Key Steps in the Mergers & Acquisitions Process
Laying the Foundation and Building the M&A Team
In the M&A world, process is king. Failure to follow a process is asking for problems. It can result in missed deadlines, lack of communication, and derailed deals. So, you need a process in place. When we help a seller market and sell their business, we focus on laying out and communicating a clear, smooth transaction process. Granted, things don’t always go as perfectly as we plan them, although having a plan is a huge help even when something unexpected pops up and takes you off the plan. Just knowing that you’re intentionally diverting from the original plan provides important context for keeping things heading in the right direction. And, among other things, mergers and acquisitions benefits from speed and momentum – slow deals are often dead deals. That doesn’t mean you can always go 100 miles per hour, although it does mean you need to try.
In this article, we’ll walk through a few internal steps to take as you gear up for selling your business. These are things you should know about even if you’re hiring a business broker or M&A advisor to handle the sale of your business.
Assemble Your M&A Team
One of the first things you need to do when preparing your company for a merger or acquisition is to assemble a team of professionals who will walk you through the entire process. M&A transactions are complex, and they require experts in many fields with deep understandings of the M&A space, at least for deals other than very tiny “main street” M&A transactions. Your advisors should work well together, making sure to put your interests first.
While every deal is unique, the largest factor affecting the deal team composition is price for which you’re expecting to sell your company. For any deal at seven figures and above, you want a competent financial/sales advisor and transactional business lawyer in your corner. For deals at $20 million+, you may want a larger team. Other factors influencing the decision include your knowledge of the process, appetite for risk, industry in which you operate, and existence (or lack) of other stakeholders, such as partners and investors.
Develop A Solid Strategy and Executable Plan to Sell Your Business
A successful sales process is a deliberate, thoughtful process resulting from extensive preparatory planning. You will need to create a plan before soliciting potential buyers for a merger or acquisition. The plan should be relatively detailed and in writing, although it must also provide some flexibility when everything doesn’t go exactly as planned.
Whenever a merger or acquisition fails to reach closing, there is always a question as to whether or not either of the companies involved had done adequate preparation and designed a reliable sales plan before entering into the process of negotiation. Considering that this is going to be the biggest sale that your company will ever conduct, you should certainly designate an appropriate amount of time and resources to developing and implementing a proper sales plan.
This is a process that will work if you put the time and effort necessary into developing a proper sales plan for making your company the target for potential partners for merger or acquisition. Your M&A advisors or business broker will lead this process if you engage them in it.
You’ll find that the momentum builds with each step, so each time you revisit the process it becomes easier to do. Implementing a sales strategy keeps you focused on the ultimate goal and makes the whole sales process easier to endure and survive.
Your sales and marketing plan should define:
- Your objectives
- Relevant trends in the industry
- Criteria for screening target buyers
- Budgets and timetables for closing the deal
- Range of acceptable offer prices to consider
- How important the past acquisition record of a buyer is
- Deal milestones and timeline, and
- Members of the acquisition team and each of their roles
The plan will serve as a roadmap, a filter, and a communication piece for your team and your advisors.
Determine Internal Goals and Objectives
Another major step for you and your team to take is determining what your internal goals and objectives are for the merger or acquisition. Making these determinations earlier on is important for a number of reasons, not the least of which is setting the deal requirements that will help narrow the list of buyers. You don’t want to go into an M&A transaction without spending a good amount of time making these determinations. Otherwise, you may be displeased with the quality of deals on the table.
An obvious goal is maximizing the sales price. That may not be the only appropriate goal, though. Not all offers are the same. $2.5MM in cash may be worth more to you than $3MM that is broken down into $2MM in cash and a $1MM seller carryback (seller financing of the purchaser price for the buyer). Other goals include finding a solid new owner for your customers and employees. Another goal is speed to close. You can have multiple goals, although be certain to communicate to your M&A advisors or business broker what matters to you.
Conduct an Internal Audit for Obstacles to Closing the Sale of Your Business
Look for any obstacles to closing a sale. These can include issues in the organizational documents or the history of equity ownership in the business. If you have loose ends from an owner who left the business, e.g., you bought another owner out but didn’t document that real well, clean those things up if you can. Work with your team to resolve these issues even before you approach prospective buyers. It’s better to have these issues handled ahead of time than when you enter the deal process and the buyers start examining the internal workings of your company, as by that point they can have a negative impact on your company valuation. And, you count on everything to be brought out in the open (you should disclose all issues in any case) when the buyer begins due diligence (due diligence in M&A is the term for the buyer “kicking the tires” of the business by reviewing all your important contracts, financials, and other documents and records).
M&A deals can be structured in a few different ways – asset sales, stock/equity sales, or true mergers. In the main street and lower end of the middle market (up to $25MM), a lot of deals are done as asset purchases. When that’s the case, anti-assignment clauses in contracts and leases can be an issue (this is less of an issue with stock deals and some types of mergers). Identify the important contracts that have clauses in them that say the contract cannot be assigned without the approval of your counterparty. Talk to your business broker about how to handle this issue. We can advise you on this issue. It’s an issue that causes a lot of heartburn, although I’ve yet to see a deal fall apart because of assignment issues. I’m sure it happens, although creative minds who want to make a deal happen can figure out ways to work through challenges around contract assignments.
