Selling a company is a process not an event. There are many steps on a long, winding road in a process that culminates in a closed transaction.
This article will provide guidance on the steps and timing. The M&A process can be divided into four phases: Preparation, Marketing, Selection and Closing. The process generally takes four to six months, although for reasons explored below, the timing can vary.
The preparation phase is critical, since the way a company is presented to the M&A market will determine success or failure. The preparation phase will take approximately one month.
The first step is to collect information regarding a company. Typically the investment banker sends the client a request for information (RFI). The client will load any items requested in the RFI into a Dropbox or other cloud folder.
The investment banker will then produce a clear, compelling Executive Summary that concisely explains a Company’s products, product road map, customers, business model, technology, marketing strategy, market size, intellectual property, management team, key growth metrics, financials and key advantages. The Executive Summary should be exciting but also factual.
Once the Executive Summary has been edited in cooperation with the client, the banker will produce a Management Presentation, a PowerPoint that covers the same topics as the Executive Summary, but with more graphics and more detailed information.
A Target Matrix, a list of targets that should be interested in buying the Company, is produced by the banker with additional targets provided by the Company based on past approaches by potential buyers and the management team’s understanding of attractive targets in their market. The Target Matrix should include a description of the targets, contact information and the activity of targets, e.g. recent acquisitions.
Finally, the investment banker will prepare a valuation of the Company, which should be based on comparable companies trading in the public markets and precedent transactions, i.e. recent acquisitions in the same sector. In the technology sector, companies are typically valued based on a revenue multiple. The valuation should be aspirational but also grounded in reality.
The marketing phase will take two months, depending on the market reaction. The banker will reach out to targets with the Executive Summary. If a target is interested after reviewing the Executive Summary, the banker will arrange a Management Presentation online. The management team will give the presentation, since targets will want to hear the pitch directly from the management team, not the banker.
In parallel, the management team will create a virtual data room (VDR) in preparation for the Selection phase. This will have an extensive collection of due diligence documents regarding the Company, everything from incorporation documents to marketing collateral to employment agreements.
The Selection phase will take one month. The first step of the Selection process is for the banker to send a process letter, instructing the top bidders what to include in their written offer. A written offer should include the total valuation, the amount upfront versus earnout, the amount in cash versus stock, employment terms, and the buyer’s approval process, among other items. The process letter will have a specific date when the offers are due. The Company and the banker will analyze the offers received on such date. A banker will often ask the top bidders for a best and final offer. The Company will select the target with the best offer with guidance from the banker.
Once a letter of intent is signed, the banker will provide the winning target access to the VDR and arrange visits to the client’s headquarters for management visits. The winning target may request additional due diligence items. The lawyers will negotiate the Definitive Purchase Agreement (DPA) with input from the banker and the client.
The closing phase takes a month and consists of confirmatory due diligence, finalizing the DPA and closing the transaction. Any last minute issues are negotiated and the transaction is closed.
The M&A process can be shorter if there is an unsolicited bid for the Company. In this case, it is prudent to hire a banker to reach out to the five most logical targets to generate competition in a timely manner. The M&A process can by longer if the buyer’s approval process takes longer than expected, the closing phase is in the summer or holiday season in December, or if there a thorny issues or due diligence items that take longer than expected.
Recognizing that selling a company is a process, not an event, and diligently preparing for the M&A process, minimizes the friction in an M&A transaction and thus maximizes the valuation of a company.
Please do not hesitate to contact Ascento Capital for confidential discussions regarding your company’s M&A strategy.