Selling a company can be intimidating for a business owner contemplating a liquidity event for his or her company.
The entire process can be overwhelming, from hiring an investment bank to negotiating a sale.
Let’s break down the process into its constituent parts to make it less intimidating.
When a company decides it’s time to sell, the first question is how to sell it.
Small businesses with only one location or less than a few million dollars in revenue may be able to sell the company independently.
Small businesses can also be sold through business brokers.
However, for larger businesses, the services of an investment bank are usually required to ensure that a more significant number of potential buyers are considered, and a competitive sale process is carried out.
Choosing a Bank
Because keeping an M&A process confidential is critical, it is best to contact investment banks through a trusted lawyer or law firm.
If a pending sale is widely publicized, it can disrupt employees and derail an M&A transaction.
When selecting an investment bank to work with, look for one with experience selling companies in your industry and who is familiar with potential buyers.
An investment bank usually provides a company valuation as part of its pitch to win an engagement.
Be wary of banks that provide valuations that appear significantly higher than the rest of the pack.
A high valuation does not guarantee that they will be able to deliver that value in a sale.
Fees must also be considered.
Depending on the expected transaction size, investment banks typically charge between 1-2% of the total sale price of the company.
Smaller businesses typically face a minimum fee hurdle (typically around $500k) before banks consider working on a transaction.
Due Process
After selecting an investment bank, the due diligence process begins.
The bank will convene a meeting with key company management members at its headquarters (CEO, CFO, etc.).
It is critical at this point to emphasize the importance of confidentiality in M&A processes to all employees who are aware of the potential sale.
It is common for the company to provide appropriate incentives to senior employees involved in the transaction for the process to run smoothly.
Many of these employees are likely to be laid off due to a company sale, and without the proper incentives, they may be uncooperative during the process.
Investment bankers will typically go through a due diligence checklist during due diligence to cover all company-related issues that would be of interest to a potential buyer.
Due diligence typically consists of a tour of the company, discussing any legal issues, such as potential litigation, and questions about how the company operates.
During the process, the company is usually asked to provide monthly financial statements so potential buyers can get the most up-to-date financial information.
The Memorandum of Confidential Information
The investment bank will then use the information gathered during due diligence to prepare a confidential information memorandum (CIM).
The memorandum of understanding is the primary sales document to market the company to prospective buyers.
The CIM is similar to a detailed business plan.
It will include a description of how the company operates, bios of the company’s key managers, a description of any legal concerns, the company’s historical financial performance, and numerous pictures and charts that help potential purchasers understand the company’s value.
In addition to the memorandum, the investment bank will typically prepare a one-page “teaser” that briefly describes the company under no name.
The teaser is used to gauge a potential buyer’s interest before providing the entire memorandum.
The Buyers’ Guide
During due diligence, the bank will also consult with the company to develop a buyer list.
The buyer’s list lists companies interested in buying the company.
For competitive reasons, specific potential buyers may be excluded from this list.
Potential buyers will learn many intimate details about a company during the M&A process. If the transaction is not ultimately completed, the knowledge of this information may weaken the company’s competitive advantage.
When the buyer list is complete, it is time to contact potential investors.
Dialing while smiling
The investment bank will begin calling all potential buyers on the buyer’s list to gauge interest in a possible acquisition.
At this point, they will typically email the one-page teaser so buyers can learn more about the company.
If the buyer remains interested, the investment bank will request that they sign a non-disclosure agreement (NDA) so that they can provide the name of the company for sale as well as the information memorandum.
Over a few days, all potential buyers are contacted, and the bank takes notes on the conversations that take place – which buyers remain interested and which decline.
The investment bank will then send copies of the memorandum to those buyers who have signed an NDA and are still interested.
A letter describing the sale process will be included in the memorandum.
Before submitting an indication of interest, potential buyers are usually given a few weeks to review the memorandum.
Intent Letters
A letter of intent (LOI) is a non-binding letter from prospective buyers. They discuss how much they are willing to pay for the company, how the purchase will be financed, and a description of their acquisition experience.
Simply because a buyer offers a high price for a company does not mean they are the best buyer to proceed with.
If a potential buyer cannot obtain financing, they may be unable to complete the transaction.
The track record of a buyer’s acquisitions may be just as important as the price it is willing to pay.
After collecting all LOIs, a smaller group of potential investors is chosen to move forward.
An investment bank can pressure buyers to offer their highest price and maximize value for the company by running a competitive process.
The Data Center
The remaining buyers – possibly two or three, depending on the circumstances – are invited to the company’s data room.
A data room was once a location where potential buyers could view and analyze highly detailed information about a company.
Data rooms are now typically virtual, with documents scanned and uploaded to a secure website for potential buyers to view.
Because the company and the investment bank can see which files have been viewed by which buyers and how frequently they have been viewed, these websites provide additional insights into the M&A process.
This data can be a good indicator of how thorough, specific buyers are in evaluating the company.
Buyers are then invited to submit their final bids and are often pressured to increase their offer to remain competitive.
Closing Procedures
At this point, the buyer is usually chosen, and the transaction terms are worked out.
The runner-up is frequently told that the company is still considering offers until a workable agreement with the winning bidder is reached.
This is because there is often a chance that the winning bid cannot agree to terms or close the transaction, in which case the process will proceed with the runner-up.
Again, the winning bidder may not be the highest-bidding buyer.
The winning bidder is typically the company with a high offer and a high likelihood of closing a transaction.
Once the practical financial terms of a merger have been agreed upon, the final closing process is turned over to the respective companies’ lawyers.
They will negotiate a purchase agreement, which will be signed by the companies completing the transaction.
Following the Wire
Only the company’s management team, a few potential buyers, and their legal and financial advisors will know that a sale is imminent in a confidential M&A process.
Before the news is made public, the company will usually issue a press release announcing the sale and notify its employees.
After completing the transaction, the management team, investment bankers, and lawyers gather for a closing dinner to celebrate the achievement.
The process can take as little as six months, a year, or more.
It depends on the company’s experience, investment bankers, and buyers.
On the other hand, understanding the process and the steps ahead will better prepare a company to deal with it.