The largest seller challenges in M&A transactions often revolve around the preparation of financials and other documents for due diligence. The seller’s ability to do this well can allow him/her to address weaknesses and anticipate the questions of potential buyers; however, it is a taxing process that benefits from the help of others, such as investment bankers and lawyers, and methodical organization and project management.
It is not uncommon for sellers to initially underestimate the weight of selling a company. Challenges range from managing teams, organizing documents, prioritizing tasks, and often result in deal fatigue.
With due diligence, the little minutia can especially lead to longer than expected request lists. Furthermore, many businesses are not accustomed to having to pull double duty - completing both the “regular” work and working on a deal transaction.
The managing team needs to maintain its performance and its focus on clients and growth - it cannot simply put everything on hold for the deal. There is a very fine line between getting a deal done and successfully selling a business and not hurting the business.
What are the first steps when a company is thinking of selling? Who is typically involved early on?
The earlier the sell-side can begin preparing information such as financials that will be needed for diligence, the better. People tend to want to get deals done quickly and while it is possible to do some things quickly, a business would need to be very well prepared to accomplish a relatively quick deal.
Here it should be noted that doing things quickly does not always lend itself to best outcomes because sellers end up with hiccups in their process or, worse yet, a broken process that hurts price. With this in mind, hiring a competent corporate counsellor and financial advisor is critical to methodical preparation of documentation to begin the process.
An internal management team should also be put together. This team’s focus is to respond to requests and lists from the financial advisor and to gather documentation.
What are the benefits of using an Investment Banker / Financial Advisor?
The are two major benefits to hiring an investment banker / financial advisor:
- Leverage - Perhaps the biggest benefit is the leverage a financial advisor or investment banker can provide. It is too much for a manager to field all the questions from the buyers. A financial advisor can do the outreach to 10-15 buyers, freeing up the manager’s time and casting a wider net.
- Competitive Dynamic - The competitive dynamic generated is invaluable and will more than pay for the banker’s fees.
Additional benefits include:
- Transaction Experience - Investment bankers can greatly assist with negotiations and have experience negotiating transactions. Obviously, this helps protect price.
- Contract Knowledge - Knowledge of contract terminology and conditions provides another perk of working with experienced investment bankers and financial advisors.
What are steps and best practices for preparing for a sale?
- Hire help - As previously alluded to, hiring a financial advisor and lawyer should be the first step in preparing for a sale. How does one pick a bank to work with? The seller must consider both industry expertise, i.e. someone who has knowledge of industry trends and drivers, and personality fit. There must be a foundation of trust that he/she will give you the best advice. Hiring help also increases the seller’s potential relationships with buyers; therefore, the seller will want to ask if the bank has completed previous transactions in and around the seller’s sector.
- Set up a dataroom - Setting up and organizing documents in datarooms is safe, provides transparency, and allows for real-time information sharing.
- Sign mandate
- Begin drafting all the go-to-market marketing materials - This requires a great deal of data; the bank provides the client with a comprehensive due diligence request list. At this point, the challenges include managing all of the data and requests, which is where a project management platform can help.
- Solicit buyers - There is no cookie cutter process here, but sellers can plan on about four to six weeks of sending out executive summaries to buyers. The buyers need to sign NDAs and confidential information memorandums. It is customary to give the potential buyers four to six weeks to digest this information.
- Ask for indications of interest - At the end of the marketing and solicitation period, ask for indications of interest, which tend to be nonbinding, but provide a range of value for what the buyer would potentially pay.
- Commence management presentations - These presentations allow for parties to meet face-to-face where they can ask more detailed questions.
- Create a new dataroom - This will be a broader dataroom because the sell-side will want the buyers to do fairly comprehensive due diligence. This stage again tends to take four to six weeks.
- Sign the letter of intent (LOI)
- Due Diligence - Plan for 4 to 6 weeks of management and due diligence.
- Closing - the closing can be anywhere from thirty to ninety days out.
How does project management technology create a better process from marketing to LOI? Then from LOI to close?
Project management technology can increase efficiency and communication, which results in faster deals and reduced burn-out. Specifically, when it comes to the marketing to LOI phase, project management technology helps tremendously by streamlining the due diligence process, which takes a variety of forms. For instance, early on, everything is streamlined because it is handled digitally, but then the buyer due diligence starts, then the confirmatory phase; at each stage, you can utilize the project management platform’s tools to help with organization and request flow.
Similarly, from LOI to close, as the workstreams increase (HR, legal, finance, etc.), the seller’s team can manage and prioritize the hundreds of questions and requests it gets.
When selling a business, being able to prioritize and manage information digitally is key. Starting the process early, especially having key documentation at hand, and building a strong team and group of advisors are also essential to ultimate deal success.