Being Acquired is a Substantial Undertaking.
There is no getting around the fact that it takes a lot of effort to close an acquisition at attractive terms. Even when a good offer appears unsolicited, there is still an incredible amount of work required to get the deal closed, especially while avoiding a price dilution along the way.
Sellers frequently underestimate the amount of work required in getting a deal over the line. Even those who have been through an acquisition process before often don’t recall the substantial level of preparation work, attention to detail and responses to buyer questions that is required to bring a deal to close. Even the most operationally mature organizations require considerable effort to identify a buyer and successfully undergo the due diligence process.
To a large extent, M&A is thought of as finding a buyer at the right price, but from a level of effort perspective, this is the easy part. Once the buyer is identified and terms are agreed Due Diligence can commence – and this is the part that is the surprising consumer of time and resources. Here, the level of effort is driven by the Buy-Sides’ requirements and Buyer’s usually have a team of seasoned M&A experts who will spend a considerable amount of time going through the target’s records to determine the following:
- Whether the target is indeed one they want to acquire (from a strategy, size, skills, culture and overall fit perspective).
- (If)The agreed price and structure still makes it an attractive target.
- Whether there are any liabilities (On and Off-Balance Sheet) or other issues they would not want to assume.
- If the business is as represented in terms of clients, contracts, margins, employees, IP etc.
- Organizational maturity levels. Can the business scale as envisioned, including whether the following are mature enough to deliver upon expectations: – The leadership team – The infrastructure (Like systems, planning/forecasting tools and analysis) – The IP/methods/reuse tools
- Where this acquired business might fit into their existing organization.
Accordingly, with this level of anticipated scrutiny, every seller should be prepared to dedicate a substantial portion of a key leader’s time to managing the process from their end. When working with Sell-Side advisors like Bravery Group, this largely means interfacing with your internal team(s) to pull together the requisite materials and your advisors who would typically be the primary interface to the Buy-Side.
It’s worth pointing out that because of the effort and expense involved, neither side would want to proceed with Due Diligence unless they are sure they are very close on deal terms. However, to get to this stage, a seller is essentially asking a buyer to value a business they know fairly little about beyond the CIM and a few management conversations. This impasse is broken by the presumption that the target company has been accurately presented by the seller and that all offers are non-binding. Thus, a potential buyer can easily rescind their offer if they find something to be inaccurately presented or omitted altogether. This non-binding nature of an offer is often surprising to sellers, but it is a convention that serves its purpose well and allows the prospective deal to move forward efficiently.
Here we look at the M&A Process through the lens of Bravery’s Intrepid Methodology – which has 4 distinct stages. Each investment bank, advisory firm or experienced practitioner will have a variation on this process, but the major components of the M&A process are well defined, so they are unlikely to differ very much from the steps shown below.
The following stages are presented in a conceptual format, however, there are a lot of technical tasks inherent to these simplified steps.
Process Stage 1 – Strategy
When “going to market” the approach can take a few forms:
Targeted Solicitation: The company is presented to a very small number of potential buyers who are thought to be very strategic or desirable buyers. While this process usually proceeds quickly, the lower number of recipients can result in lower valuations. However, this can be negligible when the fit is highly strategic (i.e., really strategic – as agreed by senior-level industry veterans who identify considerable synergies that a combination offers).
Limited Auction: The company is presented to 20-50 qualified buyers, mostly industry participants who may find the strategic fit appealing. This is a more balanced approach between speed and valuation.
Broad Auction: The availability of the company is communicated to a wide audience which includes industry participants as well as financial buyers. This is very time consuming but is largely believed to deliver the best valuation. Generally speaking, this is not an efficient means for small but growing, closely-held businesses who, in most cases, will be part of the go-forward organization and finding the right cultural fit and growth opportunity is almost as important as outright valuation.
Even though these are distinctly different approaches, the high-level process shown below is broadly applicable for each. The number of interested parties differs substantially, but the essence of the Strategy stage of the process is the same, to provide each qualified party with the business information they need to evaluate their interest levels and valuation ranges.
The end-goal of the Strategy stage is to prepare and distribute the Confidential Information Memorandum (CIM), which is the “marketing” document that prospective buyers receive (aka the “book”). In order to accomplish this, we must identify the attributes of the selling business that would be valued by a buyer, package them into the CIM, and ensure that the CIM makes its way to interested buyers. This stage starts with a gathering of the selling company’s attributes (both financial and strategic) and ends with the distribution of the CIM.
Prep Financials: Preparing the financials is more than simply including the latest Financial Statements. Pro Forma Adjustments need to be made for items like PPP (Covid related) loan forgiveness, owner distributions and other activities that don’t reflect the true operating performance of the underlying business.
