Corporate Finance FAQ
What is a Letter of Engagement (LOE)?
A Letter of Engagement is a written agreement between a Client and a company.
Specifically for M&A Deal platform, a Letter of Engagement or LOE is a written agreement between the client selling a business (vendor) or looking to buy a business and M&A Deal Platform.
Similar to a contract, a letter of engagement but is less formal than a contract with less legalise.
The Letter of Engagement is intended to briefly but accurately describe the services to be delivered, the terms and conditions, the deadline or deadlines, and the compensation. A letter of engagement is a legal document and binding in a business deal.
The Letter of Engagement is intended to provide the client with reassurance of what our service is, how much it will cost, and clearly describes the deliverables with the intention to prevent "scope creep".
What is Due Diligence?
When the vendor agrees the buyer’s Heads of Terms, the process moves to due diligence, where the buyer conducts its own investigations of the business, also validating the information provided thus far.
The process of due diligence is important to allow the buyer to confirm facts and details of the business they are purchasing. The vendor is expected to disclose all its contracts, financials, customer information, employee information, and much more to the buyer.
Typically, the due diligence information is uploaded to a secure, online data room, commonly known as a data room, where multiple persons are able to make access, make notes and then to ask vendor additional questions also known as Request for Information (RFI).
Due diligence involves understanding the following factors about the company.
- The business operations, including products, services, markets, assets and how the company functions and its growth plans.
- Understanding management capabilities, key personnel and employment matters.
- Determining an appropriate valuation of the business, assets, and transactions.
How much does it Cost to Sell my Business?
The buyers’ fees are paid by the buying company, with the vendors (sellers) M&A Fees typically structured as,
Retainer with Success Fee or Success Fee Only.
The buyers’ fees are paid by the buying company.
The vendors M&A Fees are typically structured in one of two ways.
Retainer with Success Fee
In this structure, the owner pays a retainer, usually in the range of £15,000 to £30,000 depending on the estimated complexity and likelihood of sale. The sales process is then started, with an Information Memorandum produced. If the company is sold, an additional success fee, typically 2-5% (of gross purchase consideration) is paid upon completion.
This type of structure is typically preferred by M&A Brokers, who see it as a win-win, with hundreds of deals generating the majority of their revenue with minimal work and no risk. A broker expects less than 10% of their clients to sell and these are typically only the most successful and best run business.
Success Fee Only
In this structure, the owner pays small retainer of less than £1,000 or even no retainer. The sales process is then started, with an Information Memorandum produced. If the company is sold, an additional success fee, typically 5-7% (of gross purchase consideration) is paid upon completion.
This type of structure is usually offered to the higher value and more certain to sell companies allowing brokers a better return.
Getting Started with M&A Deal Platform
Our platform will guide you through the various steps but below are descriptions of the different sections.
My Tasks
The platform helps you track all of your completed and outstanding tasks, allowing you to see what actions you need to complete next.
My Documents
The Platform helps you track all your uploaded documents, allowing you to selectively share them with M&A Deal Platform potential buyers.
My Agreements
The Platform helps you track all your uploaded contractual documents. And if you are short of a legal document, for example you are missing a mutual NDA or Intellectual Property agreement with an employee, then the platform will help you quickly create them, share and sign all online.
Company Valuation
The Company Valuation Application enables you to model valuations using standard M&A methodologies, such as DCF and Market Multiples.
Our Company Valuation Application also allows you to model what is scenarios and working with your M&A Account Director we can provide strategy advice on how to tweak your business model to maximise company valuation.
Information Memorandum
In this section, you enter background information on your company, including business model, revenue, target markets etc., to create the Information Memorandum, with the Platform guiding you through the process. This is a sales brochure for your company, that will provide potential buyers with an overview of your company, which the buyers only see after they have signed a mutual NDA and you have given them permission.
Company Detail
Here you enter further detail on your company, including product details, sales pipelines, competitors etc. that is used to enable the platform and M&A Account Director to provide further advise on your company strategy and support the due diligence process.
Buyers & Partners Directory
You can search our directory of Buyers and register an interest in them. Your M&A Account Director will be notified of your interest. You will also find a list of our M&A partners, including lawyers & accountants.
Company Settings
You can add / change details about your company including Company Name, Website URL, Company number, registered address, bank details etc.
Who Pays the M&A Fee?
Sellers’ success fees are paid by the company.
Sellers’ success fees are paid by the company and are therefore effectively absorbed by the buyer as they are considered a company cost. However, retainer fees are typically paid by the owners to hide the listing until later in the process.
Auction Versus Negotiated Sale
An auction is a business sale process and a negotiated sale occurs when a vendor talks with multiple buyers.
