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Selling Your Business: Maximizing Value and Closing the Sale
Throughout the life of your business, there are many steps you can take to maximize enterprise value. However, it’s during that last six to 12 months of ownership, when you are navigating the actual sale process, that you have one final opportunity to bring your exit goals to fruition.
Selling a business takes planning, preparation, strategy, and flawless execution. The process is very complex, and the consequences are significant. Most business owners only go through the sale process once in their lives, so doing it right is essential. The stakes are high so relying on expert advice is critical. Although you can sell a business without the help of investment bankers, doing so can often increase the risk of lower valuations, wasted time, and deals that never close.
Given these risks, the best place for business owners to start is by building your advisory team, including an investment banker who can recommend other key members of the team, if you do not already have them. These may include legal counsel, an accountant, and other professionals as needed. Look at your investment banker as the quarterback of the sale process, but even with their guidance, the process will require extensive involvement from management and ownership.
Below we review some best practices and what to expect at each stage in order to address common challenges and maximize your chances for success.
Choosing the best sale process
The first opportunity to maximize the sale occurs when you are deciding on the type of sale process you will run. There are three primary options.
Pre-emptive negotiations. In this most narrow of process alternatives, a few potential buyers are prioritized according to their often-unsolicited interest in acquiring the company. These buyers are each contacted to begin negotiations with the ultimate goal of entering into exclusivity with one of them. Pre-emptive buyers are often major competitors in the same field as the seller or private equity sponsors focused on the sector or with relevant portfolio holdings.
Pre-emptive negotiations offer the highest degree of confidentiality, the most control over managing sensitive information, and the fastest path to closing. However, they may provide lower negotiating leverage and make it difficult to realize the highest possible price, unless such pre-emptive discussions are accompanied by the threat of competitive bidding.
Targeted auction. This process can involve 10 to 20 of the most likely strategic and/or private equity buyers. Targeted auctions create more competition while still enabling the seller to maintain control over confidential information and benefit from a shortened process timeline. The primary disadvantage lies in the potential exclusion of certain buyers and outlier bids.
Broad auction. In the third type of process, a larger number of prospective acquirers are approached. The process consists of a highly structured timeline with specific deadlines and information dissemination designed to create competitive tension and result in a group of two to 10 final bidders. This process allows sellers to explore the full gamut of potential buyers, strategic and financial as well as international and domestic.
The broad auction is generally the most popular process for selling a business because it allows the seller to evaluate a wider range of transaction structure options and identify the most suitable buyer, thereby increasing the chances of maximizing the sale price. On the other hand, the larger number of participants brings a higher risk of confidentiality breach and will require more management time. Broad auctions can take seven to 12 months or longer to complete.
Preparing the company
Sale preparation is one of the most time-intensive stages for owners and managers. It’s also one of the most important, because the success or failure of a transaction largely depends upon anticipating potential process and due diligence challenges. To successfully prepare for selling a business, you need to:
Eliminate surprises. In the course of a transaction, there are seldom good surprises. To avoid being caught off-guard by information that can jeopardize the transaction, the seller needs to conduct substantial upfront due diligence and proactively address and properly position potential challenges.
To support robust due diligence, it’s important to engage legal, accounting, and investment banking advisors early, and to fully populate and organize the virtual data room (VDR). A VDR is a third-party service that gives authorized buyers secure, password-protected, online access to a repository of all the documents they need to fully evaluate and make a credible offer for your business, including financials, contracts, regulatory and tax filings, and more.
Establish credibility. One of the best ways to establish credibility when selling a business is to provide potential buyers with realistic and detailed financial projections and assumptions. Don’t just offer annual profit projections for the next couple years.
Projections should be based on input from throughout the company, including business line units and sales and marketing, and they should reflect the company’s expectation to achieve future results on a month-by-month basis. The projections need to be realistic, as forecasts become historical information during the process. Meeting or exceeding projections during the process increases your credibility and maximizes your negotiating leverage.
Craft a compelling story. Work closely with your investment banker to create a compelling positioning for your business that highlights its strengths, competitive advantages, and growth opportunities. Your goal should be to paint a convincing thesis for investing in a unique enterprise. Effective positioning often leads buyers to see value beyond the financial metrics of the company and view your business as a critical asset for tapping into a large market fueled by major societal or economic trends. The related marketing materials and the message conveyed during the process should:
Consistent messaging is necessary. Buyers need to hear the same message from your entire team — management, bankers, lawyers, and other advisors. Inconsistent messaging will compromise your credibility and can jeopardize a deal.
Marketing the deal
The initial step in marketing the deal is defining the buyer universe. It’s vital, because if you don’t have the right mix and types of buyers in the initial pool, you won’t get the result and valuation you are seeking.
