Sell-Side M&A: 9 Tips to Make the Sale of a Business Unit or Company Successful
A sell-side transaction is a mergers and acquisitions process where you sell a business unit or company. The concept is similar in many aspects to buying a company, i.e., a buy-side deal; however, there are also significant differences. Some examples of specific sell-side issues are the timing of sharing information, preparing the Confidential Information Memorandum (CIM), or transition service agreements (TSAs). Here are a few tips from my transactions that will make it easier for you to be successful in the next sale of a business unit or entity.
Reasons for Selling a Business Unit or Company
There are different motivations for selling a business unit or company. The most common reasons are financial distress, cashing out, getting additional liquidity, and no strategic fit. The motivations create different risks and opportunities. The most challenging is financial distress because you need to get the cash quickly. Cashing out is often the primary reason for company founders after some time, and it is part of the M&A strategy for venture capital and private equity. If you have investment programs where you make more money with the new idea than with the existing business unit or entity, the sale can make sense. Every company should regularly ask itself whether its business units and entities are still a good fit for the long-term strategy. I worked on many M&A transactions where multi-billion dollar companies sold smaller units because their strategic focus changed..
9 Tips in a Sell-Side M&A Deal
Select the right team of internal and external experts - This is a constant reminder in my articles, and it underlines my fundamental belief that the right people in the right role can make anything happen. Take your best internal people and find excellent external lawyers, accounting firms, and other experts that may be helpful for the sale. I strongly recommend talking with investment bankers and advisors to help you. From my experience, they can come up with more interested parties than just doing it yourself.
Prepare a thorough business case and start early with compiling answers to likely due diligence questions - You probably already have a detailed business case from the internal analysis of whether you should sell the business segment or company. Start with it and make it more presentable. Keep some of the information (for now) out of the first versions and add more details later. See also below the topic of the due diligence and the timing of sharing details. The investment advisors will provide you with questions that most likely will come up during the due diligence. Since the preparation of the answers to some of them can take some time, start early with preparing additional data.
Confidential Information Memorandum (CIM) - This is one of the most critical documents in the sell-side M&A process. It includes the business description, your organization and management, market analysis, go-to-market approach, your opportunities in the market, your approach to operations and client service, and initial financial information. Good investment banks/advisors are very helpful in putting this together. The CIM needs to make potential buyers interested to learn more. Ensure you take enough time to review this document and make it a good combination of a sales document and facts.
Think like a salesperson - Many finance and legal people are involved in an M&A transaction, which makes some of the M&A material very factual but not a sales document. Keep reminding everybody that this is a sales process and not a dissertation.
Mergers and acquisitions due diligence: Be careful with your information and share it step-by-step - This is a crucial and sometimes tricky issue. The interested party will quickly ask about your clients, R&D plans, current problems, and more detailed financials. Besides ensuring that you have legal protection (e.g., non-disclosure agreements), be slow in providing that information and do it only when you see real progress in the deal. There are companies out there who start a DD project only to get competitor information. The best approach is tit for tat: Give more details if you receive more from the buyer. I have been in due diligence projects where the exchange of information was very slow because it was a competitor. Also, especially when the potential buyer is a competitor, anonymize client and employee information. Speak of clients 1, 2, and 3 in your presentations and data rooms instead of naming the clients.
The sales price is only one element of the deal - There are many details that you should include in your analysis of term sheets and final sales documents. Some examples are the amount and period for escrow accounts, the calculation and time for working capital adjustments, other post-closing adjustments, earn-out payments based on the achievement of specific metrics (e.g., revenue and EBITDA), non-solicitation of critical employees, the complexity of conditions precedent, and many more. M&A lawyers and advisors can help you with those topics.
Think carefully about exclusivity - The potential buyer usually asks for exclusivity in the term sheet for the period of the due diligence and negotiation period. Since it is not clear at this point whether the transaction will be successful, try to keep the exclusivity period as short as possible. If you are in a strong negotiation position, you can also decline exclusivity; however, this is not often the case.
Support the buyer with their mergers and acquisitions integration - Depending on whether you want to sell a business or a legal entity and how they are integrated with the rest of your business, the buyer may need some time after closing to complete the transaction. For example, if you sell a business unit and many G&A functions - such as accounting, FP&A, tax, HR, IT, or legal - are fully integrated, you usually offer a certain period for the transition. You can charge the buyer for those services. Define all of the T&Cs in a Transition Service Agreement (TSA). The length of the TSA is deal-specific, and especially the IT integration can be tricky and lengthy. I have seen short (e.g., three months) and long periods (e.g., more than 12 months).
Talk with tax experts about the deal structure - Especially in a sell-side M&A situation, there is the possibility of realizing a significant taxable gain. There are many ways to structure the transactions, and I propose using an external M&A tax expert to help you find the most beneficial approach. If you have an internal tax department, they should lead that discussion. Remember: Tax evasion is illegal, but tax optimization is not.
Be Patient and Wait for the Right Deal
Sell-side M&A transactions can be lengthy and sometimes exhausting for the deal team and senior management. I have been in meetings where you can feel and see that people want to finish it as soon as possible because the process has been going on for some time. Ensure that you only accept deals that make sense to you. M&A is a stage-gate process; saying "No" at one of the gates should not be a surprise. Keep motivating people and keep pushing for good deals.
Feel free to contact me to discuss specific mergers and acquisitions examples.
