A typical process for selling a Company follows several steps. The length of each of these steps differs per transaction. On average, a sales process takes 5 to 7 months in total.
Expression of interest
In the case of an exclusive process this is when a Buyer approaches a Company with the wish to acquire it. When the process is structured as an auction, this is done through sending out a Teaser. A Teaser is a document detailing the key information of your Company without mentioning the name of your Company. The reason for Teasers being anonymous is that they are used to attract interest of potential Buyers before signing non-disclosure agreements. Teasers are short and no longer than 2-3 pages.
The broker will prepare a long-list of potential Buyers. In consideration with you, based on the long-list, a short-list is made to which the Teasers are send. Based on feedback received from the short-list (or lack thereof) additional companies from the long-list can be added. For example, perhaps your initial plan is to sell a portion of the shares in your business to a local investment fund. However, after little or no interest you decide to try some companies from the long-list which are internationally based.
Receive interest and sign confidentiality agreement
If potential Buyers are interested they will indicate their interest, often through a so-called Indication of Interest (IOI) letter. With the potential Buyers you want to continue agree a confidentiality agreement or non-disclosure agreement (NDA). Be sure to involve your lawyer in this.
Share a Confidential Information Memorandum (CIM)
Now more information can be shared about your Company. The main document shared is a Confidential Information Memorandum or CIM. The CIM includes detailed information about your business, the market it operates in, the main products and services, its management team, workforce and the key financials. It includes historical financials as well as a business plan showing the financial forecast for the next 5 years. If you require financing and are interested in selling a portion of the shares, indicate in the CIM what you are planning to do with the funding and how it generates increased profitability in the future.
The CIM is the main document to attract investors and should indicate why an investor should invest in or acquire your Company.
In addition, the CIM could include deal specifics. For example, if you as owner do not plan to continue post-acquisition this is the document where that should be indicated. Or if the real estate of the business is held by another legal entity you own and is currently rented out to the business. Is this real estate entity be part of the transaction or not? Will a new rental agreement be agreed?
As part of this process Management Meetings can be held with potential Buyers, in which more information is provided and where the Management of the Company meets the Management of the potential Buyers. Often the Management Presentations are done after receiving a non-binding offer.
Receive non-binding offers
If potential Buyers are still interested after analyzing the initial info they will send a non-binding offer (NBO) or term sheet. This document has many different names, such as Letter of Intent (LOI) or Memorandum of Understanding (MOU). In this document the Buyer sets out a specific purchase price, the basis and assumptions of this price (a multiple times EBITDA), deal structure (cash- and debt free), timing of payments (e.g., deferred payments or earn out), timing, the plans with the Company, how they will finance the acquisition, what more work they want to perform (e.g., due diligence), etc.
The LOI is a very important document in the next stages of the process. Be sure to involve your broker / M&A advisor and legal counsel in deciding which potential Buyers you want to progress to the next stage and start diligence.
Some key elements to look out for:
- What are the underlying assumptions of the price? Do they consider the forecast financials from the CIM or make their own assumptions?
- When do they plan to pay the purchase price? Getting all your money directly is always better than deferred payments or earn out, which binds you to the Company and leaves risk of non-payment (for example, when earn out conditions are not met).
- How do they plan to pay the purchase price? Completely with cash or with external financing? If the last, do they already have this financing secured? Be sure to check if they pre-qualify for financing.
- How do they see the role of the current Management Team and you as an owner? Be sure to align on those expectations.
- How do they see the future of your business? Do they want to keep running it as a stand-alone business or integrate it into their own existing businesses? If the last, be sure to investigate how they see the integration and consequences (e.g., firing of your employees).
Due diligence phase
In this phase you offer potential Buyers the opportunity to do a detailed due diligence on your business. Basically, this means opening your books and let Buyers verify the underlying assumptions of their purchase price and confirm there are no other risks or liabilities which are not considered.
This is an extremely intensive period for you and your business. Multiplied by the number of potential Buyers which are still in the race. Because of this make sure you prepare clean, understandable and sufficient information to be shared. In most cases the Seller uploads documents in a so-called virtual data room, which is a secure website you can use to share documents (a common used data rooms is Dealroom).
