You’re a business owner or company executive and have decided to sell your business or a division of your company. This isn’t something you do every day, so the prospect of the whole process is rather daunting. If this is you then this post should be helpful.
To help you get a flavour for what goes into a sale process, I’ve outline the typical steps involved. Every transaction has its own nuances so you may not follow all these steps, or follow them in this exact order, however most sale processes will follow a path similar to this:
- Preparing for the sale
- Finding a buyer
- Early deal phase/s
- Due diligence
- Negotiation & Transaction agreements
- Interim period
Much has been written about most of these steps and even their sub-topics. I’m not going to delve into the detail, but will just touch on each to paint the big picture.
The earlier you start planning the better. If your business needs some work then even a few years in advance could be appropriate.
Is selling the right decision?
Before you get going be sure to confirm that selling is the right decision. Many sellers have been remorseful of their decision to sell once the deal is complete. If you’re selling a business or division which is part of a group, ensure you’ve considered the impact on the group as a whole.
Understand all that goes into the sale process
Understanding the process will help you plan and help you achieve your exit objectives (usually a clean exit with maximum pricing!). By the time you’ve finished reading this post you’ll have a good idea of all that is involved at a high level.
Evaluate the sale-ability of your business
What needs to be fixed, resolved or optimised? What would be important to a buyer? Does a successor need to be groomed and introduced? Should a new line of business be started to help boost the valuation? ... and the list goes on. Make a list of all the items you’d like to fix and then prioritise what can reasonably be done prior to selling.
Just as you can’t perfectly time the market, you can’t perfectly time your exit. You can however consider where both your business and the business environment are placed. You always want to be 'selling high and buying low'. If your business needs some work, or the market you operate in is in a bad place and you’re not under pressure to sell, consider delaying the sale until conditions improve.
Consider exit options
Also consider your exit options. I’m assuming you want a true exit so won’t touch on options such as retaining a passive shareholding. Some common exit options to consider are:
Trade buyer – a buyer linked to your industry (i.e. competitors, suppliers or customers)
Investor – e.g. private equity fund, family office, principal investors, etc.
Management or employee buyout – selling to your management team and / or a group of employees
Listing / Initial Public Offering (IPO) – taking your company public by listing on an exchange
Liquidation – Close the business, sell the assets, settle all liabilities and pocket the difference.
Other options exist for a partial exit, a staggered exit or a combination of various options. These are beyond the scope of this post though.
Consider your transaction team
A number of different skills are required in a transaction:
- Valuation / appraisal
- Transaction structuring
- Sales / Negotiation
- Project management / administration
- Other specialist skills: Tax, accounting, communications, regulatory, compliance, etc.
These skills won’t always reside in your organisation, so consider what you can effectively cover internally and then get external help where needed. A transaction advisory firm or investment bank can often cover a number of these areas or assist with with obtaining the required skills.
Look at the other steps in this post and start planning which are appropriate to you and how you intend to execute each step.
2. PREPARING FOR THE SALE
If you haven’t been through a deal before you’ll likely underestimate the intensity and speed of most deals, so do as much as you can in advance.
Get the business ready for a sale
Fix, resolve and optimise where needed, push hard on revenue, drive costs down and register a year or two of good results in your financials. Not everyone has this luxury though, so work with the time you have to get the business in as good a condition as you can.
Assemble a transaction team
Once the business is in a sale-able state, assemble a transaction team. Appoint a ‘deal owner’ from within your firm (if you don’t assume this role yourself) who will manage the process and be accountable for it. The deal owner should then assemble a team of internal people and external specialists who will work on the various parts of the transaction.
Value the business and decide on pricing
I’d like to draw the distinction between value and price before I cover this section. Value is what something is worth and price is what someone pays for it. In the words of Warren Buffet, 'Price is what you pay. Value is what you get'. Your business may be valued at around $10m, but you price it at $12m.
I won’t go into the details of valuation and pricing strategy now, but I do want to make the point that it is important to have a good standalone valuation of your business to use as the basis for your pricing strategy. A thorough standalone valuation will also assist with the structuring of the deal (e.g. an earn-out) if necessary. If there is high demand for your business or if the buyer can derive significant additional value from your business then look to price above the standalone value of your business.
