The M&A Process Summarized

The Standard M & A Process that Axis Follows

• Source the Deal
• Execute Non-Disclosure Agreement [NDA]
• Information Exchange
• Evaluate Investment
• Submit a Letter of Intent [LOI]
• Conduct Due Diligence [with “109 Questions”]
• Legal Documentation of Transaction
• Closing and Transfer of Funds

Deal Fees [DFs] (i.e., 2%-5% of the total deal price; however, our fees may be more or less depending on certain characteristics (e.g., nature of the deal, complexity, etc.))

Documents & Terms [Some examples]

• Engagement Letter
• Non-Disclosure Agreements [NDAs]
• Indication of Interest [IOI]
• Term Sheet
• Letter of Intent {LOI]
• Stock Purchase Agreement [SPA]
• Asset Purchase Agreement [APA]
• Escrow Agreement
• Senior Management Agreements [SMAs]
• Stock Option Plans
• Price
• Timing of Payments
• Conditional Payments (e.g., Earnouts)
• Management Roles/Retention

Documents & Terms [Described/Defined]

Non-Disclosure Agreements (NDAs) – a confidentiality agreement between two parties. The NDA prevents one of the parties from disclosing the information specified in the agreement. This helps to ensure proprietary and sensitive material is kept confidential.

Engagement Letter – outlines the scope of work that a service provider / vendor will provide to the client, including the type of work that will be performed, how much work will be performed, the payment method for the work (e.g., hourly vs. fixed fee), and the timing of the payments. In addition, an engagement letter defines the deliverables that the client will receive.

Indication of Interest (IOI) – this is a letter that the Buyer sends to a purchaser. It basically provides an offer range for the business, as well as the ownership percentage that the buyer is seeking.

Term Sheet – this is a one or two-page document that provides a little more detail to supplement an Indication of Interest (IOI).

Letter of Intent (LOI) – a letter of intent is the preliminary agreement entered into between a buyer and a seller. This document summarizes the transaction terms and conditions that have [in principle] been agreed to by both parties.

Stock Purchase Agreement (SPA) – an agreement by which the owners of a company sell their shares of stock to a buyer. Basically, a SPA details the terms of the transaction (who receives what, how much, and when; plus legal conditions and/or other issues).

Asset Purchase Agreement (APA) – an agreement by which the assets of a company are sold to a buyer. Basically, an APA details the terms of the transaction – who receives what, how much and when; legal conditions and/or issues.

Escrow Agreement – which ensures parties fulfill contractual obligations and helps to mitigate disagreements. For example, a buyer typically escrows part of the purchase price to protect itself in a transaction. The escrow is typically released after one and/or two audit cycles. Basically, a buyer wants to make sure it is buying a sound business…

Senior Management Agreements (SMAs) – an employment contract between a company and its key executives. This agreement formalizes a Company’s relationship with its senior managers. SMAs outline such things as base and incentive compensation [both short-term & long-term], employees’ roles, and severance terms, etc.

Stock Option Plans – stock option plans govern employees receiving ownership (or right to exercise an option for ownership) in a company. Business owners use stock option plans to retain and motivate workers since they share in any upside. In addition, business owners receive tax savings, which improves/helps cash flow. There are two types (i) incentive stock option pans, and (ii) non-qualified stock option plans.

Some Common Terms

Deal Fees – generally related to an advisor, where an “Engagement Letter” outlines the scope of work that an advisor will perform for the client, and further specifies how said advisor will be compensated. For example, financial advisors typically earn a fee that is equal to 2%-5% of the total deal price. This fee may be more or less…, depending on certain characteristics (e.g., the nature of the deal, complexity, etc).

Earnouts – conditional payment(s). For example, a buyer may agree to pay the owner of a business an additional $5 million in the year following an acquisition provided that that year’s  earnings grow by at least 20%.

Some Common Deal Terms

Price – how much are you paying / receiving?

Timing of Payments – when are payments paid or received?

Conditional Payments – are any payments contingent (e.g., contingent on some future financial or measurable target) [commonly referred to has “Earnout” payments]. For example, is part of the compensation based on company achieving a certain amount of revenue by the end of next year? Two years from now, etc.?

Management Roles / Retention – is the transaction contingent on the an individual being given certain duties or being retained prior to the closing?

 

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