Mergers & Acquisitions
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Take a Look at The Deal Process
For a better understanding of the M&A sales process, click on each stage for more information.
The Non-Disclosure Agreement (NDA) also referred to as the Confidentiality Agreement (CA), is signed between the buyer and seller before any confidential information is exchanged between parties regarding a potential sale. The purpose of the NDA is to maintain that the parties will not disclose any information regarding a potential sale to outsiders not covered by the agreement. This is to protect both sides, but is especially important for the seller. News that a seller is marketing their company for sale could result in customers cancelling their contracts and employees leaving the company. The NDA is a legal document which prohibits these events from occurring by establishing legal confidentiality between buyer and seller. If the agreement is terminated, both parties will have to return or destroy the confidential information which was shared.
This is when the buyer and seller first meet with each other. The management meeting often occurs before the offer is made, but can happen after the offer is placed too. It doesn’t have to be a physical meeting and can even take place over the phone. The management meeting is the ideal time for the acquirer and seller to meet each other, and determine if there is a natural fit and chemistry between the two parties. Further, it provides the seller an opportunity to learn about the purchasing company, acquisition strategy, and integration plans between the two companies.
If the purchaser decides to make an offer, they will submit a Letter of Intent (LOI). The LOI sets the framework for the transaction and defines the purchase price, method of payment, and type of deal structure. While these items are non-binding and have room for further negotiation during the due diligence, there are conditions in the LOI which are binding. This includes exclusivity meaning that when you sign an LOI with one party, you agree to stop negotiations with all other potential suitors. Another example of a binding condition in the LOI is a no material change clause. This condition means that the business will operate as usual until the company is acquired or the LOI is terminated.
Once the buyer and the seller agree on the LOI, the process of due diligence begins. Due diligence is a detailed examination of the seller’s business conducted by the purchasing company. The purpose of due diligence is to confirm and verify everything that has been provided and submitted by the seller. This includes many of the same items presented to the buyer so far, but now from a technical, legal, financial, and strategic perspective. With larger transactions the information from due diligence is stored into a confidential and secure online data room. It is the responsibility of the M&A advisory firm to control who has access to what documents in the data room and act as a gatekeeper when information is requested from the buyer.
After finishing due diligence or towards the end of the due diligence, the final document, which is called the purchase agreement is finalized. There are two types of purchase agreements. The first is called a Stock Purchase Agreement (SPA) if the transaction is structured as a stock purchase. The other is called the Asset Purchase Agreement (APA) if the transaction is structured as an asset purchase. You will want to make sure everything which has been negotiated up to this point is clearly stated in the purchase agreement since this document is final and legally binding. The purchase agreement will include the purchase price, deal structure, deal financing, non-competes, employee agreements, guarantees the seller makes regarding their business, promises the buyer makes regarding their business, and post-closing adjustments or dispute resolutions.
The closing is the actual event where the purchase agreement and supporting documentation is executed or signed. With the help of technology, not everyone attends the closing like in the past. Those involved in the acquisition can be in separate offices during the closing. At the end of the closing, the seller is paid in the form of a check or bank transfer from the buyer. This is after any buyer holdbacks and fees for accountants, lawyers, and advisors have been deducted from the purchase price. Any adjustments of working capital, which is agreed upon beforehand, will either be added or subtracted from the purchase price based on the terms of the agreement.
Regarding Our M&A Services
Most frequent questions and answers
The ideal time to sell is when the market trends are positive. Solid corporate earnings and strong economic conditions impact company valuations. The more capital the buyer has available and the cheaper the acquisitions costs to finance, the higher valuation levels can reach for a target company. However, the markets are extremely cyclical and can change dramatically from when you decide to sell your company to the time that your company closes. Since market conditions are difficult to time, our advice is to focus on creating and developing value for your company. Buyers look for scale, recurring revenue, route density, good profitability, consistent annual growth, operational efficiency, a strong leadership team, up to date technology, normal customer concentration, and competitive pricing to name a few. Once you have control over these aspects of your business and are personally prepared for a sale, that is always the best time to sell.
A wave of heavy industry consolidation or an industry roll-up usually increases company valuations. Entry of a new player, increased market share of a strategic buyer, or an arms race of sort between buyers in a given industry will create competition among acquirers. While there are certainly buyers who are disciplined and selective with their targets during these times, we’ve observed how increased market competition between strategic buyers drives up valuations especially when it comes to platform sized and performing companies or niche businesses that provide a specific service and capture a particular market segment that acquirers find attractive.
The deal process takes as long or as short as you would like it to be. It depends on the size of your company, how current your financial records are, if you have all your tax returns completed, and how organized you are in providing us with the information that will be required to present your company to the market. We have observed transactions that take three to six weeks with companies who are very efficient and deals that take over a year due to a lack of organization. But in most cases, you should prepare for the deal process to take anywhere between four to eight months to collect the initial information, prepare the marketing materials, meet with potential purchasers, evaluate non-binding offers, conduct due diligence, review the purchase agreement, and finalize the transaction at the closing.
The length that owners stay on post transaction varies based on the preferences of the owner, type of acquisition, and culture of the acquirer. For tuck-in acquisitions that include a route or two, the purchasers may ask the seller to stay on between 40 to 60 days in order to introduce the technician to the route. With larger acquisitions called a bolt-on, the owner can stay on until the integration has been completed, which will usually take three to six months. If you’re an owner of a platform company, the buyer can ask you to stay on for one to two years unless you have a strong management team. Then, you may be able to exit sooner and serve in some consulting capacity until the new management team is in place. It is important to note that in all these scenarios, the owner can be retained and work for the buyer who can offer competitive pay, wider access to benefits, and career growth within a larger organization, without any of the overhead and risk of being a business owner.