Be careful and diligent what you share, once documents are uploaded they are hard to get back. Consider sensitivity of some documents, as potential Buyers can be your competitors.
Do not share any information on customer names, margin per customer/product, employee names, etc. Where possible, anonymize as much as possible by not using customer names but numbers (customer 1, customer 2, etc) or blackline sensitive info in contracts (customer names).
Consider the quality of the documents, especially for financial overviews you share. Be sure that the underlying detailed overviews you share reconcile with your income statement or balance sheet. Ensure the files do not include formula errors or hidden rows, columns, sheets. This sounds easy, but it goes wrong a lot and results in Buyers losing confidence in your financials and the internal control environment of your Company.
Depending on the size of your business it is advisable to hire external transaction advisors to assist you in preparing deal-ready financials. This can vary from an Excel file, including your key financials with narratives (e.g., Databook or Factbook) to detailed reports (e.g., sell side reports or Vendor Due Diligence reports). These type of reports ensure consistency and quality of your financials. Also, it answers many questions from potential Buyers and saves you time to focus on other areas in the diligence. As such, these detailed financial reports are common for large deals with an auction process. For a Financial Fact Book example click here.
Lastly, make sure to have a formal process for submitting and answering of questions. Many virtual data rooms have a build-in module for submitting and answering questions. An Excel Q&A tracker works as well.
Virtual data room contents
Most Buyers do due diligence in the areas of operational, commercial, financial, taxes and legal. At a minimum the data room has to contain information regarding:
- Historic financials (up to 3-years back), such as trial balances, financial statements and break-downs of key accounts (sales, inventory, receivables, payables)
- Tax returns (up to 5-years back)
- Corporate documentation, such as: incorporation documentation and shareholder minutes
- List of assets, intellectual property, equipment and employees, including employment terms
- Key contracts with customers and suppliers
- Other relevant contracts, such as financing or leases
- Legal structure of your business and organizational chart (description and responsibilities per function)
- Where relevant, overview IT infrastructure and environment, pending legal or environmental claims
Drafting the purchase agreement
During the due diligence phase, the lawyer of Seller will share a draft Word version of the purchase agreement with the potential Buyers. In case of a share deal this is a Share Purchase Agreement (SPA) or in an asset deal an Asset Purchase Agreement (APA). As part of the binding offer the Buyer provides a mark-up of the SPA or APA, indicating the conditions and terms of the acquisition (e.g., guarantees or indemnities).
In this stage negotiation on the purchase price and the purchase agreement is common. Many mark-up versions of the purchase agreement can go back and forth between Buyer and Seller before an agreement is reached.
The purchase price is not the only determining factor to decide who will be the ultimate Buyer. Also items as: deferred payment, earn out, guarantees or indemnifications impact which offer from which Buyer is best for you.
After both Seller and Buyer agree on the purchase agreement and the final purchase price is determined, the purchase agreement and supporting agreements are signed by you and representatives from the Buyer.
The signing of the purchase agreement does not mean that money is directly transferred. This depends on the Closing. Closing occurs when all pre-closing conditions in the purchase agreement are fulfilled. Closing conditions could be: obtaining regulatory approval (e.g., antitrust authorities), third-party consents, key employees signing employment agreements, etc.
During the pre-close period, Buyer and Seller are responsible for fulfilling the pre-closing conditions and preparing closing deliverables (e.g., closing balance sheet).
Once all pre-closing conditions are completed and the closing deliverables have been provided, the money is transferred. This is the moment that the transaction legally occurs.
After Closing, the Buyer starts to integrate your business into its own business. For a Seller it means paying your taxes and plan your next steps. However, this does not mean you have no more responsibilities towards your sold business. This depends on how the transaction is structured and what is included in the purchase agreement. For example, it is possible that a portion of the purchase price is paid to an escrow which will only be released to you after a certain number of years. This could be the case when several guarantees and / or indemnifications are agreed. Or in the case of an earn out. Even without an escrow you could still be held responsible for damages post transaction.
Experienced legal counsel is crucial in drafting the purchase agreement in protecting you now and in the future!