Qualitative Analysis
May 3, 2024
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This guide is designed to familiarize you with the teaser, which is a document used in M&A (mergers and acquisitions) transactions. To learn more about the M&A process, read our guide: The M&A Process Explained. To begin with, here are some bullet points to help you understand the teaser as a document before we cover how it’s used in M&A:
This part of our guide will cover how the teaser is used in the M&A process—the process leading to the merging with or acquiring of another business. If you’re unfamiliar with this process, then you can brush up with our guide: The M&A Process Explained.
Here we’ll see the teaser from both the buyer’s (acquirer’s) and the seller’s (target’s) perspectives. From both perspectives, the teaser will come into the M&A process near the beginning.
Generally speaking, from an acquirer’s perspective, the M&A process begins when they determine what their acquisition criteria and strategy are. In other words, it starts when they determine what they’re looking for and why they want it.
After that, they begin actually looking for potential acquisition targets. A big part of how they do this is through relationships with investment banks and M&A firms. These investment banks and M&A firms act as intermediaries between the prospective buyer, and the potential seller—whose identity is kept confidential at this point. So, when buyers go searching for acquisition targets, they go to these intermediaries. In turn, they are given teasers with information about businesses that may be a good fit for their acquisition strategy. This is an oversimplification, because some buyers are in effect always looking for acquisition targets. Private equity companies, for example are never not looking for a great investment. Either way this explains how the teaser comes into play. When a prospective buyer goes looking for target companies, they get a hold of teasers through intermediaries, such as investment banks or M&A advisory firms.
The teaser is how the seller advertises itself to potential buyers while keeping its identity confidential. As a document, the teaser is a one- or two-page document giving high-level information about the seller’s company so that potential buyers can determine if they’re interested in learning more about the company. The teaser keeps the seller anonymous.
The teaser fulfills a function in the M&A process that’s almost like speed dating. In speed dating, each person is paired up with many other single people for short 5-minute conversations. They can learn some basic information, and the only purpose is to determine if they liked the person enough for a second date.
If prospective buyers are interested in the business after reviewing the teaser, they will sign a Non-Disclosure Agreement and request more information. In exchange for signing the NDA, the seller will have a pre-prepared document—called a Confidential Information Memorandum (CIM)—that they give to the buyer through the intermediaries they are using to facilitate the sale. The CIM will have more detailed information than the teaser does. The NDA and CIM help to further protect the seller's confidentiality in conjunction with the teaser.
In M&A transactions, the teaser works extremely well for its intended purpose. The seller doesn’t have to put a lot of sensitive information out there until they come across a buyer that’s seriously interested to learn more about them. To understand this, we’ll look at the M&A process from the seller’s perspective next.
The teaser is where the M&A process often starts for the seller. After they’ve determined they’re looking to sell their business, they begin working on this short document to see who might be interested in buying them.
The seller’s goal is to advertise their business through those intermediary channels we saw earlier (investment banks, M&A firms, etc.) but with the added objective of confidentiality. Generally speaking, the seller cares a lot more about confidentiality than the prospective buyer does. This is a huge part of the reason why the teaser exists in the first place. If the owner of Company A is looking to sell his business to Company B (or Company C, etc.), he’s concerned with more than the price.
In the majority of M&A transactions, we’re dealing with a privately held business, meaning they don’t publish financial information that’s available to the public, like Apple and Amazon do. So, they’re concerned with keeping their financials confidential. But at a deeper level, they also have reason to fear blowback and other consequences from deciding to sell.
If word were to get out that the founder was looking to sell the business, and that business’ information were to get released to the public, unintentionally, here are some potential negative side effects:
So, it’s easy to see why the seller is more concerned with confidentiality than the buyer is. The teaser fits into this process like speed dating does. It helps the intermediaries (like investment banks or M&A firms) match prospective buyers with potential sellers in a way that limits the exposure of sensitive or confidential information.
After a prospective buyer reviews the information in a teaser and determines that this business could potentially make a good acquisition target, they will request more information. The teaser doesn’t include enough information for the prospective buyer to do detailed financial analysis or modeling on the target company.
