The process of selling a company or selling a business isn’t all that complicated, but if you are thinking of selling your company, you’ll want to know what to expect before you begin. A process here is no different than having driving directions on your phone or having a printed roadmap. You wouldn’t get in a car and drive hoping to simple stumble upon the Grand Canyon if you wanted to visit the area. You would prepare your plan and head out on the appropriate roadways to efficiently reach your intended destination. You would be sure your car was in good order, you packed your suitcase and that you had cash for the trip.
The process for selling a business is not that different. It is a logical and obvious path that prepares you, the Seller, for the transaction and offers Buyers a logical methodology to understanding your business’s value and growth opportunities.
We think about the deal process in 3 phases; Deal Preparation, Active Marketing, and Deal Closing. Each phase has 2 steps. These phases and steps are presented in the infographic below which presents the process in an easy to understand way. We then explain this process in greater detail so you can have a better understanding how you might go about selling your business in a timely and successful manner.
Preparation is the foundation for a successful, and perhaps less stressful, deal. The time spent at this phase of the process to sell a business is time well spent. This is when your investment banking team will outline what is needed and expected of you.
The 2 steps in Phase 1 are: (1) Client Engagement and (2) Market Preparation.
Step 1 – Client Engagement
This the time to share your information with the investment banking team so they can learn more about your industry and how your company fits into that industry. They will then determine the target valuation range for your company and share it with you.
In looking at the value range, you will likely learn about areas where your business’s value can be enhanced. Based on your desired timing for a sale, and the anticipated increase in your business valuation, you may consider spending time to improve these areas.
It could be that these opportunity areas are better addressed by the future owners of the business and this is a decision that you make with your investment banking team. If you decide against making changes before selling, then these areas would be presented as a value growth opportunities to potential Buyers.
A critical issue here is to be sure that the valuation range meets your target. Consider the value and compare it with what you expect. Also consider the valuation range with an eye towards tax implications and involve tax advisors and wealth managers to understand the full impact of the valuation against your expectations.
Agreeing on your company’s value range is necessary before moving forward with the process of selling your company. We have seen situations where business owners make the mistake of brushing past the valuation hoping that it will all work out in the end. If the valuation isn’t acceptable, then this is time for you and your management team to identify value enhancement areas and get to work on them.
Assembling a deal team is also critical at this stage. You should consider including your CPA, Tax Attorney, and Wealth Manager. If you haven’t already found a M&A Attorney, then this person should be added to your team. It is best when everyone is working together from the beginning of the process.
Let’s talk briefly about each role and why they are so critical to your success.
The CPA has the knowledge of your company’s financials and filings. We recommend that you have audited financials for the 2-3 years prior to the sale because these documents provide a sound basis for financial presentation. The CPA is helpful at the beginning of the process and again later on during due diligence. While you are the owner of the business and know it best, unfortunately most buyers will defer to the company’s CPA when looking for financial information. So it is important to have your CPA involved.
A Tax Attorney is also critical for providing advice, specifically for tax issues. Your Tax Attorney will know all the current rulings and regulations. It’s important to note that tax attorneys are generally very busy people and they are extremely busy at certain times of the year. You don’t want to delay a deal closing because you are unable to find a tax attorney. Do your best to involve them from the start of the process as well.
The M&A Attorney is someone who speaks the M&A legal language. Most likely, your long-term general business attorney will not have the experience and skillset to efficiently navigate purchase documents. A specialized M&A Attorney knows what’s reasonable and expected in a deal like yours and can help to get a deal done. Too many times we see general business attorneys bog down a transaction when they really don’t understand the process or subject matter.
The final person needed for your deal team is a Wealth Manager. The Wealth Manager should also be involved from the start. Afterall, if we have a valuation range that doesn’t meet your personal financial goals, then we need to work on value enhancement as stated earlier. The mistake that we have seen with past clients is that they initially agree on a value for the sale of their company and wait to consult with their wealth manager. They then realize there is a value gap and must either adjust their expectations or stop the deal, neither of which are positive situations.
Step 2 – Market Preparation
This is where we assemble the selling materials for your company and these items include a One-Page Teaser (Teaser), a Confidential Information Memorandum (CIM), a Non-Disclosure Agreement (NDA) and all the supporting documents that Buyers need to fully understand the opportunity of buying your company.
The Teaser will be sent to everyone on the client approved buyer list (which is also prepared during this step with your involvement). The Teaser is designed to generate interest among potential Buyers and will be your lead marketing piece.
