Management & Strategy
May 3, 2024
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This guide is designed to walk readers through what a typical sell-side M&A process looks like. We will break the process down into seven steps so that you can see how deals progress. Here are some key takeaways about a sell-side M&A process.
Understanding the ins and outs of sell-side mergers and acquisitions can be a daunting task. The process involves a plethora of steps, from initial preparation to the closing handshake. This guide aims to shed light on this complex journey by breaking down the various stages of the sell-side M&A process.
We journey from building a list of prospective buyers to the intricacies of the auction and bid process, through the maze of negotiations, due diligence, and finally, the closing. This comprehensive guide aims to empower business owners and sellers with the knowledge they need to navigate the sell-side M&A process successfully, ensuring profitable outcomes while mitigating risks.
Here, we'll begin by breaking down how a "typical" sell-side M&A deal would work. First, we'll look at this process in steps so you can get a better understanding of what actually needs to happen to drive a deal all the way through to closing. Then, we'll look at the process in "phases" so that it makes more sense conceptually.
As a quick note, this guide assumes the business owner is working with a competent sell-side advisor to assist them in the sale of their business. Business owners shouldn't attempt to go through the process of selling their business alone.
M&A deals are extremely complicated, time-consuming, and often stressful transition periods.
Here are some good reasons for using an intermediary to help you sell your business:
1. Expertise — First and foremost, intermediaries excel in facilitating M&A deals. This is their primary focus, and they have undoubtedly orchestrated numerous successful transactions from which they can draw invaluable experience. They possess a keen understanding of the tactics employed by professional buyers to gain an advantage over sellers, and their guidance will shield you from costly missteps throughout the process.
2. Competition — Competition is one of the most crucial factors in maximizing the sale price of your business. By attracting multiple offers, preferably from diverse types of buyers, you create a situation where they must make more enticing offers to outbid one another win the deal. This not only drives up the price but also ensures that you receive the best offers from a pool of competitive buyers.
3. Speed — Intermediaries will help you to get a deal done more quickly. The M&A process often feels tedious and drawn out, especially if you have unrealistic expectations or no prior experience with M&A. Some deals are never finished, not because the buyer backed out, but because the time it took to finish was longer than the seller had stamina for. Intermediaries will do everything they can to advance a good deal to the next steps.
4. Realistic Valuation — Many business owners are uncertain about how to go about valuing their business. Intermediaries normally provide a lot of help with the valuation and assessment of a business. They can help sellers with a more accurate valuation range and help set expectations about what a business is reasonably worth to a buyer. They can help to ensure that a seller is not underpricing their business or undervaluing what it could be worth.
5. Reduced Risk of Not Getting Offers — In this guide, we used real estate agents as an example to explain intermediaries and how they work. In some senses M&A deals are much different than residential real estate deals. In real estate, maybe a homeowner wants to list their house for sale at a high price, just to see if they can get it. If they can’t, they can always take it off the market. This strategy could prove disastrous for a business owner in an M&A setting. M&A deals take time, cost money, and open a business up to the risk that word will get out they are looking to sell. Listing a business for sale preemptively may be a big negative for a business if they inadvertently turn off some buyers that may have been a good fit, just because they tried to rush their business to market.
6. Confidentiality — Confidentiality is a huge concern for sellers in the M&A process. Intermediaries know how the M&A process works and understand how to preserve a seller’s anonymity in the early stages of the deal. This ensures that the seller is protected from information about their business leaking out by more professional standards.
We highly recommend this guide as an excellent resource for business owners looking to sell.
1. Evaluation & Alignment - The process of selling a business should always start with an alignment call with an M&A advisor. These alignment calls are important because no two M&A deals are exactly alike. In order for the advisor to do a good job representing you in the sale of your business, they need to first understand your business, your personal goals (regarding selling it), as well as your expectations for valuation and the terms of the deal. Here, your advisor will talk to you about the various channels and options you have for exiting your business and you can start to figure out which one makes the most sense for you. Additionally, a competent advisor will have a great "read" on the market, helping you to assess whether the timing is right for the type of deal you're trying to get done. Depending on many factors this phase can last one or two weeks and may involve several calls. Once you've found an M&A advisor you trust and that you feel like you have a good working rapport with, you can progress to the next stage. We've also included a great list of questions as well as some potential red flags to watch out for later on in this guide. You can use these free resources to have better conversations with the M&A advisors you talk to.
2. Market-Based Valuation - For the seller, much of the foundation that this entire process is built on is based on how much they can get for their business. The truth is that valuation is as complicated as you want to make it. It's the objective of a sell-side M&A advisor to get you the best deal you can for the business you have now (or to reassess timing or options). The practical side of valuation for most sell-side middle-market M&A deals is a much different process than academic valuation.
For middle-market private companies, valuation should be:
To learn more, we recommend our guide: Intro To Private Company Valuation.
