What Every Private Company CEO Needs to Know About M&A Transactions
The 20th edition of the EY Global Capital Confidence Barometer found that many privately held companies are preparing for future growth through mergers and acquisitions (M&A). Most private companies, compared to public companies, do not have established corporate finance resources or the experience of acquiring or selling companies. This article focuses on tips the private company seller can employ to enrich the process and ensure a successful transaction; some of these tips apply to buyers as well.
Convene Your Own Deal Team
If you and your board have decided to sell your company, the first action you should take is to convene your own deal team. If you don't have a corporate finance professional on staff, it is imperative that you engage professional assistance. There are various types of corporate finance help available, including finders, single practitioners, boutique firms, and larger investment banks and other professionals that function as investment bankers. Part of the process is determining what is right for your company. Whoever you decide to engage, verify their recent transactions in your industry sector, question their process for managing the project, and assess how deeply they will be involved. Among the most desirable are investment bankers who have knowledge of and connections to possible buyers, have recent deal experience in your sector, and assume full responsibility for the management of the sell process. Other members of the deal team include a lawyer experienced in M&A transactions, a tax professional experienced in the tax impact of alternative deal structures, and perhaps a public relations professional if your company or products are consumer-facing. You and your primary finance person should also be part of this team. Not every member of the deal team needs to be involved at every step of the process, but communicating with them as the deal progresses will enable them to add value to the process, potentially increasing value and minimizing legal and financial liability.
Honor Your Commitments
After you have convened a deal team, it is important to understand your role and responsibility as well as that of each team member. Your investment banker should present a detailed schedule of tasks, timelines, and the designated person responsible as one of the first deliverables to you. Many of these tasks are time-dependent. As the CEO, you need to commit to providing access to yourself and your organization, providing information, and responding on a timely basis. Above all, it is important to be honest with yourself and your deal team about your expectations regarding the deal terms such as valuation, the terms of your continuing involvement with the company, arrangements concerning your employees, and deal structure like asset, stock, earnouts, etc. This will help them appropriately represent you to achieve your objectives.
Understand the Cadence of the Deal Process
Most transactions take about nine months from when you initially engage an investment banker to the deal closing. There are three phases to the engagement, each taking approximately three months. Below are outlines of the cadence of the deal process and the responsibilities of the deal team members.
Phase I. The first phase is information preparation. At this stage, the investment banker will be conducting due diligence to craft an information memorandum, PowerPoint, and teaser. Doing the due diligence at this early stage also gives you the opportunity to gather any missing information, correct any deficiencies, and communicate any issues to the buyer. It is a time-consuming effort, but if postponed until there is a signed letter of intent (LOI), it could result in you finding yourself time-constrained. Also, price adjustments often arise from due diligence findings.
You and your staff are responsible for providing information to your investment banker and reviewing the prepared materials. It is also a good idea for the deal lawyer to review the final documents before they are distributed. Remember that in addition to imparting information so the potential buyer can make an informed decision, these documents are essentially marketing documents. I find that crafting the Information Memorandum as an executive summary with detailed information in an appendix helps keep the reader focused on the transaction before getting mired into the detail. The Phase I deliverables include the project management schedule and the written materials (teaser, sample confidential agreement, information memorandum, PowerPoint presentation, and due diligence materials).
Phase II. The second phase of the engagement is the communication phase. You and your investment banker will be discussing the right kind of prospect to be contacted (i.e., strategic vs. financial, size of the company, domestic vs. international, etc.) and jointly developing a list of prospects. The investment banker will contact these companies to assess initial interest and vet whether or not they are serious prospects. Many companies routinely perform "market research" to learn about the market, valuation, and competition. At this point, the prospective companies will receive a teaser. If there is interest in learning more, the companies will sign a confidentiality agreement (reviewed by your lawyer) before receiving the Information Memorandum. If there is interest, the companies will submit an Indication of Interest, which is non-binding but includes the value they would pay for the company. The objective is to cull this group to an initial slate of three.
At this point, the potential buyers will want to speak to management. I recommend practicing your pitch and formulating answers to difficult questions in advance. Your investment banker should be on the call or in the meeting with you to concentrate on the individuals' reaction to the information you are imparting. The Phase II deliverables include a schedule detailing the prospects, contact information, contact dates and status, and the Indications of Interest.
Phase III. The third phase of the engagement is the negotiation and closing phase. This is the phase where the lawyers and the tax professionals are heavily involved. By the end of the second phase, you should have a good idea of which buyer you are proceeding with and will be negotiating the provisions of the LOI. The LOI will include the main provisions of the deal and is a binding document but dependent on due diligence and other provisions. Do not forget that a lot of negotiation occurs in the purchase agreement, and there is usually a significant time lapse between the LOI and the purchase agreement, so there are no guarantees that a signed LOI concludes in a closing. After the LOI is signed, the buyer will be conducting due diligence. Your investment banker should review any information before it is given to the prospective buyer and should be present for any Q and A.
One of the considerations you need to decide is how hard a line you want your investment banker and lawyers to take both on the LOI and the purchase agreement, and whether or not you want your lawyers to participate in any negotiations. I have observed that the "bull in the china shop" approach does not usually win over the other side. In addition to the substantive issues, you also need to decide how tightly you want the purchase agreement written. Both sides will have their respective lawyers trying to protect their clients. You might determine that a light markup is all that is warranted.
You should expect that your investment banker should project manage the negotiation and closing process. This should be made clear before the engagement begins. I have seen many a case where the ball was dropped because it was not clear who the designated project manager was.
In addition to the purchase agreement, depending on the circumstances, additional agreements might be needed, such as employment agreements, licensing agreements, non-compete agreements, etc.
Some deals tank for a variety of reasons, even after a signed LOI. Many times, it is for a reason out of your control, such as a management change at the acquiring company. This occurred on a deal I was working on after the purchase agreement had been negotiated and agreed on. That is why you keep the number two and number three players in the mix all the way to closing. Most deals do close, however, and with these tips, hopefully with minimal degradation of price and a smooth transition.
The Phase III deliverables include all the signed documents mentioned above. At this point, you might want to create an electronic file of these deal documents, due diligence materials, and information that was disseminated for easy referral.
At a certain point in the deal process, usually in Phase III, you should be communicating with your employees. You should design a communication plan as to timing and what you want to communicate. Your employees will be primarily interested in their employment status. You and the buyer will have certainly discussed this, and you will want to include the buyer as part of the communication process. The same applies to customers. Don't forget to communicate to the number 2 and 3 companies that you had waiting in the wings.
Becoming a deal expert is a function of doing many, many deals. Each deal is different, and different issues surface. You may only participate in one deal in your professional life. I've only touched on a few pointers but hopefully have given you the confidence to see that one deal to a satisfying conclusion.
Gail F. Lieberman serves as a board director and chair or member of audit, compensation, and nominating committees for public and private companies in the technology, life sciences, manufacturing, financial services, and utilities sectors. Her current board assignments are the privately held Equilend, Thesys Group, and W.L. Gore & Associates and publicly held ICTS International.