Matt Stewart wrote a new post, The complicated alchemy of selling a private company, on the site PE HUB 1 year, 10 months ago
For a private company, finding a buyer involves more than just putting the company up for sale. An auction or other structured sale process is a complicated undertaking that starts many months before a formal marketing process is commenced.
Understanding the strategic considerations involved in selling a private company can unlock value and facilitate a successful outcome. This is why it’s important for sellers to have a plan. In a prior article in this series, I outlined strategic issues to be considered at the outset of a private company sale. This article briefly outlines a starting point for the discussion of key milestones throughout the transaction—what to expect and when.
The Preparation Period
This is the period of time before commencing a formal process to sell the target company. Here are a few key milestones/action items to consider for this period.
*Engage legal counsel and other advisors, such as investment bankers, accountants, etc. Sellers that hire investment bankers typically do so six to 18 months prior to beginning the sale process, but that time frame varies widely. M&A counsel are typically hired much closer to when the sale process is started—usually three to six months prior to starting the formal sale process.
*Take remedial/preparatory steps to prepare for buyer’s due diligence investigation. This includes organizing the target company’s books and records, creating a “data room” containing the target company’s key documents, resolving pending litigation/claims and orienting and incenting the target company’s management team in connection with the sale process.
*Create a market (or finding potential buyers you will likely approach when the auction begins). This should be done informally on a periodic basis, regardless of whether a formal sale process is on the horizon. Management and the target company’s directors should periodically evaluate potential liquidity or other strategic transactions, likely counterparties/buyers, etc. As the target company moves closer to undertaking a formal sale process, this activity often includes performing a “market check”, understanding valuation and anticipated purchase price proceeds allocation and getting to know potential buyers.
The Pre-Signing Period
This is the period of time between the date a formal sale process starts and the date the definitive purchase/sale documentation is signed. Here are a few key milestones/action items to consider for this period.
*Execute confidentiality agreements/non-disclosure agreements, negotiate the term sheet or letter of intent, and enter into an exclusivity agreement with the potential buyer—typically in that order. In the confidentiality agreement, each potential buyer agrees to keep the target company’s information confidential while evaluating that information in connection with a potential M&A transaction. In a term sheet or letter of intent, the principal terms of the proposed transaction are outlined prior to drafting the definitive transaction documents. And in an exclusivity agreement, the target company agrees to negotiate “exclusively” with a particular potential buyer for a defined period of time (say 30-45 days), during which the parties typically work to finalize due diligence and negotiate a definitive purchase/sale agreement.
*Facilitate and complete the due diligence process with the buyer. Managing the due diligence process requires thoughtful management, including what to disclose, to whom and at what time. How to manage this process is beyond the scope of this article, other than to note that the target company’s management and advisors should carefully manage this process.
*Negotiate transaction documents, including the definitive purchase/sale agreement. The purchase/sale agreement is the agreement outlining the terms and conditions of buyer’s acquisition of the target company. Other key transaction documents typically include disclosure schedules and key ancillary agreements, such as an escrow agreement, employment agreements, non-competition agreements, etc.
The Transaction Signing / Closing
This refers to when the definitive purchase/sale documentation is signed by the transaction parties (the “signing date”) and when the transaction is “closed”/becomes official (the “closing date”). Here are a few key milestones/action items to consider for these dates.
*Obtain board of directors and stockholder approval. In an M&A transaction, approval of the target company’s board of directors and stockholders is typically required. Board approval is typically obtained prior to or concurrently with the signing date, and stockholder approval is typically obtained after the purchase/sale documentation is signed and prior to or concurrently with the closing date.
*Obtain requisite third party approvals. These may include regulatory approvals (e.g., HSR, industry regulators, etc.) and contract counterparty approvals, and typically must be obtained prior to or concurrently with the closing date.
*Satisfy closing conditions set forth in definitive purchase/sale agreement. A closing condition is a condition that must be satisfied for a party to an M&A transaction to complete the transaction. If a condition to a particular party’s obligation to close the transaction is not satisfied, that party will not be contractually required to close the deal. Closing conditions vary widely in M&A transactions, but may include such items as (1) the continued accuracy of the other party’s representations and warranties for the period between the signing date and the closing date, (2) the performance of the other party’s covenants for the period between the signing date and the closing date, and (3) the receipt of all required third party consents and approvals prior to the closing date.
*Close and fund the transaction. This is the time when the transaction becomes official, the purchase price is paid and buyer becomes the owner of the target company. (Congrats!)
The Post-Closing Period
This is the period commencing on the closing date and extending for an indefinite period thereafter. Here are a few key milestones/action items to consider for this period.
*Finalize any post-closing purchase price adjustment included in the purchase/sale agreement, resolve any indemnification claims and process release of any escrowed funds.
*Manage integration (people, products, services, prices, assets, etc.) of the target company and execute on investment thesis.
Understanding the key milestones in private target M&A transactions, and architecting and executing a customized approach based on that understanding, can unlock value and facilitate a successful outcome. The milestones briefly outlined above represent a good starting point for this conversation, but keep in mind that this article represents only a high-level overview of certain characteristics of private company M&A transactions.