It is also important to set your minimum or ‘reserve’ price before you get into the heat of the deal. Going below this price is then a clear walk-away trigger.
There are 3 main categories of documents which you’ll need to prepare in advance:
Transaction marketing documents – these include an Investment Teaser (a document of a few pages which outlines the key features of the business at a very high level) and an Information Memorandum (a detailed document which is given to a qualifying buyer which, depending on your process, should give enough information to enable the buyer to table an indicative offer).
Legal agreements – At a minimum have your Confidentiality / Non-Disclosure Agreement ready in advance. I’d suggest also having your Sale & Purchase Agreement and any other relevant agreements ready in advance so that the first draft tabled is an agreement which you’re happy with. It is then up to the buyer to negotiate away from the first draft.
Process and other documents – Depending on the process you’re running (e.g. an auction process) you may need other documents which outline the process to potential buyers. If you need to file regulatory filings or notify other parties of the transaction, start working on these early in the process.
Due diligence preparation
Decide how you would like the due diligence process to work and what information you will disclose when. Anticipate the information the buyer will request and start collating this into a logical format. Also decide how your data room will be managed:
Physical data room (less common these days) – where only hardcopies of documents are made available for review in a room or across a few rooms.
Virtual data room – where documents are shared electronically. For smaller, less sensitive deals file sharing services such as Dropbox can be used, however, for larger or more sensitive transactions specialist virtual data room providers such as Merrill DataSite, Intralinks, RR Donnelley, ShareFile or others can be used.
A combination of both – where more sensitive information is made available in hardcopy only in a physical data room, while all other information is placed in a virtual data room.
3. FINDING A BUYER
To state the obvious, your options are: 1) find a buyer yourself, or 2) get someone else to find a buyer for you (e.g. an investment bank, transaction advisor or business broker for smaller deals).
If you go the DIY route, make a list of potential buyers and then form a set of criteria to prioritise the ones to be targeted. You’ll likely get better pricing from a trade buyer (a buyer related to your industry), as they have a higher probability of being able to extract synergies from the deal, so I’d advise you to use your industry network discreetly to source a buyer if you can.
Presenting your business
At this stage, you want to divulge as little information about your business as possible, but enough to draw the interest of buyers. At this stage the recipients of the information (typically an Investment Teaser), have not yet signed a confidentiality undertaking. Just enough information should be given to whet the appetite of potential buyers.
4. EARLY DEAL PHASE/S
You would have already had initial contact with potential buyers - now you start engaging with the interested one/s. They’ll want more information about your business, but you also want more information about them. Before you hand over more information put them through a screening process to ensure they are suitable. Those buyers which are suitable should then sign confidentiality undertakings and be given more information (e.g. the Information Memorandum you’ve already prepared). Before a potential buyer goes any further in the process (e.g. Due diligence) they need to show some form of serious intent.
Determine what is important to you in a buyer and then ask them for written responses. Typically you’d want to know:
Buyer profile - Basic information about who they are, what they do, and what their values are.
Financing – How they intend to settle the purchase price.
Transaction rationale – Why are they looking to do the deal?
Plans for the business post-transaction
Sign a Confidentiality / Non-Disclosure Agreement with suitable potential buyers. This should typically be a two-way agreement where both parties agree to keep any information shared confidential. The following provisions may also be inserted into such an agreement:
Exclusivity period – Where a single potential buyer is given a period of exclusivity to investigate the business and potentially conclude a transaction.
Non-solicitation provisions – Don’t ‘steal’ our employees or customers!
Non-circumvention provisions – Don’t bypass us and go directly to any of our ‘partners’ to our detriment (suppliers, customer, intermediaries, service providers, etc)!
Get an indication of serious intent in writing
Once the potential buyer has had time to review the information received and has asked further questions the terms of a deal should be starting to formulate in the buyer’s mind. It’s a good time to get these in writing and start crafting the high-level terms of the deal. This can take various forms and show varying degrees of commitment at this stage. Such documents could include a:
- Letter of Intent
- Non-Binding Offer letter
- Term Sheet
- Memorandum of Understanding.
These documents are not necessarily the final terms of the sale, but do provide a good starting point for more serious negotiations. Before allowing a potential buyer to do a Due diligence on the business, ensure that there is serious intent and the means to complete the transaction.
