FAQs

While the chosen buyer may be granted some degree of temporary exclusivity, it is important they understand we have not rejected the other buyers at the table. Nor have we severed relations with them. To do so would ignore the commercial realities of this stage of the process since retaining this right offers you choice, which in turn influences the price, speed, and terms ultimately received. The LOI documents the major terms of the sale:

• Confirmation of the price and terms of payment
• Conditions precedent: matters agreed to be resolved before closing
• Confirmation that it is non-binding, subject to a Definitive Agreement of Purchase and Sale
• Restrictive covenants, such as noncompete clauses
• Recognition that holdbacks, warranties, and indemnities are deferred to and detailed in the Definitive Agreement
• An agreed period of exclusivity or no-shop clause
• Acknowledgement of key employee retention
• A timetable of events

Critically important is that the LOI clearly establishes the material business terms of the deal. Agreeing to agree later surrenders negotiating leverage to the other side and increases cost, time, and frustration to the due diligence and closing process. Savvy buyers view the due diligence phase as the beginning of the negotiations in an attempt to erode value agreed to in the LOI. Sequoia negotiates the major business items before accepting the LOI as a means to circumvent that strategy and to defend the value of your company through to closing.

An operating enterprise is a moving target, so what is really being sold? How is the working capital target determined and rationalized from LOI to closing? Who settles nontransferable outstanding bank advances? Does the company have redundant assets that should not be transferred? How are allowances managed for warranty expenses, obsolete inventory, bad debts, and extended or tainted receivables? How are unearned revenues factored into working capital calculations? What happens to operating versus capital leases? Short-term indebtedness versus long term debt? Inter-company transfers? These are just some of the issues that must be analyzed and documented well before the LOI phase to establish and defend the value of the company through closing. Failure to do so can ultimately result in a dramatic reduction of the negotiated purchase price at best, and a frustrated transaction at worst.

Global Target Market

For each client engagement, Sequoia creates a unique global market of buyers specific to the company we are selling. Identifying the maximum number of qualified buyers is key. The most probable buyer does not fall into a single category or profile. Who is most likely to benefit from the characteristics of your company? Is the principal value in your customer base, your people, or your geographical coverage? Mapping these benefits to prospective buyers will result in buyers that are not necessarily competitors. Opportunistic buyers may be better suited than those with an acquisition on their agenda. Lateral thinking at this stage pays great dividends.

Sequoia targets three different buyer categories for each marketing campaign we execute:

1. Strategic Buyers
Strategic buyers are companies that would gain a synergistic benefit from the acquisition of your company. Sequoia undertakes exhaustive market research to identify allied industry sectors whose member companies would benefit from a combination with your company. We mine numerous leading industry databases and internet sources for companies in those sectors. Sequoia’s worldwide reach stems in part from our continual investment in best-in-class market intelligence technology one might find in use at multinational investment banks and corporate finance groups. These industry specific tools enable us to determine the fit of potential strategic buyers as well as identify each strategic buyer’s acquisition history, transaction multiples paid for past acquisitions, and details on the company decision makers. The result of this research is a global market of strategic buyers to which we market your company. Sequoia’s engagements have produced unique target strategic buyer lists ranging from 100 to 500 companies. The list of strategic buyers created for the sale of your company is provided to you for review and approval before we launch our direct marketing campaign to the company CEOs, Corporate Development VPs, and other executives within each strategic buyer company.

2. Private Equity Groups
Private equity firms are professional investors that acquire companies using funds provided by institutions and other pools of money seeking a return from the investment in diverse business interests. Private equity firms broadly classify their investments as either “platforms” (typically companies with more than $5 million in EBITDA) or “add-ons” (typically companies with less than $5 million in EBITDA). Your company may have many attributes that are highly sought after by the private equity sector. Sequoia has direct access to approximately 2,400 private equity firms that are appropriate for mid-market transactions. We have successfully sold companies to private equity in past engagements and will directly target them in our marketing campaign for your company.

