This article was first published in two parts by Games Industry.biz on 23 November 2010, as part of Tim’s monthly column ‘Money Games’.
Some people find dealing with potential buyers difficult. Some won’t get back to you, others don’t make an effort to understand your business, some think your business isn’t worth much, and occasionally they can seem quite rude. There is a good reason for this, which makes the exit process much easier once you learn to accept it – buyers are looking for a reason to say “no” as soon as possible.
That may sound odd, but makes perfect sense when you think about it. Buyers make most of their money based on the return on investment (ROI) generated by the businesses they buy, which means they think in ROI terms for everything from business financials to how they spend their time. So the sooner they realise that they aren’t going to buy your company, the sooner they can move on to something else where they might generate a return.
If you approach them in the same way, you will soon discover which potential buyers are a waste of your time too. This makes the process easier for both you and them. At the extreme, one well known billionaire entrepreneur walks out of investor meetings as soon as thinks that he won’t get the support he wants. This isn’t to be recommended, but it works for him.
1 Business Review
Review all your basic assumptions about the business in detail, with a particular focus on the underlying dynamics and economics of your market, competitors and business. Question everything, and do not take anything that you believe for granted. Potential buyers will be coldly analytical about your company and its prospects, will do their own detailed due diligence, and will spot any potential problems long before you see the colour of their money. Professional buyers of companies are smart people with a lot at stake, so will take everything seriously. You need to do the same.
2 Write an Information Memorandum (IM)
Potential buyers expect a detailed IM describing all aspects of your business. Preparing an IM properly is a lot of work, but forces you to take an objective outsider’s view of your business. This should hopefully help to identify answers to some of the questions you may be asked, and also highlight key aspects of your business you hadn’t realised before.
In terms of style for your IM and other documentation, objective, fact-based and unemotional documents are generally taken more seriously than self-serving, subjective claims. While you should be excited about your business, try to remove unnecessary adjectives. Phrases which may reduce your credibility include:
- “Unlimited market potential”
- “No competitors”
- “Unrivalled experience”
- “Huge returns”
- “Fantastic growth prospects”
- “Vast global markets”
- “Dominant market position”
Back up what you’re saying with facts referenced from reputable third parties, and if that isn’t possible then make sure that you connect the dots to cover probable counter-arguments. The people who read what you write have heard it all before, and aren’t easily impressed.
While all IMs are different, investors expect to see:
- Investment highlights
- Sale process and timetable
- Business overview
- Market opportunity outlining the problem your business solves, who it solves it for and how it solves it
- Business model
- Business history and performance
- Growth strategy
- Business infrastructure/technology/intellectual property (IP)
- Sales and marketing
- Customer support
- Market overview
- Competitive analysis, focusing on competitive advantage (what your company does better than the competition that matters to customers)
- Financials (historic and one-year forecast)
- Key financial drivers
- Profit & Loss
- Cashflow statement
- Balance sheet
3 Write a Teaser
An executive summary of the IM should be prepared once it is complete, without any confidential information.
4 Prepare a Management Presentation
A 10-page (at most) slide presentation covering the high points of the IM, an update on recent trading and a product demonstration.
5 Prepare a Target Buyer List
The best way to sell a company is to be bought, so if you have strong PR and buyers are approaching you, the whole process becomes much easier. If not, you will need to go out to target them.
All buyers are different, but once you have determined their specific sector focus and deal size, it is very much a numbers game from your point of view. Don’t worry about targeting buyers too tightly at first, as you will never know who is likely to buy you unless you already have a good relationship with a target buyer (which unsurprisingly is the ideal way to approach them).
Initially approach everyone whose criteria you appear to meet, and nobody whose criteria you don’t. It’s usually helpful if potential buyers have a strategic or investment need which looks like you, as the more familiar they are with your sector the easier it is for them to take an informed view on your business.
The best way to find out what they are looking for is to ask them. Don’t be afraid to approach people within target buyers to try to find out their strategy and approach for acquisitions, as you will refine your targeting and save yourself a lot of wasted time. Take the time to review your buyer prospects in detail, so you can customise your pitch to each of them individually.
