In contrast to an acquisition, the process associated with selling a business is considerably more reactive. However, it too can be broken down into several distinct phases, specifically:
The seller of a private company often has no prior experience in navigating the issues encountered in such a sale. Once serious discussions with a prospective buyer begin, the seller should enlist the assistance of a number of advisors. This should include an attorney with M&A experience and some combination of business, tax, and financial professionals who are skilled in the M&A field. The primary area of focus for the inexperienced seller should be an understanding of the value of the business being sold, the tax impact of the terms of the sale, and how the transaction will unfold. Accordingly, the professionals engaged should provide expertise in these areas. In addition, the seller will want to mobilize a limited number of internal managers to assist in early-stage discussion and data assembly. To minimize the potential for business disruption and reduced productivity, it is generally advisable to keep this group small and to impress upon them the importance of strict confidentiality. One other potential member of the seller’s team may be a business broker or investment banker.
Their understanding of the market and the sales process can be of significant value. However, the seller must determine whether that value is likely to be in excess of the commissions paid for their services.
Public company sales, as noted earlier, are considerably more complex than private sales. Similar to the private seller, the management of a public company will seek out M&A expertise. However, at this stage of the process, management will also maintain an ongoing dialogue with its board as the transaction takes shape.
There are a number of major elements to be considered in structuring the transaction: price, the form of the sale (stock or assets), the form of the consideration (cash, debt, stock, or a combination), tax implications, the ongoing role of the seller (if any), and, possibly, the impact of the sale on the seller’s employees. As a result, the negotiation process can be expected to be iterative and protracted. Expert input in the areas of greatest importance and an understanding of interrelationships (e.g., tax and valuation implications on the form of the transaction) are critical. From a strategic perspective, the seller, with the assistance of his or her team, should identify deal breakers and establish a walkaway position and be prepared to discontinue discussions if issues critical to the seller cannot be resolved.
The negotiation process is not necessarily different in concept for a publicly traded company. The major difference lies with the number of individuals involved in the process. A public company will enlist a substantial number of advisors and will involve the close participation of board members as well as the most senior members of its management team. In sharp contrast to a smaller transaction, especially one in which there is owner management, the communication and decision-making process can be quite Byzantine.
The parameters of due diligence are negotiable but, under any circumstances, preparation for and administration of due diligence requires the dedication of a substantial amount of company resources. Due diligence consists of extensive document review and analysis, management presentations, interviews of key personnel, and tours of facilities. Creation of a data room (the locus of document review) is a labor-intensive activity, and preparation of management presentations can be expected to tie up key managers and their staffs for substantial periods of time.
The length of the formal on-site due diligence process varies but will generally span several days to several weeks, depending on the size and complexity of the company being reviewed. Clearly, review of large public companies with multiple locations will require more time and staff power than review of small closely held businesses. In addition, there is a vast amount of historical financial and business information available in the public domain for publicly traded companies. In the broadest terms, due diligence includes analysis of such information outside the framework of formal on-site diligence.
Although these activities have no impact on seller’s resources, it is worth noting that, from the buyer’s perspective, they may in fact dwarf the efforts associated with the formal, on-site due diligence review.
Contract and Close
Negotiation of the final contract (or definitive agreement) can be a lengthy, iterative process. Even for small deals, the final contract may take in excess of a month to negotiate. Typically, the seller is supported by his or her M&A attorney, a financial advisor, and/or the company’s chief financial officer (CFO). This is the point in the process where the attorney is of greatest assistance and value. Negotiation of the granular detail of the transaction requires someone who is intimately familiar with the process, the associated documents, and the issues. By virtue of training and experience, a good M&A attorney will have mastered the first two of these items.
Participation in the acquisition process from the beginning will have provided the attorney with the basis for dealing with the issues. That said, the active participation of the seller and his or her financial advisor is critical to ensure that business and financial issues are quickly and properly resolved.
In the case of private companies, contract and close can occur simultaneously, unless there has to be an HSR filing. As noted earlier, closing on public company acquisitions is more complex, and the time from contact to close is substantial and requires an affirmative vote by the board and, ultimately, the approval of the stockholders.
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