Overview and Description

The effectiveness of any search effort is critically influenced by the quality of skill, preparation and research of the mergers and acquisition team. In an acquisition environment where the target pool is limited, where pricing, competitive interest, and easier credit prevails, search methods influence success more than ever before. This proposal describes the conditions surrounding the acquisition market, why most search methods fail, and what can be done about it. Lee Sperling Hisamune is committed to providing individuals and corporations with specialized merger and acquisition services devoted to transactions in the small and lower middle market. Regardless of the size of the acquisition, it is paramount to make the final decision based on all of the best information available.

Assessing the Acquisition Market

The distinguishing attribute of deal making in the 1990's is the emphasis both buyers and prospective sellers place on strategic value. The number of private companies compromising the middle market in the United States is slightly over 34,000. The bank of acquirers who prospect this pool includes over 13,000 public companies, 1,200 private investment firms, 1,000 merchant banks, and an indeterminate number of private investors. The companies compromising the small - up to the middle market is represented by hundreds of thousands of companies/businesses and an indeterminate number of private investors.

The ideal, lower middle market acquisition candidate is a business whose entrepreneurial founder has grown the company from start-up to the five to twenty million dollar level. He will have been in business ten to twenty years and may have completed his estate planning and merely desires an exit, or he may have grown his company to the critical point where more investment is needed to compete with the larger public companies for additional market share. In a proportionate fashion the small - up to the middle market is defined in the same way.

However you define their profile, these individual owners are sophisticated and understand the valuation process better than in years past. They are willing to explore the various options available to them and M&A firms regularly seek these companies as clients.

The most aggressively courted targets include businesses with a dominant position in a niche market, a "branded" product or a desirable distribution system. In many cases, these businesses are pursued as acquisition candidates for their stand alone value, complementary, add-ons as well as investment quality companies that are suitable platforms for leverage build-ups, or as stated above as stand-alones.

Typical searches are conducted by intermediaries and brokers engaged by individuals, corporate buyers or private investment firms to actively seek and search for potential acquisitions or to just keep an eye out for possible candidates for acquisition.

LSH maintains regular contact with a variety of possible target candidates for two reasons: first, in order to represent them should they decide to sell, and second, when acting as an agent for an individual(s), financial or corporate buyer.

Individual, corporate and financial buyers, in combination, bring hundreds of millions of dollars to bear on the acquisition market and it's their activity, or lack of, that drives the acquisition market. Financial buyers are stymied by individual/public acquirers and the public markets which offer higher valuations. This condition is ideal for individual buyers but not for financial buyers.

In addition to tough conditions in the M&A marketplace is that M&A endeavors are frequently subjected to competitive auction situations which drives up pricing. In general, pricing is hefty for companies with advantageous positions in growth or in advancing industries, but much lower for firms in commodity industries with no unique qualities.

The fear of overpayment is a constant concern for business acquirers whose objectives include return on investment. Consequently, buyers are demanding heavier up front due diligence before proceeding.

Why Most Searches Fail

In an auspicious environment where acquirers are few and targets are plentiful, virtually any technique for sourcing deals and contacting the candidates will work. However, the 1990's offer no such environment and are never likely to.

The acquisition market is highly competitive and sellers are informed and often advised. The quantity of desirable, privately-held companies in the United States is relatively small and the market is impacted by a number of negative factors previously discussed.

Most acquisition plans falter for a number of reasons. Many buyers fail to dig deeper and uncover less competitive, non-auction candidates. Furthermore, they don't adequately understand the cost associated with a search or the purchase of a company of sufficient quality to avoid troublesome turnarounds. Other reasons include the abundance of low quality or "damaged" leads verses the scarcity of better quality candidates. And, by moving slowly or making "low-bail" bids, the buyer invites competition and the potential of an auction when sellers begin to explore other options.

Buyers may be experienced but may not have the dealmaking skills required to entice a reluctant owner to the bargaining table. Additionally, the constraints placed on a buyer's time causes many would-be acquirers to take short-cuts.

The constraints on both the buyer and seller's time are prohibitive. From initiation to completion, the time it takes to complete one deal can take from six months to over a year. Attempting to perform an acquisition alone can deplete a buyers resources and his ability to objectively stay focused on the real and important issues of the deal.

The problem with using Intermediaries for help contacting candidate companies is that buyers fail to recognize the value of a "good" intermediary. To further confound matters, if and when a contact is made, many intermediaries use a generalist and a non-committal approach when talking to the seller or his advisor(s) for fear of committing to a deal without knowing enough information about the target.

In addition to mixed levels of professionalism and tough market conditions, buyers, both strategic as well as financial, complicate matters further by failing to involve themselves early on in the process.

The precious time it takes to bring all parties up to speed can be costly If the target is a hot prospect. Although many companies devote junior personnel to the tasks involved in handling acquisitions, this invariably slows down the process when decision makers are brought into the procedure too late.

