Through the Seller’s Eyes: Mergers and Acquisitions
The mergers and acquisitions market in Australia has totaled a record $200 billion in the first three quarters of 2021. The economy is slowly recovering from the effects of the pandemic, driven by cheap interest rates, record equity markets, and various stimulus packages.
Starting a potential merger or acquisition involves many processes and extensive due diligence, for both the seller and buyer. Both sides want to maximize the value they gain from the sale and will have specific strategies in place to do so. In M&A, the sell-side process describes the deal process from the seller’s perspective. It is concerned with defining types of sellers, common strategies they implement, what their advisory team looks like, how the deal can be executed, and other elements.
In this guide, we will help you comprehend the seller’s process, the documents you will need, frequently asked questions and more.
Let’s start off by describing the different categorizations of M&A sellers.
Types of Sellers
Divestments are usually done when a business unit or if a subsidiary unit is not performing well. Business owners divest a business unit, an asset, a product line, a subsidiary or a non-performing, non-core asset to another company to optimize core operations of the parent company.
2. The recapitalization
Recapitalization, or recap, is when sellers restructure the debt and equity of their company by bringing in savvy private equity investors to reduce personal financial risk without giving up complete control over the business.
3. The growth capital
Companies looking to expand, or restructure may issue more stock to raise capital without a change in control. These sellers are not actually selling the business and the capital raised does not go to the business owner but to the company. Instead, they sell shares of the company in return for capital that can be invested into the company’s growth objectives.
4. Complete change of control
A business that sells more than 50% of its shares warrants a change in management and control. Depending on the circumstances or intention, the parent business may merge with the buying company, or be completely acquired by the buying company and cease to exist.
Beginning the Sell-side Process:
There may be multiple reasons why you want to sell your business. These could include lifestyle changes, personal reasons like a divorce, retirement, declining health, partner disputes, or boredom. Likewise, owners may have strategic incentives to scale, new opportunities in the market, or receive an offer from a potential buyer that is too good to refuse.
Whatever your reason, a good starting point would be to define your selling strategy to gain maximum value from the deal.
While many factors affect the price tag of a business, selling a business ultimately comes down to one thing: the value of your business. While you may have a price in mind, buyers, too, will valuate your business based on its potential for sustainable revenue growth and return on investment (RoI). Agreeing on a transaction value is the primary challenge in all merger and acquisition deals.
How do You Value Your Business?
A well-designed sell-side process will showcase your business as an asset to be acquired rather than a business ‘for sale’. A lot of this depends on the business valuation.
The objective of valuation is to:
- identify internal and external variables that will impact your company's revenue growth
- attract buyers that understand the potential and value of your business.
An unbiased view of your business and a nuanced understanding of the market is imperative to drive a successful valuation. Here are the drivers that will help you establish an achievable valuation.
- The financial strength of your company through records that show historical revenue growth, profit margins with earnings, annual turnovers, and valuation of tangible assets owned.
- The stability, skill, and efficiency of your current workforce, reflected through documented job descriptions, skill sets, salary structures, and the impact that key employees leaving after the merger may have on the business.
- Market information and industry growth indicators, including historical and projected growth. Assess the market objectively to identify your competitive edge or the factors that make you an industry leader.
- Intangible assets like intellectual property, patents, customer retention rates, brand value, brand recall, customer data, etc., cannot be quantified but add significant value to your business.
- Operational efficiencies, management success, the scalability of your business, the diversity of the products or services you offer, and the expanse of your distributor network are some factors that you should consider in your valuation.
- If your business has tremendous growth potential, but you lack tangible or intangible assets or financial history, like many IT startups or eCommerce websites do, you can valuate your business using Discounted Cash Flow (DCF). The DCF method is used to estimate the value of a business based on its potential future cash flow.
We advise you to hire an experienced sell-side advisor or an investment banker that can assist you in the valuation and in turn, execute an optimal sales process. You will need to sign an engagement letter with your M&A advisor to determine their legal fees, payment structure, the scope of their duties and a non-disclosure or exclusivity clause to protect the confidentiality of the M&A process.
A detailed engagement letter will ensure that the intermediary and the seller know what is expected from them and there are no surprises along the way. This is also a great opportunity to lay down the groundwork and discuss your objectives for the transaction with your investment banker.