3. Sequoia’s Professional Network
Sequoia invests significant time and energy cultivating its network of professionals related to the “liquidity event”. We have connections with approximately 3,000 individuals locally and worldwide that are either mergers and acquisitions professionals in the field of investment banking, business succession, and tax planning, or are part of a community of business advisors adjacent to liquidity events such as corporate accountants, fractional CFOs, transaction lawyers, commercial bankers, and wealth managers. Whereas our Professional Network members are not the buyers per se, marketing to them results in direct connections to qualified buyers for businesses we have successfully sold in past engagements.

The following steps remain to close the transaction, a process that takes typically two to three months to conclude.

Due Diligence

When writing a letter of intent, the buyer’s commitments come with caveats that the closing of the pending transaction is subject to buyer verification. The time has come for the buyer to validate that what has been represented is substantially what is being bought. To facilitate, Sequoia will provide access to the electronic data room to enable select, time-limited access to the buyer and the buyer’s advisors engaged in due diligence.

Sequoia plays a critical role in managing the effects of change in the mindset of the parties during this phase. Although buying and selling a company is a business matter, it is one conducted by people. When a letter of intent is accepted, there is a distinct change in buyer behaviour — glasses once half full become half empty. The increased presence of advisors (accountants, bankers, and lawyers) can produce conflicting information and negative viewpoints. Maintaining momentum is crucial. Sequoia’s role now focuses on defending value, maintaining clear and direct communication flow between all parties, anticipating roadblocks and solutions thereto, and eliminating friction and mitigating emotions between parties adopting an adversarial stance. We’ve efficiently and successfully managed transactions with buyer deal teams of more than 35 professionals, including subgroups from strategy, finance, operations, real estate, environmental, insurance, HR, and legal. Until the transaction is done, the process remains a sales function and closing becomes the number one most important sales skill.

Momentum Management

Managing the flow of information is a full time job once there is an executed letter of intent and due diligence is underway. It is critical to have all information requested by the buyer catalogued and accounted for to facilitate a smooth and expeditious due diligence process. Sequoia’s electronic data room technology ensures that all documents and data that are accessible by the buyer are tracked from source of request through posting to the electronic data room to satisfy each due diligence item without redundancies that can cause significant delay, and in some cases, can derail the transaction. Our electronic data room technology enables real-time viewing of who on the buyer’s deal team is accessing what information and when. On a typical transaction managed by Sequoia, the information flow through our electronic data room amounts to gigabytes of data, not to mention thousands of emails, and countless phone calls, teleconferences, and meetings to coordinate the due diligence process — diligence indeed.

Assign Material Contracts

Most companies have valuable contracts with key suppliers, distribution channels, landlords, or customers that contain change of ownership clauses that require consent, explicitly or otherwise, to assign or transfer the contract to a third party (i.e. the new owner of your company). The realities of business dictate that the timing of these meetings be well thought out to ensure a successful outcome. Sequoia has considerable experience in the planning of these meetings and generally attends them with you and the buyer of the business.

Purchase and Sale Agreement

This is the final written agreement upon which your company is sold. The buyer’s lawyer initiate the agreement. Both sides need some caution with their lawyers at this stage. First, choosing an experienced lawyer that specializes in mergers and acquisitions is paramount. There are many facets of business law — those lawyers focussed on M&A transactions know the ins, outs, and nuances of business transactions and are a necessity for representing your legal interests in this matter. Besides the lawyer’s specific expertise, a good M&A lawyer will focus on closing the transaction, pragmatically find a way around problems, and think in sound commercial (and not purely legal) terms. Conversely, a poor lawyer inexperienced in mergers and acquisitions will find ways to unpick a good transaction through irrelevant distractions to the point where it becomes at risk of frustration or failure. We must agree with the buyer that both sets of lawyers are to be servants of the transaction and not masters of it.

The following is a description of the work we undertake pre-engagement, at our expense, to determine the fit of your company to our proven marketing process. These valuation methods calculate a financial value for your business. Sequoia takes on engagements where we are confident that we can beat the financial value in the market.

