The Seller’s Perspective in M&A
M&A is one of the most complex and unpredictable processes to exist in the world of business. These transactions usually begin with various promises of value creation and innovation, but it requires meticulous research, legal and financial knowledge and a concrete understanding of processes and procedures, from a general perspective of M&A.
Building a successful company is not an easy process and selling a business can be just as challenging. Therefore, when an opportunity to sell arises, sellers seek to ensure that they are on the receiving end of the best deal possible. They aim to make a substantial profit, with little potential liability towards the buyer.
There are numerous sets of motivations which drive sellers to make a deal and sell off their firms or merge with others. These include the following.
1. Age:
Older board members, executive management, and owners may be looking for a way out of the industry. Entering into an agreement to sell off their business might be the break they need.
2. Return on investment:
Where public and private companies, as well as banks are concerned, the right market and risk characteristics enable them to reap the rewards of excellent opportunities and realize solid returns for their investors.
3. Regulatory concerns:
As the financial sector sees an increase in regulations, businesses, especially smaller banks, find it challenging to keep up with the rising regulatory burden given their limited resources. In addition, restrictions on their activities have squeezed profits. The risks related to regulatory failures are also an increasing concern, forcing directors to think about their liability exposure.
Find out more: Want to know more about the buy-side of M&A? Understand the buyer’s perspective in mergers and acquisitions.
Types of Sellers
A seller of a company who decides to merge with or be acquired by another, can be divided into three distinct categories.
1. Proactive sellers:
This type of seller prepares their business for sale even before the actual sale takes place. Their preparation includes adding systems and management to enable the owner to make a quick and efficient exit once the transaction is done and the sale is complete.
Since a seller of this kind does not want to continue managing the business, they seek a relatively high cash consideration. Therefore, their needs align better with corporate buyers, who are willing to pay a greater purchase price.
2. Reactive sellers:
A reactive seller does not prepare for a sale but is rather forced into making a deal. These circumstances usually arise due to disability, death, desperation, disenchantment, or divorce. This drives them to monetize a certain amount of their equity and actively seek higher cash consideration. Like proactive sellers, they too match better with corporate buyers.
3. Strategic sellers:
A strategic seller could have been thinking about selling a business but is certainly under no pressure to do so. However, they require managerial expertise or additional capital to ensure the continuous growth of their business.
A seller of this kind is more willing to accept non-cash consideration, given that they will stay responsible for their company after receiving management and capital from the buyer. Financial buyers, for example, are suitable for strategic sellers because they strive to encourage the company's growth and monetize at a greater valuation in the future.
Beginning the Sell-side Process
Selling a company is probably one of the best ways to maximize the wealth of the shareholders. Perhaps the buyer has resources that would allow the merged firm to achieve objectives that it would otherwise be unable to. Whatever reason you may have to sell your business, make sure that you are always ‘sale ready’.
Here are typical steps that you as a seller should follow when initiating the sell-side process.
Create motive:
Once sellers decide to merge with another company or sell to them, they must first sit down and evaluate why other firms would want to make a deal with them. What about your company stands out? Why would someone find value in merging with you? Do you have innovative structures or assets that would be appealing?
Value your business:
It is always beneficial to know the worth of your business before you step into the market to look for a buyer. Start with making a detailed Discounted Cash Flow (DCF) analysis and then hire an analyst to check whether the growth projections are attractive.
Find out more: Need an accurate, trustworthy valuation of a business? Try our free, online valuation tool.
Develop a sales memorandum:
The sales memorandum is simply a marketing document that you make for your business. It lets you highlight all the important information regarding your business for the buyer and their team, encouraging them that this is an attractive investment opportunity.
Employing an investment banker:
The skills and expertise of an investment banker can help you come to terms with the detailed and complex nature of M&A transactions. They play the role of an intermediary, and can help you bring your transaction to a desirable close.
However, before you can go ahead with this step, you need to evaluate its costs and benefits. Investment banking services require hefty fees that may be out of reach for many businesses. But their contacts and experience can help you go a long way.
Negotiating with potential buyers
The negotiation process is where you need to have your eyes and ears open at all times. Remember, this is the business that you are selling, and you have every right to close the negotiations early if you are not satisfied with the direction they are taking. It is recommended that you hire an advisory expert who is familiar with the ins and outs of negotiations.
Conduct your own due diligence
Due diligence is the crux of selling a business, as it addresses all problems that an organized buyer would bring up while carrying out their due diligence process.
One of the best sell-side strategies that can increase the chances of you securing a favorable outcome from the sale of your business is carrying out thorough research of your own company. Most people refer to it as an internal audit, as it allows you to identify your weaknesses and figure out what is driving growth.
