The keys to a successful sell-side M&A engagement are thorough preparation and creating a competitive marketplace. The goal is to create a private auction amongst qualified potential buyers, with successively higher offers and better terms.
Our disciplined sell-side M&A process is very much like a funnel; whereby we start with a broad list of potential buyers, and that field of potential buyers is narrowed throughout the process, until a single buyer is identified and selected. We then work with that buyer until a successful conclusion is reached.
The following is a brief summary of the steps that we employ:
1. Assessment
The assessment phase is arguably the most important. During this phase, we perform a preliminary assessment of the seller’s goals and objectives, determine a preliminary valuation range, and assess the current M&A market to determine if we think the business can be sold for a price (and structure) that will meet the owner’s objectives. After all, there is no sense starting down a path if we don’t think the owner’s objectives can be achieved. Our disciplined approach is time consuming, and we generally receive the majority of our professional fees only if a transaction is successfully consummated. The owner can pull the plug on a process at any time, so there is no sense wasting time and effort if we don’t think we can reach a successful conclusion. Therefore, we tend to be very selective in determining which potential clients we want to work with.
During this phase, we also begin to assess due diligence readiness, obtain buy-in for overall process and strategy, and engage advisors and assemble the transaction team.
2. Preparation
We start this phase with an internal due diligence process to identify and correct potential problems and prepare the business to be put on the market. We spend a lot of time learning about the business, what makes it an attractive acquisition candidate and how the business works from a financial and operational perspective. We help summarize historical and prospective financial information and draft a detailed narrative (called a “Confidential Information Memorandum”, or “CIM”) to eventually communicate relevant information about the business to hand-selected potential buyers. We then spend a significant amount of time and effort identifying and researching potential buyers and determining a marketing strategy, with the goal of creating a preliminary target list to whom we will market the business.
3. Marketing
During the marketing phase, we contact potential buyers and judge preliminary interest by providing them with a short summary about the business, which we call an “Acquisition Profile” or a “Teaser”. The goal of the Teaser is to provide just enough information about the business for a potential buyer to determine whether or not they’d be interested in pursuing an acquisition, while not providing identifying information about the seller’s business. If the potential buyer is interested, we have them execute a confidentiality agreement and then communicate the bidding process and provide them with a copy of the CIM. The goal of the CIM is to provide them with enough information about the business to make a preliminary offer. Given our significant transaction experience, we generally know what information buyers need, and therefore prepare the CIM accordingly. During this phase, we also coordinate preliminary information requests from buyers so that they can make an informed decision.
4. Deal Making
The deal making process is the part of the process that I enjoy the most, and where we provide a significant amount of value. Given our familiarity with the customary terms, structures and valuations of middle-market business transactions, this is where we have a significant advantage over business owners that think they can do it on their own. We receive initial (non-binding) letters-of-intent and establish precise deal terms around the following:
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- Transaction type/what’s included
- Purchase price and payment terms
- Balance sheet targets
- Escrows/holdbacks
- Earnouts or future equity participation
- Employment/consulting/lease agreements
- Non-compete agreements
- Contingencies and timing
We then analyze and negotiate offers simultaneously, setting the buyers against one another in a type of private auction. At the conclusion of this phase, we generally select a single winning bidder, although we’ll sometimes allow more than one potential buyer to continue to the due diligence phase.
5. Due Diligence
During the due diligence phase, we act as the intermediary between the winning bidder (or bidders) and the seller so that the buyer can complete their due diligence. Due diligence typically includes a review of the following aspects of the business:
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- Legal and organizational
- Financial reporting and Quality of Earnings (Q of E)
- Tax matters (income, sales, etc.)
- Assets and liabilities
- Indebtedness and commitments
- Customers and contracts
- Facilities and operations
- HR and employee matters
- Regulatory matters
During the due diligence phase, we address issues that arise and negotiate the deal impact on behalf of the seller.
6. Transaction Documents and Closing
Once the due diligence process is complete, the definitive transaction documents are drafted by the attorneys and negotiated by the parties. By this point, both parties have invested a significant amount of time and effort in the process, and we work hard to ensure that nothing derails the potential transaction. That is why it’s so important that the previous steps have been completed thoroughly. I have seen many transactions go awry during this phase because the previous steps have not been completed thoroughly. The job of the attorneys is to “paper” the transaction and terms that have been agreed to by the parties; it is NOT to renegotiate the deal. But if precise business terms have not been negotiated, if reps/warranties/indemnification provisions have not been discussed, and if disclosure schedules and exhibits have not been thought about, things can quickly get chaotic, and I’ve seen many deals crater as a result. The goal of the investment banker is to shepherd the parties through this process and get them to the closing table, where documents are signed, and the deal is consummated.
We have found the above process works very well when approached with a disciplined manner. And since our compensation is normally based on a percentage of the transaction value, our interests are very much aligned with those of the seller.
If you’re considering a sale of your business and would like to discuss the contents of the article, please contact us.
Jeffrey G. Lewis, CPA, is a partner at the Bonadio Group, a nationally ranked, Top 40 accounting and consulting firm. He oversees the firm’s Transaction Advisory Services team, which specializes in sell-side investment banking transactions.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
