Selling a business can be a very emotional decision for the owners and senior managers and it is well worth spending some time with those who have most at stake in a sale before initiating the process. This includes fellow shareholders and key management.
The ideal time to sell a company is when market conditions motivate potential purchasers to acquire the business. The business itself should be able to demonstrate that it has a sustainable business model with good growth prospects and a strong management team in place.
Assuming that the decision to sell has been made and that all the stakeholders are behind the decision, the following sets out some of the key stages and issues that are likely to arise on the sale of a business.
Pre-sale steps
Appoint a good adviser
In purely financial terms, an experienced adviser can repay his fees many times over with the additional value that can be
created through managing the sale process and keeping potential purchasers on their toes. In addition, an adviser can
minimise the time an owner/manager needs to be away from the business which can have a significant impact on the
business performance in the run up to a sale.
Management incentivisation
The management face an uncertain future with the new owners of the business and yet an acquirer's perception of their
strengths and motivation will be a key factor in deciding whether it wishes to acquire the business and how much it is
prepared to pay. Therefore it is important to put a meaningful management incentivisation in place as early as possible to
ensure that the management are well motivated to achieving the best sale price and conditions.
Tax and other pre-sale planning
Before getting too far down the track, the seller should consult its tax advisers to devise a sale structure that minimises tax.
Other items that should be given consideration before starting the sale process are pension schemes, valuations of properties
and any legal obligations that may be affected by the sale e.g. certain parties may have rights in the event of a sale of the
business, such as licensors, or holders of financial instruments may have conversion or repayment rights.
Alternative sale processes
The sale process can be an auction sale or a sale to a targeted purchaser. An auction sale involves disclosing information to
a number of potential purchasers with the objective of exposing the attractions of the business to a wide (though carefully
controlled) audience and engendering competition between them in order to obtain the best price and associated conditions.
The targeted approach involves selecting a single purchaser and giving it a fixed minimum price that has to be adhered to or
the sale process will be opened up to a full auction.
Valuation
The seller and its advisers should consider what are reasonable price expectations for the business. While the process of sale
should be designed to generate the highest price, expectations should not be set too high as a decision to withdraw a sale,
especially late in the process, can be very damaging.
First round documents
The seller will need to prepare and assemble a number of documents for the sale process. Some will be required for the first round and should be prepared in advance of starting the process, and others will required for the second round and can be prepared once the first round is under way.
Information Memorandum
The Information Memorandum is a sales document and a key skill in preparing the document is to make the purchasers
really hungry to acquire the business while not appearing to oversell. A seller and its advisers should be able to identify a
purchaser's motivations and to play to them. A potential purchaser should be led to believe that this is an opportunity not to
be missed.
Executive summary
An executive summary will be prepared. It should have a strong upbeat tone as it is a vital document in the marketing
process and should not contain competitively sensitive information.
Non-Disclosure Agreement (NDA)
Signing an NDA is standard practice now and most genuine purchasers don't have a problem with the customary formats.
Some big companies have their own formats, most of which are acceptable.
Vendor Due Diligence
To reduce the time when a seller is most vulnerable at the end of the process and to reveal any significant issues at an early
stage, the practice of preparing a vendor due diligence report has become popular with sellers. A firm of reporting
accountants is instructed to prepare a due diligence report which is given to potential purchasers in the second round. If the
work is started well before the Information Memorandum is completed, it will facilitate the inclusion of any issues arising
from the review in the Memorandum.
Second round documents
PowerPoint presentation
The presentation should follow the style of the Information Memorandum and concentrate on the key selling points. It
should contain contributions from each of the key senior managers who should present their own activities.
Data Room
Additional information will be disclosed to the short-listed parties in a Data Room which is usually at the Company's solicitors'
offices. The information will include most of the confidential material. Some Data Rooms are virtual with documents in PDF
format and access controlled by password. This is a more expeditious way of organising the Data Room but some sellers
may be concerned about the security of documents put into the Data Room which potential purchasers will be able to
download. The contents of the Data Room will be agreed and time allowed to prepare and assemble the documents. The
seller should also determine if any of the documents may not be copied.
