A Primer on M&A

Feature Interview by Dan Beaulieu
D. B. MANAGEMENT GROUP

Tom Kastner of GP Ventures is a busy man these days. He’s been involved in several M&A deals, including the sale of Royal Circuits and Advanced Assembly in May to Summit Interconnect. Tom spent some time with Dan Beaulieu, who often consults with PCB and PCBA companies, about what it looks like when a company is thinking of buying or selling—and how a consultant like Tom helps negotiate the best deal.

Dan Beaulieu: Tom, thanks for talking with me. I know you are very busy with your focus on PCB and PCBA-related companies. How did you get involved in this area of your business?

Tom Kastner: I started in the industry with Hakuto, a Japanese company which makes cut-sheet laminators for PCB manufacturing. They also distribute components and semiconductor equipment. I started with connectors, followed by RF/microwave components, then I got into corporate investments and PCB equipment. I’ve been in M&A since 1996.

Beaulieu: You have completed several company sales in the past. Please share some of your recent examples of your successes.

Kastner: The most recent was Royal Circuits and Advanced Assembly to Summit Interconnect. Overall, I have been involved in more than 20 deals in the PCB and EMS sectors.

Beaulieu: Tom, if someone wants to sell a business and they want to hire you, what does that look like?

Kastner: First, we talk about the owner’s goals and expectations. If they are looking to sell soon, we focus on the process of selling. If they are looking to get ready to sell in three to five years, we can talk more about long-term preparations.

Beaulieu: I assume all your dealings are in the strictest confidence?

Kastner: Yes, my business is dealing with very sensitive subjects, so confidentiality is key for me and my clients.

Beaulieu: Tell me about the process.

Kastner: In the beginning, I’ll talk with the owner about the potential value of the company and the possible terms such as cash at closing, earnouts, etc. I’ll also visit the company and get to know them better. Once we are signed up, we put together a professional executive summary and confidential presentation. We reach out to potential buyers which are screened in advance by the client. We’ll answer questions and, after a certain period, ask for initial offers (IOIs). The top bidders get invited to Zoom calls and in-person meetings, then we ask for letters of intent (LOIs). We sign one LOI, then go into due diligence. Once due diligence is completed and we negotiate the purchase agreement and other closing documents, we close the deal.

Beaulieu: Tom, let’s get a little more specific about your fees. I know that you customarily charge a monthly retainer. What is that for?

Kastner: With my team, we spend an incredible amount of time on each deal, so we feel we should be compensated in part for our time. Usually, 90–95% of the total fee is based upon success, so the retainer is a small part of the deal.

Beaulieu: That makes a lot of sense. Now let’s talk about what your team provides with that retainer.

Kastner: It includes all the services described earlier, from developing the materials to closing the deal.

Beaulieu: How do you find the right buyers for the company you are selling?

Kastner: We reach out to as many buyers as possible. Sometimes, the most obvious buyer closes the deal. Sometimes, it’s a buyer we never thought would be interested or that we had never heard of before. Buyers know that we’ll be reaching out to a wide range of buyers, so there will be competition. Also, by engaging our firm, the seller is sending a strong signal that they are serious.

Beaulieu: How is the price of a company developed? How do you set the price?

Kastner: Before getting started, we talk with the owner about the probable valuation range of the company. We do not go to market with an asking price, however, we let buyers compete to set the market valuation.

Beaulieu: Is it possible to sell a company that is not making any money?

Kastner: Yes, but it’s not easy. Typically, if a company is not making money, we’ll look to represent a buyer who is looking for that type of deal. Most likely, the valuation will be related to the value of the assets.

Beaulieu: What is the most important piece of advice you would give to someone selling a company?

Kastner: Prepare as much as possible, get educated about the process, and assemble a good team of advisors.

Beaulieu: How long does this all take?

Kastner: For a seller, we usually estimate between six to nine months from the time that we are engaged. It’s possible to sell more quickly if a pre-emptive buyer emerges. If something happens during the process, such as the company’s results drop or the economy falters, it can take longer.

Beaulieu: What are some of the challenges of selling a company?

Kastner: The biggest issue that occurs is that the company’s results start to drop. Sometimes, the timing is not right in terms of the overall economy, the electronics sector, or global events. Buyers have issues that come up from time to time.

Beaulieu: What is an LOI, what does it mean in the process, and what are the steps after the LOI?

Kastner: A letter of intent is a document that spells out the valuation, terms, and conditions of a deal. It is typically non-binding except for an exclusivity clause and any break-up fee. Once an LOI is signed, we move into due diligence.

Beaulieu: What is due diligence? What does that encompass?

Kastner: Due diligence is an intense examination of the seller’s information. Buyers investigate all aspects of a company. It starts with accounting, but it includes legal documents, customers, suppliers, employees, IT, facilities, etc. Even the most prepared sellers will learn something about the company during the due diligence process.

Beaulieu: How long does it take from LOI to actual completed sale?

Kastner: For prepared sellers and motivated buyers, it usually takes 45–60 days. If a seller is not very prepared, the due diligence process can be much longer. Also, if major items come up that need to be resolved, it can be much, much longer. By preparing in advance, we can help cut down the due diligence time. Also, if the buyer knows that other buyers are waiting outside the window, that can motivate them to move faster.

Beaulieu: Then you get a success fee on the sale. What does that consist of?

Kastner: We receive a percentage of the value of the transaction, plus a bonus if we really hit it out of the park.

Beaulieu: Is the retainer taken out of the final success fees?

Kastner: No, we work hard, and we earn both the retainer and the success fees.

Beaulieu: Now let’s talk about buy-side agreements. How does that work?

Kastner: When we work with buyers, we will reach out to a pool of sellers to find the right fit for our client’s criteria. We gather information, set up calls and meetings, help negotiate with the seller, and generally assist the buyer through to closing.

Beaulieu: How do you find qualified buyers and how do you know they are qualified?

Kastner: Our buy-side clients are usually private equity-backed and/or have experience with acquisitions. I might sound like Yogi Berra or something, but I try to work with buyers who have money, because it takes money to buy companies. Buyers can also use debt as well as earnouts and other types of deferred payments to make acquisitions.

Beaulieu: What is the most important piece of advice you would give someone buying a company?

Kastner: Be patient and do not just fall in love with the first owner who wants to talk. Be ready to hit the eject button if the deal stops making sense.

Beaulieu: Tom, thanks for talking to me today.

Kastner: My pleasure.

Tom Kastner is the president of GP Ventures, an investment banking firm focused on sell-side and buy-side transactions in the tech and electronics industries, and an I-Connect007 columnist.

Dan Beaulieu is president of D.B. Management group and an I-Connect007 columnist.