Why Use LSH

The simple answer is because we know the small to lower middle market and how to navigate within it. Our team of professionals has established itself as a premier partner for merger or for acquisition of privately-held small to lower middle market companies and corporations by sponsoring a number of successful acquisitions for individuals and companies throughout the United States.

Unlike traditional intermediaries and business brokers, our acquisition team provides a qualified and motivated buyers service which makes things happen and which enables a buyer to concentrate on evaluating and closing transactions rather than spending the time and expense to locate them.

We work for you on a variable cost basis and save you the fixed overhead associated with an acquisition search, keeping current information sources, and developing technical databases for the all important research, valuation and strategic modeling.

The philosophy of our organization is to work as a partner with you, our client. Our function is to identify and, on a non-auction basis, "make for sale" companies which correspond to your tactical objective(s). LSH's seasoned professionals thoroughly research your desired "target" market(s) and identify suitable companies which make sense to acquire, based on your criteria and capabilities.

We have a thorough understanding of the M&A marketplace, external factors, and other issues which impact value. We compile information which addresses the specific interests of buyers such as detailed evaluation material which includes historical performance, information regarding the personal reasons for exiting ownership to consider a sale, information you need regarding market share and improved economies. We provide guidance in dealing with sensitive issues regarding competitors, vendors, and employees. We interview industry observers and participants, conduct competitive intelligent investigations to qualify each candidate for market share, competitive advantage, profitability, economies of scale and class of management, and we perform exhaustive financial modeling to demonstrate the profit potential of an acquired business. These are the facets essential to a successful sale.

We control the information flow which allows you the time to concentrate on matters relating to the sale without costly time consuming interruptions. We provide access to deal structure and negotiating skills and the experience of expert merger and acquisition specialists who control the information flow and guide proposed transactions to a successful and profitable close. This expertise enables you the time to negotiate agreements while we continue to monitor deal flow.

We are aggressive in our approach. We don't wait for opportunities to come to us. Instead, we actively pursue the right acquisition candidates. Throughout our operation, we maintain the highest quality professional staff - chosen for their creative skills, problem solving abilities, and level of professional support they bring to each deal.

To prepare for each assignment, we spend the bulk of our start-up time with you, the buyer, identifying and developing strategy and pinpointing the right markets for the search. We launch our program only when we are convinced that our work is perfectly aligned with your goals and plans.

We identify targets which fit the strategic plan; qualify each candidate for compatibility, financial strength, market share, competitive advantage, economies of scale, and class of management; contact potential target companies; and then coordinate the entire process for a successful acquisition.

Benefits

Our contribution to the deal process is distinctly unlike "merger-brokers" in this field, virtually all of which are counseling and information firms.

The Acquisition Search offers every buyer access to targeted dealflow; access to acknowledged professionals in market research, telemarketing, and public relations; and the service of dedicated merger/acquisition professionals who assist in the strategic planning, analysis, valuation, negotiation, and structure of a transaction.

However, unlike most firms, we don't limit our search to only companies which have told us they are for sale. At any time, the best companies a buyer would desire are not up for sale - they have to be found and properly "worked" so they may become a prime acquisition candidate. We develop and implement aggressive, buyer oriented searches which are exclusive to you and for which we professionally facilitate. By integrating our expertise and state of the art research, we provide the tools that helps you achieve your goals. We work closely with you until you are completely satisfied with the results of our work. And, what's more, we are completely effective in every phase of our service. Our firm is strategic in our thinking, experienced in our approach, and distinguished by our quality transactions.

Acquisition Sources

Databases

We subscribe or have access to over 2000 of the best known sources for dealflow and business information. This information includes Securities Data, Lotus, OneSource, InfoTrac, Thomas Registers, state lists of manufacturers, Lexis-Nexus, Bloomberg, Dialog, Dow Jones, Business Information Systems, and many others.

Industry Specific Trade Publications, Newsletter, and Associations

We maintain regular schedules with industry trade shows and keep up to date on the industrial movers and shakers. Also, routine to each major search and with our buyer-clients permission, we interview the publishers, editors, advertising managers, and senior editors of trade journals and newsletters to identify the players in your target marketplace and to ask questions in order to develop an objective analysis of an industry.

Actual Market Search

Once we have identified what we believe to be the complete list, we go into the field to speak with retailers, vendors, suppliers, managers, and the like to make sure your list is complete and we have not missed anyone. During this phase of our search, we discuss the competitive advantages and disadvantages of each target's products and/or service with the individuals who use them on a daily basis. This information is crucial as it provides market information and a basis for topical discussion with respective targets.