Understanding your timeline
Private companies can decide to sell soon after an unsolicited approach from someone willing to acquire them. In such cases, the sellers either continue negotiating or try and control the process by conducting an auction.
Here is a general timeline that the four-stage sell-side acquisition process is broken into.
1. Preparing for Sale: 4 to 6 weeks
- Figuring out if you want to sell
- Identifying potential buyers
- Coming up with a valuation framework
- Organizing financials
- Creating projections
- Producing marketing material
2. Round 1: 4 to 6 weeks
- Receiving initial bids to sift through indications of interest. This is used to narrow down the list of buyers.
3. Round 2: 4 to 6 weeks
- Meet with interested buyers
- Facilitate the process of due diligence for seriously interested buyers
- Receive final bids and letter of intent
4. Negotiations: 6 to 8 weeks
- Negotiate terms with acquirors submitting their respective bids
- Enter into an exclusivity agreement with a chosen bidder
- Continue helping with due diligence
- Present the final terms of the deal and produce an engagement letter
- Sign the agreement to complete the transaction and pay the legal fees
Sell-side Strategies to Ensure a Successful Deal
By selling a company, high-value businesses can take considerable risks off the table. It allows owners to make money off their years of determination and hard work and move on to other things. On the other hand, it could mean long-term security for the employees and a completely new path for the business to follow.
Familiarizing yourself with sell-side strategies can ensure favorable deal terms, so it is essential that you study these strategies before you begin the process and pursue potential buyers.
Understand valuation
Business valuation is not science, rather an art. Every prospective buyer will view your business with a different value in their mind. A single buyer’s idea may also change with time, as market factors fluctuate. Therefore, your main focus is conveying how synergies can enable the joint company to create greater value.
You can easily find a buyer whose objectives align with yours by understanding the valuation of your firm. This will help you see eye to eye and work on your prospective buyers, encouraging them to focus on the value drivers you hold in high esteem.
Thoroughly assess your firm
If you have decided to be present in a specific product category, market segment, or business, you will choose from two options available to you, build or buy. Given that building is time-consuming and costly, you will want to enter into a merger agreement with a business that can achieve your goal. This concept can apply to the buyer as well.
Where the buyer is concerned, they will carry out their due diligence and verify every fact that impacts your valuation. Thus, you will want to search your books and business to figure out any deal breakers hidden in some nook or cranny.
Know the market
One of the most popular sell-side strategies is to know the market inside and out. Experts believe that it is vital to gain a competitive advantage in a variety of respects.
Firstly, knowing your industry allows you to position your firm for sustainable and strong revenue growth, which sends a positive signal to all the potential businesses you could merge with. Next, by familiarizing yourself with possible impactful technologies, you can be on the defensive to protect the quality of your earnings.
Thirdly, by being especially attentive to the M&A market for your particular industry, you can get a better sense of the best firms to merge with.
Write an impressive confidential information memorandum
A confidential information memorandum, or CIM, is the best way to reach a favorable valuation. It helps you convey your value proposition to potential acquirers, as well as establish facts. Moreover, it highlights the competitive advantages that your business enjoys and opportunities in the future that it is bound to benefit from.
Carry out a tight M&A process
In an M&A marketplace, you only get a single chance to drive the value that you desire. This means that you need to do it right on the first go. There is one buyer out there who has the perfect offer for you. They have spent time and money going through your CIM and carrying out their due diligence. Therefore, it is now up to you to ensure a smooth and flawless process.
The most important thing for you to do is to keep the buyer interested during every step of the process. This includes marketing, letters of intent, indications of interest, appropriate due diligence, exclusivity agreement, and finally, the closing and funding.
Document Checklist for Sell-side Merger
1. Legal documents
- Occupational license
- Shareholder certificate documents
- Business licenses approved by local, state, and federal authorities
2. Financial documents
- Updated tax returns documents
- Correspondence from the auditor over the last five years
- Audited financial statements for at least 3 years
3. Marketing and sales documents
- An in-depth overview of marketing and sales strategy
- Sales and marketing coordination protocols
- Listed revenue
Document Checklist for Sell-side Acquisition
1. Legal documents
- Documents indicating the power of attorney
- Outstanding or previous legal cases
- Tax registration documents
2. Financial documents
- Audited financial statements from the at least 3 years
- Capital structure
- Capital budgets, strategic plans, and projections
3. Marketing and sales documents
- Overview of credit terms with agencies and customers
- Sales reports according to service or product category
- Existing market share
How BusinessesForSale.com Supports Sell-side M&A
Sell-side intermediaries usually pursue traditional methods of research and outreach to find buyers, and this can be a difficult and exhausting task.
