) and high net worth individuals seeking acquisitions.

Grand Avenue Capital will create a competitive marketing environment and will:

• Time the process to insure strategic prospects are contacted before financial investors. Strategic investors typically take more time in initial evaluation.
• Obtain NDAs from all interested parties before disseminating Investor Memoranda
• Effectively communicate the Company’s vision, operating and financial capabilities, and answers to questions to key decision makers
• Screen serious buyers and will coordinate facility visits with Sales Candidate management
• Following facility visits, the interested parties will be asked to submit letters of intent

Grand Avenue Capital will lead the negotiations with serious bidders, and assist in the negotiation of the letter of intent. Grand Avenue Capital will advise on the following:

• Structure of the proposed transaction
• Financial consideration and proposed major terms and structure
• Form and timing of any type of proposed deferred compensation
• Coordination of employment contract issues with key Company executives, if appropriate
• Negotiate all other relevant terms in the letter of intent
• Coordination with appropriate legal and tax counsel
• In the event of multiple bids, negotiate strict time-dependent milestones in order to obtain the optimum transaction. At all times, Grand Avenue Capital shall maintain momentum with prospects to minimize delays prior to standstilling the marketing of the Company.

Grand Avenue Capital will coordinate and participate in all substantive due diligence meetings with the selected acquirer. The key role is to maintain momentum and solve problems that invariably arise during the due diligence process. During this time, Definitive Agreements are being drafted, reviewed, and additional negotiation occurs with respect to legal details, indemnifications, representations and warranties, etc. Grand Avenue Capital will remain involved during these negotiations working with legal counsel from both sides, and with financial advisers of the acquirer. Grand Avenue Capital shall manage this process to ensure adherence to a strict timetable in order to keep all parties focused on closing the transaction.

Whether approaching a large buyer population or a few, the M&A advisor preparesconfidential information memorandum (CIM) documents, often called "the pitch book,"that include significant financial, operations, and strategic information about the selling company.

Closing the Deal

Finally, a selling client should be confident the advisor can help with final negotiation of deal terms, including structures, currencies, escrows, reserves and other key issues. If it takes contingent payments to get the deal done, the advisor should be able to guide those decisions. Ifnon-price considerationssuch as non-compete agreements are critical, or if an employment or consulting contract for the selling owner is needed, the advisor should help formalize those elements as well.

The Timeline below outlines the steps and processes the experienced investment banking firm will employ to proactively, professionally and confidentially market the client’s company.

180 South Lake Avenue Suite 205 Pasadena, California 91101

Direct: 626-676-1880 office: 626-405-1500 fax: 626-441-2794