Conducting Sell-Side Due Diligence in M&A: Maximizing Deal Value and Minimizing Closing Delays

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Conducting Sell-Side Due Diligence in M&A: Maximizing Deal Value and Minimizing Closing Delays THURSDAY, JUNE 4, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Claudine M. Cohen, Principal, CohnReznick Advisory Group, New York Karen C. Hermann, Partner, Crowell & Moring, Washington, D.C. Andrew J. Sherman, Partner, Jones Day, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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6 Andrew J. Sherman Mr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,700 lawyers worldwide. He is the author of 26 books on business growth, capital formation and the leveraging of intellectual property. His twenty-second (22 rd ) book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your Company s Intellectual Property, (AMACOM) was published in October of Other recent titles include the best-selling Mergers and Acquisitions from A to Z, third edition was published by AMACOM in He is also the author of the 2nd edition of the Due Diligence Strategies and Tactics, which was published in the Spring of His twenty-third book Essays on Governance, was published June of 2012 and in 2013, he was named by NACD as one of the Top 100 Leaders in Governance. In 2014, he was included in the global IAM 300, recognizing the world s thought leaders in managing intangible assets. He has appeared as a guest and a commentator on all of the major television networks as well as CNBC s Power Lunch, CNN s Day Watch, CNNfn s For Entrepreneurs Only, USA Network s First Business, and Bloomberg s Small Business Weekly. He has appeared on numerous regional and local television broadcasts as well as national and local radio interviews for National Public Radio (NPR), Business News Network (BNN), Bloomberg Radio, AP Radio Network, Voice of America, Talk America Radio Network and the USA Radio Network, as a resource on capital formation, entrepreneurship and technology development. He has served as a top-rated Adjunct Professor in the Masters of Business Administration (MBA) programs at the University of Maryland for 26 years and at Georgetown University for 17 years in both the business school and the law school where he teaches courses on business growth strategy. He has served as General Counsel to the Entrepreneurs Organization (YEO) since In 2003, Fortune magazine named him one of the Top Ten Minds in Entrepreneurship and in February of 2006, Inc. magazine named him one of the all-time champions and supporters of entrepreneurship and business growth. Copyright Andrew J. Sherman. All Rights Reserved

8 Current Trends Affecting Due Diligence Best Practices Societal expectations of transparency/age of social media/millenials Impact of shareholder activism and accountability of company leaders/brands for the success/failure of transactions Depth/breadth/scope of due diligence (post-enron, mortgage crisis, etc.) Cost and timetable impact of the new era of diligence Volatility of capital markets and geopolitical shifts Copyright Andrew J. Sherman. All Rights Reserved

9 Current Trends Affecting Due Diligence Best Practices (Cont d) FCPA/regulatory enforcement effects on due diligence Data rooms vs. face-to-face /on-site diligence IP issues (crown jewels analysis, hidden intangibles, Black Duck, etc.) Cyber-security and data privacy laws and developments Cross-border considerations Other trends for discussion??? Copyright Andrew J. Sherman. All Rights Reserved

11 Legal and Transactional Goals of Due Diligence Identify and mitigate risk Test the underlying economic premise of the goals of the transaction Prepare for post-closing integration challenges and tasks Gather key information for drafting R&W s, covenants, indemnities, etc. Identify unexpected opportunities Copyright Andrew J. Sherman. All Rights Reserved

12 What Is Due Diligence? Due diligence is both an art and a science Proper due diligence involves: Knowing where to look Knowing what to ask Knowing what tools to use Knowing who to ask Knowing how to test premises/answers Knowing who should ask Knowing how to verify Copyright Andrew J. Sherman. All Rights Reserved

13 What Is Due Diligence? (Cont d) The Art of Due Diligence: Understanding how to extract key information from a person or situation Understanding the objectives of the parties and the underlying transaction Identifying key hurdles and risks Identifying why information might be falsified or omitted Targeting the proper sources for disclosure of information Copyright Andrew J. Sherman. All Rights Reserved

14 What Is Due Diligence? (Cont d) The Science of Due Diligence: Do your homework Be prepared and well-organized Be precise in your requests Be persistent in your quest for the truth Don t accept the first answer as the final answer Trust your gut if it s too good to be true Copyright Andrew J. Sherman. All Rights Reserved

15 Due Diligence Best Practices Work as a team, but have a clear quarterback/captain Designate a primary point of contact for each party to the transaction Conduct regular team meetings to compare notes and coordinate carefully The more you know, the better questions you can ask Be organized set timetables and deadlines for deliverables Use industry experts early and often Use technological tools available to you (search engines, data rooms, etc.) Develop penalties/consequences/remedies for non-compliance Understand why a party may be trying to hide key facts or circumstances Question everything BE INQUISITIVE! Copyright Andrew J. Sherman. All Rights Reserved

