Overview of the M&A Sale Process
The M&A sale process is the transitioning of a business in the hands of one owner, to another. The sales process for a mid-market business can take anywhere from as little as four months, to well over a year. Other daunting statistics show that 80% of all businesses listed for sale never sell at all.
There are several steps that must take place for the sale process to be effectively executed. For the seller, the process may be an emotional one. Once it has been decided that a business will be sold in an external transfer to a third party, a typical M&A sales process for mid-market businesses usually contains five major steps. These include:
- The preparation phases
- The market phases
- The diligence phase
- The negotiation phase
- The transition phase
Each phase is distinct in its own nature, but nonetheless vital to the process. The process is also very fluid and these phases can overlap in timing and execution. An M&A advisor (investment banker, M&A intermediary) will usually lead the process and their role is to transition through each phase with the least amount of complications. In most successful M&A sales, the advisor has played a major role in executing the necessary components. On the flip side, an overruling management that restricts the advisor ability to lead each phase can hindered the process. The following is a summary of each phase of the sales process as it is conducted under a controlled auction.
The Preparation PhaseBefore the process starts, the seller and their advisors must prepare the business to be sold. In other words, the business must look attractive to buyers, and in the interest of the seller, be positioned to attain its maximum value. Key activities that are undertaken in the preparation phase would include:
- Preparation of a Confidential Information Memorandum
- Strategy and number of potential buyers to approach
- Research and preparation of a prospective buyers list
- Preparation of virtual data room
This phase is the underlying foundation to a successful M&A process. Some companies spend anywhere between one to three months to prepare these materials. Buyers will judge the financials first but take a holistic approach in deciding to submit an offer. Once the advisor and management agree the pieces are in place, they will initiate what is called the marketing phase.
The Marketing PhaseOnce the preparation phase is completed, the advisor will begin contacting the entities from the prospective buyers list. The advisor approaches each buyer and interested parties will be presented with an investment teaser that provides an overview of the opportunity. Each potential buyer will then begin their own process of analyzing the prospect of purchasing the company and the potential fit with their acquisition criteria. Interested parties will sign a confidentiality agreement (or non-disclosure agreement (NDA), which ensures that all information migrating between buyer and seller, is confidential between both parties. Once the NDA is executed, the confidential information memorandum (CIM) is sent to allow the buyers to analyze risk, benefits, and terms of the investment.
Buyers that decide to pursue the acquisition will present an indication of interest (IOI), which provide initial parameters on valuation and deal structure. Depending on the number of companies that review the business, this period will generally last for one to two months. Also, the type of sales process being employed will determine how the M&A advisors will create competitive tensions between the various prospective purchasers.
The Diligence PhaseOnce the marketing phase ends, the M&A process generally becomes more formal. At this stage, it is clear to the seller, which buyers are still interested, and a range of valuations and deal structure for the transaction becomes more apparent. The seller and their advisor can create a shortlist in which they selects only the buyers that are approved to continue with the process.
At this stage the buyers will undergo a detailed diligence of the business. This is primarily an investigation of operational, financial, and legal history of the business. Due diligence will also highlight any particular flaws, or hidden benefits of purchasing the business. The diligence phase is thorough and will often scrutinize a business by using tax agents, lawyers, accountants, and bankers. The buyer will often go through a series of questions, which attempt to reduce the chances of the investment being a failed one. It is at this phase where serious buyers begin gaining momentum.
Formal management presentations take place from the seller to the entire team of buyers that further highlight the positive aspects of investing into the business. These presentations go beyond the marketing materials and will incorporate all aspects of the business. The shortlisted buyers are also allowed entry into the facilities, and the sites of business. After this one to three month period each buyer submits a binding letter of intent (LOI) that allows the seller and the advisor to determine the best fit to meet the seller’s objectives. Buyers go through final negotiations prior to selection, and ultimately one acquirer is selected as the winner of the bid.
Negotiation PhaseOnce the winning bid is determined, the acquirer and the seller have to begin a complex negotiation phase that will hand over the business. At this point many of the operational, business and financial aspects of the deal aren’t yet hammered out. The purchase price and high-level deal structure outlined in the LOI is only the initial agreement between the buyer and seller. In other words, small but important details between buyer and seller are needed to be determined. In this phase, the buyer and seller will negotiation and complete the following agreements:
- Purchase and sale agreement - The purchase and sale agreement (PSA) is the settlement of the entire sale as followed within the boundaries of the original Letter of Intent (LOI). PSA will set out in detail among other things, the amount and timing of the purchase price, seller’s and buyer’s representations and warranties, purchase price adjustments, the form of transaction (i.e. share or asset purchase) and dispute resolution and arbitration protocol.
- Transitional service agreement - A traditional service agreement is when the seller will provide transitional support to the buyer. This can include, but is not limited to accounting, human resources, and other management positions. At a minimum, TSA's should include a description of services covered, the fee for the general scope of services and additional charges for services beyond the scope.
- Non-competition agreement - A non-competition agreement stipulates that the seller cannot engage in direct or indirect competition with the buyer during a specified term. The violation of a non-competition agreement is usually followed by legal action from the buyer.
- Vendor financing agreements (if any) - Vendor financing generally occurs when there is a gap between the purchase price and the financeable asset base of the seller. Vendor financing agreements will contemplate security arrangements in place to protect the seller against the risk of default, and the amount, timing and interest rate associated with the financing.