5. DUE DILIGENCE
Typically the buyer will assemble a team to review your business to understand any potential risks, assist in structuring the transaction from their perspective, and, if applicable, to aide them in planning for the integration of your and their businesses post-transaction. Elements of a typical due diligence include:
Information request – Ideally you show the potential buyer the information you have prepared and they can request additional information where necessary. This allows you to keep the structure of the data you have prepared and make additions vs restructuring the data into the buyer’s requested format.
Data room management – Loading and tracking additional information in the data room.
Q&A – As the buyer’s due diligence team works through the data they are bound to have questions. Set a process in place for managing questions and answers which all parties understand as this can be quite disruptive to your business if not managed well.
Inspection / interviews – Most buyers will want to interview management and key technical specialists and inspect the business’s premises, assets, etc.
6. NEGOTIATION & TRANSACTION AGREEMENTS
Once the due diligence is complete the buyer should have all they need to enable them to negotiate and finalise the transaction agreements. The main agreement will be a Sale & Purchase Agreement, which will capture the purchase price, transaction structure, and terms. Depending on the nature of the deal there may also be other agreements (e.g. a Shareholders’ Agreement), which together will form the suite of transaction agreements.
The negotiations will likely already have begun, but this is where they become more serious. Remember that a Sale & Purchase Agreement is there largely to protect the buyer. As a seller, the ideal situation for you would be to have the buyer pay you the full purchase price and you hand them a signed share transfer form and a share certificate. You’ll very rarely (if ever!) get away with this so you’ll need to negotiate the terms of the Sale & Purchase Agreement to a level which you’re satisfied with and then sign the agreement. There are transaction structures (e.g. earn-outs, clawbacks, adjustments, etc) and other means (e.g. warranty and indemnity insurance) which can be used to bring the parties to agreement when it seems you are too far apart.
7. INTERIM PERIOD
Sale & Purchase Agreements often contain conditions which need to be fulfilled before the transaction can be fully effected (let’s call this ‘Closing’). Let’s call the time between the signature of the Sale & Purchase Agreement and Closing the ‘Interim period’. Typically the conditions to be fulfilled in the Interim period are: regulatory or third-party approvals, board approvals, accounts being finalised, various other agreements being put in place, etc.
There are often restrictions on the seller and/or the business regarding how the business is operated during the Interim period. There may however be no Interim period, as no further conditions to complete the transaction are required, and the Closing can then happen when the agreement is signed. I’ve also worked on transactions where the Interim period has lasted for several months (and in one case over a year!).
It’s good practice to keep a checklist of conditions that need to be fulfilled in the Interim period and ensure that the pressure is kept on to get them fulfilled as soon as possible. Once all the conditions are fulfilled it’s time to close the transaction. All approvals are now in place and all conditions are now fulfilled. All that is outstanding is for the buyer to make payment and for you to transfer the business to the buyer. These items happen in this step.
The transfer requirements and paperwork will depend on the nature of the transaction (e.g. share sale, or business and assets sale) and the jurisdiction you operate in. For a share sale, for example, the transfer will typically be effected by signing a share transfer form and issuing a new share certificate to the buyer showing title of the acquired shares. Other documents such as board resolutions, director resignations, confirmation that you have no claims against the company, etc could also accompany the documents of title. If you’re going to have media coverage of the deal this is the best place to do it, as the deal is finally done!
After a long, intense process it's now time to relax and celebrate! Remember to acknowledge your team members for all their hard work, particularly your internal staff members working on the deal while also keeping up with their normal daily work load.
While all the hard yards are done, there may still be a few obligations and requirements of you the seller. These could include:
- Specific undertakings you gave the buyer
- Regulatory or other notifications you may need to make
- A handover process you may have agreed to
- Paying tax on the transaction proceeds you received (unfortunately!).
Well done for pressing through and making it to the end of this rather lengthy blog post. I hope it gives you a good feel for all that goes into the often long and involved sale process. Start planning and preparing early, get a good team together to assist, and execute with speed and precision. All the best with your sale process!
ABOUT THE AUTHOR
Steven Harper is the Managing Director of Helmsley Advisory, a specialist Financial modelling, M&A advisory and Valuation advisory firm based in Hilton, South Africa.
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