Opinion of Value Analysis

Sequoia will conduct a Preliminary Opinion of Value Analysis of your company. The opinion is an estimate of the range of the expected value to a financial buyer (i.e. a rational buyer seeking a return on the expected future cash flow of the company). The opinion provides the seller with a benchmark of the company value in the absence of exposing the company to an open market of strategic and private equity buyers. The opinion is not used as a “price tag” for your company. Instead, when a business is taken to market, its value is based upon what buyers are motivated to pay — creating competition for your company dramatically increases value.

Sequoia has developed its own proprietary financial modelling and forecasting tools that are customized specifically for mid-market companies and uses the following proven methodologies.

1. Iterative Discounted Cash Flow (IDCF) Analysis
IDCF is a rigorous and comprehensive methodology that optimizes the maximum price of the company to the seller subject to achieving the buyer’s financial return objectives. Value to a buyer is quantified by the true cash flow generated over an investment time horizon after satisfying the cash requirements of the five claim holders to the business cash flow: a) the Seller, b) the Buyer, c) the Business, d) the Lenders, and e) the Tax Authority. Determining the buyer’s true cash flow requires knowing the buyer’s post-acquisition capital structure, but the buyer’s post-acquisition capital structure cannot be known until one knows the company value. One does not know the company value until one knows the buyer’s actual cash flow.

This circular problem is solved through an IDCF analysis. An IDCF analysis repeatedly calculates complete pro-forma financials (fully projected income statements, statements of change in cash position, and balance sheets) until a value and a capital structure are found that satisfy the objectives of the seller and buyer.

2. Capitalized Earnings Approach
The Capitalized Earnings Approach seeks to determine the selling price of a company by capitalizing its normalized cash flow as a function of the cost of equity of the company. Such analysis involves determining the adjusted EBITDA of the company over a multiyear period, determining the cost of equity through consideration of industry coefficients for competition, risk, profitability, industry trends, ease of replication, barriers to entry, and the like, and computing the most probable selling price of the target company based on the product of the above.

Target Market Analysis

The success of Sequoia’s process is rooted in the saying that “Whenever you create competition for something you possess, the possession increases in value.” To create competition, we need to create a large enough number of global strategic buyers such that we are able to extract multiple offers from the market to purchase your company. Therefore, before engaging with any client, we conduct preliminary research of allied markets to your company to determine if a full market research would yield the desired size of target market for the marketing of your company.

If the Preliminary Opinion of Value Analysis and your selling price expectations are in sync, the Target Market Analysis is positive, and we are both comfortable working with each other, we will have the basis upon which we can enter into a Business Marketing Services Agreement.

Once a non-disclosure agreement is signed, Sequoia will touch base with you to ensure you are ok to share the Confidential Information Memorandum and financial information. If you have any concerns, we will probe deeper into financial capacity, intent, or valuation expectations before sharing information. Once you’re comfortable, we will share information through a secure electronic data room.

Secure Electronic Data Room: Real Time Access, Real Time Results

Sequoia will compile information about your company to prepare a secured electronic data room. Content of the data room anticipates all information a buyer will require during due diligence to validate the legal and financial condition of the company, its properties and assets, and other matters to satisfy the feasibility of the proposed transaction. After a letter of intent (see next section) has been mutually accepted, the content is posted to Sequoia’s secure electronic data room to enable access by the buyer and the buyer’s advisors engaged in due diligence — typically lawyers and accountants.

Access to the data room and its contents must be provided and controlled in a secure manner. For this reason, Sequoia continuously invests significant resources to maintain a state-of-the-art technology infrastructure to host our client’s data room materials.

Our data room technology enables Sequoia to set customizable user access settings to:

Customizable User Access Settings

Expire access to documents even after downloading

Restrict saving, printing, copying

Track and audit document and user activity

Revoke documents remotely

World Class Security

Leading 256-bit AES SSL/TLS encryption technology

Two-factor password authentication

Internationally recognized security compliances (SOC 2, HIPAA, SAS70 Type II, CSAE3416)

Physically secure data storage with biometric safeguards plus multiple firewalls

The product we sell, your company, is high value with a complex sales cycle involving multiple decision-makers, gatekeepers, advisers, and influencers. When selling a company, professional sales expertise is a must. Sequoia M&A specialists are seasoned sales professionals with proven track records in strategic deal making.

