Selling a company is an exciting process. Years of effort building value in a company culminate in a six month process to sell the company. Getting the M&A process right is critical to extract maximum value. “Conduct” is the right word since there are many moving parts in the M&A process. This article will help you ensure that all the parts work together harmoniously for a smooth, efficient and successful M&A process.
Assemble the Team: The team needs to be in place early in the process, including an investment banker, M&A attorney, private wealth manager, and accountant. An experienced banker is highly recommended to orchestrate the process. The attorney hired should have specific M&A transactional experience. A private wealth manager should be consulted early in the process since there are structures that save taxes. An accountant is critical to prepare and stand behind the numbers.
Develop a Strategy: What is the overall strategy? This often depends on if there is an unsolicited offer or it is a fully marketed transaction. It there is an unsolicited offer, then speed is key in order not to lose the interest of the buyer at the table and fewer targets should be approached. In a fully marketed transaction, it is worth spending time to approach both obvious targets as well as targets in adjacent sectors.
Select the Targets: Targets can include venture capital firms if the company is interested in a parallel path, approaching both financing sources as well as strategic acquirers. On the M&A front, both private equity firms as well as strategic acquirers should be approached. Private equity firms have a lot of dry powder and are now competitive with strategics on valuations. Non-technology companies should also be approached in a tech deal, since non-technology companies are aggressively acquiring tech companies to keep abreast of the rapid technological changes. For example, Walmart just acquired a VR startup which I explore in my article: Walmart’s Buys VR Startup Spatialand.
Prepare Detailed Financials: Before launching into the M&A market, make sure you have detailed historical financials and solid projections backed by reasonable assumptions. The first six months of projections should be very conservative, since at the end of the M&A process, when the buyer’s board is meeting to approve the transaction, a board member inevitably will ask if the seller is on track on their projections. If the seller is not on track, there is an increasing chance that the transaction will not be approved.
Develop a Defensible Valuation: A valuation should be prepared with comparable companies and precedent transactions. Comparable companies are comparable public companies. Precedent transactions are similar M&A transactions. Be prepared to defend the valuation since the buyer will question the relevancy of each and every comparable company and precedent transaction.
Refine Marketing Materials: The marketing materials are not for selling a product, but for an M&A process. M&A marketing materials typically include product descriptions, product road map, customers, marketing and sales strategy, market trends, market size, technology, IP, company history, management team, employees and financials. Typically a blind profile is sent, and if there is interest, an NDA is followed by an in-depth Confidential Information Memorandum, or a “book”. If there is interest after the buyer reads the book, then a Management Presentation will be scheduled where in depth questions will be asked.
Conduct a Robust Auction Process: It is imperative to conduct a robust auction process for the highest valuation. Interested parties should submit offers on a date certain and be encouraged to submit a best and final offer thereafter. Going down the road with one buyer is dangerous and can result in a valuation change on the downside days before the closing with the buyer giving no justifiable reason for the price decrease whatsoever.
Expect Thorough Due Diligence: Expect the buyer to conduct thorough due diligence, more than you expect. Set up a virtual data room to smooth the due diligence process. If the seller has sensitive items such as IP or source code, then only reveal these items later in the due diligence process when there is a high degree of likelihood that the transaction will close. Some closing are blackbox, meaning the transaction closes only after the buyer pears into the seller’s blackbox the day of the closing and the buyer is assured that the highly sensitive item is what the buyer expected.
Negotiate the Definitive Purchase Agreement: While the attorneys negotiate the definitive purchase agreement, there are certain moves that can be done to accelerate the close of the transaction outlined in my LinkedIn article How to Accelerate Closing a Transaction. If earnouts are part of the consideration to be paid to the seller, make sure the earnout goals are conservative and simple. More on earnouts can be found in my LinkedIn article How to Structure Effective Earnouts.
Schedule Moving Closing Dinners: Finally, on a lighter but practical note, schedule moving closing dinners. I represented a Japanese public company acquiring a French private company. On the day of closing, the lawyers were busy finalizing all the closing documents but were far from finished. I went to get a coffee at a Parisian cafe and when I got back, much to my surprise, the parties were signing papers. The seller had scheduled a closing dinner at 8 p.m. on a river boat on the Seine, and nobody wanted to miss the experience. Papers were signed, the minor issues still left were put in escrow for the lawyers to finalize later, and a fine closing dinner was had by all.