I am routinely asked by company owners as how they can get the most value for their company? My answer is always the same, leave it to professionals who truly understand how to value a company and know how to sell it.
Every day businesses are being sold in whole or parts for all cash, combination of cash and stocks or for a stock swap. Knowing how to select a brokerage or an investment banking firm depending on the size of your company may mean the difference between a good deal or leaving millions on the table. This blog will discuss the formal organized M&A used in my company when we represent sellers.
First, to get the most value out of your company, you must plan ahead. If you are thinking of selling your company or sell parts of it to raise funds, you must contact an investment banker or a broker at least 9-12 month in advance as the process that I am going to explain to you, takes time and lots of work for the sell side of the the deal team. If your business is doing over US$5M in annual sales, I recommend seeking a professional investment banking firm.
A professional firm knows that the first thing they have to do, is to truly understand your company and your business. If your company is private, expect your management team to spend a lot of time answering questions of an analyst so he/she can prepare the best defense in your valuation as the information is not readily available compared to a publicly listed company. This process can take up to 6 months depending on the complexity of your business and expect to pay anywhere from $10K-$150K for the valuation of your company and a negotiated percentage typically 2.5-10% success fee, on final transaction depending on size and complexity. This initial fee may come as a surprise to many business owners if they are not familiar with how the process works or if they are used to brokers telling them that they only have to pay a success fee. Understanding the process, will help you appreciate and value what professionals can bring to the table and without getting paid for the valuation and bidding process, there is no way anyone can do a good job for you. This is the list of some of the work you can expect from them.
1- Interview the seller/stakeholders and understand the goal for this transaction
2- Meet with the seller's personal financial adviser and plan for a reduced tax strategy.
3- Interview the management and learn about the business and analyze the company based on SWOT model.
4- Learn the industry and get information on the top 5 competitors.
5- Build a financial model to do a preliminary evaluation of the company. The financial models will be based on the following
Comparable Companies Analysis
Precedent Transaction Analysis
Discounted Cash Flow Analysis
6- Do a financial projection from the buyer's perspective and build a model for anticipation of questions and objections from the buyer's team of lawyers and accountants.
7- Meet with seller's team and discuss valuations and make any necessary modification.
8- Create a CIM ( Confidential Information Memorandum ). This is a detailed information package about the company and can be up to 100 pages.
9- Meet with potential bankers or investment groups who can finance this deal and include all of the financing information in the CIM.
10- Decide with the company's management team as how to select the buyers. The buyers selection can be done as an " Broad Auction" meaning that all potential buyers are contacted at once and ask for their bids or a ' Limited Auction". In the latter only a handful of companies are contacted that have been prescreened for compatibility.
11- Create a marketing teaser to attract potential buyers. In the teaser, the interested buyers are informed that a confidentiality agreement (CA) must be signed.
12- Draft a legal confidentiality agreement. Depending on the size of the buyer the draft and negotiation of the terms of the CA may take up to 2 months to complete.
13- Distribute the CIM package, only after the CA is signed to all parties at the same time with specific instruction on how to submit initial non-binding bids.
14- Meet with the buyer's team to answer any questions and help them with their initial bid.
15- Meet with the seller and the management team to present all of the bids and select top 3 bids for consideration.
16- Contact the successful bidders and set up a management presentation.
17- Meet the buyer's management team, representatives, investment banking team, attorneys and accountants for an interactive presentation of the target company and encourage them to give their highest bid. Give instruction as when the final binding bids must be submitted.
18- Set up a "Data Room", at the seller's location or online depending on the need and provide a time frame for the buyers to do all of their final due diligence. A data room is a place where all of the company's financial and non financial information is stored for review by the buyers' team.
19- Receive the final binding bids and review with the Seller's team.
20- Prepare for final legal agreement with the legal team from both sides.
21- Close the deal.
As you can see, the process is highly complex but it is organized well to help attract and encourage the highest paying bidders. Depending on the buyer's type, Strategic Vs. Financial Sponsor, the preparation time may vary but the process is the same.
Dr. Allen Nazeri is the CEO and founder of Nazeri & Company Co., Ltd as well as Dr. Allen Nazeri Healthcare and Advisory Group with offices in Las Vegas and Bangkok. He has received his dental degree from Creighton University in 1990 and is currently receiving his MBA degree in investment banking and private banking from Bedfordshire University in London. He specializes in Investment Banking, M&A sell-side and buyer-side advisory. He can be reached at Drallenci@gmail.com. www.Drallennazeri.com
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Investment Banking-2013- Joshua Rosenbaum 2nd Edition.