How to Perform a Disciplined Sell-Side M&A Process to Maximize Results

The sell-side M&A process, facilitating the sale of a business, is long and complex. Bringing a company to market does not guarantee the company will achieve its M&A goals. The M&A process is challenging for three reasons:

This report contains the step-by-step guide Jahani and Associates (J&A)—an NYC-based professional services and advisory firm—uses to maximize results for its clients. Each step in the sell-side M&A process is driven by activities, deliverables, and solutions.

STEP 1: Preparation to Solicitation

Preparation for solicitation requires the company and their investment banker to generate the artifacts buyers need to make an offer for the company. This information includes but is not limited to financial information, the growth history of the company, intangible asset information (e.g., customer relationships and proprietary technology), and the reasons the owners are selling the business.

Industry-standard deliverables, such as a confidential information memorandum (CIM) and audited financial statements, are used in this phase to market the business to potential buyers. This phase is vital because any delays while in market can impact the outcome of a transaction.

STEP 2: Solicitation to IOI

Reaching a sufficient number of solicitations to find an interested buyer is difficult and crucial, particularly in the lower-middle and middle markets. J&A recommends only sending detailed material during the preparation phase to potential buyers after they have signed an NDA. Common sources of buyer solicitations include direct connections from an investment banker’s network, direct solicitations of qualified buyers determined from research (e.g. PitchBook), and targeted emails to qualified lists of buyers. 

IOIs (Indications of Interest) contain valuation ranges and general expectations of earn-out, which should be negotiated as necessary to have a smooth transition from an IOI to an executable letter of intent (LOI). IOIs are non-binding.

STEP 3: IOI to LOI

A site visit usually occurs while transitioning an IOI to an LOI and is an opportunity for the buyer and seller to meet and conduct a deep dive into any outstanding items that need to be settled before executing an LOI. Since LOIs are legally binding, many buyers will require exclusivity after an executed LOI, which is also referred to as a “no-shop clause.” This means the seller will not be able to conduct sale-related conversations during the no-shop period and must ensure the upcoming due diligence will be satisfactory, in order to close the deal.

STEP 4: LOI to Purchase Agreement, Including Due Diligence

Due diligence is the process of affirming the information the buyer has used to make his offer and determining whether or not the company is in good standing with all relevant information in its possession. It is often the longest part of the sell-side M&A process, as it may take up to 120 days.

Once due diligence is complete, executing the purchase agreement, where ownership changes hands, is the final step in the sell-side M&A process. Agreements can be asset purchases or stock purchases. If due diligence went as expected, which is vastly important, this step should be relatively simple. Changes that may affect purchase agreement negotiations are material discoveries in due diligence, economic forces, material alterations in business operations, and management changes.

Problems and Solutions: Quickly Resolving Challenges Requires

Deep Thinking and Preparation

Jahani and Associates has collected common challenges that exist in each step of the sell-side M&A process and the best way to resolve them. In order to avoid disruptions or delays in the M&A process, it is important for M&A stakeholders to plan ahead and know where weaknesses may rise, and also imperative that the investment banking team has a plan to resolve these challenges before they even arise.

Preparation to Solicitation

Companies most often do not go from preparation to solicitation when seller management teams are not aligned or properly prepped for the sell-side M&A process. This can occur when multiple stakeholders are involved, particularly in companies boasting a significant capital raise. If a business undergoes a change that materially reduces the company’s desired valuation, management often decides to postpone the process.

Solicitation to IOI

As a solicitation to IOI is fundamentally a sales process, sellers, and their teams are most prepared when they view this as a sales exercise. This is often the most difficult step in the process for unprofitable companies in the lower-middle market.

IOI to LOI

Moving from an IOI to LOI is a matter of negotiation and mutual understanding between the buyer and seller. A site visit is often used between the IOI and LOI to develop a relationship between the buyers and sellers.

LOI to Purchase Agreement, Including Due Diligence

Due diligence is the process of confirming the buyer’s understanding of the business at the time they made their offer. Due diligence is time-consuming and material information that changes the valuation, and earn-out identified in the LOI may be discovered during due diligence. This will be negotiated as part of the purchase agreement, which may be made for either cash or stock, each of which has its own tax, legal, and strategic considerations.

The sell-side M&A process is challenging, but the seller’s success will be maximized when a disciplined process is followed.

The challenges, solutions, and KPIs in this paper are not exhaustive, but they provide an overview of the way to maximize success in sell-side M&As. It is important that all stakeholders understand the challenges they will face and how to alleviate them as quickly as possible. Establishing a consensus among stakeholders and then focusing on a problem-solution-KPI framework gives transparency to the client and allows the investment banker to increase the size of their team while preserving client service and information sharing. Experience in dealing with these issues is paramount to successfully delivering M&A results, and that experience must be coupled with actionable outcomes.