1. Active Marketing
We actively market the value drivers of your company through a competitive sales process. Passive marketing yields sub-prime results. Mid-market businesses do not sell themselves. We have no interest in engagements where we cannot add value to the transaction. We embrace the challenge of proactively creating a unique, global market of buyers for your company that place a premium on its value.

2. Attention to Detail
What matters is closing. Closing demands attention to 100% of the details. Packaging your business, defining a market, qualifying buyers, anticipating problems, negotiating the best terms, defending value, managing deal momentum, mitigating emotion, and sweating the details. These are some of the skills we use to find the best buyer and guide the transaction across the finish line — to close the sale of your company.

3. Buyer Competition

Whenever you create competition for something you possess, the possession increases in value. Creating a market to foster buyer competition is the most effective way to maximize your company’s value and discover the most capable buyers in terms of:

• Valuation. In the presence of competing parties, buyers are motivated to raise their valuation to the highest end of their range for reasons that are as unique as their company strategies.
• Momentum. Nothing motivates buyers to keep the transaction on pace than the knowledge of competing parties.
• Terms. Cash at closing, vendor financing, capital structure, target working capital, transition support, exit timing, etc., are all influenced by competition more than anything.
• Cultural Fit. The presence of multiple competing buyers facilitates the seller’s ability to evaluate and select the buyer with the ideal cultural fit to succeed in the future.
• Equity Participation. Certain buyers would prefer that ownership rolls over and retains a minority equity interest in the company post-sale or that key management be afforded the opportunity to participate along side the purchaser. A well managed competitive process leads to the optimal determination of equity rollover and participation terms.

4. Preserving Confidentiality

Guarding the confidentiality of the sale process from suppliers, competitors, employees, and others is essential to preserving value. Yet, there is an apparent incongruity between the wide exposure of your company to a global market of strategic and private equity buyers and the absolute need to protect the confidentiality of it being for sale. Confidentiality is second nature to Sequoia’s professionals — it’s in our DNA. We understand it’s the lifeblood of sustaining a successful transaction. We know what information to disclose, when to disclose it, and to whom to disclose it, in order to preserve the confidentiality of the sale of your company. Furthermore, we coach our clients on responding to inquisitive parties, either internal or external, should our clients be unexpectedly confronted about a possible sale of the company.

Sequoia will conduct guided interviews with you to understand strategies, policies, and procedures of the company, including competition, marketing, sales, distribution, customers, territories, administration, manufacturing, engineering, customer service, human resources, financial matters, information technology and security, process control, intellectual property, and the like. The pool of information gathered enables us to prepare two essential sales documents before taking the company to market — the Anonymous Business Profile and Confidential Information Memorandum.

1. Anonymous Business Profile (ABP)
The ABP or “teaser” is a one-page data sheet used in the early stages of buyer contact. It highlights the fundamentals of your company and sells the benefits of your company’s unique characteristics to buyers without identifying your company name, location, or other company characteristics that you deem confidential.

2. Confidential Information Memorandum (CIM)
The CIM is a comprehensive book that conveys an individual expression of the unique characteristics of your company. It is provided only to parties that have been qualified, signed a nondisclosure agreement (NDA), and have been approved by you prior to being sent. The focus is the benefit of your company to prospective buyers. The goal is to engage the buyer in discussions about your company in the context of combined resources (merged operations, new capital investment, etc.) with the buyer. Whereas it discloses financial information of your company, it is not exhaustive. Details are deferred until due diligence, after a commitment has been made by the buyer to acquire your company. The contents of a typical CIM include:

Company Overview

• Company History and Timeline
• Ownership Structure
• Business Lines and Sources of Revenue
• Facilities
• Company Strengths and Weaknesses
• Market Opportunities and Threats

Financial Analysis

• Summary of Company Financials
• Income Analysis
• Normalized EBITDA
• Balance Sheet History
• Working Capital Analysis
• Capital Expenditure Analysis
• Marketing and Sales Analysis
• Target Market Analysis
• Geographic Market Analysis
• Sales and Promotion
• Pricing Strategy
• Competition

