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Basic Items Owners Want to Know About How an M&A Transaction Works

What are the steps involved in a sell-side M&A Transaction (i.e., selling a business)?

The M&A process is a "courtship" which traditionally follows a series of steps necessary to reach the mutual but conflicting objectives of both buyer and seller. Buyer wants to know everything possible about a company and pay as little as possible, seller wants to protect his/her trade secrets and sell the business for as much as possible. What ensues is a series of exchanges of both information and viewpoints, the outcome of which, reflects the relative strengths and negotiating leverage of each party to the transaction.

There are three (3) distinct phases of the transaction: pre-market preparation, marketing and finally negotiation & closing. The pre-market preparation phase involves developing a well written and concise investment memorandum and supporting materials, formulating a comprehensive data room, developing an optimal buyer list, assembling a team of knowledgeable advisers, analyzing historical and projected financial statements and developing valuation methodologies supportive of the seller's valuation objectives. The marketing phase involves initial contact with potential buyers, obtaining signed NDA's, handling preliminary due diligence, obtaining non-binding indications of value, arranging either offsite or onsite meetings (or both), and introduction to management followed by submission of a final binding letter of intent ("LOI"). Finally, the negotiation and closing stage involves final due diligence, determination of final terms and conditions and negotiation of a definitive purchase agreement and related schedules.

How Long Does it take to Complete an M&A transaction?

Every transaction is different. However, most transactions take anywhere from six (6) to nine (9) months to complete.

Janes Capital Partners has completed transactions in as short as three (3) months while others may have taken up to twelve (12) months. In instances, where the transaction takes significantly more or less time than the norm, there are usually certain company or transaction-specific circumstances which necessitated a variance. These tend to be exceptions however. In the absence of unknown or unanticipated special circumstances, six (6) to nine (9) months should be sufficient.

Although the seller might be anxious to conclude a transaction quickly, it is not in his/her best interest to "rush" the process. Speed often comes at the expense of other negotiated terms and conditions. Buyers are attuned to a seller's need or desire to move quickly and will not hesitate to capitalize on this perceived weakness. Quicker is not necessarily better.

How Many Prospective Buyers do you USually Contact?

It depends. In some cases a large number, in other cases a small number. For example, Janes Capital Partners recently marketed a very attractive business to only eight (8) potential buyers. In actuality there were only eight (8) suitable and financially qualified buyers. Of the eight, six (6) companies submitted letters of intent. In contrast, we marketed another less attractive business to over ninety (90) candidates and after considerable time and effort received four (4) letters of intent. Two different businesses marketed in two different ways. Both ultimately met each respective seller's valuation objectives and each transaction was successfully concluded.

How Are you Going to Keep The Transaction Confidential?

First and foremost, because we do not use a shotgun approach. We believe that quality is more important than quantity. Our activities are carefully controlled, preemptive and highly discrete. We insist that the client approves the buyer list prior to contact being initiated. In addition, the client is afforded an opportunity to review and approve all data and information prior to its dissemination.

Initial contact with potential buyers does not reveal the identity of the company. Signed non-disclosure agreements are obtained prior to the release of any sensitive information. Even after signed NDA's are received, we adhere to a strict process of revealing the minimum amount of information necessary for any given stage of the process (i.e. on a need to know basis only). We know what information to release and when to release it. This means that certain information may be withheld until the "11th hour" which might be the week before closing, or even the day of closing. Throughout, we use a series of screens to eliminate candidates that are either financially unqualified or just "tire kicking".

WHo will the Likely Buyer Be?

In every M&A transaction it is important to have a "Plan A" and a "Plan B". Ideally Plan A will work out and there will be no need to revisit Plan B. Janes Capital Partners will not take on an assignment unless there is a high probability of success. We always have a Plan A and a Plan B.

In essence, there are two (2) main types of buyers. These include: strategic buyers and financial buyers. We include management buyouts under the category of financial buyers as they often involve private equity firms, or at the very least, are structured similar to a financial transaction. As a rule, we tend to shy away from entrepreneurs looking to buy their first business. They tend to be unfocused, undercapitalized and in the final analysis, reluctant to actually "pull the trigger".

The buyer that is usually able to offer the highest price is a strategic buyer-a large well capitalized, knowledgeable and sophisticated corporation within your industry. They typically seek horizontal or vertical integration opportunities, market share gains etc. They know your company, they know your industry, they tend to easily understand the potential strategic fit between their business and yours, they have the money to pay for a transaction and are experienced acquirers with sizable in-house as well as external M&A capabilities. All things being equal, a strategic buyer can and will pay more than any other type of buyer due to the presence of "synergies". Synergistic value can be substantial but it is not given up lightly. This has to be "pried loose" through a competitive sale process and exhaustive negotiation.

Financial buyers ("sponsors") offer different, but potentially attractive alternatives for a seller. Sponsors tend to be an excellent alternative to explore when the management team would like to recapitalize, diversify a portion of their wealth away from their ownership in the business, and still remain with the business - sharing in the future value created by the combined management and sponsor team. Sponsors typically inject a disciplined, sophisticated set of financial tools to manage the business, either by providing growth capital or introducing operating partners in key unfilled roles that a business may not easily fill on its own.

What will be Expected of the Seller After the Transaction has Closed?

Most if not all post closing conduct of the seller is specifically addressed in the purchase agreement which may include a non-compete agreement, a non-solicitation agreement, a non-disparagement agreement, a confidentiality agreement as to terms of the transaction, a requirement to cooperate on certain tax filing matters, and an obligation to indemnify the buyer for certain breaches of the reps and warranties above certain limits. In addition, seller is expected to cooperate with buyer in drafting a closing balance sheet for purposes of determining any post closing purchase price adjustments.

What should the seller expect from the buyer after the transaction has closed?

Most if not all post closing conduct of the buyer is specifically addressed in the purchase agreement. Expectations of the buyer tend to be more limited. Buyer is expected to cooperate on certain tax filing matters. Buyer is expected to cooperate with seller in drafting a closing balance sheet for purposes of determining any post closing purchase price adjustments. Buyer is expected to provide seller access to the books and records of the company in the event seller is entitled to any deferred or contingent consideration. Finally, buyer is also responsible to indemnify seller for buyer's breach of reps and warranties, although this is extremely rare.