Any business owner seeking to sell their business must carefully consider all these factors and be aware of expected obstacles in order to significantly increase the likelihood that their company successfully completes a sell-side M&A transaction. The analysis contained herein is based on decades of experience and is included to support business owners across the world as they achieve a maximally successful exit.

In 2019, J&A surveyed hundreds of business owners about successful and failed M&A deals, why they failed, and how those failures could have been avoided. J&A then compared these stories with its own processes and tools to determine the best way to anticipate and avoid these failures in any M&A scenario. The resulting analysis is this document that outlines common reasons for failure and how to avoid them. This document is meant to serve as a resource to business owners and other service providers to give the best strategic advice and service for their business or clients.

Sources:

1. Baird, Les, David Harding, Peter Horsley, and Shikha Dhar. “Using M&A to Ride the Tide of Disruption.” Bain & Company, January 23, 2019.

2. Buesser, Gary. “For the Investor: Internally Generated Intangible Assets.” Accessed November 22, 2019.

3. Corporate Finance Institute. “What is the No Shop Provision?” No-Shop Provision. Accessed November 22, 2019.

4. Deloitte. “Cultural issues in mergers and acquisitions.” Leading through transition: Perspectives on the people side of M&A. Last modified 2009.

USA Health Care Technology in 2022

In 2022, $110 billion was invested into health care technology. The health care sector in the USA experienced growth in capital market activities due to the impact of the COVID-19 pandemic, and approximately 45% of the transactions were in M&A deals. Health tech innovators played a vital role during the industry’s response to the pandemic and in the post pandemic recovery.

Investors have been consistently deploying capital into companies thinking ahead and planning for the future of the health care sector, positioning health care tech companies well for success.

USA Health Care Technology – Market Breakdown

• Health care technology means any technology, including medical devices, IT systems, algorithms, artificial intelligence (AI), cloud, and blockchain, that is designed to support health care organizations and improve medical outcomes.
• The benefits of technology in health care include increasing speed, accuracy, and accessibility in improving patient experience and care and real-time information exchange.
• Health care technology is used in various forms, including, but not limited to, disease diagnosis and treatment, medical imaging, health care operations, and clinical research.

USA Health Care Technology in 2022 – Capital Market Analysis

• In 2022 Q1, around $31 billion was invested into health care technology companies in the USA, accounting for 28% of total investments.
• This figure dropped by 23% to $24 billion in Q2. This may be attributed to the invasion of Ukraine and the global geopolitical tension.
• The highest capital investment per deal was seen in Q4, when the market started to pick up again, with an average of $33 million per deal.

• The total amount invested in USA-based health care technology companies by Asian and Middle Eastern investors in 2022 was$10 billion over 137 transactions.
• In 2022 Q4, $4 billion was invested, accounting for 40% of total investments in 33 transactions, averaging $121 million in each transaction. This is linked to the relaxation of COVID-19 regulations, which helped boost optimism.
• The increase in capital investments by Asian investors was led by China as they began to relax COVID-19 restrictions.

• The USA contributed the highest share (57%) of capital raised by region.
• Europe was significantly impacted by the Russia-Ukraine war, which caused high inflation rates throughout the year. However, in Q4 the Eurozone recovered and outperformed other regions. Europe accounted for 19% market share.
• East Asia only accounted for 17% of the total capital raised in 2022 due to ongoing COVID-19 restrictions.

• China accounted for 52% of investments made by Asian and Middle Eastern investors into USA-based health care technology companies in 2022, due to the COVID-19 pandemic’s impact on the public’s overall mental and physical wellbeing.
• China is followed by Hong Kong, which accounted for 17% of total investments in 2022 after achieving strong growth in Q4.
• South Korea, Singapore, UAE, and India accounted for a combined 24%.

USA Health Care Technology in 2022 – Deal Type Analysis

• In 2022, 45% of the transactions in health care technology were mergers and acquisitions. This could be due to markets and valuation uncertainty, making buy-side mandates more attractive.
• There were notable investments made by venture capital (VC) and private equity (PE) firms despite market conditions, with around $13 billion invested by VCs and $24 billion by PEs.
• Noticeably, only 4% of the capital deployed was in IPOs, confirming the low valuations with a decreased appetite for companies to go public.

• In 2022, 60% of the transactions in health care technology made by Asian and Middle Eastern investors were mergers and acquisitions, which was lower than in previous years due to high inflation rates in the USA.
• There were notable investments made by VCs and PEs despite market conditions that accounted for 9% and 28%, respectively.
• Noticeably, only 2% of the capital deployed was in PIPE deals.