Prep Strategy: A Strategic buyer is generally a competitor or company in an adjacent space and will usually focus on the synergies that an integrated business offers while a Financial buyer will often be a PE firm who wants to let the firm run independently and focus on increasing cash/margin levels of the existing business. As such, a Strategic buyer will typically place a higher value on the business because they can capture synergies like cross-selling and IP leverage that a Financial buyer cannot. Therefore, we spend a significant amount of time understanding the attributes of the selling business that will be highly valued by a Strategic buyer, and then articulating those opportunities in the CIM. This level of strategic application can only come from advisors who have deep operating experience in the industry and is critical because it is what buyers value and will ultimately justify a higher valuation.
Market Outreach: This is tricky as it benefits greatly from buy-side relationships. Knowing the contacts at potentially interested Strategic and Financial buyers is key to building a list of CIM recipients.
Teaser CIM: Usually, a truncated version of the CIM is created in order to provide a high-level outline of an unnamed business that will be coming to market to generate market interest.
CIM: This is the document that makes the best case for why the selling company should be considered an attractive purchase. As much as it is a “marketing” document, everything that is provided needs to be accurate and supportable.
Process Stage 2 – Selection
The Selection stage is concerned with generating and evaluating offers for the business, ultimately leading to the signing of a Letter of Intent which (somewhat) commits both parties to the negotiated terms and period of exclusivity.
Target companies may be approached with an Unsolicited Offer. From a process perspective, an Unsolicited Offer simply circumvents the efforts in the first Stage (Strategy) and still leaves about ¾ of the process to be conducted as the processes can be seen to merge in Stage 2.
Management Q&A’s: These provide the potential buyer the opportunity to meet the management team and get a better understanding of the business. There are usually a series of specific items that buyers wish to clarify which is balanced at this stage between the need to keep certain information such as client and employee details confidential.
Evaluation & Negotiations: Once offers are received, they need to be evaluated against competing bids and the option of continuing as a stand-alone. We believe that the option of saying “no” should always be available to the seller, regardless of what it means for the advisor’s fees. From this process, a preferred offer starts to emerge. Competing offers come in a variety of structures and it’s not always easy to identify the “best” valuation. (e.g., is this still the best deal if growth slows to 15%?). In what we believe is a unique, but incredibly powerful tool in helping our clients understand the impact of subtle deal differences, Bravery runs Monte Carlo simulations on the offers to provide an objective analysis of valuation(s) under hundreds of thousands of varying performance conditions.
Negotiate LOI: The LOI takes on many names and forms but is the document with the deal parameters defined (although non-binding) plus exclusivity, non-solicitation terms and more (binding). Upon execution, this allows the buyer and seller to move into an exclusive period to conduct due diligence.
Process Stage 3 – Readiness
Readiness should commence at the same time as the Strategy phase to allow for sufficient time to gather the documentation that is expected to be requested during Due Diligence. We provide a standard Checklist of expected requests that consists of about 80 typical items; however, we have seen actual buyer request lists of over 500 items. Once gathered, the checklist items are usually staged in anticipation of a buyer request list.
This is an entirely internal stage whose sole purpose is to pre-empt some of the frantic gathering and analysis required during Due Diligence.
Process Stage 4 – Diligence
The Diligence phase is where the buyer examines the seller to make sure they know exactly what they are buying. Due Diligence can be frustrating as the continual stream of questions and conversations need to be promptly addressed, but it is a critical path to moving to a close and needs to be respected as such. Less obviously, it is also a test of the seller’s character and attitude, both in terms of the business representations as well as moral character. During our buy-side days, we once pulled out of a deal after the due diligence was completed because the leader of the acquired business couldn’t behave at a small celebratory dinner we had.
Populate Deal Room: The buyer (in conjunction with their legal, tax and accounting advisors) requests comprehensive documents and assertions from the seller in the form of a Request List. These items are usually transmitted via a Virtual Deal Room platform.
Buyer Review: As the missing items above are gathered, the buyer’s team can hopefully begin to review the documents that were previously staged and can immediately populate the deal room. The buyer’s advisory teams will rigorously examine the provided documents and will have a series of follow up questions and clarifications for the Sell-Side team.
At some point during the process, the Buy-Side will feel confident enough that the representations made are proving sufficiently accurate that the final purchase documents can start to be negotiated/compiled in parallel with the completion of the Due Diligence work.
Integration Planning is a critical contributor to the success of an acquisition and it should commence in parallel with Due Diligence. It is however, usually a direct dialog between the buyer and seller teams so we do not address it in this article.
Following a well-constructed, comprehensive process is critical to successful outcomes, regardless of the specific advisors that are involved. Ultimately, selecting advisors that understand the industry, category and service offerings of a business is critical to ensuring the process is efficient and effective at delivering on the target objectives of a strategic sale.
For convenience, the complete Simplified Process is shown below.
You can reach the author, Paul Newton at email@example.com should you have any questions or simply want to learn more about selling your business.