Your internal M&A preparation audit should include corporate housekeeping and administrative matters, collecting and organizing customer information, cost structure and profitability, market share, real estate and other property (are there liens on the properties that have been paid off but not yet released? If so, clean those up by getting the liens released), the status of intellectual property registrations, assignability of key contracts, regulatory issues, minority shareholder issues, and litigation.
Your M&A advisor will help you organize your contracts and other materials in a manner that will make due diligence move more smoothly. Your M&A advisor or business broker will also take the lead in recasting financials to adjust salaries and benefits to prevailing market levels and eliminate personal expenses such as expensive car leases, country club dues, etc.
Prepare A Valuation Analysis (Appraisal of Your Business)
Work with your business broker or investment banker (other advisors) to complete a valuation of the business. Having your own valuation analysis prepared by external valuation consultants can help realistically set your expectations for the sale of the business (and, c’mon, we know you’ve wondered many times, “what is my business worth?”
Having some idea of what’s a realistic valuation is helpful when it comes to presenting the business to potential purchasers. If you ask for a price that’s way out of market, a buyer may just walk away. Buyers fall in love with businesses, although with larger deals, there may be lots of people weighing in on the deal. Some of them will be crunching numbers hard and you’re not the only game in town. A knowledgeable M&A advisor will guide you on pricing your business.
Two important things to note. First, don’t put too much emphasis on any internal valuation. There are many ways to value a company, and negotiation leverage can cause the value to swing far off the projections. While good to have for expectation setting reasons, the valuation analysis should not be overly relied upon.
Second, we generally don’t advise that our clients give a buyer an internally-ordered appraisal. There are exceptions to this general rule, although talk this through with your advisor/business broker to determine if it’s the right strategic move to share with prospective buyers an appraisal you ordered.
Prepare Sales Documents, including the Executive Summary/Teaser and Confidential Information/Selling Memorandum
Typically, as M&A advisors/business brokers, we will prepare a brief document that presents less sensitive information about the business. This is sometimes called an Executive Summary or Teaser. The reason to you need this document is to have something to provide prospective buyers who haven’t expressed significant interest in the business and have not yet signed a confidentiality agreement. The goal of the Executive Summary or Teaser is to pique the interest of a prospective buyer (hence, the word “teaser”).
The Confidential Information Memorandum is referred to in the industry as the “Book.” It may also be called the Offering Memorandum or Information Memorandum. Some business brokers call it a Selling Memorandum or Seller’s Presentation. Whatever we choose to call it, this is the primary sales presentation document. It lays out for prospective buyers how much opportunity the selling business presents. To prepare the Book properly takes time and a thorough understanding of the business being sold.
The purpose of the Seller’s Presentation is to give prospective buyers all the information they need to decide if they want to purchase the business. A buyer will still conduct due diligence, although the goal is that the Book/CIM/Seller’s Presentation takes a prospective purchaser to the point where they are ready to engage and make an offer for your business.
Collect and Organize Due Diligence Materials
You will work with your advisors to identify the type and quantity of information to collect, organize, and ultimately make available to a buyer. This information is typically stored electronically (back in the day, we would travel to a target’s headquarters to pour through contracts and records, although that’s almost entirely a thing of the past) in some type of online data room. There are specific products in the market for online data rooms (e.g., Intralinks). Dropbox can do the trick, too.
You do not want to spend so much time on stocking the data room that it undermines the deal value. You also need to be fairly selective about what you include, what restrictions prevent you from disclosing certain information, and more. Some of the information to store in the data room includes:
- General corporate data, including organizing documents and operating agreements, capitalization, meeting minutes, etc.
- Any government licenses and permits
- Important customer and vendor contracts
- Insurance policies and claim history
- Litigation history and related documents
- Human resource information on employees and employment agreements
- Tax filings for every level of government for the last three fiscal years and any open years, any audit information, etc.
- Financial documents like audited and unaudited financial statements for three fiscal years, budgets and comparisons to actual performance, details on capital expenditures, and more
- Marketing and customer information, including totals, sales channels, marketing strategy, competitor information, sales operational information, customer contract terms, support services, and product pricing;
- Internal affairs management and information systems overview
Having quick access to this information is also helpful for your company. Make sure your team is regularly updating this information during the sales process.
This isn’t everything. There are other processes in the M&A arena. However, this is a solid introduction to the procedures and different phases of buying and selling businesses.
We help quickly close and maximize sale prices for two types of businesses – people businesses (e.g., professional services companies, real estate and mortgage brokerages, etc.) and technology companies. They’re very different, although we know each space inside out. If you’re selling one of these types of companies in the $1,000,000 – $20,000,000 range anywhere in Texas, give us a call at 800.595.7159.