In the world of mergers and acquisitions (M&A), the competitive business sale process is a complex yet essential part of the journey. If you're a business owner or a part of a management team considering a business sale or capital raise, understanding this process is crucial. In this piece, the competitive business sale process will be analyzed, the key stages defined, and insights offered to help a business owner better position for a sale or capital raise and a successful outcome.
Process Fundamentals
Goals of a Competitive Sale or Capital Raise: In any M&A transaction, there are two primary objectives that an owner and his advisors should seek.
- Drive maximum value and an optimal transaction structure for the business.
- Find the best-fit buyer or investor (i.e. financial sponsor).
Transaction Structure: The transaction structure refers to how the buyer and seller organize the different forms of consideration to comprise the total valuation. To learn more, please visit the BG Insights article entitled “Structure: The Backbone of a Mergers & Acquisitions Transaction.”
What is an Investment Banker? Investment bankers play a vital role in M&A transactions. They facilitate the entire process, including advising a company how to best prepare a business for a sale and managing buyer conversations and negotiations to lead to a successfully closed deal. To learn more, please visit the Bundy Group Insights video titled "Why Hire an Investment Banker."
Sellside Quality of Earnings Report: A Sellside Quality of Earnings analysis and report is an in-depth financial audit of the seller’s financials for the purpose of facilitating a transaction. The seller hires an independent transaction accounting firm to complete the analysis and report, and that accounting firm is also in place as a seller advisor throughout the transaction. While the transaction accounting firm focuses on validating historical financials, the investment banking advisor focuses on the future and maximizing value and negotiating leverage. This can be another mechanism to drive value and increase the certainty of a closed deal. To learn more, please visit the Bundy Group Insights video and article titled "The Sellside Quality of Earnings Report."
Unsolicited Offer: An unsolicited offer is an unexpected proposal from a potential buyer who initiates contact without prior engagement from the seller. To learn more, please visit the BG Insights video and article entitled “What is an Unsolicited Offer?”
Business Sale vs. Capital Raise: A competitive sale typically involves selling over 50% of your company’s equity to an outside party, while a capital raise often involves selling less than 50% of a company’s equity or using debt for financing.
Key Stages of the Competitive Business Sale Process
The business sale process can be broken down into four distinct phases. Each phase is centered around creating a position of negotiating strength for the seller and driving competition. There are very few strategic buyers or financial sponsors that will put their best foot forward unless they are pushed to do so.
- Preparation Phase The preparation phase is focused on evaluating all facets of a company to position it in the best possible light for a competitive process. To use a golf analogy, it is akin to lining up in the tee box correctly and taking a few practice swings with the end-goal of smoothly hitting the ball down the center of the fairway. Key preparatory items include:
- Crafting confidential marketing materials that articulate a compelling story and provide an ideal position of strength.
- Developing a financial model, inclusive of future projections and key metrics to ensure the data reinforces the story.
- Populating a secure data room to utilize for providing relevant information to the buyer and its advisors.
- Drafting a Non-Disclosure Agreement (NDA) for the buyers to sign.
- Create a strategic buyer and / or financial sponsor list by considering potential fit and track record of successful acquisition and investments. To create such a quality list, it is imperative that the owner and / or its advisors have intimate knowledge of the key players in the industry and their respective investment thesis.
- Indication of Interest (IOI) Round: The IOI round is when potential buyers express their initial interest by submitting preliminary offers, or Indications of Interest. This phase helps the seller and its advisor determine which buyers are worth continuing conversations with. Key attributes of this round include:
- A material amount of information is provided by the sellers, and buyers will complete an assessment based on this data and marketing materials.
- Introductory calls, and sometimes face-to-face meetings, with key executives and shareholders are often used to help both sides learn more and develop chemistry.
- IOI’s are submitted by buyers, which usually contain a range of offer values, details on transaction structuring, and key due diligence items needed for the Letter of Intent round.
- The seller and its investment banking advisor review the preliminary offers to assess which groups the client wants to invite to continue in the sale process.
- Letter of Intent (LOI) Round: The LOI is the formal offer, or the document that establishes the framework for the purchase agreement between the buyer seller. This phase is meant to be a much more intensive phase with the goal of driving buyer interest and attracting well-educated formal offers. Key elements of this phase include:
- Sharing more detailed company information with buyers so that all critical diligence information is accomplished prior to the LOI submission date.
- Hosting face-to-face management meetings between the buyer and the seller to foster chemistry building and information sharing. In short, both parties are learning more about one another.
- Receiving LOIs from buyers by a deadline date with details that answer all key seller questions (i.e. purchase price, structure, deal financing, etc.)
- Ensuring buyers provide a list of confirmatory due diligence items that must be accomplished after an LOI is signed along with anticipated timeline to close.
- Utilizing the LOI’s against each other to drive the offers beyond what was submitted in the LOI’s. This is the moment where the seller and its investment banking advisor ensure that deal structuring is appropriate to accomplish the seller’s goals and no money is left on the table.
- Ensure that the seller’s CPA and M&A attorney are able to provide thoughts and advice on the LOI’s submitted to certify all tax, accounting, and legal considerations are addressed.
- Due Diligence and Closing The due diligence stage is where buyers conduct comprehensive investigations, including legal, financial, and operational diligence. In short, the buyer or investor is ensuring that there are no surprises and that its underwriting assumptions for the LOI are sound. This is usually the phase where any company issues or weaknesses (example – financial; employee retention; etc.), which have not been addressed, are uncovered. While the buyer has already been selected in the LOI round, it is imperative to keep the competitive pressure on that party, as it is very common for them to attempt a retrade during diligence (i.e. attempt to close on the deal at a materially lower value and / or more buyer friendly structure). During the period of due diligence, the seller’s counsel and buyer counsel negotiate the purchase agreement, and the transaction is closed. The payout to the respective parties (i.e. funding of the deal) occurs as a last step.
Timeline and Considerations
The entire process can typically take 6 to 12 months. However, the process timeline depends on a variety of factors such as the complexity of the business, the quality and accessibility of financial data, the extent of due diligence required, and the intensity of the negotiation phase. Furthermore, hiring an experienced investment banker that understands the best pool of buyers for that industry and can best position the company in a process will have a substantial impact on both the transaction terms and the timeline to close.
Takeaways
Navigating the competitive business sale process in M&A transactions involves a series of well-defined stages, from preparation to closing. A business owner is highly recommended to focus on the following in a competitive process:
- Focus on driving competition from the beginning to the end of a transaction to ensure maximum value and a high certainty to close at the agreed upon terms.
- Prepare the company for a sale to ensure all potential issues and buyer challenges are identified and an appropriate story and defense is crafted before going to market.
- Ensure that milestones and timeline are identified and then maintained so no momentum is lost.Curate a quality list of buyers and financial sponsors, which can be included in a competitive sales process.
- Contemplate hiring an experienced investment banker to manage the process, limit distractions on company management and deliver added value in a transaction over and above what could be achieved without the element of competition.
A business sale, or capital raise, is a complicated process that could yield tremendous gains for a seller or result in significant amounts of money being left “on the table.” Furthermore, the outcome could produce a quality long-term partner or a new owner that tarnishes the reputation of the company. The best way for an owner to ensure a strong outcome is to run a competitive process, ideally managed by an experienced investment banker, which delivers multiple options to drive an educated decision-making process that minimizes risk and maximizes the quality of the outcome.
