Finding a Qualified Buyer: Ready, Willing and Able to Close
- Do Not Try to Do This on Your Own.
You decided it is time to sell your company. What is the best way to do so? A word of warning: Many business owners who are thinking of selling have been approached by potential buyers. Just because people are interested in buying your business, do not think you should try to do this by yourself. The best results for you as seller will come from a team approach involving you as owner, your key executive(s), your outside CPA, a corporate lawyer experienced in merger and acquisitions (“M&A” lawyer) and a qualified investment banker (“IB”). Each of these has a distinct and important role to play in the process.
- Engage an Investment Banker.
Once you, the business owner, have decided to sell, the recommended next step is to consider involving a qualified investment banker (IB) as early in the process as possible (if your business is valuable enough to bear the associated cost). (If your business is not large enough to warrant the engagement of an investment banker, consider engaging a business broker. That is a topic for another memo.) As described below, good IBs effectively pay for themselves by obtaining a higher purchase price and saving your time, in amounts in excess of its fees.
As a general rule, buyers are much more experienced in sale transactions than the typical seller, which is why it is so helpful for sellers to have experienced professionals involved, including an IB. Reputable IBs have extensive networks of potential buyers categorized by buying history and interest, industry, and company size; and they have relationships with private equity groups, wealthy individuals, and international buyers—networks that are normally beyond the reach of even the most successful business owners. In addition to locating the optimal buyer, IBs can assemble a list of backup buyers in the event the first attempted deal doesn’t close. IBs can also help determine which interested buyers are financially able to purchase the business before you commit to the expensive and time-consuming sale process.
Connecting with a potential buyer without the advice of an experienced M&A lawyer and an IB is unwise and can put you, the seller, in a weak negotiating position or—worse yet—allow a competitor to access confidential information without adequate legal protection in place. Sellers who agree to exclusivity or deal terms before a proper letter of intent has been signed and appropriate preliminary due diligence has taken place put themselves at risk of a price change or having the deal drag out for months on end.
An effective IB can help create a sense of urgency in the sale and momentum toward the close, keeping the process from slowing down. IBs also remind buyers there are multiple offers pending.
Once you’ve selected an IB, have your business transaction lawyer review the proposed IB engagement agreement to ensure your interests are being protected and that the fees being charged are consistent with market prices. Then, as soon as the IB has been engaged, insert the IB as intermediary between you and all potential buyers throughout the following several steps of the buyer vetting process. Beware that some potential buyers will try to deal with you directly rather than through the IB. Gently refer them back to the IB.
- Begin Buyer Solicitation and Evaluation.
In this step, you will work with your IB to solicit and evaluate qualified buyers. The several categories of buyers, all of which require different strategies and marketing plans, include direct competitors, private equity groups, strategic buyers who want to remove your company from the marketplace, and wealthy individuals who are looking for income and perhaps a new business interest.
Different buyers focus on achieving specific, unique outcomes once they acquire a business. This could be a high internal rate of return on their investment, regular income, a clear exit strategy, easy integration of the acquired business into their own company, or access to intellectual property they cannot replicate. Retaining existing management may also figure in.
As you methodically provide information to the buyer about your business, you will also request reciprocal information from the buyer, giving you and your IB ample time to verify what has been presented. Screening in phases is necessary, not only to keep multiple buyers interested, but also because buyers will resist giving large amounts of documentation, such as financial statements, at the early stages of the process.
Treat everyone fairly during the vetting process and don’t play favorites.
- Have Potential Buyers Sign a Non-Disclosure Agreement (NDA).
Ensure that each potential buyer signs an NDA before you share any confidential or proprietary information. This document should be created by your transactional lawyers. Do not provide any potential buyers with any nonpublic information before this document is signed. The NDA process acts as a useful screening agent; buyers who will not sign an NDA are not serious candidates.
- Present the Potential Buyer with a Letter of Intent (LOI).
Your IB will provide this document, and your lawyers will review and revise it. The LOI should cover every material element of the deal: price, structure, scope of representations and indemnifications, caps and baskets, escrow amounts (if any), and the timing of release(s). It should also address non-compete provisions and employment/consulting arrangements post-closing. Although the negotiation of the LOI can be hard, once both parties sign an LOI, the process usually becomes more cooperative.
If as the seller you are providing financing or accepting payments over time, your IB will ensure the buyer is financially qualified before you negotiate.
- Select the Buyer.
The perfect scenario involves keeping multiple potential buyers interested until the end by using a managed blind auction process. This will contribute to the seller receiving the best price and deal terms. If there is only one potential buyer, they buyer will have an advantage and will attempt to exploit its single buyer status.
Your IB or financial advisor and your business transaction lawyers will be a critical part of your final decision when selecting a buyer. If you are a business owner interested in learning more about this process, we are happy to discuss any of the above in greater detail.
Robert (“Reg”) Gipson
Main Tel. No.: (310) 556-4660