There are several reasons a business owner might decide to sell:

  • To Cash Out: Private business owners often have a significant portion of their wealth tied up in the business. A sale – either partial or full – is a way to create liquidity and diversify to reduce risk.
  • Market Conditions: Favorable market conditions, such as high valuations or strong demand for businesses in their industry, can make it an opportune time to sell.
  • Unsolicited Offer: Receiving an unsolicited offer from a strategic or financial buyer can prompt a business owner to explore a sale process and understand the market value of the company.
  • No Clear Succession Plan: Business owners who are nearing retirement without a clear succession plan may look to sell. This is common in family-owned businesses where the next generation is not interested in carrying the torch.
  • Health Concerns: Poor health of an owner may prompt a sale for trust and estate planning purposes. Ensuring the business is sold can provide financial security and simplify the estate planning process, offering peace of mind to the owner and their family.
  • Desire for a Lifestyle Change: After years of long hours at the helm, some owners may want to step back from the day-to-day to pursue other personal interests and goals.
  • To Accelerate Growth: The business may have high growth prospects but lack the capital and outside expertise to reach its potential. Sometimes an owner chooses to partner with an institutional investor who can offer the ideas and resources to lead the business in its next phase of growth.

No matter the reason for selling, it is useful for any business owner (or aspiring business owner) to understand the process of selling a business. This article outlines the key phases associated with most Mergers and Acquisitions (M&A) processes.

 

Phase 1: Pre-Sale Planning

Goal: Assemble Your Deal Team, Prepare Your Information, Determine Your Ultimate Goal

Business owners will typically begin discussing their intentions with trusted advisors — accountants, lawyers, wealth managers, etc. These advisors can inform the owner about how they are currently positioned for sale and can make introductions to a sell-side advisor, such as an investment bank or business broker. The sell-side advisor can discuss M&A trends in the industry, provide a valuation estimate of the business, and talk about how best to prepare for an eventual sale. The advisors can also discuss options for remaining involved with the business, partial ownership, or a complete exit from the business.

Once the owner decides to move forward and assemble their deal team, they have set the stage for a successful transaction.

 

Phase 2: Marketing Preperation

Goal: Prepare Marketing Materials, Determine Buyer Universe

After the sell-side advisor has been engaged, the advisor begins collecting information via data room/email. As information is received, the advisor often prepares the following suite of marketing materials:

  • Financial Model: Dynamic model showing the company’s historical performance and future projections.
  • CIM: Confidential Information Memorandum detailing the company’s history, operations, financials, organizational structure, IT and infrastructure, etc.
  • Buyer List: List of qualified financial and strategic prospects to be targeted.
  • Investment Summary: One-page “teaser”, does not disclose the company name.

The length of this stage depends on the company’s readiness — typically, companies with well-laid-out corporate finance and legal functions are better prepared than those earlier in the business cycle. Sometimes the advisor may recommend changes or business improvements to increase the value of the business for sale.

 

Phase 3: Initial Marketing & IOIs

Goal: Narrow The Buyer Universe

With the marketing materials finalized and approved, the advisor’s team initiates the marketing outreach. Each prospect receives the investment summary (teaser) and an NDA. Interested parties return signed NDAs and receive the CIM, allowing them to take a deeper dive into the business.

After weeks of evaluating the business and discussing with the sell-side advisor, prospects submit Indications of Interest (IOIs), outlining their value range for the business, along with other key deal points. This allows the business owner and their deal team to assess the IOIs received and choose the top groups to invite to the next phase of the process – management meetings.

 

Phase 4: Management Meetings & LOIs

Goal: Pick The Best Buyer

Management meetings provide the business owner(s) an opportunity to meet the top prospects while discussing their background and plans for the business. These meetings typically take place on-site at the seller’s facility, or at a nearby location if the owner is concerned about confidentiality amongst employees.

After meetings, the remaining interested prospects conduct more diligence on the company before submitting a Letter of Intent (LOI). The LOI marks the second round of bidding, where buyers definitively address the following deal points:

  • Purchase Price & Structure: The total enterprise value (TEV) of the business on a cash-free, debt-free basis, often calculated as a multiple of the company’s earnings (EBITDA). The buyer also outlines the forms of consideration – cash at close, seller note, rollover equity, earn-out, etc.
  • Sources and Uses of Capital: Identifying the sources from which the buyer would finance the transaction, often a combination of outside debt and equity capital.
  • Due Diligence and Exclusivity: The timeline to close and primary diligence workstreams (accounting, legal, tax, insurance, etc.). The exclusivity period establishes a period in which the seller is restricted from soliciting other buyers – a sign of working in good faith with the selected party.
  • Plans for Ownership/Management: Details about the go-forward plan for ownership and employment agreements for key personnel.
  • Real Estate: Intentions for buying or leasing the company real estate, future rent rates, and terms.

The number of LOIs received varies depending on the attractiveness of the business, scope of the buyer universe, and ability of the sell-side advisor to generate a competitive process. Once LOIs are received, the owner and deal team will begin negotiating with the preferred buyer(s) in good faith. The agreed-upon terms in the LOI are meant to form the basis of the final purchase agreement.

 

Phase 5: Due Diligence and Closing

Goal: Close The Deal

The due diligence phase involves a thorough examination of legal, financial, and operational aspects, often with the engagement of third-party experts. Confirmatory due diligence typically lasts 45-90 days, depending on the buyer and scope of work involved. Key negotiation points, including purchase price, Net Working Capital (NWC) target, and legal agreements, are meticulously negotiated. Upon successful completion of due diligence and the negotiation of final terms, the transaction is consummated after the signing of legal documents and funding, marking the beginning of an exciting new chapter for the company and its shareholders.