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ORDER OF OPERATIONS
For sellers -- especially first-time sellers -- the M&A process is sometimes frustrating, often confusing, and virtually always more drawn out than they anticipate. To avoid feeling that the whole project has slipped out of your control, it's extremely valuable to understand how the M&A process typically unfolds.
True, there is no single, set sequence that all sellers follow in their M&A deals. Each transaction is different: Some will involve a letter of intent (LOI), while others will only have a merger agreement. Sometimes there are negotiations with various parties and, yes, sometimes there is only one bidder.
Nevertheless, most deals proceed along similar lines. For example, the letter of intent must precede the merger agreement, not the other way around. Fortunately, it is possible to sketch out a general order of operations that most sellers are likely to follow. The following outline should provide you with your bearings -- but remember, it's intended as a loose guide rather than a rigid schedule.
Some of these steps can occur in a different order than presented here, and some can occur simultaneously.
MAKE THE DECISION. This is the first moment of truth, the culmination of all your soul-searching and consultations. Perhaps you've discussed the matter with some of your shareholders, top managers, and even your family -- stressing the need for confidentiality, of course. You have consensus, and you're committed to following through. (See page 12, "Making the Decision: Why Sell" for a discussion of the motives for selling.) Now you start telling people, in an appropriate order, about your decision (see the "Informing Others" section).
HIRE A BROKER (OR INVESTMENT BANKER). Some owners wait until they've done some preparatory work on the company before taking this step, but it's a good idea to get a broker (or investment banker for big-ticket deals) involved to help you figure out what needs to be done to bolster the company's value in the eyes of a potential buyer. A good broker should be able to tell you how long it will take to make your business shipshape for the best possible deal. The broker gives you a proposal of what steps he'll be taking. Many times, they'll put together a pitch book -- a document you can send out to potential buyers. So when you're looking for a broker, ask to see some of the books they've done.
HIRE AN ATTORNEY (AND CPA). Even if you have in-house counsel, a corporate attorney is not the same as a deal attorney. It's wise to hire a lawyer specializing in M&A as early as possible. You need to know what information you should give out to potential buyers, for example, and the attorney will also offer useful real-world advice. The preliminary consultation needs to be only three or four hours. (You'll start racking up the billable hours later.) Some brokers are also attorneys, but there is more objectivity if you go to a different professional.
As for the accountant, the one you already use is fine, assuming it's an independent, third-party firm. But if you have had your accounting done in-house, then you need to hire someone outside.
VALUATION. This is optional -- some owners opt out of this step entirely. For example, a lot of smaller companies in fluid, less efficient markets, where valuations are all over the dial, decide against it. Public companies, and larger companies using investment bakers, usually have to perform a valuation. For some others, valuation is performed on a regular basis, perhaps once a year. For entrepreneurs who have an inflated sense of their company's worth, a third-party valuation is a very useful reality check, which ultimately helps them.
GET YOUR HOUSE IN ORDER. With the help of your broker, you're ready to start "corporate cleanup." (See the section "Corporate Cleanup" in this chapter for a thorough discussion.) By now, you've started to hear about some issues you hadn't considered -- what about that lawsuit? or that other licensing problem? Your goal is to take care of problems and ensure that the company's affairs are in good order. So this is when you go to your accountant to discuss your books and to your (outside) lawyer to address licensing deals, articles of incorporation, and so on. This is also when you want to figure out what kind of deal is best for you -- what type of transaction is best for your company, given its unique circumstances, and what impact it will have on your tax situation. (See chapter 5.)
FIND THE BUYER. Finally, the real fun begins. Well, not so fast: Even before putting the word out and soliciting bids, you need to have done some research. First, to ensure you get the best price, you want to know more about your industry than you ever have before. For example, how does your company's valuation stack up against your competitors? Brokers often help owners conduct some of the research that the owner doesn't know how to do. This is when you and the broker actively seek a potential buyer. Hopefully, your broker already has some warm leads to go to -- but make sure he goes further than just that.
PRELIMINARY NEGOTIATIONS. You hold in-person meetings with parties interested in buying your business. Here it's fairly easy to weed out any unsuitable potential buyers. Many issues are discussed -- price, deal structure, financing considerations, and everything else relating to the deal. You might even end up with an "auction" between two or more bidders. (See chapter 4.)
LETTER OF INTENT (LOI). Once you and the buyer have settled on a price, you sign an LOI -- even if the details aren't thoroughly worked out. The LOI often stipulates "pending due diligence." Although LOIs are usually not binding—especially concerning the price—some clauses will be binding, such as a covenant not to shop the deal or to disclose confidential information. This is a very critical document, and having a sharp attorney goes a long way toward protecting your interests.
DUE DILIGENCE. You will be spending a lot of time with the prospective buyer as he conducts due diligence on your company. Negotiation is still going on, and the buyer will have loads of probing questions based on the due diligence. You will have to "open your kimono," as we say, and this is usually not fun for the seller. At the same time, it's key that you conduct some due diligence on the potential buyer. It probably won't be as rigorous as the process applied to you, but it is crucial, especially as it pertains to a deal that involves stock. After you have spent a big chunk of your life building your company, the worst thing that could happen would be to sell it to a fraud -- and lose everything. (See chapter 6 for a full discussion of due diligence.)
SIGN MERGER AGREEMENT. This is where the deal is made official. The merger agreement is the generic term; the actual document is more likely to be an asset sale agreement or purchase agreement. Sometimes the seller must receive shareholder approval before the document can be signed. After the signatures, there is usually an exchange of certificates, for cash or other forms of assets.
POSTDEAL INTEGRATION. After the transaction, there's an all-important transition period, and the seller is often obliged or encouraged to play a role. In fact, many deals contain earn-out provisions whereby the former owner has a financial stake in the continuing performance of the company. Also, nowadays it's quite common for a seller to partially finance the deal by floating a loan to the buyer. Also, some deals stipulate the seller will stay on as a consultant for a certain amount of time. It's not always the case that a seller can simply wash his hands and walk away with the pile of cash. (See chapter 8.)
