The Seller’s Perspective: Mergers and Acquisitions

The Seller’s Viewpoint

In our guide on mergers and acquisitions, we provided an extensive analysis of these common business transactions. We ran through definitions, examples, pros and cons and other useful information. However, mergers and acquisitions – like any business arrangement – require two sides to function. The sell-side and the buy-side.

This guide will take a closer look at the seller’s perspective, providing a detailed run through of seller motives, different types of sellers, guidance on preparation strategies and ways to ensure the highest purchase price, including a checklist and frequently asked questions. These are general guiding points that can differ according to the seller’s particular situation, business type and objectives.

Nonetheless, it is a helpful starting point for those who wish to comprehend the multi-step process of selling a business through a merger or acquisition. It’s imperative that the seller and their advisory team are familiar with the ebb and flow of sell-side M&A, as this is likely a once-in-a-lifetime opportunity. Usually, the seller will focus on the best possible deal terms through strategic tactics, a step-by-step timeline, marketing, and buyer identification, amongst other elements.

Before we begin, it is important to note that it is uncommon for sellers executing these types of transactions to do it alone. M&A includes rigorous analysis of legal, financial, and corporate elements, so hiring a specialised M&A team should be on the top of your to-do list.

Selling a business could mean the owner wants to completely cut ties with the business and pursue other goals. But this is not always the case. There are multiple motives for selling through mergers and acquisitions, and each motive has a specific objective:

Liquidation

As much as running a business can be profitable and fulfilling, it can also be tiring. At some point, an owner will decide to sell their business, either partially or fully. This can be related to multiple factors, including retirement plans, health problems, no clear succession plan, or a lifechanging circumstance.

To extract this capital, owners can decide to liquidate their equity by converting assets into cash. In this case, acquiring investors may offer a lower price for the acquisition as the owner is likely to have no part in the integration and post-sale process.

Internal fallouts

Having multiple shareholders in a company pose benefits and risks. One of these risks – which is quite common - is conflicting opinions. While these disputes can be resolved, there are situations where these disputes can escalate, and shareholders decide to dissolve their partnership. Alternatively, some companies have a buyout agreement and can choose to exercise it.

Restructuring

Recapitalisation is a form of restructuring where the owner wishes to exit but wants to hold a minority stake in the company (usually 10 – 40%). While the owner would still have some involvement in the business, they would have more personal time to pursue other projects.

Likewise, an owner may notice synergy potential that will have significant financial benefits and increase efficiency. This may initiate a merger with a competitor, customer, or supplier.

There are multiple motives to sell a business through strategic restructuring. These include increasing market share through a larger company, seeking out finances from an acquirer to grow and expand, and diversification (customer base and products, for example).

The seller’s motives will determine the deal structure, and a seller’s advisory team should assist in determining the best way forward, alongside clear strategies and negotiation tactics that will ensure a high purchase price.

When discussing the seller’s perspective, it is also important to note that sellers are often grouped differently depending on their motives and type of business. The seller’s motives and what type of seller they are will influence the deal process:

Types of Sellers

Divestiture seller

Not all sellers wish to completely cut ties with their company. Strategic sellers can implement a divestiture, where they sell off units of their business in an attempt to manage their asset portfolio.

These can include assets, entire divisions, or products. For example, a company can decide to sell off a division that is underperforming to focus on divisions that are profitable and growing. Likewise, selling a unit can generate cash that can be invested into other parts of the company. If a merger is carried out, it is common that certain operations or assets might duplicate, so these would need to be divested.

Alternatively, spinoff demergers can also be implemented when all units of the business are performing exceptionally. Breaking them up into independent subsidiaries promotes a higher chance of unlocking independent value and could lead to higher profits.

Ownership change

Change is a part of life, especially when you own a business. Motives surrounding this type of seller could be intentional or involuntary. Some of the reasons could be related to age, a new opportunity, or an unprecedented event that requires change in ownership.

It can take the form of selling the entire business, incorporating new partners, or handing the business to someone in the family. The way this transaction is carried out will have differences if you are a public company, or a private company with shareholders.

It is crucial to remember that changing ownership will affect multiple parts of the company, including its organisational structure, vendors, customers, and employees.

