Sales Process Expectations A Sikich White Paper
Introduction This document is meant to provide an overview of the process of selling a company. It contains information on timing, required information, required activities, and suggestions to make the process run smoothly and maximize the potential value of the transaction. As your investment bank ( i-bank ) will act as the quarterback of the transaction, this document is written with a focus on the activities in which the i-bank is involved. Timeline Preparation: During the preparation phase, your investment bank works closely with the company to gain the best understanding of the company and identify key selling points and potential issues. The i-bank will use this information to create materials used to generate interest from buyers in acquiring the company; these materials usually include a nonconfidential overview and a confidential information memorandum ( CIM ). Additionally, the i-bank will create a list of potential buyers.most often this list will include strategic buyers as well as financial buyers with a history of investing in the company s industry. This list will be reviewed with the client and specific buyer candidates will be approved for outreach. Typically, the Preparation phase will take 5 to 8 weeks. Process Initiation: I-bank professionals begin this stage by reaching out to prospective buyers usually via direct phone calls for high priority targets and often with mailings to secondary targets. Based on interest, the non-confidential overview is provided to the prospective buyer. Buyers who have continued interest sign a confidentiality agreement and are provided with a numbered CIM. Your i-bank will stay in constant contact with the buyers reviewing the CIM and answers specific questions they might have about the company, the process, and the desired deal structure. On or before a specified date generally identified in the nonconfidential overview as well as the CIM interested buyers must submit an indication of interest ( IOI ). The IOI will contain information about the buyer s interest in purchasing the company as well as a valuation range. The i-bank works with the client to identify the most attractive buyers based on their IOIs and perceived fit with the client s desires. The top candidates are invited to attend a management presentation. The Process Initiation phase typically takes 5 to 6 weeks. Buyer Selection: Management presentations (typically to the top three to five buyers) are the first opportunity for the client to meet with the buyers in person. While it is important to sell the company during the presentation, it is equally important to begin to develop a feel for the potential buyers to better ascertain the right fit. Buyers who have submitted attractive IOIs are also granted access to portions of the data room that contain deeper information about the company. This is done to help guide the buyer in determining the valuation and deal structure they will offer in their letter of intent ( LOI ). Like the IOIs, LOIs are due by a predetermined date. Once LOIs have been collected, the i-bank will work with the client to determine which ones have the greatest merit. The i-bank professionals will then negotiate terms with the buyers to maximize value for the client. Ideally, multiple LOIs will be submitted and the i-bank can use this to lever up the offers in an auction-like process. In the end, one buyer is selected and the LOI submitted by that buyer is signed. This initiates an exclusivity period in which the i-bank and the client work only with the buyer submitting the winning LOI. The Buyer Selection phase typically requires 5 to 6 weeks. Transaction Execution: Upon the signing of an LOI, the buyer will initiate the diligence process. In general, the client should expect that the buyer will want access to every piece of information available on the company. A list of typical diligence items is provided later in this document. Additionally, the buyer will likely hire an accounting firm to complete a Quality of Earnings report. This typically requires on-site access to the company and certain personnel by the accounting firm for up to a week. The buyer (and any lenders they plan to bring into the transaction) will also want to have access to key personnel at the company at this point. Most buyers will also wish to call on important 2
customers as part of their diligence process. I-bank professionals (and usually the buyer) realize that access to employees and customers can be a sensitive issue and can help to create strategies that minimize disruptions. The most sensitive discussions of this type are typically not conducted until near the very end of this stage. Legal documents (purchase agreement, employment contracts, non-competes, etc.) are also drafted during this phase. This usually occurs after the bulk of the diligence has been completed. Closing occurs after all open issues have been addressed, approvals have been acquired, and documents have been finalized. The Transaction Execution phase is the most laborious phase for the client and company management and typically takes 10-12 weeks. Ideally, the entire process should be complete in 24 to 30 weeks. While your i-bank will endeavor to keep all parties compliant with a well defined timeline, a number of factors can affect the actual duration of the sales process. Timely access to information will affect how quickly the transaction proceeds. During preparation, delays in obtaining information can delay the creation of the marketing materials. Later, during diligence, a great number of items and pieces of information will be requested by the buyer. Having this information readily available will speed up the diligence process. Please refer to the diligence section for a list of typical diligence requests. Access to personnel can also affect the timing. Questions will periodically arise that require input from the company. It is often beneficial to identify a point person to whom all questions should be addressed. The type of buyer can often affect the pace at which a transaction proceeds. In general, strategic buyers especially very large organizations will take longer to close a transaction due to internal procedures and red tape than strictly financial buyers/private equity funds. The time of year can affect the timeline. There is often a slow-down during major holidays and late summer. Legal counsel can have a dramatic affect on the timing of a transaction. It is critical to retain legal counsel that is experienced in mergers and acquisitions not only to keep the transaction moving by focusing on the important aspects of the legal documents, but also to help avoid common pitfalls that inexperienced counsel may miss. Process Dos There are a number of ways for the client to help ensure the sales process will proceed smoothly. Below is a short laundry list: 1. Have a clear goal for the transaction, including acceptable valuation, transaction structures, and desire for the future of the business. 