Preparing for Success

Preparing for Success

The third installment of The Credit Junction's 4-part M&A blog series. In this piece, learn about the steps you should take to prepare your business for a sale. 

Benjamin Franklin famously declared that “by failing to prepare, you are preparing to fail.” This saying is particularly relevant as you look to sell your company.  The preparation you put in upfront will greatly influence your odds of success.  Working with professionals to sort out your financial system and your corporate governance will reduce the risk of a buyer uncovering an unknown issue during due diligence.  By being prepared, you and your advisors can anticipate questions and plan accordingly. This will allow you to put your best foot forward and should result in a smoother and shorter transaction process.

By failing to prepare, you are preparing to fail.
— Benjamin Franklin

The typical sale process (controlled auction) is filled with ups and downs, and takes approximately six to nine months to execute.  That is from initial preparation through to a close.  If a banker tells you he or she can get a company marketed and sold in less than six months, you should ask for specific examples of their track record.  My guess is you will see that most deals take at least nine months from start to finish. Throughout this time period, you and your ownership team will experience many highs and lows. Preparing adequately for each step of the process will make a big difference in the long run.

Design the Approach

The first phase of the sale process involves planning and strategy.  In this phase, you and your advisors will develop an equity story and prepare a detailed information memorandum and financial model containing all pertinent information required for potential buyers to formulate a fair and well-considered offer.

  • The preparation of the information memorandum and a financial model will require close cooperation between selected key personnel of your company and your advisory team.  Your advisors should lead the process and should do all they can to limit the strain on you and your company resources.
  • Access to key operating information will be required.  Sensitive information can be withheld from potential buyers during the early stages to protect your company from the competition.
  • Your company and your advisory team will create a management presentation that delivers a complete, concise picture of the current business and its future potential.
  • The investment bankers, attorneys, accountants, and other professionals should work to coordinate the preparation of the data room.
  • The main goal of this phase is to anticipate critical deal and pricing issues before any information is provided to potential buyers.

Approach the Market

Once you have completed the initial process of defining the equity story and creating the information memorandum, you and your advisors must then develop a list of qualified, selected buyers for the initial solicitation of bids.

  • After a potential buyer expresses interest in the company, the investment banker will negotiate a non-disclosure agreement and they will distribute the detailed information memorandum to each potential buyer. 

  • Each potential buyer will receive specific instructions on the timeline for developing and submitting an indication of interest.

Indications of Interest

Potential buyers in this first round will be invited to submit detailed, non-binding, indications of interest based on the information memorandum.  These indications will consist of general terms to be considered by the sellers – valuation, structure, sources of funding.

  • You and your advisors will analyze the offers for the legitimacy of interest, the degree of detail, extent and structure of financing, strategic motivation and timing.
  • You will decide on which potential buyers to invite to the second round for a management presentation, site visit, and access to the data room.
  • The main goals at this stage are to evaluate the legitimacy of the offers and to evaluate the likelihood and ability of each buyer to reach a satisfactory contractual position with you.  These qualifiers are invited to participate in the second round.

Letters of Intent

Potential buyers invited to the second round will be provided with controlled access to you and your management team.  You and your management will present views from the financial, the operating, and the strategic perspective, and potential buyers will present themselves and their intentions regarding the future of your Company.

  • A data room will be made available to these selected potential buyers.  It is crucial to include as much information as commercially possible.  This will allow the potential buyers to submit a letter of intent.
  • Buyers will be invited to submit a formal letter of intent that likely provides exclusivity to the buyer for a period of time in order to allow enough time to perform due diligence and close the transaction.
  • The preferred buyer(s) will be selected based on valuation, compatibility with you and your management team, ability to complete the deal, and contractual negotiation issues, subject to your approval. 

Due Diligence

Once the final bidder has been selected, they will begin conducting detailed due diligence on your company.  This might include a quality of earning review, environmental studies or other detailed third-party analyses.  Your company and your advisory team will assist in processing due diligence requests, organizing further detailed discussions with management, and ensuring that the relevant information is filed with regulatory bodies (if necessary).

Contract Negotiation and Closing

You and key principals of the deal team will begin final contract negotiations with the preferred buyer.  During this final phase, the advisors’ key role is to defend against any attempts at price erosion and limit the representations and warranties section of the contract.  The advisors should now benefit from the in-depth knowledge they achieved during the “internal due diligence” of your company.

  • This process typically runs concurrently with due diligence.
  • Signing and closing will be targeted to occur simultaneously.
  • If there is a period between signing and closing, your advisors will assist in processing any conditions to closing.

If you work with experienced, reputable advisors who help prepare your company for this process, you should be able to get to a close within nine months.  External forces such as the financial markets, holidays, weather, health, regulatory changes, elections, war, etc., can affect the timeline of any transaction.  However, if you spend time planning for a transaction, you will only increase your chances of success.