Growth capital

This type of seller is not interested in selling their company, but rather shares in return for capital. To qualify for growth capital funding, a business needs to prove that it is compelling through growth prospects and future profits.

There are different types of growth capital, and the cost of them will vary depending on the size and objectives of your business. For example, it can be structured as a loan, which will charge specific interest rates. Or it can be structured as an equity investment, where the business would sacrifice a percentage of its shares in return for funding.

Growth capital will not go directly into the owner’s pocket, but rather into initiatives for growth and expansion. These could be investing in new technology, expanding into new markets, creating a new product line, investing in research development, or increasing marketing and advertising initiatives.

How to Begin the Process as a Seller

The process would usually begin when a seller decides it is time to sell. This could be strategic and planned, or it could be involuntary. An acquirer or investor could also approach the seller, kickstarting the process.

Regardless of how the deal starts, you should always be prepared to be acquired or merge with another firm. Meticulous preparation – even if you don’t plan on selling your business – will put you at an advantage.

As a starting point, begin by answering the following questions:

• What are the motives for selling your business?
• How will this impact your valuation?
• What are your ideal deal terms?
• Draft a business plan
• Clarify a timeline, separated into sections that are dedicated to each objective

Thereafter, decide who will form part of your advisory team. Depending on what you want from the deal, your advisory team will have M&A specialists like an investment banker, a broker, a lawyer, analysts, accountant, or tax advisor. This relationship should be solidified in your engagement letter, which will be discussed further on in the guide.

Visualise your buyer pool

Developing a comprehensive buyer pool is a significant step to a successful outcome. You don’t want to waste time by spamming acquirers who won’t find value in your company or industry. In the same breath, you don’t want to waste time with buyers who can’t afford the transaction or won’t grow and develop your business.

Obviously, the type of buyer and how many you’re looking for will depend on your objectives. Understanding your buyer list will not close the deal, but it will help engage decision makers and demonstrate the seriousness of your case.

An accurate business valuation is crucial

A crucial sell-side strategy is the valuation of the business. A valuation on its own is a prerequisite with any business transaction, but how you implement it and present it can make or break your deal.

If you put yourself in the buyer’s shoes, what would be a significant factor to influence your decision making? The value of the business. A valuation is not just concerned with the price tag of a business, but its potential for growth, its future trajectory, return on investment (ROI), and its synergy potential. Buyers and investors often look at future financial projections.

Sellers invest a significant amount of time, emotions, and energy into their business, so objectivity and a pragmatic approach can often be clouded by this. This can lead to unrealistic valuations. Understanding your valuation through the eyes of a buyer will be advantageous, and potentially highlight any cracks or oversights. At the same time, you may not notice areas of your business that will drive up your value, so your advisory team should play a significant role in this part of the process.

Throughout the whole negotiation, ensure your business functions optimally. M&A transactions take time, so your valuation is bound to fluctuate. It would be counterproductive to neglect your business by paying too much attention on selling it.

Strategies You Can Implement

Sell-side strategies exist throughout every step of the transaction. You can begin by understanding the transaction through the buyer’s eyes. There are also different types of buyers. They can range from individual buyers looking for a small or middle market firm, to private equity investors who are searching for private high value targets. Comprehending your buyer’s intentions might help you see your business pragmatically.

Preparation is your key to success

Preparing to sell your company is a vital undertaking, not matter its size or industry, and it should begin from the moment you start your business. While part of this preparation is accurately valuing your business, buyers will also scrutinise your company to assess its transferability. Factors that they may analyse are its market fit, cultural environment, and brand value.

Assessing every aspect of your company will highlight areas of significant potential or demonstrate areas that need more improvement and structure. There are always opportunities to make your business more valuable, so take time to identify elements that can be revitalised, adapted, or updated.

This comprehensive understanding of the internal ebb and flow of your business is crucial, but the external ebb and flow of its industry is equally important. Analysing your industry is a significant part of your preparation. Comprehending competitive dynamics will help you make sense of the bigger picture from a buyer’s perspective. Think about demand and supply, what the competition looks like, who the key players are, what investors are looking for, what the future prospects are, and what external factors influence your industry.