2. Identify any assets within the company that are not to be considered as part of the transaction (subsidiaries, real estate, etc.). 3. Identify and secure good legal counsel. At a minimum, your attorney should have deep experience in mergers and acquisitions. Ideally, your attorney will understand your industry and your business. 4. Identify early on a point person that your i-bank professionals should contact with questions and information requests. 5. Clearly identify which employees will have knowledge of the sale process and update your advisors if this changes. 6. Continue to operate the business as effectively as possible. The transaction process can prove to be a distraction and sometimes can have an adverse affect on company performance. It is imperative that the company continue to perform as predicted and presented to the buyer. 7. Delays are the enemy of all deals. Be responsive to information requests. In cases where information requested by a buyer is not submitted in a timely manner, the process begins to bog down and experience delays. Once the process is initiated, it is imperative to keep the deal momentum up to assure a closing. 8. Make financials available on a monthly basis. 9. Keep your advisors informed of any material events taking place at the company. If there is an issue, you will want to make the buyer aware of it as soon as possible. Late, negative events almost always either kill a deal or, at a minimum, drastically impact the proceeds. 3
10. Call your advisor if you have any questions or concerns at any time during the process. Process Don ts 1. Panic nearly every transaction process will have emotional hills and valleys. It is important to remain focused on the goal and trust in your advisors to help navigate through any complications. 2. Incur non-operational expenses (personal travel, etc.). If this is un-avoidable, make sure to clearly document the nature of the expense and the reason it is non-operational. 3. Attempt to hide any information from a buyer everything will come out in the diligence process. This does not mean all information will need to be disclosed up front information is only disclosed when appropriate. Miscellaneous Notes Personnel: It is not necessary to disclose to all of the personnel in your company that you have entered into the process of selling until some point in the Transaction Execution phase. Your i-bank professionals will take every precaution in keeping the process confidential. Some thought should be given to messaging to the employees and its timing. Dinners: It is customary for the client to host dinner (or in some cases lunch) for buyers visiting for management presentations as well as a closing dinner after the transaction has been completed. Questionnaires: Many i-banks use general questionnaires to aid in obtaining information about the Company. Ideally, the client will fill these out and submit them to the i-bank prior to a kick-off meeting where attendees will discuss the answers in detail. Alternatively, though less efficient, these can be completed by the i-bank professionals in conjunction with the meetings. Outreach and Marketing Materials: The i-bank advisor should not, at any time, approach a potential buyer even in a non-confidential manner without first obtaining express permission from the client (typically in writing via email). Similarly, the advisor should not distribute information documents to potential buyers who have not been approved by the client. Cash Free / Debt Free: Nearly all acquisitions are made on a cash-free, debt-free basis. This simply means the client will keep all cash and cash equivalents and pay off any debt held by the company. The resulting post-close balance sheet will be free of debt and cash. Definitions Non-Confidential Overview: This document is a short (1 or 2 page) executive summary of the business. It contains a general overview of the business, industry, high level financials, client goals for the transaction, process timeline, and investment highlights. It does not disclose the identity of the client s company. It is circulated without a Confidentiality Agreement. Confidential Information Memorandum (CIM): This document, often referred to as the book, contains a significantly detailed description of the company, its operations, personnel, market, financials, and other information pertinent to a buyer considering a purchase of the company. These are only circulated to buyers expressing a high level of interest that have signed confidentiality agreements. Add-backs: Many companies are valued as a multiple of EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). Often the company has non-operational expenses on its income statement (expenses that have nothing to do with the operation of the business or will have nothing to do with the business after acquisition). These expenses are typically added back to the EBITDA of the company to create an adjusted EBITDA with which buyers determine their valuation. Typical add-backs include, but are not limited to: personal expenses run through the company (personal travel and entertainment, company car, etc.), excessive compensation (salaries and bonuses that are paid that are well above market), salaries and bonuses of executives and other employees that will be redundant after a merger (for instance the CEO and CFO in the case where a strategic buyer is making the purchase or the owner s daughter that is kept on the payroll but does not perform a critical task for the Company), charitable giving, and one time charges for services (such as payment to your i-banker, attorney, and accountant associated with selling the Company or litigation expenses associated with a legal suit). 4
It is important to have good documentation for all expenses identified as add-backs. Though companies in some industries, such as Software as a Service or IT services, typically are valued as a multiple of revenue, it is still important to identify all potential add-backs to EBITDA as profitability is always considered by buyers valuing a company. Indication of Interest (IOI): This document is submitted by interested buyers after reviewing the CBM to express their interest in purchasing a company and provide high level guidance to how they would value the company. It is non-binding and non-exclusive. Letter of Intent (LOI): This document is submitted as a formal bid for the company. It typically provides details on the structure of the deal (equity contributions, debt secured for the transaction, etc.). By signing an LOI, the client enters into an exclusivity period during which time the company may not be marketed to any other buyer. LOIs are typically nonbinding and contingent on successful completion of due diligence. The client should be of a mind that he has agreed to sell his company by signing this document. Data Room: The data room is an on-line repository for various documents that will need to be provided to potential buyers. All, or nearly all, diligence materials will be placed in the data room. The data room has useful features for the control and monitoring of information: The data room is secure and password protected; The data room is structured with multiple levels of access that may be controlled by the administrator (usually an i-bank professional). This allows information to be released to buyers ONLY as they enter into the later stages of the process; Administrators have full control over documents in the data room and whether they can be saved or printed by buyers; and The data room provides metrics on data room activities such as which buyer has reviewed which documents, the time being spent by a buyer on a particular document, etc. Due Diligence Information All buyers have their own lists that they use for requesting diligence materials. While the buyer s attorney and lender will piggy-back on the buyer s diligence, they will often have their own lists that will augment the buyer s list. While it is not necessary (and not possible) to compile all of the diligence materials ahead of time, it will make the process run smoother if the data room is populated with certain documents ahead of entering the diligence process. While not allencompassing, the list below attempts to identify items that are typically requested. Not every company will have all of the materials requested. Financial Information Internal financials (Income statements and balance sheets) going back five years, monthly if possible Add backs to historical financials Past five years of financials from accountant (reviewed, audited, etc.), if available Any auditor s letters, opinions and management reports over past five years Bank statements (five years if possible) Tax returns: federal and state (five years) Financial projections going forward three years A/R and A/P aging reports Fixed asset list with depreciation Information on all banking relationships (contacts, etc.) Detailed information on all loans or credit agreements Information on any UCC or similar liens Information on any guarantees to or from directors, stockholders, officers or employees Detailed capitalization table Revenue breakdown by product (five years if possible) Revenue by customer (five years if possible) Quote log Backlog Revenue recognition policy Documents related to any write-offs or write-downs Any foreign currency or hedging agreements Building appraisal if facility is owned by company Lease agreements (facility and/or equipment) All commercial contracts and agreements 5
Industry Data List of industry groups List of trade publications List of relevant trade shows and identification of which the company participates in Any industry or market reports owned by the company General Corporate Materials Organizational documents (articles of incorporation, by laws, etc.) List of jurisdictions in which the company is licensed to operate Stockholder meeting minutes five years if possible) Board of Directors meeting minutes (five years if possible) List of officers and Board members List of any subsidiaries and JVs with relevant details Products and Services Product and service literature including marketing materials Standard forms used in connection with the sale of products or services Warranty information Product development agreements Product/service roadmaps Any agreement associated with the delivery of products or services (obligations, etc.) Commissions agreements Advertising agreements List of any sole-source suppliers Litigation Information on any past, current, pending, or anticipated litigation, including: Detailed description and relevant information Settlement Potential liabilities outstanding Governmental Filings Filings related to state and/or federal securities laws Material filings with municipal, state, federal or foreign entities Citations or notices received from government agencies Government licenses, permits, or consents Any other government related documentation of a material nature Human Resources Organizational charts Employment agreements List of employees including title, salary, and bonus for each Detailed information on all employee benefit plans Employee handbooks and other related materials Confirmation of existence or non-existence of union List of consultants, sub-contractors, 1099 employees, etc. along with a description of the services provided and compensation Intellectual Property List of all patents (issued or applied for) List of all trademarks Description of trade secrets License agreements Description of any anticipated IP generation Other Information on environmental matters (permits, compliance, identification of hazardous waste, etc.) All other agreements the company has entered into with an outside party or employees List of powers of attorney or proxies Press release (five years if possible) Company overview presentations Business plan if available Growth plan if available 6
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