6 Contact Buyers
While many buyers have a ‘send in your business plans here’ section of their website, this usually results in a review by a junior analyst who is bombarded by literally hundreds of business plans (with the obvious result). You’re better off identifying a senior person at the buyer who is most relevant for your sort of business, and sending them your teaser directly. Senior people will generally ask a junior analyst to review you anyway, but you’ve got a better chance if it’s coming from someone’s boss than directly from an outsider.
With a trade buyer, you should contact the CEO, CFO, a divisional MD or corporate development director. Within a private equity firm, you should contact the most relevant partner. The best way to do this is via an introduction from someone in your contact network or a professional services firm (investment bank, law firm, accountant, etc) who already knows the buyer.
If you can’t get to them this way, the next best way is to call the firm and ask to speak to “X’s office.” When you’re put through to X’s assistant, simply state who your are, that you are working on the sale of a business that you think would be interesting for X – and that you would like to know where to send the materials.
Normally the assistant will give you their email address, and you should send a brief note stating (i) what your company does (ii) any facts about performance to date (iii) your growth targets (iv) your general timetable and (vi) attaching the teaser. In terms of following up, this is best done by email at intervals of no less than one week. Buyers don’t like being pestered, but will put up with being reminded about you periodically to show perseverance. Always be professional and polite, and never take a slow (or no) response personally.
7 Distribute the IM
A small subset of the buyers you contact may ask for a copy of the IM. You can try to put a non-disclosure agreement (NDA) in place before sending the IM to a buyer, but this often restricts your potential audience as many buyers won’t sign NDAs as a matter of policy. If your IM is genuinely commercially sensitive, either do not send it without a NDA or remove commercially sensitive material which you wouldn’t want a competitor to see. Be pragmatic.
8 Prepare a Data Room
This is an electronic copy of all documents that a potential buyer would be interested in as part of detailed due diligence. The cheapest way to distribute this is by CD-ROM, but you can go down the more expensive remote data room route. There are any number of web based data room providers, but be sure that you need the flexibility they provide before committing to using them.
Data rooms usually include materials to enable due diligence in the following categories:
- Organisation, staff and pension
9 Conduct Management Presentations
A small subset of the buyers who receive your IM may ask for a management presentation. They want to decide whether your management team is credible, and to get a better understanding of the business beyond the IM. At management presentations, you need to know every fact there is to know about your business and its market, as nothing impresses a buyer like a management team with all the relevant facts at its fingertips.
If you don’t know the answer to a question, say so and undertake to get back to them with an answer shortly after the meeting. Never make anything up, and never try to skirt around answering a question directly. You will usually need to go to the buyer’s office for the meeting, but occasionally the buyer will come to your offices to kick the tyres. You may meet several times before moving to the next stage in the process.
As part of most buyers’ review processes, people beyond those you meet are likely to review your documentation, product and so on. Try to find out who they are, and ask if you can also meet with them directly. Many discussions fall over at this early stage because someone you have never met comes up with a reason not to proceed with you, and you have no chance to prevent it if you don’t get yourself in front of them. Never underestimate the complete consensus many firms require to make an acquisition decision.
10 Receipt of an Indicative Offer from Buyers
A small subset of the investors you meet may make a non-binding indicative offer to buy your company for a specific amount, subject to due diligence. The offer is likely to be short and to the point, with detail about the structure of the offer likely to come as part of any final binding offer you might receive. Make sure that buyers describe the basis for their valuation, so that if they try to renegotiate their final binding offer there should be something specific discovered during due diligence which has changed their views on the business.
You should require details on how the buyer intends to fund the transaction, particularly where the transaction will be funded with a mixture of debt and equity. Given the collective decision making process for most acquisition decisions, ask buyers to outline their internal decision making process to date and going forward to completion.
11 Selection of the Potential Buyer
If you have more than one indicative offer, you must decide which you think best meets your needs. This decision should always be a balance between financial and non-financial considerations, including:
- Total price
- Cash on closing
- Earn out (see Final Offer below)
- Equity roll over (see Final Offer below)
You may want to spend some time with potential buyers outside the formal process, as you may discover things over a meal or a drink which are not apparent in the formal environment of a management meeting. However, be wary of showing your own hand in a more informal setting, as they will still be very much in evaluation and negotiation mode at this stage.