Human Resources Overview

• Organization Structure
• Summary of HR Status
• Key Employee Review
• Status of Existing Contracts
• Management Transition

Comprehensive Email Campaign

Initial contact with prospective buyers starts with a series of comprehensive email campaigns. Sequoia invests continuously in highly customized campaign management technology to initiate, monitor, and control the distribution of the Anonymous Business Profile to the target market. The campaign management technology uses the most up-to-date methods for negotiating corporate firewalls, spam filters, and other email suppression techniques to ensure maximum penetration of the target audience while complying with anti-spam legislation. For each deployment, our campaign management system delivers real time notification of metrics on emails opened, links clicked, emails bounced, blocked, and unsubscribed.

The initial campaign generates a large number of parties that have further interest in the opportunity. After a review of the Anonymous Business Profile, buyers with a bona fide interest sign a nondisclosure agreement (NDA) protecting the confidentiality of all subsequent communications and information transfer. All prospective buyers are qualified to determine their motivation, fit, and expected valuation range to consummate the purchase of your company prior to any detailed information being shared.

Target Market Penetration

We actively monitor the progress of the initial and all subsequent email campaigns. Within the strategic buyer segment, we strive for 100% contact with the CEOs, Corporate Development VPs, and other executives within each strategic buyer company. For each company that did not respond to the initial email campaign, we initiate direct contact by telephone with supplemental email campaigns. Armed with background knowledge about the company and its executives obtained from our market intelligence technology, we determine the buyer’s level of interest to acquire your company and focus on the benefits that could be derived in combination with the target strategic or private equity buyer.

Buyer Engagement and Selection

Subject to your approval, qualified buyers under NDA are provided the Confidential Information Memorandum. Following further discovery and qualification, each buyer is introduced to you in a controlled set of conference calls, meetings, and management site visits. It is during this stage that we assert a compelling commercial thesis to each buyer that emphasizes the added value represented by your company within the framework of their operation or ownership. Likewise, we provide guidance of the range of expected commercial terms for a successful transaction.

Sequoia’s sales process causes an effective auction that has resulted in 3 to 8 bona fide letters of intent to purchase our client’s companies. That not only increases valuation, but affords choice of who our client sell to and the terms upon which they want to sell. That is important because when you sell your company, you have a vested interest in its continued growth and success since you may retain a minority equity interest in the company, hold a vendor note, or perhaps be landlord to the new owner of your former company. Not to mention that you want to sell to the party that is both a growth partner for your company’s management team and is a responsible steward of your company’s culture, its brand, and its legacy.

After you have chosen the preferred buyer, the next step is to negotiate a Letter of Intent (LOI).

With a sole focus and a long history of success in sell-side M&A, there are a number of benefits to working with Sequoia.

1. Return on Investment
We have sold our clients’ companies for significantly higher than expected and are happy to provide client references to substantiate this statement. We are committed to getting you the most possible for your company, while securing the best terms.

2. Experienced Specialists
Would you rather have your surgery done by the promising young intern or the specialist doctor that has been practicing for many years and dealt with multiple unforeseen complications that can arise in the operating room? Would you rather fly to Singapore on a flight commanded by the recent flight academy graduate or the veteran pilot that has 10,000 hours of flight time and hundreds of legs in varying conditions of weather and mechanical related uncertainty. How about selling your company? For more than fifteen years straight, Sequoia has flawlessly executed the same process year-after-year — the sale of privately-held companies like yours. Fifteen years of encountering the unexpected. Fifteen years of honing best practices. Fifteen years of success. Experience is knowing and doing. That’s why.

3. Success
Since our inception in 2007, we have achieved an unwavering degree of success for our clients. We have repeatedly proven that the consistent rigour of our process leads to successful outcomes.

