STRUCTURAL BUILDING COMPONENTS MAGAZINE
June/July 2006 Support Document

Mergers & Acquisitions Part 1: How to Prepare for Sale

Valuation - the amount agreed upon as the value of the enterprise; there are several methods that can be applied in determining such value.

Escrow - arrangement where a portion of the purchase price is held by a third party and is to be released in accordance with instructions from either the buyer or seller or both as negotiated; escrow arrangements can require significant time to negotiate.

Representations and Warranties - the representations are the factual statements that each party makes about the status of its enterprise and business; the warranties are the promises that the representations are true and correct.

Indemnification - the hold harmless provisions that are to apply when one or more of the representations is determined to not be true.

Right of Offset - the right of the buyer to withhold a future payment or payments held in escrow as a result of a breach of the representations and warranties.

Valuation Multiples - generally refers to the earnings stream multiple that buyers will apply in valuing a business; i.e., common ranges are 3 to 6 times annualized earnings before interest, taxes, depreciation and amortization (EBITDA) or 6 to 10 times net annualized earnings.

Private Equity Group - money management firms that usually form limited partnerships for the purpose of raising funds from limited partner investors; the management firm pursues investment opportunities which include the purchase of businesses.