In the second episode of our series on M&A transactions, we aim to share with you what steps there are in a typical process of selling a company regardless if it´s an auction or exclusive sale.

A typical sales process consists of several steps. The length of each step differs per transaction. On average, a sales process takes 5 to 7 months in total. In ideal conditions, it is possible to manage it in 2 to 3 months only, but it is rather rare. In case the Seller is very cautious about actual sale of his / her business, it´s useful to involve skilled advisor who will guide the Seller through the process and explain the potential opportunities and pitflalls. The advisor is usually incentived to ensure the best deal possible is closed with the Buyer.  

Expressing the interest and Teaser

Expressing interest in one´s company could be done in various formal and informal ways. From handshake in a restaurant to sending a non-binding offer to the owners of the company.

When the process is structured as an auction, this is done through sending out a so-called Teaser. A Teaser is a document providing the key information of your Company with or even without mentioning the name of your Company. The reason for some Teasers being anonymous is that they are used to attract interest of potential Buyers and the name of the Company is presented after signing non-disclosure agreements. Teasers are short (no longer than 2-3 pages). The advisor will prepare a long-list of potential Buyers. Based on consultation with the Seller, the desired entities are selected from the long-list, and a short-list of potential Buyers is made to which the Teaser is sent.

If potential selected Buyers are interested, usually they sign a confidentiality agreement or non-disclosure agreement (NDA). NDA is a standard document prepared by advisors to ensure sensitive information are not leaked to public or competitors.

Sharing a (Confidential) Information Memorandum (IM / CIM)

After signing NDA, more information can be shared about the selling company. The main document shared is an Information Memorandum (IM) or Confidential Information Memorandum (CIM). The IM / CIM includes detailed information about your business, the market it operates in, the main products and services, its management team, workforce, and the key financials. It includes historical financials as well as a business plan showing the financial forecast for the next years. Preparation of the IM / CIM is a bit more time-consuming and is usually being prepared by an advisor, who can prepare it very professionally.

As part of the process of sharing IM / CIM, management meetings can be held with potential Buyers, in which more information is shared between the management of the company and the potential Buyers.

Receiving non-binding offers

If potential Buyers are still interested after analyzing the initial information, they will send a non-binding offer (NBO) or term sheet. This document has many different names, such as Letter of Intent (LOI) or Memorandum of Understanding (MOU). In this document the Buyer sets out a purchase price, the basis and assumptions of this price (a multiple times EBITDA), deal structure (cash- and debt free), timing of payments (e.g., deferred payments or earn out), timing, the plans with the Company, how they will finance the acquisition, what due diligence they want to perform, etc.

The LOI is a very important document in the next stages of the process. Be sure to involve your M&A and legal advisor in deciding which potential Buyers you want to progress with to the next stage and start due diligence.

Due diligence and Q&A process phase

In this phase you show your accounting books and key  legal documents and let Buyers verify the assumptions of their purchase price and confirm there are no other risks or liabilities which were not considered. Identified risks and potential liabilities will be adequately treated in the Sales and Purchase Agreement (SPA).

This is an extremely intensive period for you and your company. Multiplied by the number of potential Buyers which you have chosen to proceed with due diligence. Because of this make sure you prepare sufficient and understandable information to be shared. In most cases the Seller uploads documents in a so-called virtual data room (VDR), which is a secure website / storage you can use to share documents. We will give you useful tips what information need to be prepared in the VDR and how to treat your most sensitive information during the due diligence process in one of the next episodes of our series.

Lastly, make sure to have a formal process for submitting and answering of questions. Many virtual data rooms have a build-in module for submitting and answering of questions. An Excel Q&A tracker works as well, mostly in case of a smaller company.

Drafting the sales and purchase agreement (SPA)

During the due diligence phase, the Buyer / Buyers share a draft version of the SPA, indicating the conditions and terms of the acquisition (including guarantees or indemnities). In this stage, negotiation on the purchase price and the purchase terms is common before an agreement is reached.

The purchase price is not the only determining factor to decide who will be the ultimate Buyer. Also items as: deferred payment, earn out, guarantees or indemnifications impact which offer from which Buyer suits best to the Seller.

Signing and Closing

After both Seller and Buyer agree on the SPA conditions and the final purchase price calculation mechanism, the SPA is signed. The signing of the SPA does not mean that control over company is obtained and purchase price is paid to Seller.

Transfer of ownership and purchase price occurs after all conditions precedent are fulfilled.  Closing conditions could be obtaining regulatory approval (e.g., antitrust authorities), third-party consents, key employees signing employment agreements, nomination of new Directors etc.