An auction is a business sale process where a group of buyers makes their final and best bids, and the company goes to the best bid.
A negotiated sale occurs when vendor talks with each buyer and perhaps tailors the pitch to highlight those benefits that will be most appealing to each individual buyer.
A negotiated sale still has elements of an auction (numerous participants making bids), but a negotiated sale involves a lot more handholding of the vendor.
How does M&A Deal Platform Sell my Business?
The main steps in selling a business using M&A Deal Platform
Before you start
- At M&A Deal Platform we start with a free confidential, no obligation virtual meeting to discuss your objectives, demo our online marketplace and gain an initial insight into your business.
- M&A Deal Platform works on success fee only. That means we don't charge upfront fees or marketplace listing fee, instead receiving a percentage of the price you achieve for the sale, only upon successful completion.
- If you require in-depth advisory and consultancy, we do offer an optional 360 Company Report for you to to really understand your business from a buyers perspective and see how you could tweak you business to maximise its valuation and further speed up your sale.
- Once you are ready to begin, you accept the M&A Deal Platform Terms of Service.
A: Preparatory Phase
- First we work with you to create a 360 Company Valuation Report, this provides a fair price for your business.
- We then create an anonymous teasers card to market you company. Don't worry this teaser passes what we call the "Google Test", i.e. no-one is able to identify your company.
- Next we work with you to produce an Information Memorandum, effectively a sale brochure for your company. This is used to provide a detailed overview to potential buyers once. you have given permission and they have signed a mutual NDA.
B: Marketing Phase
- Your company is now listed on Precision.Market™ our private online marketplace where buyers, are always searching for companies to acquire.
- In addition M&A Deal Platform maintains an extensive network of contacts searching for opportunities, whom we confidentially market you business too.
- And our M&A team use advanced data platforms to perform target identification, research, screening and engagement to manage your acquisition to further increase possible buyers for your market.
- At M&A Deal Platform, our aim is to run a blind auction on Precision.Market™ with multiple buyers for ever transaction, to maximise the likelihood of a successful sale.
- During the auction phase, our platform, combined with our expert M&A advisory team manages the engagement process, clarification of the business model, and with meetings potential buyers.
-
At this point, if the buyers are interested, they will submit via the M&A Deal Platform, a Letter of Intent (LOI), also known as “Heads of Terms”, a non-binding document that forms the basis of the final deal. It contains a specific purchase price, rather than a range and provides the steps needed to close the deal. If there are multiple buyers and therefore LOIs, the seller can select their preferred option and sign the relevant LOI.
- When a buyer is ready to proceed to the next stage, they provide a formal Heads of Terms.
- And once a seller (also known as the vendor) accepts a Heads of Terms, then the auction ends and the transaction moves to the Legal phase.
C: Legal Phase
- When the vendor agrees the buyer’s Heads of Terms, due diligence begins, where the buyer conducts its own investigations of the business, also validating the information provided thus far. The vendor is expected to disclose all its contracts, financials, customer information, employee information, and much more to the buyer. Again this is all managed via the M&A Deal Platform.
-
The Purchase Agreement is now completed, matching all the previous steps to the due diligence documents, and capturing any remaining gaps. Again this is all managed via the M&A Deal Platform.
- Once the contracts have been signed, the transition between owner manager and buyer begins, following the process agreed within the Purchase Agreement and tying up the loose ends of the deal in the post-closing adjustments and integrating the acquired company.
How Do I Sell my Business?
There are three main phases for an owner to manage when selling their business, these are the preparatory, marketing, and legal phases.
A: Preparatory Phase
1. Why You Want to Sell
It’s very important for owners to understand why they are looking to exit as this will drive the approach and directly impact the likelihood of success. Common reason are:
- Retirement
- Change of personal circumstance and
- The business has grown to a point where it’s no longer fun to work in
If any of these reasons speaks to you then you’re ready to sell.
2. Market Research
Market Research is the process of understanding the selling companies’ sector and identifying the best strategic acquirers, where ‘best’ is usually defined as providing highest valuation and most likely to protect your legacy.
This is the single most important job and we combine our Precision.Market™ that contains many registered buyers with our M&A Advisory Team to rapidly unearth multiple strategic buyers.
3. Information Memorandum
The Information Memorandum (IM) is a key document in a successful sale, that really needs to show the best features of your company, by pulling out its Unique Selling Points (USPs) and growth story to convince the buyers make your company a strategic purchase.
Redacted Information Memorandum
This is a special version of Information Memorandum that is shown to buyers that may be just looking to steal your IP and / or business model and therefore all confidential information should be removed.