The M&A process is fraught with legalities, confidentiality agreements, due diligence requests by buyers, and extensive documentation. A sell-side advisor brings immense value to the table and will help you drive a lucrative deal. This is especially true for high-value mergers and acquisitions.
Another role of an investment banker is to help you identify and contact potential buyers and send them a teaser in the form of a short presentation containing general information about your business.
If there is interest from potential buyers, ask them to sign a non-disclosure agreement (NDA) before sending the Information Memorandum and further procedural steps. In our advice, you, the seller, should remain anonymous to potential bidders, allowing your sell-side advisor to act as an intermediary instead.
The next step would be to decide the kind of process you want to run.
Organizing How You Want to Auction Your Business:
1. Broad auction
In a broad auction, you or your sell-side advisor contact many potential buyers and invite them to participate in the bidding. A broad auction can include competing firms, private companies, entrepreneurs, distributors, and customers.
A broad auction maximizes the purchase price by casting a wide net and increasing the probability of obtaining the highest possible bid.
The controlled bidding timeline also increases your negotiating leverage and puts you in the driver's seat.
2. Limited auction
Limited auctions are suited for high-value businesses that, due to the asking price, have a small pool of 10 - 50 potential buyers, identified by your advisor as a strong strategic fit. It is important that your banker vets these potential bidders to ensure they have the financial resources to acquire your business.
When compared to a broad auction, a limited auction has a higher level of confidentiality, minimizing any possible disruptions while giving you the advantages of a broad auction.
3. Targeted auction
Larger companies that seek to maintain confidentiality and reduce industry disruption prefer targeted or controlled auctions involving 2 to 5 perceived strategic buyers.
A targeted auction weeds out buyers that do not fit the criteria set out by the seller. It puts you in control of the negotiation leading to a higher business valuation.
4. Exclusive negotiation
An exclusive negotiation is when a seller negotiates exclusively with one potential buyer. Typically, the seller signs an exclusivity agreement for a specified timeline where they do not negotiate with any other potential buyers.
As a seller, you will want to ensure that you can terminate the exclusivity agreement if the buyer's offer is not close to your company valuation, or the negotiation takes longer than expected.
An exclusive negotiation offers the highest levels of confidentiality, speed, and minimal business disruption. The biggest disadvantage is a closed market, lowering your leverage and the distinct threat of not maximizing the deal potential.
Strategies For Sellers
A common mistake many businesses make is to draw up strategies or conduct due diligence only after being approached by a potential buyer. This delays the sell-side process and compromises the deal.
While there are multiple strategies sellers can implement to ensure a satisfactory deal, we’ll go through a few common ones:
1. Hire the right advisors
Hiring the right sell-side investment banker will ensure a smooth process and maximum value for your business. An experienced M&A banker will help you identify the value drivers of your company, provide a market check, find potential buyers and act as an intermediary to negotiate the highest exit value.
M&A advisors usually charge a retainer fee in addition to a commission upon completion of the transaction. The benefits of hiring an expert analyst far outweigh their legal fees as an experienced M&A banker will market your business to a far wider pool of potential buyers and will be with you through every step in the M&A process.
2. Be prepared for due diligence by the buyer
A potential buyer will, without a doubt, conduct their due diligence before the bidding process. An effective sell-side strategy is to be prepared for this by conducting your due diligence to identify potential weaknesses. This places you in a position to act, and iron problem areas out before a similar process is conducted by the buyer.
3. Set up an online data room
An online data room is an electronic record of key company documents like financial records, contracts, employee information, valuation of the company's tangible and intangible assets, intellectual property information, and other documentation.
You can provide essential corporate information to potential buyers in a controlled environment, preserving confidentiality, yet ensuring that potential bidders have all the necessary information to understand the deal value.
4. Write an appealing CIM
A CIM or a confidential information memorandum, is the only way to show prospective buyers the potential of your business by establishing the financial health of your business, highlighting your competitive advantage, and identifying future opportunities to forecast the growth potential.
A compelling CIM must include:
- A snapshot of your business.
- The history of your company, business goals, mission, and vision.
- Detailed financial records and future projections
- Exhaustive industry research, including your market position and competitor analysis
- Your company's organizational structure and managerial strengths
- A marketing and sales strategies and historical data supporting past successful marketing and sales campaigns.
5. Create a shared vision
Your sell-side advisor should target companies that are a good cultural match and have compatible values to create a shared vision for the new company after the merger.
