In the first post of our three-part series on the sale process for a middle-market company, we focused on the strategic perspective, discussing how to optimize revenue, and quality of earnings given the constraints of a firm’s business model. The second post then delved into how a business needs to identify important house-cleaning actions, including accounting, financial, operational, and legal to prepare for a sale.
The next step is going to market. Once a client engages the M&A team at Crewe, it will typically take four to six months to close a transaction with an interested buyer. In this third and final post of the series, I will walk through what you can expect to happen during that time frame.
Overview of the Sell-Side Process
Our initial emphasis after engaging a client is to spend about a month getting to know the business intimately and gathering as much data as we can, including financials, marketing materials, culture, personnel, and customers. This intensive approach provides us with the information and expertise to prepare all the documents and materials needed to take your company to market, including the teaser, confidential information memorandum (CIM), financial models, and buyer list. As information is being gathered, we aim to identify a wide range of possible buyers in order to conduct a competitive process.
Once a list of potential buyers is finalized and approved by management, we typically produce a one-page teaser that provides high-level financial and operations information about the company (omitting the company name for confidentiality) to help entice potential buyers. This teaser is sent to all targeted firms and gauges initial interest for the sale of the company.
Crewe would then share the CIM, which typically ranges between 40-80 pages, with the potential buyers that sign a non-disclosure agreement (NDA). The CIM is the primary document used to “present” the company and includes everything a buyer would want to know, from an executive summary to financials and company/industry overviews.
The next significant stage is a call for indications of interest (IOIs), again with the goal of encouraging many potential buyers to evaluate the company at the same time. We handle the screening of all interested buyers so the owner can focus on business operations.
A good company might receive between five and 20 IOIs. We would then conduct a comparative analysis so the seller can understand how potential buyers differ in terms of pricing, culture, and financial mechanisms/engineering. Typically, individual management meetings are then arranged between the seller and four or five buyers who have emerged as the best candidates. These meetings are similar to first dates, where the owner and interested buyer get a feel for whether it would be a good match in terms of pricing, culture, and structure.
We then ask for letters of intent (LOIs) to be submitted by a certain date, usually one to two weeks after management meetings, and the seller would sign the LOI they like best. The process between signing the LOI and closing the deal can take about 90 days as due diligence is conducted. During that time, legal teams also work on employment contracts, conflicts of interest, and other pertinent transaction details.
Client Concerns
It’s natural for clients to have concerns about the go-to-market process, and one of the most common is that they don’t want competitors gaining access to key information. This requires being very careful about the scope and details of NDAs. Depending on the business and potential trade secrets, good legal representation can be vital for a seller. The buyer list is also heavily vetted and approved by the seller so that information on the company and possible sale is only shared with potential buyers who have been preapproved and signed an NDA.
Many sellers are also concerned about the idea of working for somebody else, since they’ve often spent years as their own boss. Even if an owner’s preference is to retire immediately after the sale, private equity firms usually prefer that they stay on for a period of time to help facilitate a smooth transition.
Businesses that have a pre-set succession plan typically de-risk the purchase, which could increase the value. I’ve rarely seen a private equity firm buy 100% of a business. It’s common to purchase 70%-80%, and sometimes as low as 51%, in order to create an alignment of interests and keep the seller engaged.
Although potential sellers might tell us they want to retire right after selling, that’s generally not a realistic option. We’ll listen to what a seller wants to do, and then try to find buyers who are comfortable with the scenario. We help the seller understand that the more limiting the parameters, the smaller the buyer pool, which could ultimately affect the selling price.
Accordingly, I advise sellers to stay flexible in order to keep all interested buyers involved, emphasizing that the employment contract can be negotiated after an LOI is signed. Most private equity acquisitions are structured so the seller will receive additional incentive compensation for working during a transition. This is commonly referred to as “a second bite of the apple.”
First-Time Sellers
Apart from general client concerns, first-time sellers tend to have their own anxieties. Primarily, they might be hesitant to pay a commission to an investment bank, not recognizing the value it can provide and wondering if they’d be better off conducting a sale process on their own.
This sentiment can be heightened if an owner has received an unsolicited offer, but that’s akin to selling your house to someone who just knocks on your door and says they want to buy it. An expertly guided sale process for your business — involving several potential buyers — is much more likely to generate maximum value, with the difference in price more than covering any commission involved.
We feel the case against trying to do it on your own is very convincing. A comprehensive sale process can include hundreds of hours on the phone with relevant parties, not to mention the time spent on preparation. If you’re trying to handle that individually, it would be very difficult to also devote the time needed to run your business well. Attempting to juggle operating the company and managing the sale process can result in your business declining in value, perhaps to the point of becoming unsellable.
A good investment bank also has strong relationships in the M&A industry and knows what buyers are looking for, as well as how to speak their language. The fact that negotiations can sometimes become confrontational is another good reason to have a third party representing you, because a seller would ideally want a positive relationship with the buyer post-transaction.
At Crewe, we enjoy trying to solve the puzzle of determining the best possible buyer for each of our clients. We find it rewarding to help a client sell their company for a good price in a deal that achieves their goals.
Importance of a Financial Advisor
One final important point is the key role of a trusted financial advisor during and after the sale process. An expert advisor can conduct financial planning while this process is ongoing, perhaps running a Monte Carlo scenario on cash flows to determine what type of income you need or how to handle income replacement coupled with growth.
If you’re negotiating a compensation plan with the buyer, a financial advisor can ensure that it coincides with your preferred timeline. IOIs and LOIs should also be reviewed by your advisor as they’re submitted, in order to clarify how well an offer would facilitate your family’s goals before you accept it.
Crewe Capital provides expert investment banking and Crewe Advisors offers highly specialized financial advisory services, making us unique in the industry. We pride ourselves on being a firm that can help business owners every step of the way — from advising on growth strategies to preparing for a sale, conducting the sale process, and offering astute financial advice both while you own the firm and after you receive the newfound liquidity from selling it. Please contact us to learn more.