Mergers and Acquisitions: How to Sell a Company
April 07, 2011 | Adam Fish
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For a business owner contemplating a liquidity event for his or her company, the process of selling the company can seem quite daunting. From hiring an investment bank to negotiating a sale, the whole procedure can indeed be overwhelming. Let’s break the process down to its elements to make it less daunting.
Once a company has decided it’s time to sell, the first question to answer is how to sell it. For small businesses — those that only have one location or less than a few million dollars in revenue — the owner may be able to sell the company on his or her own. Alternatively, small businesses can be sold through business brokers.
For larger companies, however, the services of an investment bank are usually needed to make sure that a larger number of potential buyers are considered and a competitive sale process is run.
Picking a Bank
It’s important to keep an M&A process confidential, therefore, it’s a good idea to reach out to investment banks through a trusted lawyer or law firm. News of a pending sale can disrupt employees and reek havoc on an M&A process if divulged too widely.
In picking an investment bank to work with, it’s important to find a bank that has experience selling companies within your industry and is familiar with potential buyers.
An investment bank will usually provide a valuation of the company as part of their pitch to win an engagement. Be wary of banks that provide valuations that seem much higher than the rest of the pack. A high valuation does not necessarily mean they will be able to deliver that value in an actual sale.
Fees are also a consideration. Investment banks usually charge around 1-2% of the total sale price of the company depending on the expected size of the transaction. For smaller companies, there is usually some minimum fee hurdle (usually around $500k) that banks will need in order to consider working on a transaction.
Once an investment bank is chosen, the due diligence begins. The bank will set up a meeting at company headquarters with key members of the company’s management (CEO, CFO, etc.). At this point, it is particularly important that the confidential nature of the M&A processes is stressed to all employees who are aware of the potential sale.
It is common for the company to set up proper incentives for senior employees involved in the transaction so the process runs smoothly. It is highly likely that many of these employees may be left without a job following the sale of a company, and without the proper incentives, they may be uncooperative during the process.
During due diligence, investment bankers will usually go through a due diligence checklist to cover all company-related issues that would be of interest to a potential buyer.
Due diligence usually includes a tour of the company, a discussion of any legal issues including potential litigation and questions about how the company operates. The company is usually asked to provide monthly financial statements each month during the process, so the latest financial information can be made available to potential buyers.
The Confidential Information Memorandum
The investment bank will then use the information that it gathers during due diligence to prepare a confidential information memorandum (CIM). The memorandum is the primary sales document used to market the company to potential buyers.
The CIM is much like a very 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, historical financial performance of the company and many pictures and charts that help convey the value of the company to potential purchasers.
In addition to the memorandum, the investment bank will usually prepare a one-page “teaser” that describes the company briefly on a no-name basis. The teaser is used to gage a potential buyer’s interest prior to providing the entire memorandum.
The Buyers List
During due diligence, the bank will also consult with the company to develop a buyers list. The buyers list is a list of companies that may have interest in purchasing the company.
Certain potential buyers may be excluded from this list for competitive reasons. During the M&A process, potential buyers will learn many intimate details about a company, and if a transaction is not ultimately executed, the knowledge of this information could weaken the company’s advantage over its competition. Once the list of buyers is complete, it is time to reach out to potential investors.
Smiling and Dialing
The investment bank will start calling all potential buyers on the buyers list to gauge their interest in a potential acquisition. At this point they will usually email the one-page teaser so that buyers have a bit more information on the company.
If the buyer is still interested, the investment bank will then ask them to sign a non-disclosure agreement (NDA), so that they can provide the name of the company that’s for sale and the information memorandum. All potential buyers are contacted over the course of a few days and the bank takes notes on the conversations that occurred — which buyers remain interested and which decline.
The investment bank will then send out copies of the memorandum to those buyers who are still interested and who have signed an NDA. Included with the memorandum will be a letter describing a timeline for the sale process. Potential buyers are usually given a few weeks to assess the memorandum before submitting an indication of interest.
Letters of Intent
A letter of intent (LOI) is a non-binding letter from potential buyers that discuss how much they are willing to pay for the company, how the purchase will be financed and a description of their experience with making acquisitions.
Just because a buyer offers a high price for a company, it does not necessarily mean they are the best buyer to move forward with. A potential buyer may not be able to close the transaction if they can’t secure financing. A buyer’s acquisition track record may be just as important as the price it is willing to pay.
Once all LOIs are collected, a smaller group of potential investors are selected to move on in the process. By running a competitive process, an investment bank can apply pressure on buyers to offer their highest price and maximize value for the company.
The Data Room
The remaining buyers — perhaps two or three depending on the case — are invited to visit the company’s data room. A data room used to be a location where very detailed information on the company is available for potential buyers to view and analyze. Now, data rooms are usually virtual, and documents are scanned and placed on a secure website for potential buyers to view.
These websites provide additional insights into the M&A process because the company and the investment bank can see which files have been viewed by which buyers and how often they have been viewed. This information can be a good indication of how thoughtful certain buyers are being in their analysis of the company.
Buyers are then invited to submit their final bids and are usually pressed to up their offer in order to stay competitive in the process.
The Closing Process
At this point, the buyer is usually selected and the terms of the deal are hammered out. The runner up is often told that the company is still considering offers until an workable agreement is reached with the winning bidder. The reason for this is that there is often a chance that the winning bid may not be able to agree to terms or close the transaction, in which case the process will then move forward with the runner up.
Again, the winning bidder may not be the buyer with the highest offer. The winning bidder is usually the company with a combination of a high offer and a high likelihood of consummating a transaction.
Once the major financial terms of a merger are agreed to, the final closing process is turned over to the lawyers of the two respective companies. They will hammer out a purchase agreement, which is then signed by the companies completing the sale.
After the Wire
In a confidential M&A process, only the management team of the company, a few potential buyers and their legal and financial advisors will be aware that a sale of the company is eminent. The company will usually prepare a press release announcing the sale and inform employees of the company before the news is made public.
After the transaction is closed, the management team, the investment bankers and the lawyers get together for a closing dinner to celebrate the completion of the transaction. The entire process can happen in as quickly as six months or it can take a year or more. It all depends on the experience of the company, the investment bankers and the buyers.
M&A is a very complicated and detailed process that can cause a lot of fatigue to all parties involved. Understanding the process and the steps that lie ahead, though, will better prepare a company to endure it.
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