3. Building The Buyers List - Experienced M&A advisors have active, ongoing, up-to-date working relationships with many different buyers with the financial ability to do deals at the transaction size a business like yours should command. The ability to build a strong buyers list will always be a core competency of a successful M&A advisor. Generally, the industry groups buyer types into two different categories, "financial buyers" and "strategic buyers." A good buyers list will include various different buyer types, depending on the nature and type of deal the seller is trying to make.
A key point to make here is that the M&A advisor needs to have the ability to bring several qualified and interested buyers together into a competitive auction where they are competing against each other during the bid process. This competition for the deal drives the price up and a competent M&A advisor will be worth their weight in gold during this process. As the business owner, you will want to approve this buyers list before the M&A advisor reaches out to them.
4. Marketing Your Business - At this point, we've established a range of value that your business will realistically command in the current market, given the type of transaction you're looking to make, and we've built a list of qualified prospective buyers. Now it's time to start marketing your company. Here, our objective is to create an auction and to get several qualified buyers to compete on both the purchase price as well as the terms of the deal. There are several different types of auctions and there are different types of buyers. Here, the goal is to drive the price up and to get increasingly better terms through the type of auction we choose to use.
A key consideration here is confidentiality. We want to advertise your business for sale to our list of prospective buyers, but we want to keep the fact that your company is for sale as confidential as possible. We do this through a document called a teaser. This document will advertise your business at a high-level, but keep it's identity a secret. If prospective buyers are interested in more information, they will sign an NDA and then receive a more detailed document with everything they need to make a competitive offer (called a confidential information memorandum).
The art in creating these documents is in giving away the best information possible, while keeping the seller's identity confidential, and protecting sensitive information, all while still being transparent about the potential short-comings of the business. The marketing materials used to sell your business need to satisfy all of these requirements or it will create a problem for us later down the road. The good news is that normally the M&A advisor prepares these documents—with input from the business owner (seller), and their attorney (who normally prepares the NDA).
5. The Auction/Bid Process - At this point, if we've done our job right, we should be able to attract multiple prospective buyers to your teaser, and entice them to sign an NDA, review your business information, and make an initial offer. Driving the bid process and handling the negotiation phase is one of the areas that M&A advisors are able to provide tremendous value.
Normally, initial offers are made when the prospective buyer submits an "Indication of interest" normally referred to as an IOI. A good M&A advisor should be able to bring in several qualified IOI's for a qualified business during the bid phase. These offers are non-binding, but they lay out both the price and terms the prospective buyer is offering. These offers are how we drive the auction process forward, and the goal for a sell-side M&A advisor is both to drive the purchase price up as well as to negotiate increasingly better deal terms. A good M&A advisor will then proceed to narrow down the candidates to arrive at the highest and best offer. This phase involves lots of back and forth, and negotiating. This is also the phase when the seller will meet with a select few of the more qualified candidates.
Negotiations end when the seller decides on a buyer (usually the one that offers the most money or the best terms) and they sign a "Letter of Intent" (LOI). In the Letter of Intent, a buyer will outline their purchase price, deal terms, and explain how they intend to finance the purchase, as well as provide a list of key items for due diligence. LOI's are different than IOI's. Normally, they are still largely non-binding agreements, but they are binding to the extent that the seller agrees to give the buyer a period of exclusivity to conduct due diligence (next).
When the LOI is signed the bid process ends.
6. Due Diligence - At this point, the prospective buyer will begin to conduct their formal due diligence process. Normally, the buyer will hire several outside consultants to help with conducting due diligence in several different areas. Here, the main objective is the buyer looking to confirm that their expectations for the business, based on how it has been represented so far during the process are accurate and honest.
Buyers will have different due diligence priorities based on their own goals. Most always there will be financial, tax, legal, and HR due diligence as well as additional due diligence items specific to the industry the business operates in.
During the due diligence phase, many things are happening at once, including the deal and tax structuring, some continued negotiation, and the preparation of legal documents. The prospective buyer’s financing also typically comes together during the due diligence phase.
7. Closing - At this stage there will be some continued negotiations, but the main thing here is the finalization of the sale and the signing of the definitive purchase agreement. This stage involves a lot of paperwork.
Note: If the seller's business was misrepresented or some potential deal-breaking information was discovered during due diligence then the deal will go back to the negotiation phase. Also there is a risk that the buyer's financing won't come through and they won't be able to close on the deal.
Working with a competent M&A advisor helps to dramatically reduce the possibility of these things happening.
Now that we've seen what a typical sell-side M&A deal looks like from the pre-sale planning through to closing, we'll look at the process in phases. It's helpful to do this because if you've never sold a business before the pace of these deals will seem confusing and feel overwhelming. This is because more than one thing is happening at each step in the process. Because of this, it's useful to look at this process in phases.
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