Mergers and Acquisitions For Dummies Read Online Free Page B

Seller an earn-out based on the performance of the business after the transaction’s completion.
    Consideration is not an either-or situation. In other words, the consideration may consist of some cash at closing, stock in the acquiring company, and an earn-out. Or perhaps the consideration is a note plus an earn-out. No single right or wrong way to structure a deal exists. Structuring a deal by using various forms of consideration is similar to twisting the knobs on a stereo: To get it just right, you may have to increase the bass and turn down the treble. Chapter 4 provides a much deeper dive into the ways Buyers can finance deals.
    Consideration is usually a defined term and therefore capitalized in documents and so forth.
    EBITDA
    EBITDA (earnings before interest, tax, depreciation, and amortization) is one of those horrible business jargon terms, but it’s unavoidable in M&A. EBITDA (and its variations) forms the basis for most deals.
    EBITDA is the cash flow of a company without accounting for interest payments or interest income, tax bills, and certain noncash expenses (depreciation and amortization). In other words, EBITDA measures the cash generated from doing what the company is supposed to do: sell its goods or services.
    Why is this number so gosh-darn important? EBITDA is often (but not always) the basis a company uses to determine its valuation (see Chapter 12) and is often a defined term in the agreements and contracts. Banks quite often include EBITDA as one of the covenants for making a loan.
    EBITDA is commonly pronounced ee -bah-dah. And in case you’re wondering, EBITDA is not a generally accepted accounting principles (GAAP) term. (Neither is adjusted EBITDA, which I cover in the following section.) However, both EBITDA and adjusted EBITDA are perfectly acceptable terms for the purposes of M&A activities.
    Adjusted EBITDA
    Adjusted EBITDA, which is EBITDA’s wild and crazy cousin, is simply EBITDA with adjustments! For example, a business owner often takes a salary larger than industry standards, so a Buyer may want to add back part of that salary to arrive at a more reasonable level of earnings. Say the owner of a company with $20 million in revenue receives total compensation of $500,000 when the industry standard for the president of a like-sized company is $250,000. In this case, adding $250,000 (plus the pro-rated amount of income tax) back to the EBITDA figure makes sense.
    Other adjustments to EBITDA may include add backs for other owner-related expenses (cars, gas, cellphone, country club, health club, and so on). If certain employees won’t be part of the business after the deal is complete, adding back their salaries (and corresponding payroll tax and benefits expenses) is appropriate.
    No set standard exists for adjusted EBITDA; adjusted EBITDA is whatever Buyer and Seller agree it is.
    Although running certain personal expenses through a business may be common, the practice may run afoul of the IRS. Consult with your tax advisor for the proper treatment of personal expenses.
    Closing
    Closing is what Buyer and Seller dream of! It’s why we M&A folks do what we do. In fact, it’s so important that I devote an entire chapter (Chapter 16) to closing. In a nutshell, closing is the day when Buyer hands over the consideration to Seller and Seller hands over the company to Buyer.
    Adhering to Basic M&A Rules and Decorum
    Knowing the M&A language is important (see the earlier section “Introducing Important Terms and Phrases”), but understanding the rules of the M&A game and the decorum for its participants is equally important. Much like a poker game, the actions, the inactions, the movements, the gestures — in other words, the “tells” — are hugely important in the world of buying and selling companies.
    If you’re going to get into the M&A business, you have to know what to do and what to expect. Those caught off guard are those who