Sell-side M&A Process

If there is one thing we viscerally believe in, it’s that running a tight process is likely to increase the chances of a great closing.  We say it over and over- M&A is hard.  Successful M&A’s are all about removing each and every roadblock to closing.  By running an effective deal process we create consistency, we follow procedures that we know work, and we improve odds of a blockbuster deal.

Like with many things in life, the preparation that goes into going to market is often as important – and in some cases more important – than the actual event itself.  We are not talking about exit planning here – that’s something that ordinarily takes a years-long effort.  Instead we are talking about the blocking and tackling that goes into getting the company ready for market now.  Things like:

• Researching and assembling the CIM
• Understanding and demonstrating market positioning
• Building a target list
• Preparing the virtual “Deal Room”

We’ll be clear: if a company wants to they can go to market without doing any of these things.  In fact, many companies do effectively just that when they receive a {LINK} unsolicited offer.  Just because you can, thought, doesn’t mean you should.

Prep Work: Before Going to Market

Company Research and CIM.

In order to take a company to market we need to know it inside and out.  We need to know the history- how did you get here?  What were the bumps in the road?  What were the triumphs?  We want to know the strengths and weaknesses.  We want to know what the trajectory is on this thing, and we also need to understand the skeletons in the closet.  Why?  Well twofold:  first, when we start talking to buyers investors they are going to ask a million questions and it’s imperative that we can talk about the issues intelligently.

Second, we need to develop a Confidential Information Memorandum (aka “CIM”  and universally pronounced “sim”).  The CIM is the main document that we develop that is designed to position the company to buyers.  Our goal is to tell the story about why Company X is fantastic, demonstrate where the growth potential is, and address and mitigate any downsides in the transaction.  We can’t overstate the importance of a high-quality CIM.  Will every buyer read every word?  No.  But there’s an issue of curb appeal:  but together a lousy CIM and a buyer is going to assume the company wasn’t worth the effort to put in quality work.

Which brings us to….

Develop a Target List

Selling a company has certain parallels to selling a house.  But how we reach buyers is where the analogy breaks down.  When you sell a house your agent drops a yellow sign on the lawn and puts some pictures on a website. Voila!  For sale. While you can sell a main street business like that, that’s not how you sell a middle-market company.

Our process is the opposite.  It’s targeted, it’s outbound, and it’s high touch.  We work with you to develop a target list of potential acquirers (both strategic and financial).  Some will be from our existing network of targets, some we will uncover in our discussions with you, and yet others will come from research.  Once we’ve scrubbed that list, that’s going to form the basis of our search.

Pre-Diligence and Prep the Data Room

Back in the “old days” when you did an M&A deal all of the company information would be physically prepared and then sequestered in a “data room” or a “war room.” As with most things, paper has been replaced with digital.  The need to prepare, however, has not diminished.

Before we go to market we want to prep for the eventual diligence request.  Could we wait until we are under LOI?  Sure – but that would likely stall diligence for a few weeks.  We want to get ahead of the requests and also get ahead of any problems.  To do so we’ll provide an initial “mock diligence” list and work with you to assemble all the required documents, reports, and likely requests.  Will this be painful?  Maybe.  Will it pay off in spades the day you sign an LOI?  Absolutely.

Next Up? Going to Market.

Now the fun starts. Once we’ve wrapped all the prep work and you’ve signed off on the CIM and target list, we’ll start grinding.  Our goal is to get a response- either yes or no – from everyone on our target list.  As you can imagine this takes a lot of leg work – oftentimes leveraging our network, working our way through corporate bureaucracies, or multiple outreaches just to find the right decision-maker.

Management Interviews / Presentation

We’ll work to tee up a small number of qualified and interested buyers which we will then introduce to the company.  Much like a chaperoned date, we’ll set up a meeting for introductions.  In some cases, we’ll work with you to develop a management presentation that is a formal presentation regarding your company.  That presentation often tracks closely with the CIM.  Continuing with the theme, the goal is to demonstrate the strengths of the company and address any weaknesses.  Bottom line: it’s management’s time to shine.

Limited Auction

Our objective during outreach is to time our efforts such that we have multiple interested parties in the transaction at the same time.  With multiple buyers and multiple LOI’s, we have a chance to create competition and drive better pricing and terms. We think of this as a “limited auction.” Our experience shows that this is absolutely the best way to drive better pricing – and conversely, why you should never engage in direct negotiations with just a single buyer unless the deal is about more than price.

With outreach underway we have a few big milestones:

• Receive and Negotiate LOI’s
• Select Final LOI
• Enter Stand-still Period
• Diligence
• Drafting
• Financing

The Letter of Intent

A Letter of Intent (or “LOI”) is a non-binding offer on the company. It should contain the principal terms that you will close on absent repricing during diligence. There is a wide range in terms of what we see in LOI’s – some are incredibly detailed, while others are at best sparse and light on details. Our own preference is somewhere in the middle of the road: cover the major points in terms of pricing and structure, address expectations for ownership transition, and cover any matters that are likely to be contentious later.  (It’s better to get those issues on the table early and not move forward with the LOI and put in time and resources and diligence only to find yourself with a busted deal).

Ultimately our goal is to create the auction environment discussed above and negotiate with multiple suitors to drive price and terms.  Once we’ve got the right buyer you’ll sign off on the LOI.

Stand Still or No-Shop Period

In return for signing the LOI, the buyer will expect a “no shop” period where we agree not to actively pursue other acquirers. There are a number of terms for this:  no-shop, stand still, or “quiet period.” It is very unlikely that an experienced buyer would enter into an LOI without the benefit of a no-shop. Why? The buyer starts spending money on diligence, drafting, and financing… and they don’t want to do that if they aren’t in a position to close on the deal. In most cases, you can expect the no-shop period to be about 60 days, which can be extended if parties feel that there is significant progress being made towards closing.

Due Diligence

Up to this point, we’ve been sharing information with the buyer through the CIM, Management Interviews and presentations, and perhaps other data disclosures. Diligence is the period where the buyer validates the information provided and satisfies themselves as to the strengths and weaknesses of the asset they intend to buy.

Make no mistake:  diligence is a dangerous period for the seller. Savvy buyers often use diligence findings as an opportunity to “re-trade” or re-price deals. Some private equity firms, in fact, are notorious for signing an LOI with a very attractive multiple only to press heavily to re-price during diligence. Our line of defense is twofold: first, as an investment banker we negotiate and position with the buyer to defend pricing throughout. Second: recall our pre-diligence process? By identifying and mitigating issues early we are cutting off the ability to re-price on them later.

Getting to Closing

In parallel to diligence, we’ll be working with legal on drafting. Counsel will work on negotiating legal points, while your investment banker like Quantive will negotiate the remaining commercial points. We’ll want to push to get drafting started as soon as possible after the LOI is signed. Ideally, we’ll have lined up completion of diligence, removal of financing contingencies, and drafting to get to an efficient closing!