Mergers and acquisitions involving privately held companies involve a ton of different legal, human resources, intellectual property, and financial issues. While trying to successfully navigate the sale of a company, it is important to understand the dynamics of the deal as well as recurring issues that can typically arise.
Bob Bjelke, a Partner here at DSJ had this to say about preparing for M&A activity, “Companies need to start proactively positioning themselves roughly three years ahead of speaking with potential buyers to get the skeletons out of their closets, no matter how clean they are. ”Bob goes on further to say, “Identifying key issues that may arise long before the due diligence stage takes place will allow for a systematic cleaning of your business before its sale, which in turn will make your company much more attractive.” To give you a better understanding of why we’ve listed out some key considerations to make when selling your company:
M&A Valuation is Negotiable:
How can you be certain that the buyer’s price matches or exceeds your company’s value?
It is important to understand that offer price, as well as business valuation, are negotiable. While they are negotiable, benchmarks for what a strong valuation is may not be clear at first. This is why it is important to know industry standards, multipliers, and much more when trying to hone in on a value and price. Some key factors you should know are as follows:
- Market Comparables – Are your competitors selling for 3x revenues or 12x EBITDA? Do you have advantages over your competitors?
- Whether your buyer is a financial buyer, or they are a strategic buyer (Financial buyers may value your business based on EBITDA multiples whereas strategic buyers may focus less on the price if the synergies are right)
- Trends in your company’s past financial performance
- Your company’s projected financial growth
- Proprietary technology your company owns or licenses
- If there are multiple bidders or a single interested party
- Experience and expertise of your management team
- And much, much more…
Mergers and Acquisitions Can Take a Long Time to Market:
Most M&A activity can take a long time to go from inception through consummation. Typically a period of 4 to 6 months is not uncommon. The urgency of the buyer to perform due diligence and complete the transaction and whether the selling company can run a competitive process to sell the company while generating interest from other buyers is something that will have implications on the timeframe of the process. There are some things you can do to shorten this time frame and increase the chance of the deal going through, such as:
- Run a tightly controlled auction sale process so that potential buyers are forced to make decisions in a shorter time frame in a competitive environment.
- Sellers should place key contracts, corporate records, financial statements, and other material information into a secure online data room early in the process
- Management presentations should be prepared early
- A lead negotiator for the seller should be put into place early in the process, someone who is experienced in M&A deals and has can make quick decisions on behalf of the company
- The company’s CFO should be prepared to answer any financial questions and defend the underlying assumptions of the financial projections
Sellers Need to Anticipate the Amount of Due Diligence Investigation the Buyer Will Undertake
Before the buyer commits to a transaction of this magnitude they are going to want to make sure everything is vetted. This includes the obligations it will need to assume, the nature and extent of selling the company’s contingent liabilities, problematic contracts, litigation risk, and intellectual property issues just to name a few. This holds even more true when referring to private company acquisitions, where the selling company has not been subject to the scrutiny of public markets, and where the buyer has little ability to obtain the information it requires from public sources.
The selling company will want to ensure that it has clean books, records, and contracts to stand up to the buyer’s due diligence process. Some issues that can arise during this process are:
- Contracts not signed by both parties
- Amended contracts not signed after amendments were made
- Missing or unsigned Board of Director minutes or resolutions
- Missing or unsigned stockholder minutes or resolutions
- Incomplete/unsigned employee-related documents, such as stock option agreements or confidentiality and invention assignment agreements
Don’t Get Trapped at the Letter of Intent Stage
One of the biggest mistakes a seller can make is not properly negotiating the letter of intent term sheet. Very often, a buyer will present the selling company with a non-binding letter of intent or term sheet that lacks detail about key deal terms. A lot of large buying companies will view these preliminary documents as more of a formality and give a quick go-ahead so the buyer can progress to the next more important stages of the M&A process. However, a seller’s greatest bargaining power is held before signing a letter of intent or term sheet. These documents, although non-binding with respect to business terms, are extremely important for ensuring the likelihood of a favorable deal for a seller.
Some key terms to negotiate in the letter of intent or term sheet include the following:
- The price, and whether it will be paid in cash upfront or all or partly in stock, and whether any of the purchase price will be deferred
- Any adjustments to the price and how they will be calculated
- The non-binding nature of the terms
- Indemnification terms and whether the buyer will purchase a policy of representations and warranties insurance to insure against damages resulting from breaches of the seller’s representations and warranties
Wrap Up
We only touched upon the tip of the iceberg in terms of key considerations to make when planning for an M&A deal. Often business owners wait too long to start the process of preparing their company and the company’s financials for sale, oftentimes leading to unsuccessful deals. To see how DSJ can add value, click here to contact us!