HOW WE SELL YOUR COMPANY
You are our employer, so its best we get to know one another to be sure the chemistry is right. Before entering into an engagement, and before any fees are paid, we want to be sure that your company and Sequoia's proven process are a fit. Toward that end, it is important that: (i) your selling price expectations are in sync with financial and market realities; and (ii) we can create a large enough target market of strategic buyers to which we will market your company.
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.
Opinion of Value Analysis
Sequoia will conduct an Opinion of Value Analysis of your company. The Opinion is an estimate of the range of the expected value of the company 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 and creating competition for your company will dramatically increase its value.
Sequoia has developed its own proprietary financial modelling and forecasting tools that are customized specifically for the mid-market and use 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; and 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 the 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 company’s Cost of Equity. Such analysis involves: (1) determining the adjusted EBITDA of the company over a multiyear period; (2) determining the cost of equity through consideration of industry coefficients for Competition, Risk, Profit Trend, Location & Facilities, Marketability, Industry Trends, Ease of Replication, Barriers to Entry and the like; and (3) 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 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.
STEP 1 - PREPARE MARKETING CAMPAIGN
Each company Sequoia sells is unique. Its people, products and services, business model, industry, competitors, and value proposition are all different. Likewise, the market of potential buyers that will pay the highest price for a company while representing the best cultural fit is also unique. For that reason, the marketing campaign we undertake to sell each company is custom tailored. To prepare a successful marketing campaign for your company, we will: (i) gain a thorough understanding of the company so we can clearly communicate its benefits through the marketing materials we develop; and (ii) create the broadest target market of potential buyers that will place a premium on your company’s value.
Custom Marketing Materials
Sequoia will conduct guided interviews with you to understand strategies, policies, and procedures of the company such as: 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: (1) Anonymous Business Profile; and (2) 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 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 commitment has been made by the buyer to acquire your company. The contents of a typical CIM include:
Business History and Timeline
Business Lines and Sources of Revenue
Company Strengths and Weaknesses
Market Opportunities and Threats
Summary of Company Financials
Balance Sheet History
Working Capital Analysis
Capital Expenditure Analysis
Marketing and Sales Analysis
Target Market Analysis
Geographic Market Analysis
Sales and Promotion
Human Resources Overview
Summary of HR Status
Key Employee Review
Status of Existing Contracts
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, 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 the same class of market intelligence technology found in use by multinational investment banks and corporate finance groups. These industry specific tools enable us to determine the fit of potential strategic buyers as well as to identify each strategic buyer’s acquisition history, transaction multiples paid for past target 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 or other pools of money seeking a return from the investment in diverse business interests. Private equity firms broadly classify their investments as either “platforms” (companies with EBITDA from $5-10 million or more) or “add-ons” (companies with EBITDA from $1-5 million or more). Your company may have many attributes that are highly sought after by the private equity sector. Sequoia has direct access to approximately 2,300 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 1,400 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, 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.
Secure Electronic Data Room - Real Time Access, Real Time Results
Sequoia will compile information about your company to prepare an 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 itself of 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 clients’ 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.
STEP 2 - GO TO MARKET
Once your company’s marketing campaign is ready for launch, there will be approximately 2,500 targets to which the opportunity is exposed. Sequoia’s marketing is about much more than just exposure, however. It is a direct sales process to each party in the target market. The rigour of each campaign strives for: (i) extraction of the maximum value the market is willing to pay for your company; and (ii) identification of companies with the best cultural fit to acquire your company.
Comprehensive Email Campaign
Initial contact with the 2,500 or so targets 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 realtime 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.
Subject to your approval, qualified buyers 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 deal.
Sequoia’s sales process creates an effective auction that has resulted in 3 to 8 bona fide letters of intent to purchase our clients’ companies. That not only drives valuation upward, but affords you choice of who to sell your business to and the terms upon which to sell it. 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).
Negotiate Letter of Intent
It is important that the chosen buyer is made aware that, whereas they may be granted some degree of temporary exclusivity, we have not rejected the other buyers at the table; nor have we severed relations with them. To do so would ignore 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 warranties and indemnities are to be 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 at a later point surrenders negotiating position 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, 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.
STEP 3 - CLOSE THE SALE
The finish line is in sight, this should be pretty straightforward, right? Fact is, we're only halfway there and this is where the rubber meets the road. Somewhere between now and closing, your conviction to sell will be severely tested. Why? As soon as the Letter of Intent is signed, for the first time since you've owned your business, you won't be in total control. And the longer and deeper the due diligence is, the more stressful life becomes. Like we warn all of our clients before starting the process – “at some point you are going to lose your marbles” – and this is the time when it will happen. Not to worry though, it's normal, it happens to everyone. Expectation management is a valuable tool in closing sales.
The following steps remain to close the transaction; a process that takes typically two to three months to conclude.
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 an LOI 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.
Managing the flow of information is a full time job once there is an accepted Letter of Intent in place 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 comapnies 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 initiates 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: (i) focus on closing the transaction, (ii) pragmatically find a way around problems; and (iii) 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.
Sequoia’s role at this stage is to: (1) Coordinate the activities between the parties and their lawyers; keep all parties focussed on the “finish line”, especially considering the emergence of matters of dispute; and (2) intermediate on business matters that arise during the drafting of the final Purchase Agreement.
Our job is complete when the transaction closes.