As a part of Windward’s on-going series of topical discussions regarding various aspects of Mergers & Acquisitions we wanted to provide some insight into the various steps and timing involved in conducting a formal sell-side engagement. While here we only address the process as it relates to a sell-side engagement, it should be noted that many of the steps involved would also be similar and relevant to a buy-side or capital raising engagement with some minor differences.
In our experience we have found that most business owners seeking to sell a company are generally unaware, and in most cases unprepared, for the level of informational requests that will be asked of them, their management and their other service providers (accountant, attorney, etc.) as a process is commenced. In addition, most owners generally do not have a full appreciation of the stages involved, the related timing for each, and the level of scrutiny that the company and the management will be subjected to during a process. By gaining an understanding of the steps of a process, the parties who will be involved, the rationale, roles and expectations of each party, and ultimately, how the owner and company will benefit, the owner, management and company can be better prepared as they embark on a sale of the company.
One visual method for discussing a sales process is by preparing a Gantt Chart, such as the one attached, as a metric for staging and managing the process. While there are various methods used for selling a business, such as a conveyance to other family members, a listing through a business broker on a website similar to a real estate sale, a sale to management, etc.; if the desired outcome of the owner is to achieve the highest value and best terms for the company, then a formal, well-planned and managed process is, by far, the best solution. Below we have described the stages of a formal process and included the parties who would need to be included at each step along the way. This is a general outline and there may be variations, depending on the nature of the business, etc. One should also note that the calendaring of a process is influenced by time of year, holidays and seasonality; all of which can have an effect on the success of the process and its outcome. The main stages are:
STAGE 1 – Information Gathering/Process Design
Primary Personnel Involved – The Investment Banker will provide the Company with detailed lists of information that will need to be collected from the Business Owner(s) and Company Management as deemed appropriate (i.e. Chief Financial Officer, Bookkeeper, Controller), Company Attorney and Company Accounting firm. Secondary Personnel and resources may include lenders, wealth advisors, industry analysts, industry associations, insurance carriers, benefits program managers, etc.
This stage of the process can be heavily influenced by the quality of information produced by the company and ability of the company to generate the information that will be needed and required to prepare the presentation materials. During this phase, as the investment banker, we perform an analysis of the company that may also identify aspects of the business that we know will be perceived as weaknesses (also synonymous with discount to value) by prospective buyers. As a result we would make recommendations and develop, with the owners, strategies for addressing and mitigating these items prior to going to market.
Externally, the investment banker conducts an industry analysis for the purpose of understanding industry trends, the positioning of the company, identifying industry opportunities and industry risks. A list of prospective buyers is developed that would include both strategic and financial buyers. This is done in conjunction with the business owner(s), management and through industry resources and is a critical step to ensure that the most likely buyers, who would perceive the most benefit and , thus be willing to pay a higher price, are identified.
Since the market will determine the value of the business during a competitive sales process it is seldom necessary to have a formal valuation performed. The investment banker, however, will discuss general ranges of values that should be expected, given market trends and industry comparables. With additional input from the company’s tax advisor, they can also provide potential ranges of net cash realizations that may be achieved. Concurrently, the investment banker will explore with the company’s attorney any corporate and legal issues that may need to be addressed or considered.
The materials that will be used to market the company are drafted, editorialized, finalized and readied for distribution. Discussions are held with the owner(s) about maintaining confidentiality, addressing management and employee concerns, keeping focus on operations and performance, and preparing for formal management presentations that will be forthcoming.
STAGE 2 – Initial Marketing
Primary Personnel Involved – This stage is primarily the responsibility of the Investment Banker. Secondary Personnel involved would include the Owner(s), Company Management, Company Accountant and the Company Attorney.
Critical steps included in this stage include the dissemination of information, preparation and collection of Confidentiality Agreements, gathering of questions and preparation of responses, and the solicitation and review of initial offers. Secondary personnel need only be involved to the extent that there are specific issues or questions raised where their input is needed to prepare responses. The owners are provided progress reports along the way and there is no direct contact between the prospective buyers and the company.
STAGE 3 – Final Marketing
Primary Personnel Involved – The Investment Banker and Owner(s) are the most active during the first phase of this stage. Secondary Personnel, who would become more active during the second phase of this stage, would include the Company Management, Company Accountant and Company Attorney.
This stage is a continuation of stage 2 and includes a review of initial offers received, the refinement of offers, the preparation and scheduling of company management presentations and the beginning steps of setting up a data room that will be required for due diligence. Prospective buyers are encouraged to refine their proposals based on feedback from a collaborative discussion between the investment banker, owner(s), company accountant, company attorney and a review of other offers received. By the end of this stage the company management has prepared, refined and rehearsed a management presentation to present to the prospective buyers who will be invited to attend a meeting at the company during the next stage.
STAGE 4 – Negotiations/Closing
Primary Personnel Involved – Essentially at this step all of the advisors to the Owner(s), Company Management, etc. are very involved. At this stage the Prospective Buyer(s) and their due diligence team, which may include their Attorneys, Lenders, Accountants, and other supporting advisors (i.e. appraisal firms, environmental firms, insurance consultants, benefit plan coordinators) are actively involved.
Stage 4 is the first time that the company owner(s) and the company management will have direct contact with prospective buyers and this takes place during management presentations to a select group of buyers who have submitted offers that are being seriously considered. These meetings typically generate a second round of questions to which responses are prepared and submitted to the buyers. At this point the investment banker will solicit formal Letters of Intent (LOI).
Once LOI’s have been received they are summarized by the Investment Banker who will review the offers with the owner(s), the company’s attorney, the company’s Accountant and any other parties as requested by the owner(s). The terms are further negotiated after which time a final decision is reached with the owner(s) as to who they have chosen as a buyer. The Buyer is then notified by a formal acceptance of the LOI.
After acceptance there is typically a 60-90 day exclusivity period within which the buyer has to bring in his due diligence team that may include accountants, attorneys, lenders, insurance assessors, etc. to conduct due diligence and commence preparations to effect a closing. During this period the owner(s), the company’s management, the company’s attorney, its accountant and other advisors to the company will need to be available to provide information and respond to questions that may arise. There is typically a data room established that can be on-site, off-site or electronically available to provide much of the supporting detail that will be reviewed. This part of the sales process, however, is generally the most disruptive to the company and its staff.
As part of due diligence the buyer will require access to employees, customers, suppliers, etc. and will, in most cases, simultaneously commence the drafting of a definitive purchase agreement. Deal term negotiations will continue throughout the due diligence period and usually accelerate toward the end of diligence as findings are discussed, purchase agreement terms are finalized, escrows are established and remaining outstanding items are resolved.
The culmination of the process and completion of the stages then results in a sale of the business with a closing of the transaction and a transfer of funds. To the extent that there is any remaining, or post-closing follow-up items, responsibility is delegated and generally tracked by the seller(s) attorney. At this point the investment banker’s obligations have usually been fulfilled except for a post mortem meeting and occasional follow-up items.