When potential buyers want more information, they typically make a formal request for more information and an NDA would be drafted, agreed upon, and signed by both parties. Generally, the prospective buyer would be listed as the “Receiving Party” and the seller as the “Disclosing Party”. To learn more about NDA’s (non-disclosure agreements) in the M&A process, read our guide: NDA Meaning in M&A.
Naturally, when a company decides they’re interested in selling, they have to actually go about writing the teaser. To do this, they need to make sure they give away enough of “the right” information to help prospective buyers see the company in the best light possible, but they also need to be concerned with their integrity and with confidentiality. This part of the guide will aim to help sellers by focusing on some key tips for writing a good teaser.
1. Prospective Buyers Should Know What Your Company Does—Knowing what a company does has both a qualitative and quantitative side. On the one hand, the prospective buyer wants to see financial snapshots, but they also want to understand more qualitative elements, such as the management team as well. Generally speaking, after reading a teaser, prospective buyers should know how your company generates revenue, the sales and revenue breakdowns by products/services sold, and they should see at least three years of historical financials (and often more for established businesses), as well as a few years of projected revenue (important). Also, they should know when your company was founded and where your company is located (geographically). Some buyers are primarily focused on buyout targets in a specific geographic location.
2. Clearly State Your Objectives—It’s important to be up front and direct about what you’re trying to accomplish with this transaction. Are the owners looking to sell their stake in the business (exit strategy)? Are they looking for an equity partner? Are they looking for a strategic merger? The prospective buyer should be able to tell this from the teaser, without needing to sign an NDA and dig in further.
3. Maintain Integrity—The teaser should be prepared with a high degree of integrity. There is no weaker way to start a negotiation than by willingly and knowingly deceiving the other party. There is no upside potential to this and they will likely figure out anything you’ve tried to cover up or hide when they do more detailed analysis, or later on in the due diligence phase.
4. Know Your Audience—Look at your company as an investor would. Try to break off three to ten investment highlights as bullet points. In other words, spell it out for them. Remember that integrity is important here, but don’t make the mistake of underselling your company as an asset to a prospective investor. You can—and should "sell” your company as a great investment, provided you’re being honest. Remember that prospective buyers look at teasers all the time. Let them see your value.
5. Take Precautions With Confidentiality—It’s important to have someone else (other than the ones writing the document) audit it for confidentiality breeches. Things can unintentionally tip off readers and one of your company’s primary goals is to maintain confidentiality. Don’t take any information from your company’s website or give away details that tip off potential readers and give away your company’s identity. Confidentiality is a necessary part of this process, so take precautions to maintain it. It never hurts to double check.
For more information on what to include and how to write a teaser from the seller's perspective, we recommend our guide: How To Write A Teaser.
Now that we’ve seen what it takes to write a good teaser, let’s look at how prospective buyers make decisions on what companies to pursue versus pass over. Here, we’re going to look at how prospective buyers make decisions.
First, we need to understand that there is more than one type of buyer. Meaning, that buyers have different reasons for making acquisitions. Generally speaking, buyers are broken into two categories, “financial” and “strategic” buyers.
Strategic buyers are usually buyers with the goal of breaking into new markets, gaining more market share, or moving into new market segments. For the strategic buyer it’s of great importance to identify and in the end, deliver operating synergies. Financial buyers are for the most part private equity companies that are more concerned with getting maximum equity returns via the use of financial leverage. You can learn more about: Financial vs Strategic Buyers, here.
Additionally, it’s important to note that prospective buyers make decisions for specific reasons that pertain to their business case. Financial buyers may specialize and buy companies in only specific size categories (ie. $10m to $50m) Other companies may be more concerned with profit margins or interest coverage. They may also focus and specialize in only one or two industry segments.
Moreover, some strategic buyers are only interested in buying businesses located in specific places (ie. Europe). A common reason for M&A is to gain access to new markets or customer segments. As far as decision making criteria go, strategic buyers are very interested in hard and soft synergies and their ability to see the possibilities in your company is important.
