Specializes in governance, strategy, finance and M&A. Author & Experienced Outside Director. Kona Advisors LLC.
Many business owners spend their life running their own business and are never involved in a transaction. The world of buying and selling companies is foreign to them. While we frequently read about deals in the news, they can be opaque to those not involved.
We ran our family business for almost 70 years and never had a transaction. Then we had a string of seven acquisitions in five years, and a few years later sold our business. Since then, I have worked with numerous owners on their first transaction, which is typically when they sell their business and retire.
They commonly have a puzzled look on their face when they realize how much they don’t understand. Having seen this look enough times, I provide advice in two parts: what you need to know and the basics of how a transaction works.
What You Need To Know
• Establish clear goals. If you don’t have specific goals for a transaction, you are likely to get frustrated. For some the goal is to maximize net proceeds; for others preserving their legacy and staff is more important. In all cases, it is about managing risk.
• Have one quarterback. Deals are about process and managing that process. One person needs to be in charge since the timing of events and negotiating postures requires the leader to constantly see the whole field of play. This is most often the lead attorney; it just depends on who is more adept at managing people and timing.
• Get a good deal done. A good deal is not a perfect deal. Two common expressions are, “You know it is a good deal when everyone walks away just a little unhappy,” and “Is that the hill you want to die on?” You should expect to lose a few deal points. As the deal proceeds, certainty of close becomes paramount to the seller.
• Understand your position players. You will need a team approach to get the deal done. This includes legal, accounting and sometimes industry-specific consultants. Your need for representations and warranties insurance may necessitate your P&C insurance broker’s involvement.
• Consider the post-close reality. It is unlikely that you will simply walk away after the closing. If you have a rollover position, earn-out or a management contract, you will have to live through, and likely lead, the transition process. Strategic buyers will need an integration plan. Financial buyers will posture based on whether this is a platform or bolt-on investment. You may need to negotiate certain terms to address these issues.
How Transactions Work
Most transactions follow a defined sequence of events. Each transaction will proceed based on the specifics of the situation and certain exogenous factors (e.g., market shocks, political events). Each deal starts with a set calendar of events. I’ve found most transactions require six to nine months to complete, but they can also be done in 90 days, or stretch out over a few years. This outline is from the seller’s point of view and assumes they have engaged an investment banker to market their business.
1. Preparing the marketing materials: The first four to six weeks are used to prepare the documents that will be used to market the business. These include the confidential information memorandum (CIM), the teaser, a nondisclosure agreement (NDA) and the approved buyer list. This is a busy time for the seller, as they need to provide the banker with the data needed for the CIM and data room.
2. Market outreach: Once the materials are approved, the bankers contact potential buyers to inform them of the opportunity and answer their initial questions. The seller typically uses this time to catch up on things they didn’t get done while preparing the marketing materials.
3. Indications of interest: After buyers have signed the NDA, reviewed the CIM and had several conversations with the banker, they will submit nonbinding indications of interest, or IoIs. This short letter states how they value the business (a range), structure of the deal, how they will pay for it and what they intend to do with the business. This is the first time that sellers get market feedback.
4. Management presentations: The next major hurdle is the management presentations (MP). These tend to be three- to four-hour meetings where the sellers present the company to the buyers, along with touring the facilities. The purpose of the MP is to help the buyers understand the opportunity and for management to showcase their abilities.
5. Binding letters of intent: A few weeks after the MPs, the buyers will be asked to submit final binding letters of intent (LoI). They will become the framework for the legal documents that will capture the transaction.
6. Selecting a buyer: At this point, the seller selects one buyer to transact with and agrees not to talk to any other buyers for 60 to 90 days. This does not mean the deal is guaranteed to get done, but the seller will not use the primary buyer as a stalking horse to get a better deal elsewhere.
7. Diligence and documentation: From here until the closing, it is a sprint. Financial, legal, HR, regulatory, market and operational diligence go full tilt. This part of the process can be exhausting. Selling a business is like running a marathon and then making an uphill sprint at the end.
8. Closing and transition: Once there is agreement on all the business and legal items, a closing is scheduled. While you may have worked hard for nine months to get there, a successful closing is uneventful.
During the final stages, a transition plan is constructed, including when and how the deal will be announced, staffing changes and operational details. It is important to consider the communication plan for each audience: ownership, employees, customers, suppliers and communities.
Getting a good outcome from a transaction requires you to maintain both a meta-level view and be intimate with the details at the same time.
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