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 firstname.lastname@example.org.
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