In 2022, health care technology companies witnessed growth opportunities, evidenced by the amount of capital deployed. Economic uncertainty and global geopolitical factors impacted deal types and investments. Middle Eastern and Asian investors played a vital role in the transactions, especially after the pandemic created an economic, social, and health impact, all of which highlight the importance of further developing the health tech sector.

Sources: Pitchbook Data, Inc.

Generative AI

Companies within the Generative Artificial Intelligence (AI) sector have raised over $15 billion since 2022. Many companies, including OpenAI, have attracted the attention of Silicon Valley and the financial media, bringing the sector to the forefront of venture conversations.

Venture capital transactions account for 45% of the capital deployed into announced Generative AI capital market transactions and 77% of all transactions conducted in the sector. The venture capital transactions showcase the momentum and growth potential of the industry.

Introduction to Artificial Intelligence Research and Analytics

AI language models utilize AI in complex linguistic structures that allow human-like interactions. The technology is set to disrupt traditional search engines by providing detailed answers to queries rather than just providing links.

The latest generation of AI language models has a wide variety of applications, including, by not limited to, complex coding, drafting legal contracts, and even creating music and art.

• Since 2020, $15 billion has been invested in Generative AI companies across 1,164 transactions. The average deal size of approximately $13 million indicates the sector’s early-stage nature and growth potential.
• Anthropic, an AI safety and research company, conducted the largest transaction in the period, closing closed $580 million Series B round in April 2022 at a pre-money valuation of $3.42 billion. A consortium of angel investors and Alphabet conducted the deal.
• OpenAI conducted a private secondary transaction with Fenrir Asset Management of an undisclosed amount on January 13, 2023. The company’s most significant capital raised to date of $1 billion was completed in July 2019, with Microsoft being the sole investor.

• Approximately $7 billion has been invested into early-stage AI research and analytics companies through venture capital transactions. The capital was deployed over 871 deals with a median size of $8 million.
• Venture capital transactions, including grants, seed and angel funding, and accelerator programs, contributed 45% of the capital deployed into announced Generative AI capital market deals. These transactions accounted for 77% of the deal count conducted in the sector over the same period.
• POs and PIPEs accounted for a smaller portion of market activity due to the early stage of the technology and companies.

• USA-based Generative AI companies raised $9.7 billion through 608 transactions, with a median deal size of approximately $16 million between 2020 and 2022. USA-based companies raised 64% of the capital deployed in the sector, accounting for 52% of the deal count over the same period.
• Companies from Israel, China, and the United Kingdom have also conducted significant capital market transactions raising $1.43 billion, $1.22 billion, and $1.07 billion, respectively.

Generative AI is set to disrupt many industries, including search engines, client services, and IT services. Early-stage companies are well-funded in the sector, particularly in the USA, by some of the largest technology companies, such as Google and Microsoft. Investors and founders need to be aware of the opportunities and threats that AI research and analytics technologies possess.

Sources: Pitchbook Data, Inc.

The USA Technology Sector in 2022: Market Overview

Investors in emerging markets are performing an increasingly important function in funding early-staged USA-based technology companies. Capital invested by Middle Eastern and Southeast Asian investors in the sector increased by 85% between 2021 and 2022, with venture capital transactions responsible for 57% of all investments in the industry in 2022.

Economic growth has continued in emerging markets such as the Middle East and Southeast Asia, prompting early-stage technology companies to be mindful of international fundraising opportunities.

The Decline of the USA Technology Market in 2022

Publicly listed technology stock in the USA fell by 30% in 2022 (Forbes.com). Economic uncertainty, inflation, and increased interest rates to reduce excess liquidity within the market were driving factors in the decline. The decrease in investor appetite for technology stocks has led to a sharp reduction in valuations, and decreased access to funding from USA markets.

• The Dow Jones U.S. Technology Index was down by over 35% in 2022, in contrast to 2021, which was a landmark year for the index, setting a record high of 4,866.69 on December 27, 2021 (SPGlobal.com).
• Other technology-focused indexes illustrated similar diminishing returns, with the Nasdaq Composite falling 33% in 2022 (Forbes.com), indicating a reduced appetite for technology stocks.
• Valuation negotiations between founders and investors have altered drastically. Valuation based on projected revenue multiples is no longer the norm, and early-stage investors increasingly utilize traditional price-to-earnings ratios (TechCrunch.com).

