Selling a business is not for the faint of heart. The mergers and acquisitions (“M&A”) process takes discipline and focus. It will be enormously distracting and will require significant management and ownership time. Owners and management must balance those demands, with maintaining (and hopefully, growing) the actual business. For these reasons, a successful M&A transaction requires advance planning even before the actual sale process begins.
Here are a few key actions to consider before the actual sale process begins. Addressing these items now will not eliminate the significant effort that will be required to complete a successful sale, but will make for a smoother and more efficient process. This article primarily addresses the sale of a middle market company – defined loosely as companies with revenues between $10 million and $1 billion. However, every transaction is different, and most of the items below apply equally to companies that fall below the middle market threshold.
Understand Your (And Your Partners) Objectives
Define your priorities for a transaction. If there is more than one owner, engage in frank discussions on what each of you wants out of a transaction. If you have a stockholder agreement, dust that off and make sure you understand how that may interact with the sale process. If you need to amend it, now is the time to do this.
Understand your objectives, Do you want a transaction with all cash and a full exit? Or are you willing to roll over a part of your equity in the Company into the newly formed buyer entity? Do you envision a future role for you, or maybe, members of your family, in the management of the new company? Do you have a strong management team in place that is ready to continue after the transaction? Are there key executives and employees who must continue with the business in order to preserve value? Knowing your priorities ahead of time and the relative importance of each priority will go a long way to crafting a deal you can live with.
Assemble the Team
It is critical to hire an experienced M&A team. For most middle market transactions, this means hiring professionals who specialize in M&A. The following professionals will be critical to the success of the transaction.
M&A Lawyers. Hire seasoned M&A attorneys with extensive transaction experience. Transactions require both M&A experience, and expertise in multiple legal disciplines. Make sure your M&A lawyer has access to subject matter experts in tax, employment, employee benefits, intellectual property, real estate, data privacy, and security, and commercial agreements, among others. If your company has a trusted lawyer who has been looking after the company’s legal affairs, and that individual does not have extensive M&A experience or access to subject matter experts, he or she may still be a valuable member to the M&A team. Make sure your M&A lawyer understands this, and is able to collaborate with your existing counsel. The M&A legal team should be capable of structuring the deal with as little risk as possible to the Seller, and proceed to completion as quickly and efficiently as possible.
Accountant. If you do not have one already, hire an accountant with M&A tax and accounting experience. The accountant will be invaluable in helping to structure the deal and providing advice on and modeling the tax effect of various transaction structures. Your accountant will also be an integral member of the team in connection with the buyer’s financial and tax due diligence.
Financial Advisor/Investment Banker. In many transactions, an experienced financial advisor or investment banker can bring significant value to the seller. In particular, they can provide critical services preparing materials to market the company to buyers, identifying potential buyers, managing the marketing process, managing the M&A process, organizing the due diligence process, helping to negotiate the letter of intent and acquisition agreements, and coordinating the various work streams involved in a successful closing. Hire a financial advisor or investment banker with a reputation for servicing middle market companies. In certain cases, firms with specialties in certain industries and markets may be a good fit. Interviewing a few firms to get a sense of their approach to M&A, and their level of experience can help you pick the right one for your transaction.
These services are expensive, but having competent advisors can mean the difference between a successful closing and a “busted transaction.” Properly managed M&A professionals should minimize the disruption caused by an already disruptive process, maintain momentum to closing, and allow management to continue its focus on running the business and maintaining strong results. Assemble the team now to prepare for success later.
In addition to assembling an experienced team of external advisors, it is also important to assemble an internal team of key employees – usually from senior management – to assist with the transaction, particularly with the due diligence process. As discussed below, the due diligence process may (and often should) start before a transaction is underway, and will involve significant time and resources from the seller to properly and completely assemble responsive information and documents the buyer’s formal due diligence requests. Sellers often are reluctant to bring non-ownership employees into the fold of a transaction until it is underway in earnest or approaching closing; however, opting not to do so early will result in the owner or owners bearing all or most of the responsibility not only for due diligence, but also reviewing and negotiating deal terms and transaction documents and managing the business at the same time – any one of which may require full-time attention. Despite the reluctance of owners to disclose a potential transaction to key employees until late in the process, doing so early on will alleviate some of the burden on the owners, facilitate more timely and complete due diligence responses, and avoid potential misgivings by key employees who may feel they were left out of the process.
Prepare for Buyer Due Diligence
Expect any buyer to engage in significant due diligence before they commit to a transaction. In the usual process, the Buyer will perform a high level diligence investigation, focusing primarily on the business and financial results. Assuming that initial investigation is satisfactory, expect increasingly detailed due diligence requests covering a number of areas, including corporate structure and governance, finance, tax, material contracts, real estate, business assets, intellectual property, regulatory matters, employment, employee benefits, and data privacy and security, among others.
Prepare for the process now. Your M&A lawyer or your financial advisor/investment banker can help organize that effort. Ideally, you should start building a virtual “data room” early to give you a head start on assembling the numerous materials and documents that buyers routinely request. Review those materials critically and identify risk areas now so that you can proactively address them. A well-structured data room with complete documentation will give a buyer confidence in the deal. In particular: (i) ensure that the record book with the certificate of incorporation and bylaws, meeting minutes, operating agreement, stockholder agreement; ownership records, and ledger is complete; (ii) ensure that material contracts and all amendments are fully executed and in force. If a particular contract is expiring soon, consider whether to start the renewal process now; (iii) identify potential regulatory issues; (iv) consider whether to include existing long lead time items like property surveys, title insurance policies, environmental studies and reports, zoning reports and the like. If those items do not exist, in some cases it may make sense to order them now, so the M&A process is not delayed. Your M&A team will be helpful in determining whether this would be desirable.
The key to due diligence preparation is to think like a Buyer, and either address (or be ready to address) potential problem areas. Check with your lawyer first, but don’t hide unfavorable items. Address them in advance if you can, and if you cannot, make forthright disclosure. You will ultimately maintain the Buyer’s confidence.
Addressing these items well in advance of the actual start of the M&A process will help shorten the time to closing. Once the M&A process starts, time is not on your side. The M&A team must proceed as quickly and as efficiently as possible to close. That is why advance planning can be so critical to completing a successful transaction. Plan and act now to ensure a successful completion.