Clear communication is the key to involve stakeholders from both companies at the start of the merger. Transparency between key players of both companies lays a solid foundation for the formation of a new company and builds a forward momentum by fostering a collaborative environment.
6. Understand the negotiation dynamics
All M&A negotiations, like many other negotiations, have a party that has greater leverage. Does the buyer want the deal to go through more than the seller's need to sell? Can multiple bidders be played against each other? There are many underlying dynamics, and understanding these dynamics is crucial to drive a successful merger.
An experienced advisory panel or investment banker will cultivate relations and build a rapport with the negotiators from the buy-side to help you gain maximum value from the merger.
Document Checklist For Sell-side M&A
To ensure that your business is ready for sale and that there are minimal impediments that can slow down the process, we advise you to prepare due diligence documents in advance. A buyer will ask for these documents and having them ready shows the buyer that your business is worth acquiring. The documents include corporate, legal, financial, commercial, human resources and marketing data.
These due diligence documents provide a snapshot of your business, its history, management structure, and more to your potential buyer.
- Executive summary of your business
- Mission and vision statements
- The history of your business
- Organizational charts
- List of addresses of all offices, branches, warehouses, properties owned or leased by your company
- Business licenses
- Occupational license
- Building permits
- Rental agreements
- Zonal and land use permits
- Tax registration documents
- Power of attorney documents
- Previous or outstanding legal cases
- Banking information
- Income statement and balance sheet
- Proof of cash report
- Annual reports for the last three years
- Intellectual property
- Domain names registration
- Social media handles
Human resources documents
- A complete list of current employees, contractors, and freelance resources
- Pay scales and salary structures for all employees, contractors, and freelance resources
- Professional resumes of key employees
- Annual leave, parental leave, paid leave, unpaid leave, and overtime policies
- Marketing and sales strategies
- Proof of success of previous strategies
- Sales reports
- List of top 50 customers including revenue generated from each for the past 3 financial years
- List of all channel partners
- List of all suppliers and distributors
Our Role in the Process
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 MergerVault, a product that has been built and tested over the last year and a half. MergerVault 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 utilize 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, MergerVault has a marketable list of over 10, 000 buyers that are internally vetted.
Answers to FAQs in Sell-side M&A
Is M&A advisory sell-side?
M&A advisors are necessary for seamless processes on both the buy side as well the sell side. Sell side advisors help sellers analyze and valuate their businesses and complete the required due diligence to prime the business for sale and make it look promising to potential buyers.
How long do M&A deals take?
Depending on the complexity of the deal, the size of your business, and the accuracy and availability of supporting due diligence documentation, M&A deals can take anywhere from 6 months to several years.
Should you buy stock before a merger?
A merger is viewed positively, and stock prices of potential target companies tend to rise before the merger. Seasoned investors tend to buy stock based on the expectations of a merger, as a merger suggests that the buying company sees value and potential for long-term revenue growth of the business being sold.
Who must approve a merger?
The board of directors of both the selling and buying companies must approve the merger. In Australia, the Australian Competition and Consumer Commission (ACCC) is the key regulatory authority responsible for merger control.
Notifying the ACCC about a potential merger of two proprietary limited (Pty Ltd) companies is voluntary. The regulations governing mergers and acquisitions apply to Australian companies and managed investment schemes listed with the Australian Securities Exchange (ASX), unlisted companies with more than 50 shareholders, and foreign buyers. The ACCC can also intervene if they deem a potential merger can lessen the competition in the Australian market.
Sectors like banking, finance, media, and energy and resources, are also governed by special M&A rules.
Is asset management buy or sell side?
Both sell-side and buy-side companies employ asset managers, though the roles and responsibilities are different. A sell-side asset manager will track the stock performance, project future financial growth and help the seller determine the value of the company.
Understanding the seller’s perspective in M&A will put you at an advantage when it comes time to sell to or merge with another entity. While sellers and buyers collaborate to ensure a successful deal, each side is very different in terms of strategies, documentation, advisory council, and objectives. It can be useful to understand the buyer’s perspective in M&A for a more holistic view.
This guide serves only as a starting point for sellers. Your advisory team should enter the negotiation with granular insights of your company, its market, and other internal and external factors.
Get in touch if you have any questions or need assistance in valuating your business, finding quality buyers, or need further information on the sell-side process.