Introduction to the M&A sell side process
The M&A sell side process refers to the process by which a company, the seller, decides to sell all or part of its business to another company, the buyer. The M&A sell side process is typically facilitated by an investment bank or advisory firm representing the seller. The M&A sell side process varies deal by deal but generally can be divided into four major phases:
- Step1: Preparation Phase
- Step2: Marketing Phase
- Step3: Due diligence and Negotiation phase
- Step4: Closing and Post-Closing phase.
Each phase in the M&A sell side process can have more detailed sub-procedures.
Step 1: Preparation phrase in the M&A sell side process
The preparation phase in the M&A sell side process sets the foundation for a successful transaction. This stage generally covers three key aspects:
- Market Dynamics and Evaluation
This can drastically affect the potential valuation range and the possibility of successfully completing the deal. Not surprisingly, a hot market can support increased valuations. On the other hand, a cool market may allow for somewhat depressed valuations. So it is crucial to understand the market dynamics and evaluate the seller within the industry context.
- Start by thoroughly analysing market trends, competitive landscape, and regulatory environment to start the robust M&A sell side process.
- Then assess your company’s market position and potential growth opportunities, as well as any risks or challenges that may be present in the industry.
- Building an M&A Sales Team
Second, the sale of the company will begin in earnest by assembling a dedicated M&A sales team, which should include internal and external professionals, such as senior management, legal advisors, investment bankers, and accountants. Ensure that each team member knows their roles and responsibilities in the hierarchy and has the necessary expertise to contribute effectively to the transaction. Once the sales team is in place, you should develop a clear and detailed action plan outlining the objectives and timeline of the M&A process. This should include key milestones such as buyer identification, due diligence, negotiation, and closing.
- Conducting a Legal Audit
This involves reviewing contracts, agreements, and other legal documents to identify any potential issues or risks that may arise during the transaction. This is a critical step in the M&A sell side process to ensure that your company is fully prepared for the scrutiny it will undergo during the due diligence. The team should assess the company’s past and current state, aiming to eliminate these problems immediately and before the buyer notices them. If just the buyer gets to know any problems, they could use this as ammunition to lower the purchase price. During this stage, it would be wise to resolve any issues with shareholders, complete the registration of copyrights and trademarks, deal with any disputes with stock option plans and renew or extend your best commercial leases.
Step 2: Marketing phase in the M&A sell side process
M&A sales marketing in the M&A sell side process involves effectively promoting the seller’s business to potential buyers by creating compelling marketing materials and identifying and reaching out to them. When you work with an IB firm as your sell-side advisor, they will develop marketing materials such as an Information Memorandum (IM). The IM is a comprehensive document providing an overview of the target company, its operations, financials, and growth prospects. And its purpose is to help potential investors quickly understand the target company and make an investment decision. Therefore, a well-crafted IM can also shorten the due diligence period of potential buyers. Its usual table of contents can look like this:
- Executive summary (or investment highlight)
- Current ownership profile
- Deal’s terms and conditions
- Business overview and history
- Management team and organisational overview
- Products or services
- Manufacturing and distribution
- Sales, marketing, and growth strategies
- Market growth and opportunity
- Competition and its position in the market
- Historical financial information
- Potential future growth opportunities
- Supplemental documentation or materials
Opinions can be divided on whether or not to include a valuation guide in an IM, but generally, do not include it in writing. It is possible to set a minimum deal value during the M&A sell side process. However, each investor has a different opinion about it, which might be higher or lower than the guided level, depending on the competition.
Marketing Phase – Listing for the M&A Sell Side Process
When creating the target list, consider factors such as strategic fit, financial capacity, and potential synergies with your company. The list can include both strategic and financial buyers who may be interested in acquiring your business. Regarding marketing methods in the M&A sell side process, there are two representative approaches you can take, depending on the nature of your business and the desired level of confidentiality.
- Public sales – involve openly marketing your business to as many potential buyers as possible.
Public sales can generate more interest and potentially higher valuations as a larger pool of buyers become aware of the opportunity. However, this method can also lead to increased scrutiny and potential negative impacts on employee morale, customer relationships, and other aspects of your business.
- Private sales - entail a more discreet approach, targeting a select group of potential buyers. Consider the benefits and drawbacks of each method before making a decision.
Private sales maintain a higher level of confidentiality, limiting the exposure of sensitive information and reducing potential disruption to your business. This approach may involve a smaller pool of potential buyers, potentially resulting in a longer sales process and lower valuations.
