Serious mistakes made while businesses are still profitable may cause restructuring needs.
Selling a business, Part IV
After Marketing the business, binding offers terms will be analysed on the way to a successful Deal Closing.
If a competitive bidding/auction process is maintained, final bids will follow further due diligence and there might often be no letter of intent. However, at a certain point of the process buyers might insist on exclusivity / preferred bidder status for a certain period or cost coverage before engaging in intensive due diligence and bilaterally agree terms on a detailed and negotiated letter of intent LOI / Term Sheet. This is reasonable but locks in the seller for a period related to the time to complete due diligence, which will be much shorter, if a vendor or sell-side due diligence has been made in advance, reducing thus the risk of a hiccup and increasing the chance of maintaining alternative bidders’ interest.
Less uncertainties and ready confirmation about the accuracy and reliability of provided information should also positively affect a potential buyer’s readiness to pay a higher price.
The negotiation phase will typically start from the SPA draft provided by the seller and the terms of the final bids or the carefully agreed LOI. The most convenient deal structure will be addressed considering many factors such as law, taxation or regulations: asset deal vs. share deal vs. merger, acquisition vehicles, carve-outs, etc.
Terms will address not only the shares or assets to be transferred, but many additional points such as closing conditions, representations and warranties to assure such as compliance of data provided during due diligence with reality or assuring that no working capital is diverted or preventing leakage of other assets before deal closing date (locked box), defects remedies and not least the terms of payment.
Payment terms lead to important consequences after deal closing:
- Cash – with no strings attached.
- Debt to be raised – you’ll have to support that step
- Vendor finance
- Earn out – you’ll still depend from the fate of the company
- Exchanging Shares – you might have to keep them for some time
Once all terms are agreed and the contract signed, closing conditions will have to be fulfilled and payments terms might affect you, but your company and its integration or restructuring is now somebody else’s business.
If you would like to sell a company, consult us, we’ll be glad to help.
Selling a business – Part III:
We can market the deal after preparing the business for sale. We shall bring the opportunity to the market maintaining control of the process and the distribution of information, while motivating bidders along parallel paths on a level playing field in case of a broad or restricted auction, or even limiting it to an individual process, according to your requirements.
Even if flexibility and readiness to amend process and papers is necessary, a disciplined approach requires best possible preparation and exclusive representation. Any compromise on such initial decisions is a trade-off possibly affecting the outcome for the seller.
The normal procedure to market the deal is to:
- Contact buyers with a reduced but strong no-name summary focused on strategic and quantitative key elements. Specialized data banks are gaining importance to expand reach and competition beyond the specific researched buyers list.
- Agree confidentiality (also referred as NDA, CU, NCND).
- Deliver the detailed Offering Memorandum (also IM, CIM)
- Follow up, complete information, arrange interaction with management. The better the Offering Memorandum, the lesser the management distractions, delays and difference in prospect buyers’ treatment. At this point there might still be many parties interested in receiving information.
- Receive non-binding indications of interest. These unilateral indications which are sometimes referred as letters of intent (LOI) too, shall contain information about the real interest, fit and ability to execute the transaction.
In the meantime, inputs from buyers’ inquiries and from indications of interest help complete the Data Room extent and preparing management presentations.
At this point, strongly interested parties on the short list will be granted access to the Data Room, proceed to face-to-face meetings, management presentations, or sometimes even site visits and be invited to submit final bids possibly based on a draft transaction structure or even a draft sale agreement, or a share purchase agreement (SPA).
Bringing to the market the deal, have assumed a bidding / auction process while also easier and more confidential but less maximising bilateral processes with single counterparties are common too.
Selling a business – Part II:
Let’s prepare for sale. In M&A criteria and timeline we didn’t go into details. And now we won’t tell you here to increase the value of your business before selling it, as we assume that you have been doing it up to now as well as you could and planned the exit. If however, the structure is not adequate to properly function without the owner or presents other issues, we should go back one step and do the preliminary homework. If somebody else just might do it better, it opens a chance and confirms the right time to sell.
At this point one has just to make sure that the value is recognized and quantifiable by the buyer at least as well as it is for you, also considering the past evolution. What is clear for you might often not be so for a prospect buyer.
Prepare for sale
To assure the necessary transparency, and to understand the value perceived by potential buyers, we shall start gathering relevant information such as:
- Reviewing business plans and market reports, financial reports and projections, strategic and financial analysis.
- Confidential talks with management and employees.
- Elaborate a potential buyers list with interest rationale.
This helps to position the business within its market environment, showing clearly its competitive advantages, strengths and the quantitative elements for its valuation.
Valuation will start from a comparison of financial performance with comparable businesses for which market prices are available from trading or recent transactions which allow to imply multiples of such as EBITDA, revenues and other relevant indicators. A more accurate price validation would include a detailed projection of cash flows as is or with assumptions such as of changes of use of assets, synergies with acquirers, or whatever rationale can add value to the transaction, considering changing scenarios, and sensitivity analysis during the expected time to conclude the transaction. Such number crunching supports negotiation points and can also the be the basis for an LBO (Leveraged Buyout).
A key of the M&A process is the preparation of a precise and professional Confidential Information Memorandum or Offering Memorandum which includes all an interested buyer needs to validate his investment hypothesis and reach a realistic valuation, not to be confuted by later detailed due diligence. It resembles a thorough business plan with its summary and investment considerations, description of the company, its structure, market analysis, trends, opportunities, competition, financial information, etc. and outlines the bidding procedures.
Constructed on this content a blind teaser with a description of the main characteristics of the company, the reason for the transaction, the main financial information from the last and the projections for the next years will attract the investor to the advantages of the offer.
“Who wants to buy shall come and see!” is the opposite approach, which seldom works out well. Why should potential buyers put considerable effort in studying and imagining the virtues of an unknown target? You better take your time and some resources to prepare for sale to be more successful later.
Further preparation is dedicated to complete the prospect buyers list based on complementary views based on the company experience and the advisers research. Such a list is analysed on presumed interest, strategic fit and potential synergies, financing and ability to execute as well as competition considerations.