Divestiture: The Difference Between Victory and Defeat
Business owners often face a once in a lifetime deal as they contemplate the sale of their company.
It’s best to think of the process as a marathon rather than a sprint, considering that it begin well before due diligence and extends well past the deal’s completion. Acquisitions usually take six to 12 months or more to wrap up.
For the sale to succeed and generate a healthy return, the seller will need to set goals and timelines, do financial analysis, source buyers, negotiate smarter deals and plan for the two companies’ integration, among other things.
Left to their own devices, many mid-market companies will stumble in the process, according to a 2018 report from the National Center for the Middle Market at The Ohio State University, “Middle Market M&A: What Executives and Advisors Need to Know to Make the Most of Mergers & Acquisitions.”
“Middle market leaders resoundingly told us that they were insufficiently prepared for the challenges and complexities they faced during M&A process,” the report said. As a result, they “may fail to drive the best bargain or may encounter unexpected challenges that impede the success of both deal execution and post-merger integration.”
Sellers will need to summon all their energy and wits, as they work to maintain outstanding company performance while simultaneously attending to the M&A process. Otherwise, if the company’s financial situation deteriorates, it could ruin the deal, or the buyer might renegotiate the price and terms.
Human nature also presents another obstacle. While most sellers take pride in the company they’ve built, they shouldn’t let that cloud their objectivity.
“To avoid having unrealistic selling price expectations, the seller needs to understand how other comparable companies are being valued in the marketplace,” according to a 2015 Forbes article, “22 Mistakes made by Sellers in Mergers and Acquisitions.”
That’s where a good financial advisor or investment banker comes in. They find multiple potential bidders to create leverage that can be used to get a higher price, better deal terms, or both. But that’s not all they do. They also provide current market comparables. To justify higher values, the seller would have to present compelling reasons, such as greater growth or better technology.
One of the biggest mistakes sellers make in M&A deals is failing to negotiate the key terms in a letter of intent. Their bargaining power is greatest before signing the letter. Therefore, they need to ensure it includes price, how price adjustments would be calculated, the scope and length of exclusivity during the process, and whether the seller will be paid up front in cash or through stock or promissory notes.
Here are some other suggestions to improve the seller’s M&A success:
- Determine the valuations needed to achieve long-term goals and seek deal terms that optimize cash flow and reduce tax liabilities.
- Make sure the company’s financial statements are complete and in order. Producing detailed reports on income statements, balance sheets, suppliers, customers and products and services will raise buyer confidence and valuations.
- Assemble the right team of trusted advisors and subject matter experts, such as investment bankers, lawyers and accountants. Their fees will pay off in efficiency and in a better deal.
- Time kills deals because it raises risks in performance, buyer financing, markets and employee retention. Once an offer is received and both sides are ready, it behooves the seller to move quickly.
- Be prepared to answer the bidder’s questions and help them with their due diligence, site visits, environmental reviews and property appraisals.
- Don’t engage in extensive disclosure without a nondisclosure agreement (NDA) to protect proprietary information, particularly when bidders are strategic competitors. This will restrict the bidder’s ability to disclose or use confidential information and to contact employees, customer and suppliers.
- Locate an online data room, a secure place where a bidder may review key contracts, patents, financial statements, employee information and other information.
- Hire a lawyer who focuses on mergers and acquisitions and can handle the complicated issues in structuring M&A deals.
- To avoid breaching the representations and warranties in the acquisition agreement, develop a disclosure schedule with details on key contracts, intellectual property, related party transactions, employee information, pending litigation and insurance.
- Finding a buyer that’s the right fit will make your company more valuable to them in the future. Companies with synergy benefit from economies of scale, best practices and sharing capabilities.
The sale of your business will be a turning point in the company’s life. Understanding the obstacles that sellers face and the advantages of working with experienced attorneys and investment bankers will help the seller meet their financial goals and ensure their company’s long-term success.