Growth of Emerging Markets in 2022

• Increasing interest rates and escalating fuel prices caused slow growth in developed markets in 2022. The USA and UK experienced GDP (Y-o-Y Q4) growth rates of less less than 1% compared to 2021 Q4, with similarly slow growth occurring across the European Union (tradingeconomics.com).
• Conversely, the increase in fuel prices, caused in part by the war in Ukraine, aided the GDP growth of Middle Eastern states such as Saudi Arabia (9% Y-o-Y Q4 GDP), the UAE (4% Y-o-Y Q4 GDP), and Qatar (4% Y-o-Y Q4 GDP). Post covid reopening economies, large infrastructure projects, and the tourism sectors’ continued development have also contributed to the region’s growth.
• Despite challenging global economic conditions, Southeast Asia remains one of the world’s fastest-growing emerging regions. Malaysia, Indonesia, and Singapore all grew GDP by over 4% in Y-o-Y Q4 2022, driven by reopening travel routes and increased trade and commerce.

• $400 billion was invested by Middle Eastern and Southeast Asian investors into USA-based technology between 2012 and 2022, with 60% occurring between 2020 and 2022 and $155 billion deployed in 2022 alone.
• The deal count conducted by Middle Eastern and Southeast Asian investors into USA-based technology companies increased from under 150 transactions in 2012 to over 1,000 in 2021.
• The sector’s deal count decreased by 24% between 2021 and 2022, yet capital invested in the industry increased by 85% during the same period, showing a continued appetite to invest in USA-based technology companies and a leaning towards more significant deals.

• Venture capital transactions accounted for 57% of the deal count by Middle Eastern and Southeast Asian investors into USA-based technology companies in 2022.
• Despite challenging economic conditions, the focus on early-stage companies further highlights the appetite to invest in USA-based technology companies, showing the strength of the US technology industry and the trust that international investors have in the US financial markets.

Early-stage technology companies from the USA should consider opportunities to raise funds internationally. Uncertain economic conditions in developed economies have reduced capital market activity, particularly for early-stage transactions. Middle Eastern and Southeast Asian investors have an increased appetite for USA-based tech companies, evidenced by the growing amount of capital deployed.

Sources: Pitchbook Data, Inc.

How Will the US Economic Downturn Affect M&A Activity?

Real GDP in the USA decreased by 0.9% in Q2 of 2022 according to the Bureau of Economic Analysis. This follows a 1.6% decrease in 2022 Q1, resulting in the USA economy falling into recession. The USA is not alone, with developed nations like Germany, Japan, and an array of others experiencing similar contractions according to Reuters.com. The global economy has been impacted by numerous exogenous shocks over the past 30 months, including lockdowns, supply chain crises, stimulus packages, and oil price hikes among others.

The economic conditions will undoubtedly affect capital markets, but the outcome remains uncertain. The reduction in liquidity could shrink capital market activity. Alternatively, a slowing business cycle could result in a buyer’s market, allowing for aggressive consolidation and roll-up strategies. This article will investigate the difference in capital market activity between 2021 H1 and 2022 H2 to determine the effects of the downturn in Western markets.

Why the USA Remains Critical to Capital Markets

• Capital deployed in M&A deals globally increased by 67% from 2021 H1 ($1.15 trillion) to 2022 H2 ($1.91 trillion). Deal count within the period has remained stagnant with a 3%decrease between 2021 H1 (12,692 M&A transactions) and 2022 H1 (12,302 M&A transactions).
• Median deal size increased from $19 million and $24 million in 2021 Q1 and Q2, respectively, to $31 million and $43 million in 2022 Q1 and Q2, respectively.
• The highlights an increased appetite for acquisition despite economic downturns, as role-up strategics become increasingly aggressive leading to larger deal sizes. Challenging business conditions would drive the supply side demand while lower valuation would lead to an increase in demand for acquisitions.

• Capital deployed in cross-border M&A deals by USA-based companies increased by 59% from 2021 H1 ($69 billion) to 2022 H2 ($169 billion). Deal count grew consistently by a 13% increase between 2021 H1 (706 M&A transactions) and 2022 H1 (813 M&A transactions).
• Median deal size increased from $53 million and $46 million in 2021 Q1 and Q2, respectively, to $70 million and $150 million in 2022 Q1 and Q2, respectively.
• The data suggest significant growth in cross-border M&A activity by USA-based companies. The degree of competition in domestic markets as well as more affordable valuations in international markets will continue to drive future cross-border transactions.

M&A in the first half of 2022 has grown significantly, with a 67% increase on 2021 capital deployment in the sector over the same time period. The true effects of a recession remain unknown. The data suggest that firms have capitalized on lower valuation multiples and challenging economic conditions to execute inorganic growth strategies. Retained profits achieved in 2021 are likely to be used to execute acquisitions. Liquidity within the market will continue to shrink as global monetary policies tighten, so it is uncertain whether the surge in M&A activity will continue. Current economic conditions present the ideal buyer’s M&A market.

Sources: www.bea.gov/data/gdp/gross-domestic-product, reuters.com/markets/europe/global-markets-recession-risk-2022-07-28, Pitchbook Data.