4. Choice

Our sales process creates an effective auction that has resulted in 3 to 8 bona fide letters of intent to purchase our client’s companies. That not only increases valuation, but affords choice of who our client sell to and the terms upon which they want to sell. A good cultural fit is important because when you sell your company you have a vested interest in its continued growth and success, since you may want to retain a minority equity interest in the company, you may hold a vendor note, or perhaps you’ll be landlord to the new owner of your former company. Not to mention that you’d rather sell to a responsible steward of your company’s employees, its brand, and your legacy.

5. Skin in the Game

Sequoia’s business model is built to get the best deal for your company (price, terms, and fit) in the shortest time frame. If we can’t add value to the sale of your company, we won’t take the engagement. We represent select opportunities we are confident we can close, which is when we earn our keep. Since our fee structure is contingent upon the sale of the company, your fee risk is minimized until the sale completes – that aligns our objectives with yours.

6. Creativity

Are we process oriented? Absolutely. Are we technology driven? Very much so. Cookie cutter? Definitely not. Selling a company is a process that requires tons of creativity because companies are like living organisms — they are constantly changing in response to stimuli in their environment. To paraphrase Terry O’Reilly, large groups are okay if you’re Amish and you’re building a barn. Creativity, on the other hand, is a problem solving pursuit for a small team of smart people. Creativity should never be clouded by the politics of large companies or smothered by corporate agendas. Big groups are excellent at implementing a creative idea. They’re just not good at coming up with them. As G.K. Chesterton once said, “I searched the parks in all your cities, and found no statues of committees.”

7. Independent

Like you, we’re entrepreneurs and continue to make our own way, as we have for all of our careers. But it’s more than just being a self-directed businessperson. In our business, being independent means being free of any and all conflicts of interest. As an independent firm that is exclusively dedicated to selling your company, our sole duty is to promote and protect your interests, free from any conflicts that might arise if we were part of an accounting firm, bank, or financial institution.

8. Focus

Above all else, selling and negotiating are collaborative efforts in problem solving. One of the things that differentiates Sequoia is that we approach our craft as professional salespeople and negotiators. The task at hand is to sell a product called your company. While we are proficient in accounting, corporate finance, and business law, we assume you would no more hire your accountant, banker, or lawyer to sell your company than to sell your company’s products or services. Successful M&A professionals do not take an us-versus-them approach when selling a company. Our employers own the companies we sell. Our customers buy them. Satisfying the needs of each maximizes value for both. While our fiduciary duty is to you, we strive for two stellar references at the closing of each transaction.

9. Peace of Mind

In short, this means we’re licensed to sell companies. Sequoia Mergers & Acquisitions holds valid Brokerage and Managing Brokers licenses under the applicable Acts in the jurisdictions we operate. and as such we: (i) Maintain Errors and Omissions Insurance; (ii) Uphold our Fiduciary duty along with our ethical, common law, and statutory duties; (iii) Are bound to the duty of perpetual confidentiality; and (iv) Maintain government audited Trust Accounts.

Return on Investment
Independent studies have shown that sellers who did not engage an M&A professional ended up with less for the sale of their company. Why? The answer lies in the maxim “Whenever you create competition for something you possess, the possession increases in value.” Maximizing your return is reason enough to use an M&A professional, but here are some additional things you need to consider.

Buyers are More Sophisticated than Sellers at M&A
Our client’s companies are typically sold to strategic buyers and sometimes private equity firms. These entities are the “bigger fish” in the food chain and experienced in the process of acquiring companies like yours. Wading alone into uncharted waters is dangerous and extremely expensive.

Selling is a High Stakes Game with No Second Chance
Selling a company is unique. It is a complex mix of critical responsibilities including guarding confidentiality, engaging key employees at critical junctures, precisely timing the release of information, selling strategic value, negotiating to balance the interests of the seller and the success of the transaction, among many others. The uniqueness is compounded by the fact that when a company goes on the market and the sale doesn’t close, it becomes “damaged goods”. Potential buyers have long memories which means the current market value of the company will remain depressed for many years to come. With no second chance, getting it right the first time is paramount. Choose carefully your M&A team to execute a proven process to successfully sell the most valuable asset you possess.

