Mergers & Acquisitions

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Introduction What are reps and warranties, and why are they so important? When selling my mid-size business, what do I need to know before signing a purchase agreement containing representations and warranties? Reps (short for “representations”) and warranties are statements of facts regarding a company’s business, assets, liabilities, and operations. They can relate to the past, present or future, and are included as one of several critical clauses in a purchase agreement. A representation is a statement of fact. If a representation is untrue, it is “inaccurate.” For example, a seller may represent that the assets of the business are in good repair, that all inventory is salable, that there are no hazardous substances used in the business, that the business has operated in compliance with all laws, or that the seller has the legal capacity to sign the purchase agreement. A warranty is an assurance. If a warranty is untrue, it is “breached.” For example, a seller may warrant that they will operate the business in a regular and normal manner and will comply with all laws until closing, or that they will pay all payroll taxes that will come due from past operations up to the time of...

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Introduction Fun fact: In 2020, almost half of Amazon’s sales came not from Amazon directly but from third-party sellers. And two-thirds of those independent sellers -- or more than two million retailers worldwide -- used Amazon’s FBA (Fulfillment by Amazon) platform. With FBA, sellers of products are able to tap into Amazon’s order fulfillment and shipping services to distribute their wares. Hence, the FBA mantra: Sellers sell, Amazon ships. This information in this article is for owners of Fulfillment by Amazon businesses or those teaching others how to sell on Amazon. Some of these principles will apply to Amazon Delivery businesses, but delivery businesses tend to operate more like local brick-and-mortar shops (albeit with a heavy dependency on Amazon). If you’re a seller of widgets, FBA might be the service for you. If you’re thinking about selling your widget-selling FBA business, Morgan & Westfield is most definitely the service for you. Check it out ... Table of Contents Minimum Requirements for Selling an Amazon FBA Business Prepare Your Amazon Business for Sale Reduce Dependency Increase Barriers to Entry Maintain Clean Financial Statements Create a Comprehensive Training & Transition Plan Develop a Persuasive Reason for Sale Prepare for Due Diligence Build...

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Introduction A prerequisite to understanding how to value your company and how to increase the value of your business is understanding how buyers think. This article will take you into the mind of a potential buyer of a technology or software company and provide you with an overview for why they make acquisitions and what is important to them when they are considering making an acquisition. Having knowledge regarding the underlying drivers of M&A activity in the technology marketplace is also helpful to accurately predict long-term trends within your industry and broader macroeconomic trends that may affect the value of your business. This knowledge can be used to manipulate the drivers of value for your company -- in other words, knowing what impacts the value of your company helps you maximize the value of your software, tech, or online business. It’s important to understand industry dynamics since that’s what drives acquisitions. There are two important things to take into consideration: Demand for Software: The demand for software in general will continue to increase, which will increase the overall volume of acquisitions. This will continue to make software companies attractive as acquisition candidates. The Cycle of Innovation: It is important to...

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Introduction Business Description: B2B Software for the Transportation Industry Let’s take a field trip! Today, we will look at the details and the decision-making process that went into preparing a specific company for sale in the competitive world of software providers. The subject company in this case study is a B2B software provider in the transportation industry that integrates multiple functions for fleets, such as accounting, scheduling, and payroll. The industry is fragmented, with sufficient room for niche products, and is not a winner-take-all market, as is the case with many industries in which software is sold. The majority of the company’s revenue is generated from a recurring quarterly support fee. The owners are retiring after operating the business for three decades. They wish to sell before a competitor introduces a new innovative product that may end up dominating the market, thus rendering their software obsolete and destroying the value of their business. The market is fragmented but ripe for consolidation, possibly by a large competitor who could vertically integrate software in the industry, or by smaller, more agile competitors who could out-innovate the company’s software and their value proposition. Where to start? With the value drivers, of course ......

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Introduction In a recent survey, Consumer Reports found that a “modern/updated kitchen” still rules when it comes to ideal home features among home buyers. When it comes to shoppers of tech, software, or other online businesses, recurring revenue is the most attractive enticement. And just as there are any number of other actions you can take to increase the value of a house -- finishing a basement and painting high-traffic areas come to mind -- there are steps you can take to enhance the value of your tech, software, or online business. These actions are called "value drivers," and in this article, we'll discuss the top ones. Specifically, we will: Introduce you to the theory and importance of value drivers. Outline the top drivers of value that can impact the value of your tech, software, SaaS, or online business. Identify specific steps you can take to improve the value of your business. What are you waiting for? Table of Contents An Introduction to Value Drivers An Important Note on the Range of Values A Note on General Preparedness for Technology Businesses Value Driver #1: Increase Recurring Revenue Value Driver #2: Document Comparable Transactions Value Driver #3: Prepare a Buyer List...