Through close observation and research, BusinessesForSale.com noticed a demand from both sell-side and buy-side intermediaries: from a sell-side perspective, intermediaries were looking for quality buyers interested in high value targets, and from a buy-side perspective, experienced investors were searching for acquisition targets in the middle-market range.
BusinessesForSale.com addresses these demands through MergerVault, a product that has been built and tested over the last year and a half. MergerVault supports expansion into a sophisticated buyer pool, allowing both sell-side and buy-side intermediaries to connect more seamlessly. To enhance this process, the product provides an advanced toolkit that both sides can utilize to find quality leads.
Our enquiry process has been reengineered to include a Verified Buyer Profile, where acquirers elaborate more on their background and investment rationale. At present, MergerVault has a marketable list of over 10, 000 buyers that are internally vetted.
FAQ in the Industry
Is M&A advisory sell-side?
An M&A advisory can be both sell-side and buy-side. Different sell-side advisors can be hired for various reasons. For example, an investment banking advisor helps prepare the company for sale. They carry out a thorough analysis of the business and then recommend steps to attract potential suitors.
Moreover, they will create in-depth valuation reports and specify a broad range of values, which the firm should sell for.
Is financial advisory sell-side?
While financial advisory can be placed into sell-side and buy-side categories both, there are several major differences between the two in capital markets. The most important characteristics that set the two apart come down to the role they play for clients.
The role that sell-side advisors play:
- Advise corporate clients regarding major transactions
- Facilitate the process of raising capital, inclusive of equity and debt
- Offer advice on the procedure of mergers and acquisitions (M&A)
- Build new business by forging relationships in the corporate space
- Market securities to sell them
- Develop liquidity for all listed securities
- Provide ample equity research of listed firms
- Perform financial valuation and modeling
The role taken up by buy-side
- Make decisions related to the funds of the clients
- Take decisions pertaining to investment, such as whether to hold, buy, or sell
- Generate a return on capital that is best adjusted for risk
- Carry out detailed in-house research to highlight investment opportunities
- Perform financial valuation and modeling
- Search for investors and raise capital for management
- Bring about an increase in assets under management (AUM)
How long do M&A deals take?
A typical M&A deal can take at least six months or at most a year to go through. The length mainly depends on how complex the deal is. Therefore, it is always suggested to devise a timeline and set target closing dates for tracking progress. However, since delays are almost always inevitable, you should build in some additional time.
Should you buy the stock before a merger?
Companies that are potential targets usually see a rise in stock prices, even before the deal has gone through and a merger or acquisition has been finalized or announced. A single whispered rumor related to either one of these deals can lead to volatility, which could prove to be profitable for potential investors. They are not unfamiliar with the process of buying stocks based on the possibility of a merger.
However, there are numerous potential risks associated with this, especially if the rumor of the merger proves to be false. The company's stock price being targeted will take a hit and leave prospective investors in the dust.
Generally, a merger suggests that the executive teams of the two companies are optimistic about future growth and earnings prospects. Moreover, an increase in the number of mergers is an indicator of a thriving market. Therefore, it is recommended that you buy stocks before a merger, but only after you weigh the costs and benefits of the move and what kind of an impact it will have on you.
Who must approve a merger?
Mergers are simply transactions that involve the amalgamation of typically two or more firms into one entity. But before a deal like this can go through, it must receive approval from the holders of the highest proportion of outstanding shares of both companies. The requirement for authorization from shareholders is governed by law. Likewise, companies that are contemplating a merger are encourage to contact the Competition Bureau of Canada.
Is asset management a buy or sell-side?
Asset managers exist on both the buy-side and sell-side of M&As but have different roles to play. Buy-side asset managers generally develop market research for sale to buyers by evaluating various companies. They will also carry out fundamental and technical analysis and then deliver it to the clients.
On the sell-side, asset managers will also conduct research and then make comparisons with paid ones. Their research is mainly intended only for internal consumption. Consequently, based on their recommendations, firms decide whether they will sell, buy, or hold different securities in expectation of profits in the future.
Final Thoughts
The process of M&A can be a complicated one, regardless of if you are sell-side or buy-side. The sell-side process consists of various strategies and steps that can be used and followed to achieve the best deal outcome. This perspective-based knowledge can ensure that you move forward with greater confidence as you progress through the selling process.
If you have further questions, or need personalized assistance, feel free to contact our team.