17 Overview of the Seller s Process Pre-transactional mock due diligence (Identify potential turn-off s and risks that will defer a potential buyer and/or adversely affect valuation/ price/deal terms) What gets fixed? At what cost? When? Financial statement re-casts (understanding the actual performance of the business on a normalized basis) Preparation of effective and accurate offering memorandum and management presentations Population of the data room (phasing of process; key participants and who will know what when?) Copyright Andrew J. Sherman. All Rights Reserved

18 Overview of the Seller s Process (Cont d) Buyer s counsel are trained to look for problems and then push hard for document protections/adjustment to terms DON T GIVE THEM ANY MORE AMMUNITION THAN THEY ALREADY HAVE! Study potential post-closing challenges, cost/impact on buyer, etc. Look at internal controls/compliance practices/ accounting systems, etc. (how will a public/large buyer perceive from an FCPA/Sarbox/etc. perspective)? Copyright Andrew J. Sherman. All Rights Reserved

20 Why do sellers need to conduct reverse due diligence on buyers? Selecting the right buyer Track record for closing deals Deal terms (seller financing/creditworthiness, stock payment/business plan issues, earn-out/ trustworthiness, deferred payments/accounting integrity Perceptions of key customers, channel partners, supplies, etc. Copyright Andrew J. Sherman. All Rights Reserved

21 Why do sellers need to conduct reverse due diligence on buyers? (Cont d) Challenges in removing/replacing seller on loan guaranty, lease guaranty, related issues Channel conflict and OCI issues Cultural and compensation impact on employees/ ecosystem Post-closing dispute patterns and likelihood of litigation Copyright Andrew J. Sherman. All Rights Reserved

22 Summary of Sell-Side Due Diligence Tips Be well-organized Be cooperative Be responsive Be strategic (what gets shared when to whom?) Don t be defensive Think 3 chess moves ahead/ impact analysis Have a key point person for coordination Momentum is key Know when to say when (due diligence disputes are often a precursor to larger problems) Copyright Andrew J. Sherman. All Rights Reserved

23 C O N D U C T I N G S E L L - S I D E D U E D I L I G E N C E I N M & A

24 T A B L E O F C O N T E N T S Page About CohnReznick 25 Transactional Advisory Services 26 Overview of Sell-Side Services 27 Benefits of Sell-Side Services 28 Gathering data room documents 30 Documenting problems 31 Contacts 32 24

25 C O H N R E Z N I C K B Y T H E N U M B E R S 10 th LARGEST ACCOUNTING FIRM EMPLOYEES PARTNERS 26 OFFICES $ MILLION IN ANNUAL REVENUES One of the top accounting, tax and advisory firms in the U.S. We offer solutions to the most complex and challenging business issues facing both public and private, middle market companies Blends the deep resources and technical acumen of a large accounting firm with a hands-on, entrepreneurial service approach that growing organizations require Serves clients in numerous industries International reach via Nexia member firms in more than 100 countries 25

26 T R A N S A C T I O N A L A D V I S O R Y S E R V I C E S Serving a broad spectrum of industries, the Transactional Advisory Service teams are comprised of industry and subject matter experts who work collaboratively with other CohnReznick Advisory Group specialty areas as well as our industry verticals. Our services are designed to (i) identify value-critical issues that could have adverse consequences on your transaction, and (ii) provide buyers and sellers with the intelligence to make informed risk/reward decisions. Transactional Advisory Services Our Transactional Advisory Services professionals deliver a full range of services focused on all stages of the transaction process. Strategic Advisory Strategic Alternatives Financing Strategies M&A Strategies Recapitalizations Sell-Side Due Diligence Financial Due Diligence Tax Due Diligence Information Technology and Operational Due Diligence Acquisition Integration Purchase Price Dispute Resolution With proven experience in complex situations, unsurpassed technical guidance, and results-driven strategy, we deliver unparalleled insight to maximize value. 26

27 O V E R V I E W O F S E L L - S I D E S E R V I C E S What is Seller Diligence? Diligence is conducted from a buyers perspective with the goal of increasing buyer confidence Sell-side due diligence provides realistic expectations of normalized EBITDA, adds credibility to data provided to the buyer, reduces the element of surprise during the sales process and shorten the buyers due diligence process. Deliverable is a function of the agreed upon scope used as part of the sale process that has been vetted with seller management for factual accuracy and content Typically performed as part of an auction, managed sale process, refinancing, etc. Is paid for by the seller but intended to reduce overall diligence costs by getting ahead and in front of issues to decrease the chance of unnecessary delays in the sales process. 27