Creating your Confidential Information Memorandum (CIM)

Whether you are looking to sell to a financial or strategic buyer, or you are searching for investment, the way you market your business is essential for sell-side M&A. Your CIM will promote your business and should provide buyers with a detailed picture of its value and potential for future opportunities. This will be your chance to tell the story of your company and defend and maximise its valuation. Some elements that could be included in the CIM are:

• Executive overview of your company
• Detailed description of what your company does and for whom
• Industry and competitor research
• Analysis of management structure
• Explanation of product or service
• Marketing and sales strategies
• Historical financial details
• Financial projections
• Supporting documents (resume, IP (intellectual property), permits)

Milestones and timelines

M&A timelines can range between several weeks to years to complete, and this will depend on multiple criteria. It is important to complete your deal in a timely manner, ensuring that you stick to your milestones to avoid creeping unwanted risks, or deal fatigue.

There will be a fine balance between taking each step with precision and drawing out negotiations tactfully. For example, the due diligence phase can take the most time, as a significant amount of documentation will be required from the seller. Organisation and compartmentalisation will be your saving grace, so use tools to facilitate the due diligence and keep your information secure and accessible. One way to do this is through virtual data rooms (VDR), online repository tools that store documentation for M&A due diligence phases.

Organising Your Deal

To ensure you get the best purchase price and negotiation leverage, there are strategic ways you can organise your deal structure. Firms are auctioned in specific ways, depending on their objectives and size. The way you present yourself to buyers and investors will play a crucial role in how the deal is structured.

These are the most common ways you can auction your business:

Broad auction:

• Usually implemented by owners of high value targets
• Purpose is to maximise value by inviting a large group of buyers to participate and compete for the target
• Seller gains a competitive advantage
• A large buyer pool can pose risks to confidentiality
• A large pursuit, so it can be time consuming. The seller can become overwhelmed and run the risk of neglecting their business

Limited auction:

• Best suited for companies with a significant equity value
• Limited buyer pool (around 10 – 50 buyers)
• Buyers are often financial and strategic
• Procedure is highly structured and formal
• Negotiation leverage can be negatively impacted as buyer pool is limited

Targeted auction:

• Implemented by companies that are well established, have a proven business model, and potential for growth
• Buyer pool consists of between three to five buyers that are internally selected
• Buyers compete and outperform one another, allowing the seller to gain control of negotiations
• Appropriate auction to ensure day-to-day operations and confidentiality are preserved
• Seller runs the risk of neglecting buyers that could have contributed to increasing the purchase price

Exclusive auction:

• Seller negotiates exclusively with one buyer
• Advantages of confidentiality, timeline management and minimal disruption
• Relationship between seller and buyer is usually defined by integrity and seriousness
• Negotiation leverage decreases significantly. The buyer will have the most control over the purchase price.

Documents Sellers Need to Consider

The sell-side document checklist will incorporate hundreds of elements, specifically for the due diligence phase. These elements will range from legal, financial, sales and marketing, assets, contracts, intellectual property, and organisational documents.

In the beginning stages, you’ll need to start off by clarifying and signing an engagement letter. This is an arrangement between you, the seller, and your M&A advisor, who should guide and support you through the entire process. This letter will outline a fee structure, services, objectives and ultimately lay the groundwork.

Secondly, get your supporting documentation in order, including your Confidential Information Memorandum (CIM) and Non-disclosure Agreement (NDA).

Your documents may vary depending on your business and the deal terms. This phase of the negotiation is where your legal fees will come in handy. It is imperative that you do not neglect your business during the sale, so your legal team should take ownership of this phase. Your document checklist should include these common elements:

General documents:

• Business incorporation documents (tax structure and entity form)
• Your business’s bylaws (name, location, shares and stocks, details of Board of Directors)
• Organisational chart
• Security regulations
• Details on stock agreements, including shareholder arrangements
• Warranties
• Agreements

Tax documents:

Your legal team should closely analyse your tax profile before beginning the sale. This is to understand your business from a buyer’s perspective. They should be familiar with areas of tax risk or benefits.

For example, if you identify tax attributes in your business, you can negotiate a higher price because of its potential value.

Intellectual property:

Intellectual property is a significant value driver. If your business owns innovative technology or software, including its protection, your legal team should make a conscious effort to include this in documentation. Intellectual property can include patents, copyrights, trademarks, domain names, trade secrets and licenses.