The Process

Step 1 - Analyze the marketplace and develop acquisition criteria:

Determine the industries and the markets served. Determine if the industry is consolidated or fragmented into small niches. Establish the strategic uses, markets, networks, and/or services, etc. required of the target. Determine the issues facing the industry and where is it going over the next three to five years. Determine the most significant opportunities for profits and the biggest roadblocks.

Establish revenue and profitability criteria; geography, if important; level of risk you are willing to accept (i.e., necessity for leverage, partners, equity contributions, etc.); organizational requirements (management to remain, percentage of ownership to be 100%, majority and to what extent, minority, etc.).

Identify the trade journals and newspapers pertaining to the industry (Business Rates and Data-Part 1). Contact the publishers, editors, and advertising managers, senior editors and ask for the benefit of their insight. Determine technical developments and improvements, what have firms done to increase productivity, who has done the best job, where are the opportunities for profit, and who are the industry leaders we should be talking to.

Contact senior executives of the trade associations and obtain demographics, industry statistics, and any censuses available.

Consult financial publications and Current Industrial Outlook.

Step 2 - Identify the marketplace and generate preliminary search report.

Compile list of targets from researched data.

Conduct field search in local and other markets as necessary for marketing, sales support, distribution, etc.

Identify targets and sort according to size, geography, and other criteria from buyer.

Step 3 - Prepare marketing materials for use in introduction:

Prepare letters of confidentiality and introduction, obtain any pertinent literature or brochures from targets sales department, develop marketing material.

Step 4 - Develop the short list:

Perform detailed background search and initiate contact with target. Visit if needed to determine willingness and readiness to sell. Screen acquisition criteria and obtain financial and product information. Determine seller's expectations relative to price.

Step 5 - Compile target's informational package and submit to buyer.

Step 6 - Set up an initial conference call and or meeting between buyer and seller.

Step 7 - Follow-up:

Ascertain appropriate values for acquisition. Assist in matters of Due Diligence. Advise on Letters of Intent. Advise on Definitive Purchase Agreements. Arrange financing when needed.

LSH's Acquisition Search Model

BUYER: Sets Acquisition Criteria

Search Team: LSH

***Publicly Held Firms*** Databases: Bloomberg, Securities Data, Data, Predicasts, Dialog, Nexus-Lexis, Disclosure, Dun & Bradstreet, M&A Database, etc. Literature: Annual Reports, SEC filings, prospectuses, industry reports, Industrial Outlook, Outlook, press releases, other media reports, etc. Expert inputs: consultants, securities analysts, industry observers, etc

***Privately Held Firms*** Data Bases: News Edge, InfoTrac, Thomas Register, Ward's Directory, OneSource, Dialog, Nexus-Lexis, D&B, M&A Database. Literature: State filings, trade directories, industry reports, press clippings, etc. Network: suppliers, customers, sales force, intermediaries, trade shows, industry observers.
Long List Of Prospects: Ranking of prospects according to fit chart, points system, etc.
Short List of Candidates.
Fact Book On Each Candidate: Management profile, shareholder profile, production configuration, customer loyalty, suppliers, technological strengths, distribution channels, product literature, price lists, inputs from surveys, competitive intelligence, etc.
Preliminary Analysis: Competitive strengths and weaknesses, financial compatibility, strategic compatibility, cultural similarities, overall feasibility of an eventual transaction.
Go Ahead Decision Formulation of a contact strategy for remaining candidates	Rejects
CONTACT

Confidentiality and Exclusivity

All information we share including specific information about you or your company (if represented), your interests in any specific targets or industries, and all information not known to the general public or addressed in any of your correspondence, reports, reports to the SEC are kept completely secret. We are gladly bound by formal agreements relating to confidentiality.

Our Search Service is devoted to the total and exclusive benefit of you, our client. Unlike many in this industry who loyalties often serve multiple interests, we do not cross assignments. We advise and engage only one buyer at a time in each specific industry classification and reserve every prospect and all intelligence gathered within that category for their benefit. As long as our engagement is active, we will not accept assignments from others or from your competitors who wish to acquire within your specific areas of interest.

In the event that we are simultaneously engaged by another individual or company that you find to be a desirable acquisition candidate, the seller would be responsible for any fees owed should you close with him.

Summary

The last major factor which separates our firm from traditional business brokers, and intermediaries has to do with accountability. Unlike other firms, if our work does not produce the desired results, we don't simply blame the economy or a circumstance. Instead, our staff starts with a fresh analysis and a review of the work done to date and all the actions that have been taken. Adjustments are made and, if necessary, we develop a completely new strategic plan which we supplement with new implementation. Your assignment is important to us, and that's the commitment we make to every client - and we honor it.

Lee, Sperling, Hisamune
550 North Brand Boulevard, Suite 650
Glendale, California 91203
Phone: (818) 507-6645 - Fax: (818) 507-7891
Email: lsh@leesperling.com