28 B E N E F I T S O F S E L L - S I D E S E R V I C E S Focuses on issues relevant to even the most scrutinizing purchaser. Provides in-depth analysis on the financial condition of the seller, and aid sellers in securing a higher price for their business by adding more control over the sale process and reducing the sales cycle. Identifies issues giving the seller an opportunity to fully explain circumstances that could be perceived as flaws to the prospective buyers. Determines the true value of their business, assist with purchase agreement structure, address carve-out and transitional concerns and coordinate data room composition. Evaluation of the integrity and sustainability of historical results. Tax due diligence & structuring, among others. 28

29 B E N E F I T S O F S E L L - S I D E S E R V I C E S Increase the quality of bids and should help to maximize value of the sale. Reducing potential buyer diligence, there is less of a need to provide exclusivity to any one buyer. Set the scope such that buyer focus should be limited to key areas. Seller will have the opportunity to comment on and screen the deliverable, providing the opportunity to address issues proactively. Less time will be required of seller management as the buyers perspective that we bring will pre-empt much of potential buyer inquiry. Allows the seller to have greater knowledge and control over the information presented. 29

30 G A T H E R I N G D A T A R O O M D O C U M E N T S Information request list details financial data and documents available. Organize and present documents in a systematic manner. Focuses on information relevant to potential buyers. Providing financial data and schedules. 30

31 D O C U M E N T I N G P R O B L E M S Identify opportunities for the buyer to create & maximize value Understand the Company s strategy for procuring, producing, distributing, marketing, and selling Assessment of the quality of management & other personnel Quality of Earnings, quality of working capital, net debt, commitments & contingencies, cash flow, seasonality, potential exposures (e.g., off balance sheet liabilities, etc.) Tax footprint current structure and whether there are opportunities to capture value Analyze whether growth, as projected by Management, appears reasonable based upon historical performance 31

32 C O N T A C T CohnReznick LLP Claudine Cohen, Principal [email protected] 32

33 Conducting Sell-Side Due Diligence in M&A Karen C. Hermann

34 Goals of the Management Presentation Provide additional information to the Buyer to potentially increase the initial offered price. Allow the management team to be introduced to the Buyer and to sell their vision for the future. Obtain information from the Buyer to focus down-selection of potential Buyers. 34

35 Components of a Management Presentation Overview of the management team and the target Significant customers / contracts Historical financial information Pipeline and growth strategy Market differentiators Threats and challenges 35

36 Legal Considerations While typically drafted by the bankers, the legal team should review for: Antitrust concerns Competitively-sensitive information Inaccurate statements Guarantees or glaring omissions Include appropriate disclaimers. Limit distribution (and attendance) to persons or entities covered by an NDA. Confirm there is strategic alignment among stakeholders and management team. 36

37 Confidentiality and Disclosure Considerations Inevitable that confidential information will be disclosed: Nonpublic business information, such as customer and employee lists. Information about critical intellectual property. Competitively-sensitive information, such as pricing, key competitors or market position. The fact that an M&A process is being considered is itself confidential information: In some cases, an NDA is signed with the investment bank before the name of the target entity is revealed. Use reputable data sites and vendors. 37

38 Non-Disclosure Agreements Critical that the NDA be tailored to the transaction and to the parties. Carefully define Confidential Information and exceptions. Limit further disclosure (to lending sources, for example) or specifically address obligations. Buyer may request that the Seller/Target also sign the NDA to prohibit the Seller/Target from disclosing that the Buyer is engaged in the process or any of the terms of the Buyer s offer. 38

39 Internal Policies and Procedures The internal flow of information should also be carefully managed. Disclosure should be limited to the deal team and deal team members should understand the confidentiality requirements. Consider setting up a password protected or separate document repository. Keep the deal team informed on who is or is not on the deal team. Hold management presentations and negotiation meetings off-site. Limit site tours to after hours. 39

40 Timing and Limits on Disclosures Stage the disclosures: Do not disclose competitively-sensitive or highlyconfidential information in the initial stages of an auction process: Redact customer or supplier names. Aggregate information where possible. Disclose employee lists by employee ID only. There may be a need to limit some particularly sensitive information until days before or even just after signing. Assume that the deal will not go forward, or that this potential buyer will not be the ultimate buyer. Consider antitrust implications of disclosures. 40

41 Contact Information Karen C. Hermann Crowell & Moring LLP 1001 Pennsylvania Avenue, N.W. Washington, D.C (202) Crowell & Moring LLP is an international law firm with more than 500 lawyers representing clients in litigation, regulatory, and transactional matters. The firm is internationally recognized for its representation of Fortune 500 companies, emerging companies, and their investors as well as its ongoing commitment to pro bono service, diversity, value-based billing, and legal project management. The firm has offices in Washington, D.C., New York, San Francisco, Los Angeles, Orange County, Anchorage, London, and Brussels. 41