Mergers and Acquisitions For Dummies by Bill Snow Read Free Book Online Page B

within in an industry or has done a good job of differentiating itself from the pack, that intangible may have value for the right Buyer. On the flip side, a company that’s essentially a faceless name in a sea of interchangeable companies probably doesn’t have much intangible value.
    The good news is a company that has made managerial errors similar to those listed here may make a great pickup for the smart acquirer. The bad news is a company suffering through a series of near-fatal managerial mistakes may have burned bridges with its customers or suppliers. Consider yourself warned!
    Changes in customer preferences: In the world of troubled companies, those affected by this situation are the most troubled of them all. Think of the proverbial story about buggy whip manufacturers in the wake of the advent of the automobile. Sometimes, technology passes by a product; regardless of the product’s quality, companies can’t do much to regain market share when customers move on to new and better products. The word for this phenomenon is disintermediation.
    If you own a troubled company, speak to your attorney and an M&A advisor about how to proceed with a potential M&A transaction. You may need to consider accepting a deal below your dream price because holding out for a better, future deal is risky. That better deal may never materialize, and the clock is ticking on the longevity of a troubled company.
    Selling a piece of the company
    Business owners don’t need to sell the business and then retire or move on to other pursuits. The following sections explore some of the common reasons a business owner may want to sell a piece of the company.
    Needing capital for growth
    A growing company often needs more cash than it can generate from operations. If the owner doesn’t want to put her own money into the company or sign a personal guarantee for a bank loan, she can raise money from an outside investor. Outside investors come in two basic flavors, control and non-control:
    Control investment: A control investment simply means the investor has control of the company. This situation occurs when an investor, often a venture capital or private equity fund, invests money in exchange for stock in the company. (Well, maybe stock, maybe something else. See the nearby sidebar “Structuring equity investments.”) In most cases, this investment is in the form of a majority equity investment — that is, the new investor owns more than 50 percent of the equity in the company, or the bylaws of the entity are amended to grant effective control to the investor.
    Non-control investment: A non-control investment, often called a minority equity investment, is similar to a control investment, except the investor doesn’t have control of the company.
    Structuring equity investments
    In the minds of most people, especially M&A novices, an investment comes in the form of equity — an investor buying stock in the company. This kind of investment makes the most sense when the company has publicly traded stock and the stock has a large-enough average daily volume to make the investment liquid.
    But investments in private companies are highly illiquid because the shares don’t trade on a public stock exchange, so investors are wise to structure the deal in the form of convertible debt, debt that they can convert to equity, usually at the time of their choosing. This way, if the company goes under, the investor gets repaid before equity holders, but she also has the option to covert her debt into to stock in the event the company goes public.
    Why structure the deal this way? In the world of accounting, debt holders are higher up on the food chain that stock owners. Say a company has two investors: One person loaned $1 million to the company, and the other person owns 100 percent of the stock. If the company fails and selling the assets recoups $500,000, that money reverts to the debt holder, and the stockholder