Material assets:

Assets are an integral part of sell-side M&A, as the total value of these will increase your valuation. Your team should also consider if they have any debts or liabilities. These can include:

• Your stock
• Buildings
• Equipment
• Technology
• Research

Contracts

Owning and running a business individually is very rare. Throughout ownership, a seller develops relationships between customers, suppliers, employees, real estate agencies, and shareholders. These relationships are documented through legally binding contracts, which will vary depending on the size of your business and its industry. Some common contracts include:

• Contracts with customers and suppliers
• Contracts with banks, like loans or credit agreements
• Contracts associated with any partnerships
• Leases
• License contracts
• Employment contracts

This is a general checklist with common documents. However, these documents will vary according to the specificities of your business and deal terms, so your advisory team should provide a more comprehensive checklist.

Sell-side M&A FAQs

Is M&A advisory sell-side?

Advisory support is for both sell-side and buy-side M&A. As we’ve mentioned, M&A transactions include a significant amount of legal, financial, and corporate documentation, so advisors that specialise in these areas are often hired.

Sell-side advisory focus on different elements of the sale. For example, bankers often generate materials and reports that they can present to the buyer’s advisory team. Investment bankers will construct Non-Disclosure Agreements (NDA) and Confidentiality Information Memorandums (CIM).

Is financial advisory sell-side?

Once again, it is both sell and buy-side. Financial documents play a significant role in M&A, so financial advisors will be present at every stage of the transaction.

However, their roles will vary. On the sell-side, a financial advisor’s role is to convince acquirers or investors that the product, service, stock, or company is worth pursuing. For example, a banking advisor will develop a financial model, develop a strategy, and prepare the business, identify and approach buyers or investors, initiate the bidding process, and support the due diligence phase.

How long do M&A deals take?

Deal-making is a complex environment. The timeline of closing the deal depends on multiple elements like the size and value of your business, the motives for selling it, whether it is a merger or an acquisition and what the seller’s objectives are. Generally, it can take three to six months, or years.

Should you buy stock before a merger?

A target company’s stocks usually experience a short term rise when a merger is announced, so it can be beneficial to purchase stocks in the target company.

This rise can be attributed to the acquiring company, who usually pay a premium to incentivise shareholders of the target firm. However, the acquiring company’s stocks may experience a drop for these reasons:

• Financing the premium would exhaust their cash reserves and incur debt
• Integration challenges
• Power struggles
• Unforeseen expenses

These drops can be short term if the acquiring company attends to them in a timely manner.

Who must approve a merger?

Usually, it will begin with the board of directors, who will send a plan over to shareholders for further approval and vote. In terms of regulations and rules, this will depend on your country.

Is asset management buy or sell-side?

Asset Management is buy-side. Asset management companies usually make investment decisions on behalf of their clients to increase and diversify their finances and portfolios. They are responsible for making well-informed purchasing decisions that are in the client’s best interest.

What BusinessesForSale.com Offers

Sell-side intermediaries usually pursue traditional methods of research and outreach to find buyers, and this can be a difficult and exhausting task.

Through close observation and research, BusinessesForSale.com noticed a demand from both sell-side and buy-side intermediaries: from a sell-side perspective, intermediaries were looking for quality buyers interested in high value targets, and from a buy-side perspective, experienced investors were searching for acquisition targets in the middle-market range.

BusinessesForSale.com addresses these demands through M&A Vault, a product that has been built and tested over the last year and a half. M&A Vault supports expansion into a sophisticated buyer pool, allowing both sell-side and buy-side intermediaries to connect more seamlessly. To enhance this process, the product provides an advanced toolkit that both sides can utilise to find quality leads.

Our enquiry process has been reengineered to include a Verified Buyer Profile, where acquirers elaborate more on their background and investment rationale. At present, M&A Vault has a marketable list of over 10, 000 buyers that are internally vetted.

Summary

One of the key differences between the seller and buyer perspective is that, for the seller, this is likely a once-in-a-lifetime opportunity. To ensure that you get the best outcome from this transaction, it is vital to understand every layer of the process, from its preparation and required documentation, to legal frameworks and industry analysis (and everything in between).

Most importantly, you want an advisory team that will support you at every stage, so take your time choosing who they will be. If you need any more information or have any questions, contact our team.