Every Deal Dies a Thousand Deaths
During the sale, which lasts for many months, facts emerge, situations arise, and positions change — this threatens the basis for completing the transaction. The prospect of the sale collapsing is a burden most sellers cannot withstand on a repeated basis and usually results in capitulation to the buyer’s demands. M&A professionals are trained to be “committed but not attached” to the transaction’s success, enabling effective out-of-the-box problem solving.

He Who Represents Himself has a Fool for a Client
Related to the parable of a thousand deaths, this saying borrowed from the legal profession is unequivocally applicable in the sale of a company. Sellers have a huge financial stake in the outcome of the transaction. When acting alone, the seller’s emotional attachment to the outcome does not afford the space and time during negotiations needed to consider proposals and advance positions.

Speed Kills
Too often the instinct of the seller acting alone succumbs to the pressure of the deal and looks for a quick close. They see a small light at the end of the tunnel and want to get the transaction over quickly. Invariably, the quick decision surrenders value and many other important terms which could have been preserved through objective negotiations.

Transaction Failure
When sellers act alone in the sale of their companies, more than 50 out of every 100 sales collapse and fail to close. The buyer’s intentions were not properly qualified, some key facts about the company were not disclosed early enough in the process, some fundamental business terms were not clearly defined, some key employees thwarted the process, or the transition of material relationships were improperly handled. There are a litany of reasons deals go off the rails when the parties entering the transaction do not plan carefully and fail to anticipate roadblocks in advance.

1,000 Hours to Close a Sale
Successfully closing the sale a mid-market company takes 800 – 1,000 hours of focussed effort. Without the help of an M&A professional, that means devoting more than 80% of your time over the better part of a year to sell your company. That’s a risky, if not impossible proposition, especially when the chances of closing (and becoming “damaged goods”) are far less than 50% without a team of M&A professionals.

Confidentiality
Knowledge of the company being for sale is an inalienable right of the seller and must be protected from suppliers, competitors, employees, etc. In our experience, however, the number one (and vastly inordinate) source of confidentiality breaches comes from the seller of the company. There is no explanation for it other than human nature. M&A professionals, on the other hand, have confidentiality in their DNA — it is the lifeblood of sustaining the transaction and M&A professionals know how and when to respond to the inquisitive and coach their clients on necessary vigilance.

We’re seeing it happen more and more recently, a strategic buyer or a private equity group directly contacts the owner of a business and wants to buy their company. For many business owners, this seems like a dream come true. They think “a company that I don’t even know wants to buy my company and the valuation they’re talking about sounds great”.

Why the recent surge in unsolicited offers?

There are two contributing factors. First, corporations have more cash on their balance sheets as a proportion of total assets since the 1960s. Second, private equity firms have more than $1 trillion in dry powder — cash that must be deployed in advance of its “best before” date — the date when the money must be returned to the private equity fund’s investors. In other words, there is an ocean of money looking for return and where better to find return than acquiring a good company?

So, whether you’re interested to sell or looking to buy, be assured your company is on someone’s radar.

Even if you’re a few years away from selling, it’s important to note that a recent study of succession trends by UBS, found that about 50% of business owners exit not because they want to sell, but because they have to sell, and a leading catalyst of the “have to sells” was an unsolicited offer.

So, what should you do when you receive that call?

Until you get the call from the unsolicited buyer, you imagine that your normal, rational, decision-making self will handle the situation in the same pragmatic way that you’ve managed all the other big decisions that have got you to where you are today. Granted, it is flattering to visualize the monetized value the party has offered for your lifelong investment. But is what you think you see in the offer what you will really get in your pocket? Could you get a significant amount more if there were other interested buyers at the table?

Stated another way, there are two issues working against you. You only have one interested buyer and you are thinking that you can save some money by going ahead on your own.

Issue #1: When you have one buyer, you have no buyers.

The companies that will approach you are the “bigger fish” in the food chain and are experienced professionals in acquiring companies like yours. After you’ve been enticed to sign an exclusive letter of intent, the pressure is dialled up in their favour because you’ve surrendered all your negotiating leverage. You feel outmatched and you may even want out of the deal, yet the prospect of the sale collapsing is a burden that you, acting alone, cannot withstand on a repeated basis. This often leads to capitulation to the buyer’s demands.