Marketing Phase – Outreaching for the M&A Sell Side Process
Once you have determined the most suitable marketing methods, it’s time to identify and reach out to potential buyers. Depending on the chosen method, the outreach process may vary:
- Public Sales – you’ll disseminate marketing materials through various channels, such as industry publications, online platforms, and professional networks. M&A Sell side advisors generally supervise this job, and the level of success may vary depending on their abilities.
- Private Sales – the outreach process is more targeted and discreet. You’ll contact potential buyers directly, either through personal connections or with the assistance of an investment bank or advisor.
Initially, share a Teaser Document. This offers a high-level summary of your company and the transaction opportunity without disclosing sensitive information. The goal is to generate interest among potential buyers and encourage them to sign a Non-Disclosure Agreement (NDA) to receive more detailed information about your company. When contacting potential buyers, advisors would inform them about the availability of staple financing. As a pre-arranged financing package provided by the seller’s investment bank, staple financing can help expedite the M&A sell side process and demonstrate the seller’s confidence in the company’s value and the transaction’s viability.
Step 3: Due diligence and negotiation phase in the M&A sell side process
- Letter of Interest (LOI) – The seller will receive a non-binding letter from potential buyers.
The Letter of Intent (LOI) – a crucial document in this process, outlining the initial terms of the transaction, including the purchase price, deal structure, and other key provisions. While the LOI is generally non-binding, it does serve as a foundation for subsequent negotiations and legal agreements. Ensure that the LOI is carefully drafted and reviewed by your legal and financial advisors to protect your interests and facilitate a smooth negotiation process.
- Selecting a exclusive bidder – The seller should carefully evaluate each offer considering the buyer’s financial capacity.
- Preparing a data room – the seller should prepare this for the buyer’s due diligence.
The data room should be easily accessible, secure, and user-friendly, making it simple for potential buyers to navigate and review the materials. During the due diligence process, it’s crucial to be proactive, responsive, and transparent when addressing questions or concerns from the bidder.
- Managing Buyer Inquiries – Assign a dedicated team member or group to navigate the inquiries and ensure that all responses are timely and accurate.
You can maintain open lines of communication with them and be prepared to provide additional information or clarification as needed.
- Final Negotiation – After the bidder’s due diligence, they will analyse it and formulate a final opinion to prepare for the final negotiation.
As the negotiation progresses, several issues will need to be addressed and resolved, including the final purchase price, deal structure, payment terms, representations and warranties, and closing conditions. To prepare for them, the seller must collaborate closely with their financial and legal advisors to establish clear objectives, priorities, and fallback positions.
Step 4: Closing and post closing phase in the M&A sell side process
- Definitive Agreements – As both parties enter the closing phase of the M&A process, they will draft agreements, such as a Sales and Purchase agreement (SPA).
These legal documents outline the final terms and conditions of the transaction, including the purchase price, payment structure, representations and warranties, closing conditions, and other essential provisions. During this stage, working closely with your legal advisors is critical to ensure these agreements are comprehensive, accurate, and protective of your interests.
- Finalising the transaction – once both parties have drafted and agreed upon the definitive agreements, it’s time to finalise the transaction.
This step in the M&A sell side process typically involves obtaining any necessary regulatory approvals, satisfying closing conditions, and making any final adjustments to the purchase price, if applicable.
- Transferring the Purchase Price – then, both parties will execute the definitive agreements, and the buyer will transfer the agreed-upon purchase price to the seller.
The seller will provide all necessary documentation to facilitate the transfer. The documents may include transferring licenses, stock certificates, and all other appropriate legal documentation relevant to the business. Post-Merger Integration (PMI) – In the post-closing phase of the deal, the seller plays a crucial role in supporting the acquiring company’s PMI. Let’s look at a few practical tasks the seller can undertake to facilitate successful integration.
- Facilitating knowledge transfer by providing documentation, processes, and training materials.
- Assisting in the onboarding of key personnel and helping with role transitions.
- Supporting the integration of IT systems, networks, and databases.
- Collaborating on the alignment of corporate culture, values, and communication practices.
- Providing expertise on regulatory compliance, legal, and contractual matters.
- Assisting with the consolidation of financial reporting and tax management processes.
- If needed, ensure a smooth handover of customer and supplier relationships, including introductions and contract renegotiations.
From the buyer’s point of view, PMI is very important so that the final contract can be concluded on the condition of the seller’s post-integration cooperation as above. Therefore, the seller’s integrated cooperation plays an important role in the buyer’s successful M&A.p
Sources and Further Reading
Other M&A Transactions where the M&A sell side process can be found: