Many businesses are acquired as a result of an auction process where a seller orchestrates a clearly defined process for disseminating information and making offers, putting a number of potential purchasers in competition with each other.
The process outlined below assumes that an auction takes place. If an auction process is not undertaken by the seller, the purchaser may need to take more of the initiative.
Identifying potential targets
Most companies seeking to make acquisitions will know which businesses they would like to acquire particularly if they are seeking to acquire within their own industry and will keep track of developments at their desired targets. In some cases a consultant may be engaged to make a list of suitable candidates.
Approach to acquisition/merger candidates
In the auction process the seller contacts the purchaser and sometimes when a purchaser contacts a potential seller the latter's response is to set up an auction! Many owners of private companies can be very reticent to admit they may be willing to sell their businesses, particularly family owned businesses. Purchasers do well to be sensitive to owners' concerns that the existence of these discussions could leak out.
Non-disclosure agreement (NDA)
The purchaser should agree to sign an NDA containing customary terms so that a seller feels comfortable releasing confidential information including the fact that it is engaged in a process of selling the business.
Review of initial information disclosures
In an auction sale the seller will distribute an information memorandum and these documents usually contain enough information to undertake a preliminary evaluation of the target company. There are often many other things a purchaser would like to know but all the potential purchasers receive the same information and more information will be released at the next stage to those who make acceptable indicative offers. Normally a potential purchaser is not allowed access to the target company during this phase so it has to make its bid using the information it is given and any external enquiries it can make within the confidentiality undertakings in the NDA. If there is no auction process the purchaser will need to make its own information requests.
Indicative offers
The purchaser will be expected to make an initial indication of the price it is prepared to pay stating the principal assumptions it has made in arriving at the price, the sources of financing and any conditions which would attach to a final offer e.g. OFT clearance.
Second round and second offers
If the purchaser is selected by the seller to participate in the second round, it will be invited to attend a management presentation and to visit a Data Room containing further information on the target. The second round is an intensive period leading up to a more binding second offer and, depending on how the seller organises the process, it may involve a high degree of commitment on the part of the purchaser. To this end a seller may supply potential purchasers with a vendor due diligence report and a draft sale and purchase agreement (SPA). If a draft SPA is supplied there will be a stipulation that second bids must be made in the light of the warranties, indemnities and other clauses which are on offer in the draft SPA. Second bids are normally expected to include a greater commitment from the purchaser's financiers and a clear statement of any conditions attaching to the offer and a timetable to satisfy the conditions.
Selection of preferred purchaser
This usually involves the seller undertaking some final negotiations on price and other conditions with the top bidders to try to squeeze out the very top price.
Exclusivity and final due diligence
The selected purchaser is allowed a number of weeks to complete its due diligence work and to negotiate the final SPA and financing arrangements. As the purchaser incurs heavy costs during this phase it expects to have exclusive negotiating rights for a limited period.
Exchange and completion
The purchaser signs the SPA and associated documents including the financing documents. Exchange and completion may take place on the same day or completion may be delayed if there are outstanding conditions which cannot be satisfied at the date of exchange, usually regulatory clearances. In some cases a seller may not be willing to bear the risk that conditions will not be satisfied and may insist that the purchaser takes the risk, particularly if other potential purchasers had not insisted on the particular condition.
