Jim MacDonald (not his real name) had worked for a large consulting company for several years and he had become a senior member of the company’s computer networking department. In his eleventh year with the firm it made the decision to divest its computer networking operation and focus on software.

The computer networking operation was sold to a large Indian firm that specialized in Information Technology (IT). After about 6 months Jim decided that, rather than adapt to a new company and a different culture, he would strike out on his own. Jim had some money saved and his wife had a good job.

Jim’s company started slowly and in the first year he barely showed a profit. However, he hired some good people and after a few years his company had revenues of about 6 million and a staff of 30 professionals. The IT industry was growing and changing rapidly and Jim realized he didn’t have the capital to make the necessary adjustments to keep pace with the industry leaders. He also felt that:

• He didn’t have the management skills to take the company to the next level.

• He had the majority of his wealth tied up in the company and he wanted to diversify his portfolio.

So Jim decided to seek an acquirer. Jim retained an M&A Advisor on the advice

and recommendation of his lawyer, an experienced M&A Attorney. After analyzing and researching the company, the industry, and recent similar industry transactions, The M&A Advisor (Rob) performed the following tasks:

• Rob worked with Jim to develop a 5 year financial plan.

• Rob re-casted 3 years of historical financial statements and calculated an adjusted EBITDA of $712,000.

• A valuation was performed using both the “multiple of EBITDA” method and the “discounted cash flow” method to arrive at a possible price range for the company.

• The valuation produced a value range of between $3.8 million and $4.5 million.

• Rob developed a marketing plan that included both ads on selected websites (“shotgun” approach) and letters to selected companies in the computer networking industry (“rifle” approach).

• Rob developed a website ad, one page teaser, and the Confidential Memorandum (CM).

• Jim signed off on the marketing documents and Rob implemented the plan.

• Rob followed up his letter to selected companies with a phone call. He got through to a few but mostly had to leave voice mails. This approach led to 18 responses and 18 signed NDAs. The responders all received the CM.

• The website ads garnered 43 total responses and 29 signed NDAs, all of which received the CM.

It will be interesting to see the number and quality of the offers (Letters of Intent – LOI) from all of these responses and signed NDAs. Stay tuned for Part 2 as we examine those offers!

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