It is important to note that while we have a valuation range for your business in mind, we never place a price on an opportunity because the market will decide the value of your business. We will of course state your desires regarding the deal structure so potential Buyers are informed from the start.
Confidential Information Memorandum (CIM)
The CIM is the comprehensive document that presents your company, the industry, and where your company fits within the industry. The CIM also highlights future growth opportunities. Buyers seek a foundation for growth when they buy a business and our efforts to share future opportunities will drive the valuation and support the financial forecast.
All investment bankers prepare a CIM, but we take this process a step further. We begin to assemble the Due Diligence documents that we expect will be required in the final phase, the Deal Close. We have seen from past experience that there will be gaps in information required for the close because, after all, no company is perfect. If you and your management team begin to address these information gaps early in the process, then these issues can be resolved ahead of time.
Again, no company is perfect, but we need to work together and be organized if we wish to drive value. Remember that missing or conflicting information is perceived as risk by a potential Buyer and will lower the deal value. We don’t want to give a potential Buyer the opportunity to lowball their offer due to information that is missing or incorrectly presented.
Non-Disclosure Agreement (NDA)
We use a straightforward NDA based upon our experience. Your M&A Attorney will need to review this document and you will need to approve it prior to beginning the next phase. Every potential Buyer will execute the NDA prior to receiving the CIM.
Other Supporting Documents
As mentioned earlier, we strive to assemble an inventory of required information by the end of this step. By having more information presented earlier in the process, we can identify information gaps/conflicts and drive value with a comprehensive information presentation. The time to drive value is early in the process. No Buyer will increase their offer after they agree upon a price because they discovered some great insights.
Once the materials mentioned above have been reviewed and approved, they are placed in a Virtual Data Room (VDR). This allows potential buyers (when they have been approved) to see more information which helps them better understand the company. Once this step has been completed then we are ready to actively market your company and this brings us to the second phase of the selling process.
This is the dynamic part of the process and what most people think of when they want to “sell their company”. This phase involves sending out the Teaser, conducting introductory calls with potential Buyers, and setting up management meetings and the like. At this point it is vital for you and your team to be in the “selling” mindset. Taking a passive approach to the process is rarely successful. Let’s take a deeper look at this phase and how we use it to drive interest and valuation.
The steps in Phase 2 are: (3) Market Launch and (4) Deal Review.
Step 3 – Market Launch
This is when we begin marketing your business. We send your Teaser and the NDA to potential buyers on the approved buyer list. In some cases, we’ll have more than one name per organization in order to get attention for your deal. We’ll personally call the Best Fit and Highest Probability Buyers based upon our industry research.
Investment Banking Team Follow Up
Interested Buyers will complete the NDA and, as they are received, we will send the CIM. From there we schedule a follow-up call to answer initial questions. It is at this point where we can understand the Buyer’s reason for exploring the deal. We’ll seek to understand fit and suitability so we can determine if the potential buyer can meet your expectations.
Once we have completed initial conversations with all potential buyers, we involve you and your management team and provide an overview on what we have learned to date.
We then schedule a second call with all potential buyers, but this time you and your management team are involved. These calls typically last an hour long and go deeper than the CIM. They provide the opportunity for you to get to know the potential Buyer and for the Buyer to request additional information.
Indication of Interest (IOI)
This is the next step for seriously interested potential Buyers. The IOI is a non-binding presentation of the transaction value and structure as well as a statement from the Buyer that presents why they believe they would be a good fit.
The IOI is the ticket to the in-person, on-site management meeting which typically takes a half day. If the valuation or fit are not aligned, then there isn’t any reason to set aside time to meet in person. If there is a good fit, but the valuation isn’t aligned, then we’ll help the Buyer understand the market value range and determine if they wish to re-visit the IOI valuation. That being said, bottom fishers or tire kickers need not apply!
During these meetings you can expect that you and your management team will meet the Buyer team in person and you will provide them a tour of your company. The goal is to show off the business while minimizing the business disruption that a visiting group can create. Typically, everyone will sit down after a tour and go through the business, getting to know each other.
I strongly encourage Buyers to listen more than they talk. After all, they are there to learn about the opportunity not pitch their firm.
Step 4 – Deal Review
Once the management team meetings have taken place, the potential Buyers will be asked to submit a Letter of Intent (LOI). In many ways the LOI is an evolution of the IOI, but with more details on valuation, structure, financing, and the closing timeline. All are critical areas to review and understand in order to select an LOI.
The selected LOI becomes the exclusive party and all other Buyer conversations cease until the deal is closed or the LOI is withdrawn. Selecting the LOI is important as you are setting aside all other potential Buyers to work with one selected Buyer in order to close the transaction.