What demands? For a start, working capital — how much stays with the business after the sale? In our experience, very few people, advisors included, can accurately determine and defend the correct amount of working capital to be included in the sale. Failing to do so correctly can cost you hundreds of thousands if not millions of dollars.

What else? Maybe it turns out that the attractive initial price included a lot of bells and whistles, such as large and extended earn-outs (the realization of which is based on dubious metrics that will be derived from accounting methods they control after the sale), vendor take-back notes, extended employment contracts that keep you in your current capacity for several years — the list goes on an on.

It may be worth asking yourself, “if this group is interested in buying my company, who else might be?” The main reason most business owners don’t go there is because they worry it will scare their buyer away. Evidence, however, does not support that line of thinking. If your buyer would walk away because of the presence of other interested buyers, your buyer is probably not willing to buy your company for market value. Perhaps another reason business owners don’t go there is because they can’t imagine who other interested buyers might be. The reality is there are likely multiple buyers that would be interested in buying your company, you just don’t know how to find them. Besides, how would you approach them if you did?

In each of our engagements, we’ve identified and reached out to hundreds of potential strategic buyers globally and we solicit about 2,500 private equity firms as well. However, there is more to it than finding buyers — preserving confidentiality, attracting interest, timing disclosure of sensitive information, obtaining multiple letters of intent, negotiating the most favourable terms, and closing the sale are all things that lead to a successful outcome.

Issue #2: You’re thinking of going it alone.

When sellers act alone in the sale of their businesses, more than 50 out of every 100 business sales collapse and fail to close. Some of the causes might be the buyer’s deliberate act of not clearly articulating their intentions in the LOI, some key facts about the business were not disclosed by you early enough in the process, some key employees thwarted the process, or the transition of material relationships with third-parties were improperly handled, to name a few.

More importantly, however, you as the owner have a huge financial stake in the outcome of the transaction. Like others acting alone, your emotional attachment to the outcome does not afford you the objectivity during negotiations to clearly comprehend the effect of what the buyer is proposing, nor how to advance your position. Beyond negotiation of the letter of intent, the litany of issues you will face when the buyer and their advisors dig deep in their due diligence will evoke strong emotional desires to satisfy yourself in ways that are inconsistent with what you believe you should do. Not to mention you still have a business to run, the value of which is likely eroding as you continue to struggle with the transaction.

Too often the instinct of the seller acting alone succumbs to the pressure imposed by the skill of the other side. The seller’s lack of knowing what is normal or what is “market” makes decision making difficult, since there is no frame of reference for what is or should be acceptable. This causes the distressed seller to look for a quick close — they see a small light at the end of the tunnel and want to get the transaction over quickly. Invariably, the quick decision surrenders monetary value along with many other important terms which could have been preserved through objective negotiations. Speed kills.

What owners need is a lightning rod — they need a seasoned M&A team on their side that is trained to be “committed yet unattached” to the transaction’s success. Smart negotiators know that being cornered into making decisions while at the table with the other side is costly. Deferring a conclusive position to people away from the table (i.e. you, the principal) avoids being pinned down, thereby enabling effective out-of-the-box problem solving while achieving a more favourable end result. Having this buffer during the sale process also enables the buyer and seller to maintain an amicable working relationship after the transaction has closed.

Selling a business is a complex mix of critical actions: guarding confidentiality, engaging key employees at critical junctures, precisely timing the release of information, selling strategic value, negotiating to balance the interests of the seller and the success of the deal, among many others. The situation’s importance is compounded by the fact that when a company goes on the market and the sale doesn’t close, it becomes “damaged goods”. Typically this causes your company’s market appeal to diminish and therefore its market value to remain depressed for many years to come. With no second chance, getting it right the first time is paramount.

When thinking of going it alone, remember — independent studies have shown that sellers that did not engage a professional M&A team ended up with less for the sale of their business. Why? The answer lies in the maxim “Whenever you create competition for something you possess, the possession increases in value.” Wading alone into uncharted waters is dangerous and extremely expensive.