Selling a Small Business Part 3 – What is the M&A Process?

So you’ve made the difficult decision to sell your business. Now comes the fun part – putting up the “For Sale” sign. There are many steps in the merger & acquisition process, and more considerations to make in each step.

In part three of our SELLING A SMALL BUSINESS Series, Candace Enman, President of Welch Capital Partners, will take you through the merger and acquisition process.

View the Vlog:

So What’s Next?

I guess the first thing is to decide whether you want to do it on your own or engage a professional advisor.  Obviously, I’m biased and believe there’s a lot of value in having someone manage the sales process, but also recognize that some transactions are more complex than others.

Advisors can really add value, when owners want a competitive process, they value the expertise of negotiation and the deal structuring and understand the importance of keeping their focus on running the business.

What does a competitive process look like and how do you create it?

We definitely have a process we follow, but it’s never quite linear, as you can imagine. 

An M&A engagement will always start with us getting to know the client.  Why do they want to exit, what would constitute a good exit (valuation, structure – share vs assets, do they want to exit completely, would they roll over equity, are they open to an earn out, etc. – as well as what is the result they would like to see for the company and its employees).

Realistically, many of these points are all questions owners could be flushing out with their advisors even before entering into an M&A process.  I recently spoke to an owner who wants to exit and his Wealth Advisor did a preliminary valuation of the company for planning purposes. 

As you well know, we do this for our clients as well. I am curious how you leverage that information.

Fair Market Value (FMV) can really only be determined in the open market, but it helps immensely if owners are proactive in understanding their company’s worth as it helps them set reasonable deal expectations.

If I can just wrap up the planning stage of a competitive process, we too are trying to understand the financial health and valuation of the business as well as their operational and growth opportunities, all while identifying who could form part of a buyer pool. 

Once we know the business and market, we would then prepare our marketing materials, starting with a teaser – a one-page “highlights” of the company that we would send to the buyer pool and then our pitch deck or confidential information memorandum or CIM to our qualified buyers. 

At this point, we will have internally assessed the value of the company and created our data rooms for the due diligence process.  Our objective at this stage is to manage the timing of when we go to market, with the hope of bringing multiple offers to the table simultaneously.

This is not an easy thing to do, as buyer interest can shift over time and it’s a mystery.

From there, we would select an offer, assist the Company with due diligence, ensure the purchase agreement is in line with the agreed terms of the deal and manage the close.

Typically how long does it take to close a deal?

Typically, it would take on average 6-9 months to close a deal.  But did I mention there can be a lot of bumps in the road?

I believe you did.  What if you’re an owner and you’ve been approached to sell?

Welch has been providing M&A services for 6 years now, and we have never seen a crazier market.  So many search funds appeared. Countless companies with excess cash want to grow via acquisition as the number of distressed companies increase and private equity funds that have excess capital and need to invest. 

So, if you are an owner that has been approached to sell, that is fantastic! I would just say know your options and do some homework with your advisors to understand if it is a good deal.

If we’re engaged in this scenario, we’d want to determine that the offer is fair and at market, and figure out if we should create a competitive process.  Otherwise, our process would not change. Finding a buyer is not the hard part of a sale, it is everything in between and getting the deal to the finish line.

When do you share the news with employees or do you advise against that?

I think you have to share it with a few key employees, but timing is important. 

Realistically most owners would be relying on their CFO’s or Accountants to help gather a lot of the financial information and I would suggest bringing them in sooner rather than later.  As well depending on the size of the company, the senior leadership team should be brought in, specifically when a letter of intent is signed.

Each situation is different, so our recommendation would not be a boiler plate response.  An owner needs to consider who will be the champions for the business sale pre and post exit.

You mentioned, getting a Letter of Intent (LOI) is a key milestone/inflection point of bringing in the team.  What else should owners be considering at this stage?

Realistically a lot of the deal negotiation and deal structure is done before or at the LOI stage, as we’re addressing valuation, possible earn-outs or financing arrangements, working capital adjustments, timing, all up front.

Pre LOI my advice is twofold:

  • Get your house in order, as due diligence can be a beast and you don’t want a buyer to be scared off at this stage (but if we’ve done our job well, that won’t happen).
  • Ensure you’ve done any necessary tax planning well in advance if you want to use your LCGE or at a minimum understand what you’re leaving on the table if a buyer is purchasing your assets vs shares.

Post LOI, I would say owners + their teams simply need to support the due diligence.  And of course, figuring out where you want to protect & spend the wealth.

View the entire selling a business series here

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