12 Exclusivity and Due Diligence
Once you have selected the buyer, they are likely to want to enter into an exclusivity period with you to conduct due diligence. This means that they are the only potential buyer to whom you can sell the business during the exclusivity period, which should be a month or so depending on the complexity of your business.
If your data room is complete and detailed, this should make it easier for everyone during the due diligence period. It is likely that buyers will ask many additional questions, so you may need to do additional analysis to supplement the data room.
13 Prepare and Negotiate Sale and Purchase Agreement
This is the document used to transfer shares to the buyer, and is best prepared by a lawyer familiar with mergers and acquisitions. This work should be done in parallel with due diligence, and if possible you should try to get your own lawyer to control the process to safeguard your interests. Your lawyer should explain what goes in the document, but it should cover:
- Price per share
- Number of shares sold
- Representations and warranties
- Conditions for closing the deal
- Any side agreements with the buyer
14 Final Offer
The final binding offer may be different to the indicative non-binding offer, depending on what happens during due diligence. Some buyers may want to renegotiate at this stage, so you should be clear about the point where you will walk away from a deal and your best alternative. There are as many different structures as there are different deals, but it is usually best to agree the simplest deal possible. Nonetheless, you may see:
- Earn out, where part of your payment is deferred based on the performance of the business
- Convertible preferred stock, which gives the buyer a preference over the common shareholders in the event of a liquidation or merger, and is convertible into common stock in the event of an IPO
- Participating preferred stock, made up of preferred stock and common stock. The preferred stock gives the buyer a predetermined amount (the original investment plus accrued dividends) on sale or liquidation of the company plus common stock. As with convertible preferred stock, it also converts to common stock in the event of an IPO
- Convertible notes, which are debt instruments which require the company to pay interest prior to exit, when the debt converts to equity in the company
- Senior debt, which has higher priority than other loans or equity in case of a liquidation
- Subordinated debt, which has lower priority than senior debt on liquidation
- Mezzanine debt, which is lower priority than senior debt with a higher interest rate and may include warrants
- Warrants, which give buyers the right to purchase shares at a pre-determined price. They are usually issued together with preferred stock or debt
- Options, to buy or sell shares at a specific price within a specific time period to incentivise management and staff
15 Close the Deal; Receive the Money
If you reach this point, then you have done very well. Make sure that the money is actually in the bank before you go out to buy that Aston Martin.
Post the Deal
Depending on the structure of the deal, you may be required to stay with the company for a specific earn out period. If you retain a significant amount of equity in the company, you will probably want to stay with the company until it is sold again.
Rule of Thumb on the Process
If you contact 80 buyers with your teaser, 20 may ask for the IM, 5-10 may ask for a management presentation and 0-5 may actually make an offer. You may not need to contact anything like this number of potential buyers (and again the best way to sell a company is to be bought), but ultimately selling a company is a numbers game.
Who does what?
With the exception of the legal documentation, if you have substantial experience of selling companies you could conceivably try to do everything yourself to save a little money on advisory fees. It can be a high risk approach, can consume substantial amounts of management time, and isn’t recommended unless you have done so successfully before.
If you don’t have experience at selling companies, you risk either wasting your time or ending up with a deal which doesn’t work for you. This happens to the smartest of entrepreneurs, because selling a company successfully requires a certain amount of experience. This may come in the form of a member of your team or one of your board members who has sold companies before, or in the form of a corporate finance adviser such as an investment bank or accounting firm.
In either case, be sure to do your own due diligence on the people or organisations who are going to help you, as asking the wrong person to help is worse than no help at all. No matter who helps you with selling your company, you need to be on top of the sales process from start to finish. While this may distract you from running your company, selling your company in the wrong way can destroy much of the value you have created.
Still Want to Sell Your Company?
If you’ve made it this far, and are still convinced that now is the right time to sell, then I wish you the best of luck. Put together the best team around you that you can afford, and to misuse Shakespeare: “If it were done when ’tis done, then ’twere well it were done quickly.”