31 Jul Timing Considerations When Selling Your Business
While we are constantly looking for ways to simplify and otherwise dis-intermediate the process of selling a business, the fact of the matter is, selling a company is a complex process often fraught with road-blocking setbacks to a successful outcome. Even the most successful investment bankers understand that the hairiest deals often have nine lives. That is, deals an investment banker once thought were dead may become resurrected. This often does not happen without a great deal of work, but it’s rarely over until it’s over.
One of the ways company sellers may need a reset in expectations is on the timing of a sell-side M&A transaction. Quality deal closings often take much longer than either buyer or seller would like. A large dose of patience is often required to ensure the deal continues to march toward an optimal close with the right strategic buyer. Most successful deals can take anywhere from 12 to 18 months to close.
Even the most prepared sellers underestimate the time it takes to prepare documentation, market, perform due diligence and get to ultimate close. Getting to market through the document preparation phase can take as much as eight weeks or more. This process includes preparing financial recasts, drafting of the pitchbook, building the appropriate buyer list and even creating outbound-focused informational videos on the company.
Once the marketing documentation is prepared, the company is taken to market in one of several outbound marketing blitz campaigns. While initial, general market reaction can be gleaned in the first 60 days, running through the full Indication of Interest (IOI) to signed Letter of Intent (LOI) can take between six and twelve months. It involves everything from multiple management meetings and advanced negotiations with multiple financial and strategic buyers. While some of the best deals can see this timeline shrink substantially, it is typically helpful to have realistic expectations on the amount of time it will take to get to a signed Letter of Intent.
Once a client reaches the LOI stage, negotiating the Definitive Purchase & Sale Agreement and working through Due Diligence can take anywhere from 60 to 90 days. The Due Diligence phase can be further extended if the buyer requires additional time to procure acquisition financing.
When preparing all parties to the transaction for the full process, we also like to set expectations—particularly on the part of the seller—of the time commitment that is likely to be required as they attempt to make a successful run at the sale of the company.
During Phase I, the company owners work with an investment bank to prepare and approve all marketing documentation (pitchbook, financials, buyer lists, etc.). As stated previously, this process can take up to eight weeks, depending on the preparation of the company sellers, which is typically the bottleneck. During this time, investment bankers and company sellers often spend equal time getting all documentation prepared for the eventual company sale.
Phase II includes a full outbound marketing push. This phase is accomplished mostly through the investment bankers on the deal. The company owners and sellers will receive regular accountability updates as to the process from members of the deal team. This process is very hands-on and includes many direct calls, emails and follow-ups with the potential buyers on the pre-approved buyer list. At this phase, the selling executives are in a “hurry up and wait” mode.
For the seller, Phase III is a bit more involved and includes some interfacing with the potential buyers. Buyer conference calls, management follow-ups, direct management meetings and some executive pre-due diligence is performed by the most vetted and interested buyers in the deal. Buyers and sellers typically spend equal time at the phase with the investment bankers quarterbacking the deal, including all communication on the deal.
At Phase IV, the herd is thinned with the date-specific request for Indications of Interest (IOI) from the most relevant buyers. Once all Indications of Interest are received, the investment bankers work to negotiate with the most promising buyers toward a Letter of Intent (LOI) that is amenable to the company seller. Once all parties agree as to the basic terms of an LOI, the LOI is executed by both buyer and seller and the transaction pushes through Due Diligence toward final close. In Phase IV, the investment banker still plays quarterback, but is much more involved between buyer and seller negotiations, ensuring the process not only moves forward but that his/her client receives the deal terms and structure that are most beneficial.
During the Due Diligence phase the buyer will send his/her complete due diligence request list. The investment banker will concurrently set-up the virtual data room for file upload, management and review between buyer and seller. The buyer will conduct due diligence, but also outline a more comprehensive transition plan that may or may not involve the company seller. During this phase a great deal of time is required by the company sellers in gathering and populating the virtual data room with the requisite information for complete due diligence. This process is perhaps one of the more time-intensive of all for the company seller.
Somewhat concurrently with Due Diligence, the final purchase and sale agreement negotiation and drafting occurs between buyer and seller and buyer and seller’s corporate counsel. This is the phase that involves the attorneys in helping to draft the final agreements. This phase also includes approval by the board (if necessary) and any additional agreements or requirements for closing. Once all legal agreements and documentation for due diligence have been completed, the closing is scheduled wherein all parties sign the definitive agreements and any cash or stock required for consideration to the transaction are transferred to the company seller.
The process of selling a business is involved and requires a committed team, including various stakeholders on both the buy and sell-side of the transaction. Successful deals are almost always completed when all parties to the transaction are focused on the same goal. The investment banker is key to maintaining focus and objectivity throughout this complex and time-consuming process.
The full PPTX used in the video is available here.