As we discussed last time, selling a company is a lengthy, complex process. Owners often ask how long it will take to sell their business, and what specific tasks they need to undertake to help make the sale as smooth as possible. Like any transaction, the sale of a company can be broken down into a series of phases and activities within each phase. To reiterate, we view the sale process as four separate phases:
Phase I: the Diligence Phase – includes gathering key documents and data, preparing a valuation of the company; preparing an Information Memorandum and no-name teaser (used to market the company to prospective buyers), developing a marketing strategy for the business, and researching potential buyers. Phase I is typically a two-month process.
Phase II: the Marketing Phase – includes making initial contact with prospective buyers; distributing teasers and non-disclosure agreements (“NDAs”), distributing the Information Memorandum to buyers that signed the NDA, answering questions raised by buyer candidates, requesting Indications of Interest (“IOIs”) from interested buyer candidates, and inviting select buyer candidates to a management presentation. Phase II is also typically a two-month process.
Phase III: the Management Presentation Phase – the owner and management team formally present the company to prospective buyers. After the completion of management presentations, buyer candidates are asked to submit a Letter of Intent (“LOI”). The owner and their team of advisors (lawyers, investment bankers, business advisors, accountants and the like) evaluate the LOIs to determine the “best” proposal, and negotiate the LOIs to improve its terms, ultimately executing one LOI during this phase. Phase III is typically a two-month process as well.
Phase IV: the Buyer Due Diligence and Documentation Phase – the buyer undertakes a thorough review and analysis of the company’s primary information to confirm summary information previously provided to them and to confirm that there are no latent issues or liabilities. Concurrent with the diligence portion of this phase is transaction documentation. In short, this phase encompasses the buyer’s diligence and documentation, and if all goes as planned, funding and closing the transaction. Phase IV is typically a three-month process.
Understanding each phase, and how to address it, will help the owner create an exit strategy that meets their objectives and brings the sale of their company to a profitable fruition. We looked at Phases I and II in the last post. In this post, we will review Phases III and IV of the sale process.
The first stage of Phase III is management presentations. As the name implies, the owner and their management team meet face-to-face with prospective buyers to pitch the company and answer buyers’ questions. Management presentations occur after Indications of Interest have been submitted and only include buyer candidates that submitted an acceptable (price, terms, vision for the business, etc.) IOI. Typically, in order to create a basis for comparison, three or more buyer candidates are invited to a management presentation. The management presentation provides a higher level of disclosure than the disclosure included in the Information Memorandum. In addition, some of the information included in the Information Memorandum that was distributed in Phase II may be repeated, but it will be addressed in more depth. Finally, the management presentation will provide an update with respect to financial information, sales and operations, the assumptions included in the company’s financial projections, etc.
The goal of the management presentation is to create excitement about the company/acquisition opportunity and to encourage prospective buyers to submit their LOI at the high end, or exceed the high end of the valuation range included in their IOI. The second goal of the management presentation is to provide the owner with the opportunity to establish rapport with buyers and ask questions of them, as well. In fact, owners should maximize the opportunity during the management presentation to suss out how a potential buyer is thinking about the company pre- and post-sale, any diligence concerns, and the buyer’s vision for the company going forward.
The third goal of the management presentation is for the owner to qualify and select a buyer who can meet their non-financial objectives such as legacy, taking care of employees, and, in the case where the owner will remain with the company post-closing, determine if the owner can work with and for the buyer. Finally, the management presentation is an opportunity to gauge the importance of the transaction to the buyer and their ability to close the transaction in a reasonable timeframe.
Likewise, buyers consider the management presentation to be part of their due diligence, and may use the meeting as an opportunity to gauge the seller’s temperament and business acumen. Additionally, in the case where the owner will remain with the company post-closing, the buyer will assess their ability to work with the seller.
After the management presentation, buyer candidates are asked to submit a Letter of Intent (“LOI”). A well-structured LOI clearly stipulates terms, such as valuation and financing, along with the buyer’s expectations and conditions, expectations of the seller post-closing, major conditions to closing, and key dates, such as when due diligence is to begin and end, completion of financing and major agreements, the anticipated closing date, etc. Once all the LOIs have been received, the owner can evaluate prospective buyers’ offers, select the best proposal, and negotiate and execute on the chosen LOI. Similar to Phase II, Phase III can be compressed, particularly if a potential buyer is willing to pay a premium to fair market value in order to preempt the sale process and have the owner take the company off the market.
Finally, Phase IV encompasses the buyer’s due diligence, documentation, and the closing of the sale itself. That said, the buyer’s diligence stage can be the longest of the entire process due to the amount of review, analysis and attention to detail that is involved. The buyer and their team often must comb through thousands of pages of documentation, including corporate organization, financial and tax, customer, vendor, contracts, employees, benefits plans, insurance, IT, environmental, etc. In addition, the buyer’s team may be in several different locations. However, the seller can mitigate these logistical issues and expedite the review process by uploading and housing all of the company’s documents in a “virtual data room,” an online repository that can be accessed via a secure login (we will explain data rooms in more detail in a future post).
Phase IV also includes documenting the transaction, including the asset or stock purchase agreement together with the purchase agreement schedules and all of the related documents associated with the transaction such as employment agreements, leases, management incentive plans, etc. Depending on the situation, Phase IV may also include third party consents, assignments, and scores of details related to every facet of the transaction.
Phase IV is the stage that the seller and their team typically work the hardest and feel the “second-job” pressures of continuing to run their company while orchestrating a sale. And in certain industries, the Phase IV timeline may be even longer and more challenging due to approval processes mandated by governmental authorities.
Understanding the four phases of the sale process can help owners navigate and manage expectations and the complexities inherent to each phase of selling their company. Taking a thoughtful, organized approach to the sale can help sustain the momentum from beginning to end, ultimately leading to a successful transaction that satisfies the seller’s goals and objectives.
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