How to Perform a Disciplined Sell-Side M&A Process to Maximize Results
A Step-by-Step Guide to the Sell-Side M&A Process
The sell-side M&A process 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:
- It is difficult to build consensus among a large number of stakeholders
- Gathering relevant, transparent, and adequate data is complicated, particularly in private markets
- The M&A process contains many steps, and within each step there are many opportunities for things to go wrong
This report contains the step-by-step guide Jahani and Associates (J&A)—an NYC-based global independent investment bank—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 to 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.1 This information must be woven together and organized correctly so buyers can efficiently formulate their offers.
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.
STEP 2: Solicitation to Indication of Interest (IOI)
This is arguably the most important part of the sell-side M&A process. Reaching the sufficient number of solicitations to ultimately find an interested buyer is difficult and incredibly important, particularly in the lower-middle and middle markets. The volume of solicitations necessary is higher than most professionals expect. The methods to generate qualified buyer leads also vary based on the industry, region, and type of investment bank (e.g., healthcare investment bank, agritech investment bank, etc.). Solicitation is initiated with a blind teaser, using a code name in lieu of the company’s name. Buyers may request more information after the teaser—at which point a nondisclosure agreement (NDA) is required. J&A recommends only sending detailed material during the preparation phase to potential buyers after they have signed the NDA. For sellers to create a succinct and consistent story for all potential buyers at this stage, it is very important not to provide too much information.
Common sources of buyer solicitations include direct connections from an investment banker’s warm network, introductions and referrals from partners in the investment banker’s network, direct solicitations of qualified buyers determined from research (e.g., PitchBook), and target emails to qualified lists of buyers. Coordinating all four types of outreach is a complicated task. Figure 2 demonstrates common reasons for failure and how J&A recommends sellers and their advisors avoid them.
IOIs contain valuation ranges and general expectations of earnout. These should be negotiated as necessary to have a smooth transition from an IOI to an executable letter of intent (LOI). IOIs are nonbinding.
STEP 3: IOI to LOI
A site visit usually occurs while transitioning an IOI to an LOI. The visit 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 often the longest part of the sell-side M&A process. Depending on the size and complexity of the deal, it may take up to 120 days.2 Due diligence is the process of affirming the information the buyer has used to make its offer and determining whether or not the company is in good standing with the relevant administrative, legal, financial, technological, security, operational, and other information in its possession.
Once due diligence is complete, executing the purchase agreement is the final step in the sell-side M&A process. These agreements can either be asset purchases or stock purchases. The purchase agreement is the binding contract where ownership officially changes hands. If due diligence went as expected, this step should be relatively simple. The changes that may affect purchase agreement negotiations are material discoveries in due diligence, economic forces, material alterations in the business’ operations, and management changes. It is very important for business activities to go according to plan during due diligence.
Problems and Solutions: Quickly Resolving Challenges Requires Deep Thinking and Preparation
Jahani and Associates collected common challenges that exist in each step of the sell-side M&A process and the best way to resolve them. It is important for M&A stakeholders to plan ahead and know where expected weaknesses may lead to exacerbated challenges.
It is imperative the investment banking team has a plan to resolve these challenges before they even arise in order to avoid disruptions or delays in the M&A process.
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. A seller may also not move to the solicitation phase due to major market forces negatively affecting business performance. If a business undergoes a change that materially reduces the company’s desired valuation, management often decides to postpone the process.
Solicitation to IOI
Fundamentally, solicitation to IOI is a sales process. Therefore, 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 in 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. Material information that changes the valuation and earnout identified in the LOI may be discovered during due diligence. This will be negotiated as part of the purchase agreement. Purchase agreements 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 from the outset will also help mitigate any issues that may unfold. 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. Being aware of expected obstacles and how to overcome them early will significantly increase the likelihood that a 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.
ABOUT THE RESEARCH
In 2019, Jahani and Associates 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 businesses or clients.
ABOUT JAHANI & ASSOCIATES
Jahani and Associates (J&A) is an independent investment bank located in New York, New York. The firm specializes in healthcare and technology and provides specialized M&A and capital markets advisory services. The combination of J&A’s unmatched skills in technology, engineering, and business operations allows the firm to create sustainable value for its clients. J&A works at the intersection of cutting-edge financial theory and business practicality. Creativity is highly valued within the firm, which allows J&A to continually improve the way businesses thrive.
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.