Your investment bankers should take the lead and create a comprehensive and creative list of potential acquirers. They will hone the buyer list, screening thousands of private equity groups and using industry and proprietary buyer knowledge and relationships to identify the most suitable potential buyers, considering both strategic and financial buyers. Using bankers with deep sector knowledge can help, as they will be familiar with the reputation, practices, and fit of various strategic buyers and financial sponsors active in the sector.
Ideally, you want your bankers to think “outside the box” and include some names that aren’t obvious. Occasionally, outliers can emerge as the highest bidders.
After you define the buyer universe, it’s time to distribute the marketing materials that tell your story and solicit indications of interest (IOIs).
Not all IOIs are equal. Some of the criteria you will want to use to sift through the IOIs and determine the best candidates to engage in the process include:
Once you identify the strongest candidates and acceptable IOIs, it’s time to advance the discussions and due diligence process. Here are two key process milestones that can play a big role in further narrowing the field and identifying the preferred acquirer:
Management presentation. The management presentation is a make-or-break meeting where both sides of a potential deal attempt to determine if they’re a good fit for one another. It typically includes the bankers and management teams, and a seller’s presentation that covers the company’s vision, business model, growth opportunities, and financial projections.
This is the seller’s best opportunity to share the vision and growth plan and highlight the strengths of the organization. It is also the buyer’s opportunity to convince the seller why it is the best suitor at the table.
A dinner the night before the formal presentation can provide an opportunity for both parties to get to know each other on a personal level and determine if there is a good cultural fit between the two organizations. The dinner also presents a valuable opportunity for the seller to gain key intelligence about the buyer and use such information effectively in the management presentation the following day.
Fireside chat. The fireside chat can be a valuable prelude to a management presentation. This is a less formal meeting in an intimate setting with fewer players present — often just the principals from both sides and sometimes the lead banker. It can be an opportunity for the seller to get to know the buyer and determine whether to proceed with a full-blown management presentation. Conversely, buyers sometimes use this meeting to attempt to persuade the seller they are the ideal partner and explore a pre-emptive path by turning off discussions with other suitors.
Selecting the winning bidder
After management presentations, the interested buyers are given access to additional due diligence information on the seller, including bid instructions to submit a final proposal. Such final bids often require the submission of a letter of intent (LOI) highlighting the economic terms of the proposal, a mark-up of a definitive purchase agreement prepared by the seller’s counsel, and evidence of financing from various debt and junior capital sources. The LOI ultimately also establishes the terms for exclusivity to the winning bidder and addresses the following key points:
When you grant exclusivity to the final buyer, you can no longer communicate and negotiate with other parties interested in buying your business. As a result, the leverage shifts from the seller to the buyer during the exclusivity period, which typically averages 30 to 60 days.
As a seller, you must live by the maxim that “time kills all deals.” The longer the exclusivity lasts, the more difficult it is to go back to one of the backup bidders in the event the selected suitor does not close the deal. Your investment bankers must drive the process to conclusion by holding the buyer to exclusivity milestones negotiated in the LOI.
Closing the deal
Exclusivity is a critical stage. You typically have 30 to 45 days to complete final due diligence and negotiate all key legal agreements.
During this phase, third parties are engaged by the buyer to assist with diligence, third party consents are obtained, accountants support their respective parties in completing accounting diligence, and lawyers negotiate the definitive purchase agreement and all the other supplemental documents. If all goes according to plan, the transaction closes once all agreements are negotiated, due diligence is completed, financing is secured, and signature pages are exchanged, and funds are wired.
Transition and integration
But the deal doesn’t end there. Sellers have an important role to play in the transition to the new ownership, and it’s important that everyone understands what the expectations are after the deal closes.
Often, there is a transition period of a year or longer during which the former owners remain in an advisory role.
The focus at this stage is on integration and there are many questions to be answered and key constituents to be addressed — customers, suppliers, and employees.
Keys to a successful sale
The sale process should be the culmination of your business vision and legacy plans. It’s a one-time opportunity to harvest the value you created and reward the team that helped you get there.
The most important elements of the sale process are being prepared, maintaining the credibility of the management team throughout the process, and telling your company’s unique story to the marketplace in a way that will win over the ideal buyer and produce an exceptional valuation. You have a greater chance of a successful outcome if you build a competent team of advisors with the right experience and chemistry, one that you can trust with the most important economic decision of your business career.
For more information about how Intrepid Investment Bankers can help your business plan for a successful sale, contact Rick Chance, Managing Director, Head of Strategic Relationships for Intrepid Investment Bankers LLC, a subsidiary of MUFG Union Bank.
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