The process of selling a company should start many months before you start selecting an advisor. You will need to analyze if it the right moment for the company, for the founders, shareholders and management team, and prepare the business for a sale.
1-Select and Advisor – Having gone through the preparatory phase of selling a business, the first step in the more formal process is typically selecting an advisor. Most companies that go through a M&A process tend to select an advisor to assist the founders and management in this task. However, there might be cases where the company has an internal team that can perform this duty, or a financial investor that has a large enough stake in the company to want to take on this responsibility. Advisors come in all shapes and sizes: independent consultants, boutique financial advisors, mid-size investment banks, corporate finance divisions of large banks like Morgan Stanley or BBVA. If your company sale is below the range below one million euros you will probably have to select an independent consultant as an advisor. If your deal is in the 1 million to 100 million range you will find a wide range of boutique financial advisory firms, often specialized in specific sectors. In operations above the 100 million range your operation will be on the radar of investment banks and corporate finance divisions of leading banks. Fees are typically a function of the size of the deal, but also will depend on the size, prestige, and experience of the advisor. You will definitely want to “shop around” and make sure you find an advisor and a team who understands you company’s value, the sector, and you feel comfortable working with. It will be a long and stressful process so you do want to make sure you are working with a team who understands the stakeholder’s motivations and goals.
2-Advisor’s Due Diligence – The selected advisor will need to go through of process of getting to know your company. They will perform a limited due diligence in order to have sufficient comfort with the information they will be providing to potential buyers. This process will also allow the advisor to detect any obvious inconsistencies or issues that could arise in a formal due diligence with a buyer in a subsequent phase. This process will also be the basis of the information the advisor will employ to draft the documentation and decks that will be used to market the offering.
3-Financial Modelling and Valuation Discussion – With the information collected in the due diligence phase and access to financial data, the advisor will validate the company’s financial projections. Analysts will propose a valuation range based on discounted cash flow analysis and comparables, and the advisor will discuss valuation with the management in order to define expectations.
4-Drafting of Offering Memorandum, Pitch Deck, Teaser and other documentation – The advisors prepare a bunch of documents that will be used in different phases when marketing the company to potential bidders. A teaser is typically a one-page document that is used to introduce an opportunity without disclosing the company’s name. The pitch-deck, which tends to be in a Power-Point format, is a document that is used to present the company in a brief and visual way and tends to be around 10 to 20 pages.
5-Research Potential Buyers – Potential buyers can be identified in many different ways. Depending on the size and sector, the buyer could be either industrial and/or financial.
Financial buyers tend to come in the form of a private equity firm and they tend to concentrate on larger size deals. Most private equity firms won’t be bothered with anything below a 20-million-euro investment, and that’s the lower end of the market. Private equity firms tend to concentrate on specific sectors and a range of deal size. So, by performing a bit of research it is easy to identify who could be a potential buyer for a company depending on geography, sector and size. Your advisor will typically have some sort of relationship with private equities firms, and will have access to databases that will help identify potential fits.
Industrial buyers can be identified with common sense and access to various kind of databases. Databases like Pitchbook, Reuters Refinitiv, or MergerMarket provide information on past transactions, that will help identify active buyers in the market. With some common sense one might also want to research potential buyers like local or international competitors, suppliers or clients. If the company that is being sold is believed to have a high demand internationally, the advisor might work with a network of international partners to try to identify buyers in markets that are harder to research or reach.
6- Teasers are distributed to potential buyers – When a list of potential buyers has been drafted the advisor will go about making some phone calls, to close contacts, and distributing via email a “teaser”. The teaser tends to be distributed quite freely to anyone on the list of potential buyers; in some cases, hundreds of contacts receive the teaser. On occasions, due to a variety of different concerns, the teaser might only be distributed to a small number of potential buyers in order to avoid having to many people knowing about the sale.
7- NDA’s are signed and Pitch Deck & Documentation are released – When a potential buyer expresses interest in exploring the M&A operation, after having read the teaser, the potential buyer will sign an NDA (Non-Disclosure Agreement), and the Pitch Deck and/or Offering Memorandum will be released, generally delivered via email attachment.
8- Discussion with Potential bidders and negotiation of the letter of intent (LOI) – With a bit of luck, and a lot of follow up emails and calls, there should be a number of potential buyers that are interested in having a deeper look at the opportunity. This phase will consist of videocalls, back and forth emails with the management of the company for sale, maybe even a visit or business lunch with the potential bidders. It is very important, to control how this phase evolves; providing sufficient information to the potential buyers for them to to place an offer, but avoiding it becoming a full-scale due diligence.
At some point the potential buyers will mature their interest enough for them to submit a letter of interest or intent. The letter of intent will tend to be a non-binding two or three pager that summarizes the structure of the deal (with valuation and pricing), the duration of due diligence, management arrangements and other provisions.
9-Data Room Preparation – Before entering the due diligence phase, with one or more potential buyers, a seller will need to prepare the documentation it will share with the bidders. Just until a decade ago, most of this information was stored in a physical room, often in the premises of the advisors or attorneys.
Today “data rooms” tend to be virtual and cloud based. Access to the data room will be granted to the people involved in the due diligence process: Typically, management from the potential buyer’s side, attorneys, accountants/auditors, and advisors. Setting up a cloud base data room is actually very simple, and quite inexpensive today, the hard work is collecting, organizing (and often scanning) all the data that needs to be available.
10- Due Diligence Process – The due diligence process will typically take anywhere from 1 month (in very limited confirmatory due diligences) to more than 6 months in complex due diligences.
It will typically cover: corporate structure, contracts, financial accounts, material assets, intellectual property, employment matters, legal issues and litigations, technology, strategic fit with the buyer, financial projections, etc…
11- Term Sheet Negotiation – In some cases, the findings of the due-diligence will initiate a renegotiation of the letter of intent that was submitted prior to the process. If there are various bidders still in this phase, the sell side advisor will try to generate an auction process to maximize the value of the deal. In this phase both parties might also need to get final board and shareholders’ approval.
12- Drafting of Contracts – In some cases before the contract is drafted the buyer and seller sign a binding term sheet. In many cases, the drafting of the contracts is based on agreements from the initial term sheet, and verbal or written agreements that arised during the due diligence phase. The negotiation of the final sale and purchase agreement (SPA), is often the place where deals fall through. Representations, warranties and covenants are rarely discussed before the first draft of the contract is shared, and provisions in these sections can turn into major deal breakers.
13- Signing of the Purchase Agreement Contact/s – Depending on the country the closing the deal could be 100% remote (signing and scanning a document that is exchanged via email), a signature in a advisors’ office, or a formal signing process in a notary.
If you have ever gone through an M&A deal you will know that this very important event is not the end of a process, but the beginning of a whole new phase for company and the management.