What does a sale process entail?
Let’s start with the basics. There are a number of stages to a sale process.
The first, and most dreaded by owners, is Due Diligence, which can take anywhere from two to six months. Due Diligence is the collection and review of an exhaustive list of your company’s legal, operating and financial documents. Prospective buyers use these documents to evaluate your company and to calculate a preliminary purchase price, so it is critical that they accurately reflect your company’s operations. Your documents must be clean and easy to understand. Does your revenue tie to your contract terms? Does your business management software data match the data held by your accounting software? Are your revenue and expenses properly accounted for on an accrual basis? (Buyers love accrual.)
During Due Diligence (and based on their review), your advisor will compile a tiered list of qualified prospective buyers appropriate to your company. This list may include strategic operating companies (strategic buyers), direct competitors and financial buyers. Strategic buyers will often offer the highest premium on your expected sale price because it is expected that your company will fill a specific need for the buyer that is not currently part of their operations. The strategic need may be a complementary product offering, proprietary IP, specific licenses, a complementary geographic footprint, or any number of other attributes.
Once Due Diligence is complete, your advisor will have a clear understanding of your company and how best to position its strengths and opportunities. This is the marketing stage, and it generally entails compiling a short summary document called an Executive Summary and a longer, more detailed deck that provides high-level information about your company. This longer document acts as a Confidential Information Memorandum (CIM – pronounced “sim”). Building these documents usually takes a couple of weeks. Your advisor will share these documents with prospective buyers in stages (in advance of diligence review) to determine level of interest.
Prospective buyers that like what they see will then request an opportunity to review your Due Diligence documents. These documents will be housed in a secure online data room that restricts entry and manages which documents are reviewed and how they are viewed. Prospects may request additional or clarifying information and select meetings with ownership during this stage. It is not unusual for your advisor to participate in these meetings. This phase can take just a few weeks or it can stretch to more than a month depending on how long it takes for prospects to review your documents and cover all of their questions. Your advisor will usually set a date for Letter of Intent (LOI) submission, which marks the end of initial diligence review.
Following Due Diligence review, interested buyers will submit an LOI. This document details each prospective buyer’s offer and terms. It is not uncommon to receive offers from multiple prospects. Traditionally, this is the last time you will have more than one offer to consider, so it is important to take time with these negotiations. Your M&A advisor will address the business terms and your M&A attorney will work in tandem to address legal terms in the LOI.
If the prospect you’ve chosen continues to like what they see, they will issue a purchase agreement, which again, is negotiated in tandem by your M&A advisor and the M&A attorney. If the buyer has encountered any unwelcome surprises, they will take this opportunity to discount their initial offer. The last thing any owner wants is discounting at this point in the process. That’s why it is so important to make sure that everything is cleaned up before you go to market. If you like the offer, you go to closing. Let the celebration begin! But if agreement can’t be reached, the deal is off, and you’ll have to start over.
