Scott Hasley

Tuesday, 25 May 2004 06:56

The M&A process

Many business owners spend years deciding whether to sell their company, then expect instantaneous outcomes once the decision is made.

To achieve a premium valuation and find the optimal buyer, consider hiring an investment banker who can explain the transaction alternatives and strategies, provide objective advice and manage the M&A process.

While the process proceeds, the most important thing owners can do is continue running the business as though they plan to own it forever. Nothing motivates a potential buyer to close quickly like a business that continues to outperform its projections.

Recognize also that not all processes run smoothly and according to plan. Buyers can and do change their minds, and financing can get delayed or rejected, even up to the last minute. However, the M&A process is a series of key steps that, on average, takes six months to complete.

  • Prepare the offering memorandum. It generally takes four to six weeks to prepare one that reflects all of the attributes of a business. During this stage, an investment banker will prepare and qualify a list of the most logical buyers, all of which are reviewed and approved by a company's owner and usually its senior management.

  • Distribute the memorandum. The investment banker will then begin soliciting interest from the list of approved buyers, require interested buyers to sign a confidentiality agreement, then distribute the offering memorandum.

    Interested buyers generally have three to four weeks to review it and submit a written indication of interest outlining the price range they would be willing to pay for the company and how they would address key issues such as due diligence, financing, management retention and speed to close.

  • Conduct management presentations. A well-run process could take two to three weeks and yield several indications of interest. The owner and management team, together with the investment banker, narrow the field to five to 10 buyers who will be invited to tour facilities, hear a management presentation that highlights key information and have an opportunity to query management.

  • Submit letters of intent. Selected bidders will be given two to three weeks to submit letters of intent, in which they must specify the final and best price they are willing to pay for the business and explain details of the transaction structure, including the amount of debt and equity needed to consummate the transaction.

    Once letters of intent are received, the investment banker negotiates the letter of intent with one or more potential buyers and ultimately, in close consultation with management and shareholders, advises them on the selection of the buyer with which to execute a letter of intent and commence due diligence.

  • Do due diligence. This process can be as quick as one month if a buyer is very familiar with a business and its activities, or can take several months, particularly if financing needs to be arranged or if governmental or court approvals are required. On average, expect this process to last two months.

    During this period, the buyer's professional advisers, including lawyers, accountants and consultants, must complete exhaustive due diligence investigations prior to advising the buyer on whether to sign the asset or stock purchase and sale agreement. This is also the period in which the seller and buyer, together with the advisers, negotiate final terms.

  • Pre-closing. Several days prior to the closing, both sides review final documents and exhibits to be certain that all details are covered.

  • Closing. The closing of a deal is normally rather mechanical and even an anticlimactic event, and generally takes place in one day, which is the day the money is wired and the executed documents are delivered.

  • Closing party. Shortly after a successful closing, the investment banker will generally treat all of the key people who worked on the transaction to a sumptuous closing party celebrating a well-run completed process. Wise business owners plant the seed early on their favorite destinations. My suggestion -- Pebble Beach.

Scott Hasley is a vice president at Brown Gibbons Lang & Co. He specializes in mergers & acquisitions and financial restructurings, with strong expertise in consumer/industrial products manufacturing. Reach him at (312) 658-1600, ext. 226, or