As is always the case in M&A transactions—including private equity investing or partnering with a private equity investor—it is important to engage legal, tax, and other appropriate advisors early in the process. Engaging the proper advisors and working collaboratively with those advisors throughout the process significantly increases the likelihood of a successful outcome.
Matt Stewart is a member of the corporate practice group at King & Spalding LLP (www.kslaw.com). Email Matt at [email protected].
Photo courtesy of Shutterstock
For a private company, finding a buyer involves more than just putting the company up for sale. An auction, or other structured sale process, is a complicated undertaking that starts many months before a formal marketing process is commenced.
Understanding the strategic considerations involved in selling a private company can unlock value and facilitate a successful outcome, which is why it is important for sellers to have a plan.
The following strategic considerations briefly outline a starting point for the conversation. However, company stockholders, directors and executives should keep in mind this article represents only a high-level overview of certain characteristics of private company M&A transactions.
First, let’s discuss “process strategies”— the what, when and how to prepare for a sale transaction.
*Start the Dialogue Early. Private companies considering a sale transaction should try to get their senior executives to meet likely acquirers. This will typically include both private equity sponsors and potential strategic acquirers.
Ideally, potential deal parties will start an informal dialogue months in advance of commencing an M&A process. This gives the parties the opportunity to build a relationship before lobbing in an unsolicited term sheet (in the case of a potential buyer) or frantically responding to that term sheet (in the case of a target company).
*Get Your Affairs in Order. Before soliciting offers, executive management of the target company should conduct a thorough internal due diligence review. The goal here is to uncover and proactively address potential issues likely to arise in the buyer’s due diligence. This can include unclear capitalization records, employee/contractor classification issues, pending or threatened litigation matters, quality of financial statements and a host of other items that often can and should be addressed prior to commencing an M&A process.
This type of review will help to make sure the target company and its advisers are not blind-sided by issues while negotiating the transaction. It also has the benefit of avoiding the need to address these time-consuming (and value destroying) issues while the buyer is conducting due diligence and the parties are negotiating the purchase price and other deal terms. Put another way, a “clean” due diligence often results in buyers getting comfortable with paying full fair market value for the target company and not insisting on onerous indemnification terms.
*Do You Need an Investment Banker? Investment bankers can add significant value in an M&A process, but they are expensive. Investment banker fees typically range from 1 percent to 2 percent of the deal value, although the fees vary by deal size and profile. Typical benefits of having a banker in an M&A process include having an agent to (1) advise on market trends and valuation, (2) approach potential acquirers with which the target’s executive management would not otherwise have contact, (3) take the difficult, “bad cop” negotiating positions, and (4) co-manage the sale process with the target’s legal counsel.
Now let’s discuss negotiation strategies—the what, when and how to manage a sale transaction.
*Agree on a Deal Timeline. Time is of the essence in M&A. A protracted process can kill deals and can kill value by distracting the target company’s management team from executing on its business plan. If each party to the transaction can get the other party’s senior business leader to commit to a timeline, it can create the momentum needed to get the deal to the finish line. Establishing a timeline also has the ancillary benefit of promoting reasonableness and pragmatism (rather than posturing and intractability) between the parties.
Also, in transactions where more than one potential acquirer is involved (such as an auction process), establishing a global deal timeline can keep all parties moving at a similar tempo and maximize deal value and deal certainty.
*See the Entire Playing Field. At times, deal parties will be inclined to make a deal by compromise or “horse trading.” Before doing so, parties are well advised to (1) understand the full range of open items, (2) develop a deep understanding of what is important to the other party, and (3) work collaboratively to design “win-win” outcomes.
*Good Communication. Strong communication, and a strong communication protocol, is a must between parties. Buyers and targets should appoint someone other than the CEO or the senior investment professional (in the case of a private equity sponsor) to be the party’s main point of contact and lead negotiator. This can be the CFO or, in the case of a private equity sponsor, another member of the deal team.
By removing the CEO (or senior investment professional) from the day-to-day negotiations, that person is able to weigh in strategically on key points with a more commanding voice. The senior business leader only gets (and only needs) a few opportunities in any M&A transaction to reach out to the other party’s senior business leader to escalate an issue. It is incumbent upon the senior business leader to choose those issues wisely and deliver specific, well-reasoned asks.
In certain situations, such as when management of the target will have leadership roles in the new company, it is best to preserve a friendly relationship with the buyer throughout the M&A process. It makes sense in such instances to have a member of the negotiating team—such as a non-management stockholder or board member—to handle the more difficult/contentious negotiations.
*Are We There Yet? We are often asked, “Can’t we make this go faster or cheaper by just not doing A, B or C?” The answer is generally “no.” Well-advised, disciplined deal parties—the kind that generate the most value for their constituents—typically will not deviate from their standard playbook unless there is a compelling business reason to do so. So architect a thoughtful, commercial and comprehensive process, and stick to it.
Matt Stewart is a member of the corporate practice group at King & Spalding LLP (www.kslaw.com). Mr. Stewart focuses his practice on the technology, media and telecommunications sectors. He can be reached at (650) 422-6705 and at [email protected].
Photo courtesy of Shutterstock
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