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Introduction There are many factors to take into account when it comes to calculating the value of a company. The process gets even trickier if it’s a tech, software, or online business. The procedure for valuing any business is the same: calculate its SDE or EBITDA and then apply a multiple. In some cases, a tech business may be valued based on revenue. However, multiples are significantly different for tech, software, and online companies. And the factors that affect the multiples are different as well. Those considerations include: Scalability of the business Levels of risk and how they are addressed Recurring revenue Contracts The company’s growth rate The condition of the online code, and The cost to replicate the business. In the following article, you’ll learn about the various valuation processes and formulas, and the steps you can take to increase the value of any tech, software, or online company. Ready when you are ... Table of Contents The Valuation Process for Tech, Software & Online Businesses Valuation Formula for Tech, Software & Online Businesses Method #1: Multiple of EBITDA Method #2: Multiple of Revenue Deciding Which Method to Use EBITDA Multiples for Tech Businesses Factors that Affect the Multiple...

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Most people think hiring an attorney is only necessary when there is a problem. However, the best time to seek an attorney’s advice is when you are starting the process of selling your business, when you are thinking about buying or starting a business, and before there is ever a problem. That’s the advice of Hanwei Cheng, senior counsel of Ed Lee Law Group PC in Los Angeles. Cheng made the remarks in a recent podcast that addressed a common question posed by first-time sellers of businesses: Why do I need to hire an attorney? Here’s a partial transcript ... “Most business owners who end up in lawsuits thought they had everything under control. As an attorney, I see this time and time again; a business owner who thought they understood the terms of the sale, but are now being sued because of the ‘fine print.’ “As an attorney, what we do best is problem-solving, so we can anticipate certain contingencies that may arise and we try to prevent those issues before they actually happen. Once those issues arise, that's when hiring an attorney becomes expensive. By then, the business owner has found himself knee-deep in litigation, and hiring a...

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Certified Public Accountants come in many forms. Some focus purely on doing taxes at the end of the year while others prepare financial statements, manage payroll, assist owners in preparing their businesses for sale, assist prospective buyers in obtaining loans to buy businesses, and more. Additionally, there are CPA firms that have become a one-stop shop for all of your financial needs. Regardless of the situation, there are three things you can do to make sure you find the best CPA for your business. 1) Communication Skills This may seem obvious, but let’s delve into what it actually means. This goes beyond whether you can get through to your CPA when you try to call them, although this is an important first step. When you do talk, do you understand what they are saying? Many CPAs use jargon when speaking to clients, which may sound impressive but does not help them understand what is going on with their finances. Find a CPA that can explain things to you in layman’s terms. 2) Ask for References This is KEY to finding the right CPA for your business. Many business owners believe that just because a person has the title “Certified Public...

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You don’t have to search too long to find opinions alleging that M&A destroys value. NYU Professor Aswath Damodaran goes as far as to say that asking an investment bank to fairly value an acquisition target is akin to “asking a plastic surgeon to tell you your face is perfect.” When the so-called father of modern valuations is so vehemently against the practice, one might wonder why the volume of M&A transactions continues its upward trajectory. Context is required here. Firstly, most academic studies on M&A use event studies to measure the success of transactions. That is, when news of the transaction is publicly released, we assume the stock market’s response to be a gauge of the success or otherwise of the deal (success, as always with the stock market, being a translation for “future earnings”). There’s at least one major flaw in this, which even academics will admit to -- it assumes that the stock market makes the right call all the time. Secondly, to give some context to Damodaran’s remark, he’s not arguing against the logic of M&A transactions as much as this may appear to be the case. His argument is based on the problem inherent in...

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Introduction Just as real estate prices rise and fall, so can rental rates. Have you tried negotiating your rent with your landlord to no success? Is your current rental amount above market rates? Do you own an unprofitable business in which it would not be feasible to continue operations without a concession from the landlord? If you’ve answered any or all of those questions in the affirmative, read on to learn what you can do to improve your chances of success. Spoiler alert: Everything’s negotiable. Table of Contents Reasons the Landlord May Lower Your Rent Prerequisites to Negotiating a Lower Rental Amount Reasons the Landlord May Not Lower Your Rent How do I Approach My Landlord and Try to Reduce My Rent? By how Much Can I Reduce My Rent? What is the Difference Between a Deferral and an Abatement? How Long Do the Negotiations Take? For how long will the Landlord Reduce the Rent? Reasons the Landlord May Lower Your Rent If the landlord doesn’t lower your rent, you may be forced into bankruptcy. The business is break-even or barely profitable. The landlord believes it may be difficult to replace you as a tenant. Your rental rate is above...

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