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@example.com.
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