Mutual NDA
A Mutual NDA should not be considered a guarantee against Intellectual Property theft and if you unsure about any buyer’s intentions its safer to provide them with a redacted Information Memorandum.
M&A Deal Platform
Our M&A Deal Platform combining with our M&A Advisors helps create a high quality Information Memorandum in next to know time.
4. Agree Approach
At this point, it’s very important that the owner(s) are on the same page about valuation, company USPs, and understand the process, the risks and potential pain points to come.
B: Marketing Phase
1. Approach Purchasers
Potential buyers are able to view teaser information via our Precision.Market™ and with a long list (50+ companies) of potential strategic buyers created during the preparation phase, the M&A advisor will also confidentiality reach out to potential buyer’s executive team and / or owners to discover if they are interested in purchasing a company.
2. Sign Mutual NDAs
Potential buyers can then elect to digitally sign a mutual NDA before been permitted to view the Information Memorandum (or a redacted Information Memorandum).
3. Information & Site Visits
Additional information may (will) be requested by the buyer via the M&A Deal Platform about the company and the vendor will need to provide full or redacted versions depending on how comfortable they are with the risks of potential loss of Intellectual Property (IP).
Buyers will want to visit the company offices and / or factories to verify them.
The meeting also allows buyer and vendor to interact and engage in question-and-answer sessions and to gauge whether both sides can play well together.
4. Offers
At this point it is typical for one or more buyers to indicate interest and produce a non-binding Indication of Interest (IOI) via the M&A Deal Platform.
Selecting the “best” offer is complex and not just about picking the highest cash offer but balancing against owners’ legacy, understanding the reasoning behind the buyer’s interest and how the deal may be structured.
The best deal might not be the initial highest offer but instead a balance of buyer’s interests aligned with sellers’ own goals, be that a quick exit or ensuring their employees and the business future are secure.
5. Negotiations
If the Indication of Interest (IOI) covered in the preceding section is acceptable to the vendor, the next step is for Buyer(s) to meet with vendor’s management team.
The vendor will conduct the meeting, with the support of M&A Deal Platform, which provides a financial update as well as updates to any other issues that may be pertinent for buyer, such as new customers, lost customers, new hires, new product launches, litigation, etc.
The meeting also allows buyer and vendor to interact and engage in question-and-answer sessions and to gauge whether both sides will be able to work together.
Step 6. Heads of Terms
At this point, if the buyers are interested, they will submit via the M&A Deal Platform, a Letter of Intent (LOI), also known as “Heads of Terms”, a non-binding document that forms the basis of the final deal. It contains a specific purchase price, rather than a range and provides the steps needed to close the deal.
If there are multiple buyers and therefore LOIs, the seller can select their preferred option and sign the relevant LOI.
C: Legal Phase
1. Due Diligence
When the vendor agrees the buyer’s Heads of Terms, the process moves to due diligence, where the buyer conducts its own investigations of the business, also validating the information provided thus far. The vendor is expected to disclose all its contracts, financials, customer information, employee information, and much more to the buyer. Again this is all managed via the M&A Deal Platform.
2. Legal
The Purchase Agreement is now completed, matching all the previous steps to the due diligence documents, and capturing any remaining gaps. Again this is all managed via the M&A Deal Platform.
3. Resolve Issues
Lots of deals can fail at this stage, which results in a large waste of time but if prepared correctly and perceived risks are properly explained away or mitigated, price chips or undesirable structures can be avoided.
4. Deal Closure
Once due diligence is completed, legal documentation finalised and all hurdles to the transaction are resolved, both sides can celebrate and then move on to the post deal.
5. Post Deal
Once the contracts have been signed, the transition between owner manager and buyer begins, following the process agreed within the Purchase Agreement and tying up the loose ends of the deal in the post-closing adjustments and integrating the acquired company.
What is Precision.Market™?
Precision.Market™ is M&A Deal Platform's online market, that connects owners with potential buyers, then manages the M&A process to achieve a transaction quickly and with the best possible valuation.
- Our Market is secure and private with none of your company data or your listing publicly visible.
- Our market brings SMBs together with Buyers to create an effective, trusted way for SMB owners to buy and sell businesses online.
- Only you decide which potential buyers you talk with and only after they have signed a mutual NDA to protect your data.
- Our platform automates the upload of company documents and data, provides transparent views and drives the end-to-end M&A process to deliver quicker, better results for all parties.
Step 1: Listing your company on the Platform
-
Using your Information Memorandum, the Platform creates an anonymous teaser that is used to list your company for viewing by our platform for viewing by our registered buyers.
