Fortune favours the process prepared, and effective preparation is key to a successful outcome.
The core preparation phase covers a number of different areas:
- Advisers: Appointing advisers (corporate finance, legal, tax) and making sure they are fully immersed in the business and understand it intimately;
- Documents: Preparing the core marketing documents – Information Memorandum, as well as detailed historic financial information and a management presentation – in order to present the business in the most attractive light; and
- Potential acquirers: Identifying the most likely potential acquirers (and/or investors) and getting ready to speak to them, including personalising the description of the opportunity for each one. Here your adviser’s sector insight and experience will be key.
Each of these can be accelerated if there is a degree of time pressure, but in general, corners cut early on cause problems or delays later.
Marketing and offers phase
The marketing phase is the stage where your advisers, and then you, interact with potential acquirers. Maintaining confidentiality is critical, as these potential acquirers are all actual or potential competitors – otherwise, why would they be interested in your business? Each should sign a confidentiality agreement (also known as a non-disclosure agreement or NDA) before receiving any sensitive information – including the name of the company.
While some advisers will advocate speaking to as many potential acquirers as possible, in general you are better off engaging with a smaller number of pre-qualified counterparties which you know to be genuinely interested in acquiring the business. Narrowing the number in this way allows you to minimise the risk of leaks to the market, and also allows you to spend more time engaging deeply with each one – building their level of insight into the business and confidence in its value – which will result in higher and more deliverable offers.
While you should be up-front about bad news, drip-feeding good news during the marketing will help build an impression of growth, progress and momentum in the business.
Once acquirers have reviewed the Information Memorandum, management presentations give them the chance to deepen their understanding of the opportunity, chemistry and potential fit. You should also be assessing them for these characteristics!
Following presentations and further information exchange, interested parties will submit offers. In a well-run process, these will come in at or around the same time, so you can compare them and play them off against one another in negotiation.
The acquirer which puts forward the ‘best’ offer (which may not be the highest valuation) will agree a set of ‘heads of terms’ – a summary of the key financial and non-financial terms of the deal – and will expect a period of exclusivity. Once you have granted exclusivity there will be little competitive tension to support your negotiating position, so it is important to negotiate key legal and other non-financial terms before this point.
Due diligence and legals stage
The acquirer will carry out extensive due diligence on the business – generally including financial, legal, environmental, technical, and commercial reviews. At the same time, the acquirer’s lawyers will begin drafting legal documentation. Detailed negotiation of the legal documents can take three to six weeks, Effectively managing the information flow to the acquirer’s due diligence teams and the back-and-forth of the legal process is key to maintaining momentum in the completion stage, and to completing the transaction within the agreed timetable.
The marketing and due diligence phases are likely to be quite demanding of your time and that of your senior team. Your corporate finance adviser should take on as much of that burden as possible, allowing you to focus on running the business and continuing to deliver the forecast financial performance, but you should expect quite a bit of distraction as the process evolves.
In a normal process, each of these phases will take between two and three months, so count on six to nine months overall.
Tom Phipps is director of Livingstone London.
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