From this point we move onto the final phase of the process of selling a company; the Deal Close phase.
This final phase in the process of selling your company is the most tedious phase and, frankly, can be annoying. The steps in this phase include; (5) Due Diligence and (6) Deal Completion. Let’s read more about each step below.
Step 5 – Due Diligence
This is when the Buyer will be asking for all types of information. It is important to remember that fatigue begins to set in on all sides and tempers can get short. However, the stress and additional time required at this stage will have been minimized if we properly populated the VDR during Phase 1 of our process.
No one likes having to open the file cabinet multiple times looking for similar information. Any efforts to plan ahead improve the management team’s efficiency. We request a comprehensive Buyer Due Diligence list upon the LOI execution. Too many times, we have Buyers asking for the same or similar information multiple times during Due Diligence and this can be disruptive to your business and time consuming.
Step 6 – Deal Completion
The Purchase Agreement (PA) will be finalized as part of the deal completion step. The good news is that the deal points have already be agreed in the LOI. Now its up to the attorneys to create the legal paperwork to formalize the deal. Traditionally, the Buyer’s attorney crafts the PA and presents it to you, the Seller. Unfortunately, most Buyers wait until most or all of the Due Diligence has been completed to draft a PA. This is a cost management strategy that drags out the deal.
When we manage a deal we recommend that we work together to craft the PA that can be shared with everyone who intends to submit an LOI during Step 4, Deal Review. Crafting the PA prior to the deal close phase accomplishes three things.
- It jump starts the Deal Completion step since you, the Seller, are not waiting for the Buyer to present the PA.
- Early PA feedback from the Buyers will provide you with an indication as to who is easy to work with and those who are going to be difficult. That feedback could be a tie breaker between two “similar” LOI’s.
- Lastly, it speeds up the Deal Close phase as you and the Buyer can work on fine tuning the PA thereby compressing the last stage of the deal.
This is the same mindset that we applied to the Deal Preparation phase when we gathered documents that we expect to need in Due Diligence in advance of needing them.
Once all of the Due Diligence has been completed and the PA agreed, its time to execute the PA and set a formal closing date. In many cases, there is a simultaneous execution and close.
In preparation for the closing, the Buyer will present a flow of funds document showing where the money is going. Typically, you and your advisors are simultaneously paid from the sale proceeds all in one multifaceted set of wire transfers.
Post-Closing Activity List
This is often overlooked or unexpected. While we have a process and we have planned each step in an efficient manner, not everything can be gathered prior to closing. It is common occurrence for the attorneys to craft a list of post-closing items that need to be completed in a reasonable timeframe so as to not hold up the closing.
We strongly believe that a proven and evolving process is critical to a successful sell side transaction. As a matter of fact, we believe so strongly that we openly share it with you. We want you, as a business owner, to know how we are going to professionally market your business and drive to a close.
You might ask other investment banking firms about their process and see what kind of response you receive. Anyone could copy it, but only those who have done it can do it well in a range of industries and situations.
Remember, our trip to the Grand Canyon that I mentioned in the beginning of this blog? That roadmap (process) is how you efficiently get to your destination and achieve your goal of selling your company.
We have that roadmap and it’s ready for you.
Illes Investment Banking is well suited to help you sell your business. More information about our process can be found on our website at https://illesinvestmentbanking.com/selling/. Or contact us today for a complimentary consultation that outlines how we can help you sell your business. Let us help you capture your future.
About Illes Investment Banking
John Illes created Illes Investment Banking as an online resource to help middle market business owners plan and execute their M&A activities; specifically those related to sell side, buy side and capital raise engagements. John has FINRA Series 24, 62, 63 and 79 licenses. He is also a member of the Alliance of Merger & Acquisition Advisors.
John Illes has both investment banking expertise and senior executive management experience. His unique background provides a pragmatic perspective to the M&A world. John knows what it takes to build an organization and he prides himself on partnering with clients to secure successful outcomes.
John is Managing Director with Merit Harbor Capital, a boutique investment banking firm with more than 100 middle market M&A deals, valued at over $6 billion, to their credit. Merit Harbor Capital is a broker/dealer member of FINRA/SIPC and John works with Merit Harbor Capital for all investment banking activities.
John Illes, CM&AA, MBA
Founder & President, Illes Investment Banking
Managing Director, Merit Harbor Capital
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As you read in the above blog post the process of selling a business is complex and potential buyers will seek to understand your company to determine the best fit. They will also place a valuation on your company based on what they see and learn.
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