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Contemplating a Sale? Here's a Breakdown of the Sale Process

7/12/18 – Keith Carlson

VonLehman and BB&T: Mergers & Acquisitions Panel

VonLehman’s Director of M&A Advisory Services, Keith Carlson, recently participated in an industry panel sponsored by VonLehman and BB&T Bank. The panel discussed market analysis, sales techniques, and a breakdown of the sale process, among other topics relating to mergers and acquisitions. A 15-year veteran of the M&A industry, Keith’s expert advice is summarized below.

Explaining the typical sale process.

For business owners contemplating a sale, you’ll want to give an M&A advisor as much lead time as possible. Ample time is needed to prepare and position the business for the market. An advisor can spend 60 to 90 hours per week for a 6 to 9 month process on a sale, depending on various factors.

The first phase involves collecting key information, hosting learning sessions, constructing key marketing materials (the book or the CIM) and building the buyers list, to summarize. This first phase can exceed 60 to 90 hours over a two to three month window. The second phase involves sharing the marketing materials to the potential suitors/buyers identified in the first phase. While showing the deal to buyers, the investment banker has an idea of what a business is worth, but an asking price is not provided. It is important to let the market drive the price, especially in the current frothy M&A market. After narrowing the top two or three buyers down to one, phase three begins. The third phase includes diligence, legal document negotiation, and further refinement of the deal. The process, in total, is roughly nine months.

What is the associated cost of a sale process?

The M&A advisory world’s pricing is somewhat cookie cutter in nature. First, you’re charged a retainer; it is either a one-time up front commitment or a monthly retainer. At the conclusion of the sale, a success fee is usually paid and is typically a percentage of the total purchase price. For smaller deals, the success fee ranges from 5-8% up to 10%. For larger deals, it can range 2% - 5%.

Testing the market.

The idea of testing the market regarding the sale of your business should be dealt with very delicately.  My perspective, which is rooted from my days on the buy side, is that when you see the same deal come across multiple times and in different forms, you begin wondering, “what skeletons are in the closet?” or “what is wrong with this company.” It’s ok to dip your toes in the water and test the market, but you should also be prepared to stay away from the market for a few years if the feedback doesn’t meet your requirements.

Techniques associated with the structure of a sale.

There are several options when it comes to the structure of a sale. You have the choice of selling a) all, b) the majority, or even, c) a minority share of your business. If liquidity is of chief concern, but giving up ownership isn’t desired, a dividend recap could also be of interest. ESOPs are also a viable option for a select few, but they are usually not a great fit for many companies given the associated risks.

One of the largest obstacles associated with sale processes.

When selling a business, one of the primary areas that buyers like to address up front is your company’s organizational chart, succession, and any other risks associated with ‘key people’. Often is the case that owners selling their business are extremely vital to the day-to-day. In a perfect world, an owner begins to mitigate those key person risks well in advance of a sale. Identifying potential replacements is important, but retaining talent is also imperative. There are different strategies that you can deploy to create a stickier environment for your key managers. You should sit down with your M&A advisor or wealth advisor to discuss the numerous options available, each of which have different implications.

Explaining the dividend recap.

With a dividend recap, the company’s balance sheet is used to receive a debt and cash reserve funded dividend from the business. You can obtain the debt from a typical senior lender or even a combination of senior and subordinated debt lenders depending on how aggressive you would like to be in terms of the size of the dividend. Simply put, the company borrows the money, which, in turn, is distributed to shareholders. Some restrictions that didn’t exist prior to the distribution may apply. These include restrictions on future distributions or excessive bonuses until a portion or all of a loan is repaid. However, many find this option appealing as it accelerates the payment of equity prior to a sale. 

Addressing the seller’s desires during a sale process.

Very rarely does a seller enlist my services while simply saying, “get me the highest price.” There are usually realistic requests – things like how employees are treated, what the future operating legacy will hold, or what they will and won’t do from an employment perspective once the deal is closed. These are all common requests or accommodations that I’m frequently asked to address. That said, a longer list of ‘wants’ from a seller usually suppresses value unless you reach out directly to buyers that are accustomed to dealing with the specific desires. This is why understanding these wants early, and developing and tailoring the buyers list on the front end, is crucial. One of the value propositions I offer all my selling clients is that I have either met with, closed a deal with, or have had deep interactions with anyone that I would show their business to, and, as such, I know what they like, how they usually behave, and what things they usually find as turnoffs.