In mergers and acquisitions (M&A), the sell-side banker helps an owner find buyers, compare alternatives and negotiate a transaction. Every sell-side process begins with what the seller wants. You organize the process; the seller decides, supported by legal counsel and tax advisors.
Before identifying potential transactions, establish shareholder objectives: immediate liquidity, continued ownership, maximum after-tax proceeds, speed or protection of employees. These priorities determine whether you pursue a broad auction, contact selected buyers or negotiate with one candidate.
The engagement letter is the contract defining your assignment. Negotiate scope, valuation and marketing responsibilities, exclusivity, expenses, confidentiality, indemnification, termination and compensation. Indemnification allocates specified claims and losses. A retainer provides upfront or periodic compensation; a success fee depends on completion. Define the fee's transaction-value base, any retainer credit and any post-termination fee period. Finalizing the engagement letter also means resolving potential conflicts, including whether your firm might finance buyers.
Identifying potential transactions starts with the business the seller wants to retain. A sale of the entire company transfers the whole enterprise. Divestitures dispose of particular businesses, subsidiaries or assets.
Common mistakes
- Comparing unlike bids. A $160 million enterprise-value bid is not $160 million for shareholders; Example 1 yields $130 million of equity value.
- Subtracting the trigger amount. In Example 2, excess payments are $400,000, not $0 from subtracting three times the base.
- Assuming stock guarantees tax deferral. Even 100% stock consideration requires the applicable reorganization conditions.
Bottom line
- The engagement letter defines services, compensation, conflicts and termination terms.
- A stock sale describes what changes hands; stock consideration describes payment.
- Section 338(h)(10) can give eligible stock purchases deemed asset-sale tax treatment.
- Section 280G uses a three-times-base trigger and generally measures excess above one base amount.
Exam shortcut
When a stem asks for the best bid, first align enterprise and equity values. Then check financing, consideration volatility, taxes and closing conditions. For a parachute problem, calculate the five-year average, test three times that amount, then subtract one base amount if triggered. Watch for equality. For HSR, locate the transaction-value band before examining person size. If a smaller target is nonmanufacturing, inspect assets.
The full lesson (about 3,847 words, 26 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- C21
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