Step 2: Create your Company Information Memorandum
-
The first step is to create the Information Memorandum (IM) with the platform guiding you through the process. The IM is a sales brochure for your company that will provide potential purchasers with an overview of the business. This only available to the buyers once they have signed a mutual NDA.
Step 3: Connecting with Potential Buyers
-
Buyers on the platform search for companies of interest as well as receive automated matching guidance by the Platform.
-
The Platform and your M&A Deal Platform Account Director will also look to identify potential buyers that suit your company’s profile in the wider global market.
Steps 4: The Marketing Process
-
Once a buyer(s) has registered an interest in your company, the platform and your M&A Deal Platform Account Director will orchestrate any communications and ensure the sale process runs smoothly.
Steps 5: Heads of Terms (HoT)
-
Receive all offers, understand the merits of each and accept a HoT from the buyer
PRO TIP: During the Sale Process it is worth uploading additional information on the company to speed up the due diligence.
Step 6: Due Diligence and Legal Completion
-
The platform then manages and coordinates due diligence between yourself and the buyer through to legal completion.
What is the Strategic Multiple?
A strategic multiple is where you company fits into another companies’ strategy.
Therefore a strategic multiple is where you company fits into another companies’ strategy, therefore increasing the value of your company to that specific buyer..
- The business operations, including products, services, markets, assets and how the company functions and its growth plans.
- Understanding management capabilities, key personnel and employment matters.
- Determining an appropriate valuation of the business, assets, and transactions.
What are Industry Sectors?
The Industry Sectors we use are based upon the Pitchbook classifications and are described below.
Therefore a strategic multiple is where you company fits into another companies’ strategy, therefore increasing the value of your company to that specific buyer..
- The business operations, including products, services, markets, assets and how the company functions and its growth plans.
- Understanding management capabilities, key personnel and employment matters.
- Determining an appropriate valuation of the business, assets, and transactions.
How do you find the “value” of the company?
There are many ways to find a value of a company with the most common explained below.
However ultimately the value of a company is only truly discovered when someone buys it either by M&A or if it is listed on the stock market.
Multiples Valuation
Multiple’s valuation or relative valuation uses the known market valuation of number of peers within a sector, usually listed companies as their valuation is easily obtained. This ratio is then applied to your own company to provide an estimate of its valuation.
Multiples Valuation is therefore very much an estimate of your current valuation based on what the stock market believes are the future growth prospects of your listed peers rather than your own companies future potential.
A typical example is accountants, who have a multiple of 1.5 to 2x versus a FinTech that has multiples of 15x or more.
Valuation = Profit x Sector Multiple
Discounted Cash Flow (DCF)
Discounted Cash Flow (DCF) is generally considered the most accurate method for valuing a company. In DCF, future cash flows are estimated and then discounted by the cost of capital to give their present values. This means DCF is more about the future growth and profit than past performance.
In order to calculate DCF, you therefore need to have your current cash flow with estimates of future cash flows and your cost of capital.
In DCF, cash flows generated over the next 5 years and in perpetuity are estimated and then discounted back to what their total sum would be worth today based on a 'discount rate' - usually weighted average cost of capital (WACC) In order to calculate DCF, you therefore need to have your current cash flow with estimates of future cash flows and WACC. DCF, like multiples have their flaws too, in general, the practice of valuing a company is an imperfect science. However, it informs a basis of discussion and overall market price.
Company Valuation Application Help
How to use our Company Valuation Application.
Watch our how to value walk through video.
Default Currency
Select the primary currency the company operates in.
The currency is used to set the Terminal Value. The Terminal Value represents the period beyond the forecasted 5 years, the growth of the company is linked to the inflation rate of the country where the business operates. This is widely considered as best practice due to the challenges in forecasting beyond 5 years.
Sector Enterprise
Select the primary sector the company operates in.
Business Current Growth Stage
Select the current business growth stage for the company. This directly changes the discount rate.
The discount rates used are linked to the lifecycle stage of the business and are inclusive of a liquidity discount for private companies.
A range of discount rates may be used when estimating the specific discount rate in view of the maturity stage of a company. For example, for a Startup business the discount rate applied is 89.00%.
Note that these rates are subject to change based on WACC (weighted average cost of capital) movements per stage of company across industries and other new research on private companies.
In our model we have used the following discount rates for the growth stages (please note we express in the form of 100%).
Idea (113.59%)
The Company has not been formed or only just formed with the founders having an idea for a product and / or service but not much more.
Development (111.47%)
The Company has begun developing its products and / or services, and the team is working to identify how the product fills a need in the market, also know as product / market fit.
Startup (89.12%)
The Company has typically been operating for more than 12 months, and you are testing the viability of the idea with trial or even paying customers. You are beginning to establish a customer base and market presence and have a better understanding of how your funds are sourced and allocated.
Expansion (49.6%)
The Company has typically been running for more than 24 months, and you have a good understanding of how your products and services meet customer needs as well as your business, specifically what drives profits. You will understand the current competitive landscape and market conditions and are now focused on strategies to expand market, revenue and potentially profit.
Established (48.75%)
The Company has typically been running for over 4 years and should now have stable Revenue and Operating. You will understand the current competitive landscape and market conditions and are now focused on strategies to expand market, revenue and potentially profit.
Historical & Forecast Financials
Financials are either Historical (past) or Forecast (future).
Consolidated Profit & Loss
Revenue
Revenue, often referred to as sales, is the income received from normal business operations and other business activities.
Direct Cost
Direct costs, also known as Costs of Goods Sold (COGS), are expenses that a company can easily connect to a specific "cost object," which may be a product, department or project. This can include software, equipment and raw materials. It can also include labor, assuming the labor is specific to the product, department or project.
Gross Profit
Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company's income statement and can be calculated by subtracting the cost of goods sold (COGS) from revenue (sales).
Indirect Cost
Indirect costs are usually business expenses that are used by multiple activities and as such can’t be directly assigned to a specific cost object like manufacturing of a product, service delivery etc. Rather, they are required to operate the business as a whole e.g. rent or management charges.
Operating Profit
A company's operating profit is its total earnings from core business functions for a given period and excludes the deduction of interest and taxes. It also excludes any profits earned from ancillary investments, such as earnings from other businesses that a company has a part interest in.
Add Back
An add back is an expense that will not be included in the buyer's future P&Ls for the company, that is, it is a one-off, non-recurring expense in the period. Understanding and applying add backs and other kinds of adjustments helps normalise a business's earnings on a go-forward basis. It can include a one-off customer bad debt or owner manager’s costs.
Directors Loans
A form of extracting monies from the company by a director that is not recorded as salary or dividend. Any monies owed to the company (overdrawn) or to the director (credit) is also recorded on the balance sheet at year end. Accurate records should be kept for tax purposes, but generally no corporation tax is paid on monies lent to the company.
Directors Salary
Add the Directors Salaries (if any).Bad Debt
Bad debt is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible. Bad debt is a contingency that must be accounted for by all businesses that extend credit to customers, as there is always a risk that payment will not be received.Other
Add other Add Backs here.Subtotal
The application automatically calculates the total of Add Backs.
Add In
An “add in” is an expense that should be included in the buyer's future P&Ls for the company on a reasonable basis. Understanding and applying add ins and other kinds of adjustments helps normalise a business's earnings on a go-forward basis. For example, it can include the market salary of a manager to run the business operations once the owner-manager steps away. If the owner-manager has no current operational involvement, this estimate example is not required.
Management Charge
Market cost of a manager to replace the job function the owner currently carries out, if any.
Other
Add other Add Ins here.Subtotal
The application automatically calculates the total of Add Backs.
EBITDA
Earnings before interest, taxes, depreciation and amortisation (EBITA) is an indicator of a company's profitability.
Adjusted EBIT
Earnings before interest and taxes (EBIT) is an indicator of a company's profitability. EBIT can be calculated as revenue minus expenses excluding tax and interest. EBIT is also referred to as operating earnings, operating profit, and profit before interest and taxes.Depreciation
Depreciation represents how much of an asset's value has been used, to allocate the cost of a tangible or physical asset over its useful life.Amortisation
Amortisation is paying off an amount owed over time by making planned, incremental payments of principal and interest.Adjusted EBITDA
Adjusted EBITDA is a measure computed for a company that takes its earnings and adds back interest expenses, taxes, and depreciation charges, plus other adjustments to the metric. The application automatically calculates the Adjusted EBITDA.
Other
Interest
Any interest earned is recorded here.Taxes
Any tax paid is recorded here.
Consolidated Balance Sheet
Current Assets
Current assets owned by the company.
Inventory (Stock)
Current Stock owned by the company.
Receivables (Debtors)
Debtors are invoices owed to you by customers
Prepayments
Prepayments are services paid for but not yet consumed.
Current Liabilities
Accruals
Accruals are services consumed but not yet paid or invoiced for.
Payables (Creditors)
Payables are sums owed to e.g. suppliers but not yet paid for.
Interest Payable
Interest payable are sums owed for borrowings but not yet paid for.
Deferred Revenue
Deferred Revenue are sums paid to the business for good or services that have not yet been delivered.
Cashflow Statement
CapEx
Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company.