Mergers and Acquisitions For Dummies by Bill Snow

is wiped out. On the other hand, if the company is wildly successful, turning the debt into stock can be quite lucrative. Say that same company sells for $25 million. As a debt holder, the investor gets her $1 million (plus any outstanding interest) back, but as a stockholder, she’d receive the remaining $24 million.
    As you may guess, Sellers tend to prefer the non-control investments, while Buyers prefer control investments. The control investor has greater recourse to change management and affect the direction of the company. The non-control investor simply goes along for the ride, with little or no recourse to exit the investment.
    Diversifying assets: Take some chips off the table
    Many business owners have nearly all their wealth tied up in their companies, so their finances are in serious jeopardy if the company fails. Selling a piece of the company to an investor allows an owner to create liquidity in an otherwise illiquid holding. This maneuver is called a recap (short for recapitalization ).
    With the right investor, an owner who has recapped her business also has a capital source for further investment in the business and/or for acquisitions. In other words, the investor may also be willing to pony up more money to invest in the business or pay for acquisitions. One of the many challenges for most business owners is the age-old question, “Do I pay myself a big fat dividend or reinvest that dough back in the company?” By selling off a piece of the company, the owner is essentially able to pay herself that big fat dividend and have a source of capital for growth.
    Lastly, a recap sets up the owner to get a “second bite of the apple,” that is to say, to generate a second liquidity event (realizing a gain from an investment by selling shares for cash) when the company is sold to another acquirer. For an owner who’s looking to retire in five to ten years, the recap can be a great way to lock in a certain amount of wealth and allow herself some additional time to continue to run and grow the company, setting up a potential second payday when she sells off her remaining shares and retires or goes off to another venture.
    Bringing in an outside investor to buy out a partner
    Partners are a great way to build a business: One person deals with one area, such as sales, and the other handles another (say, the back-office administration and accounting). That’s a good coupling. The downside to having partners is that they sometimes stop seeing eye to eye, and one of them needs to leave the business.
    For a closely held business, this situation can be a problem; the partner who wants to stay may not have the money to buy out the partner who wants to leave. Bringing in an outside investor is a way to solve this problem.
    Planning Ahead to Ensure a Smooth Sale
    If you’re thinking about selling your company, a division, or a product line, you can take a few steps to make your asset more attractive to potential Buyers. This section tips you off to some areas to look at before you sell (or even decide to sell) so that you can avoid common pitfalls.
    If Seller is unable to institute operational improvements prior to a sale process, she should inform Buyer where he can make additional improvements. Getting Buyer to pay for the improvements he’s bringing to the table is often a difficult proposition, but it’s usually worth a try. At a minimum, Buyer will view the suggested list of improvements as a sign of goodwill, thus increasing the odds of a successful closing.
    Clean up the balance sheet
    One of the biggest obstacles to getting a deal done is a messy balance sheet. Now, don’t freak out about the accounting. Repeat after me: Accounting is your friend.
    One of the key figures on a balance sheet is the current ratio, or the difference between current assets and current liabilities. Anything labeled current on the balance sheet is essentially the same thing as cash. So what are these