Draft sale and purchase agreement (SPA)
The seller's solicitors will draw up a draft contract setting out the warranties and indemnities which the seller is prepared to
give. The solicitors will also draft a disclosure letter that limits the risks on the warranties. A number of the items referred
to in the Disclosure Letter will be contained in the Data Room.
The sale process
The following describes the normal two-stage auction process. The stages can be combined into one if the list of potential purchasers is kept very short. A number of elements of the auction process can be incorporated into the targeted approach.
Identifying potential purchasers
It is important to identify any trade purchasers that could have a strong motivation to acquire the business. Also certain
financial purchasers may have a focus on the industrial sector the business operates in and the people with this specialisation
are often highly motivated to acquire companies in their sector. A keen purchaser can make a big difference to the price and
tone of the whole process. The typical optimum size for an initial list is about 10-15 names.
Contact with potential purchasers
This is normally done by phone and if the potential purchaser is interested it will be sent the executive summary and the
NDA. Upon the return of the signed NDA, the prospective purchaser is sent the Information Memorandum.
First offers
Potential purchasers are requested to make initial or indicative offers, usually within three weeks of receiving the Information
Memorandum. In addition to the price, offerors will be requested to supply details of any proposed non-cash consideration,
the sources of the cash consideration and any conditions attaching to their offers.
Short list and second round
If the seller is satisfied that the indicative offers are within the range it is expecting, a short list of 3-5 potential purchasers is
drawn up. These are usually the highest bidders in the first round but other criteria may be applied, e.g. certain trade
purchasers may be excluded or held over if the seller is not comfortable giving them competitively sensitive information or
meeting the management team.
The parties on the short list will be invited to management meetings which will usually consist of the presentation, a question and answer session and a site visit. If a site visit is considered too sensitive, the meetings may be held off-site and a small number of visitors may be taken on a site visit on some pretext.
Parties on the short list will be allowed access to the Data Room and given copies of the Vendor Due Diligence and the draft SPA.
Second offers
The seller requests a second bid when the short-listed parties have been through the second round process. The period
allowed for submitting second bids can vary but it is normally 6-8 weeks after the parties are notified that they are on the
short list. Potential purchasers will be asked to make their offers subject only to any clearly stated preconditions and to
provide strong evidence that they have the financial backing to complete the offer.
Final negotiations on price/terms
A final negotiation will take place with the top bidders to ensure that the maximum price has been obtained and also to
remove, dilute or clarify any preconditions.
Selection of acquirer and finalisation of process
The preferred acquirer is selected, usually on price, but some of the pre-conditions or other terms may influence the choice.
The seller then makes every effort to close the deal as expeditiously as possible as this is the stage when it is most
vulnerable. If the purchaser makes any late changes to its offer at this stage, the seller may find it difficult to resist such
changes. One of the preconditions may be a requirement for further due diligence and an exclusivity period in which to
undertake this. The seller's response to such conditions will depend on its negotiating hand and how he plays it. Potential
purchasers will be expected to start their own due diligence once the decision is made to put in a first offer. It is normal for
some time to be allowed for final due diligence but it should be tightly controlled. The price agreed for the business
sometimes goes down during this phase and the longer it goes on the greater the risk of this happening.
Sale and purchase agreement and completion
A legally binding arrangement is entered into when the seller and purchaser sign the sale and purchase agreement. Normally
the purchase consideration is paid at this time but completion may be delayed e.g. if the purchaser needs approval from its
shareholders at an EGM or if clearance is required from regulatory authorities or third parties. The seller should ensure that
there are as few conditions as possible and that the uncertainties are minimised e.g. in the event that shareholder approval
is required major shareholders should be asked to undertake to vote in favour of the resolution to approve the transaction at
the EGM.
In many cases a portion of the consideration is paid into an escrow account pending the determination of certain unknowns
in the purchase and sale agreement e.g. the seller may have guaranteed a certain level of net assets to be passed over to
the purchaser. In the latter case the balance sheet on the day of Completion is drawn up some two/three weeks later and
confirmation is requested from the auditors to both sides before the funds are released.
Timetable
The whole process can take five to six months:
