The Process
THE PROCESS
A MARKET-DRIVEN APPROACH TO THE SALE OF A MID-MARKET COMPANY
1. Our approach to the sale of a company
Strategic and Market-Driven: Mid-Market Partners approach to M&A leverages our market research and go-to-market strategy capabilities to create a Market-Driven Strategic Approach to Mergers & Acquisitions.
In this regard, we are different from investment bankers that focus almost exclusively on the financials of a deal to the exclusion of the market analysis, or business brokers that tend to focus on the volume of deals “flipped” rather than conducting in-depth business and competitive analysis before packaging and marketing the company.
We do our homework and analyze the market opportunity, the competitive landscape, adjacent technologies and industries, and the company itself. We then determine the best positioning of the offering and package it accordingly in our offering memorandum.
Casting a Wide Global Net: We have learned that no matter how knowledgeable you are about the industry and the players, you can never know from where the best acquisition suitor may come. As technology disrupts business models and industries converge, it is not always the most obvious candidate that emerges as the best fit or the highest bidder.
We leverage our global market research and strategic analysis capabilities to identify the longest-possible initial list of potential buyers. We look primarily for strategic fit, but we do not limit our search by geographic or industry boundaries.
A Blind Competition: Our process is designed to produce the best offers from potential suitors- leading to the highest possible valuation. Two fundamental principles underpin our approach:
- Value is in the eyes of the suitor: We cannot assume – but can strive to learn – the strategic motivation behind an offer to buy. By letting the market speak in a competitive environment, we ensure we achieve the best valuation rather than setting a price or relying on standard industry multiples.
- Competition increases value: Under our process, suitors know they are competing with other buyers but do not have visibility into who they are or what they may bid. This blind competition compels bidders to put forth their best offers, and prevents them from assuming any advantage.
A Disciplined and Tightly-Managed Process: Managing the process is essential to success and to realizing the best value. We control all communication and information exchange and keep each bidder moving forward at roughly the same pace in the process. This allows management to continue to focus on running the company instead of being caught up in constant inquires and negotiations.
More importantly, we are able to maintain an arm’s length relationships with potential bidders who know they are in a competition. This precludes them from attempting to gain a degree of intimacy with the principles and to take actions that may position them preferably, or even provide them exclusivity.
The key to the process is maintaining a friendly but arms’ length competitive relationship with all suitors
Experienced negotiation, deal structure and sequencing: Getting a good offer is only the beginning of the process of closing with a good deal; and a negotiated Letter of Intent (LOI) is viewed by many buyers as the first step in serious negotiations.
Sophisticated buyers know that an enticing offer that is non-binding can be a lever to gain exclusivity and so that they can then begin to shave away the value through stages of due diligence. Even a definitive closing contract often is not the end of negotiation in many cases where there is a minority ownership or an earn-out agreement.
Our experience in negotiation and deal structure is how you prevent “getting a haircut” after you thought you negotiated a good deal
.
A Disciplined and Tightly-Managed Process: Managing the process is essential to success and to realizing the best value. We control all communication and information exchange and keep each bidder moving forward at roughly the same pace in the process. This allows management to continue to focus on running the company instead of being caught up in constant inquires and negotiations.
More importantly, we are able to maintain an arm’s length relationships with potential bidders who know they are in a competition. This precludes them from attempting to gain a degree of intimacy with the principles and to take actions that may position them preferably, or even provide them exclusivity.
The key to the process is maintaining a friendly but arms’ length competitive relationship with all suitors
Experienced negotiation, deal structure and sequencing: Getting a good offer is only the beginning of the process of closing with a good deal; and a negotiated Letter of Intent (LOI) is viewed by many buyers as the first step in serious negotiations.
Sophisticated buyers know that an enticing offer that is non-binding can be a lever to gain exclusivity and so that they can then begin to shave away the value through stages of due diligence. Even a definitive closing contract often is not the end of negotiation in many cases where there is a minority ownership or an earn-out agreement.
Our experience in negotiation and deal structure is how you prevent “getting a haircut” after you thought you negotiated a good deal
.
II. The Process
Discovery and company diligence: After signing a non-disclosure agreement and receiving and reviewing company financials, personnel, customer, and related information, we like to begin a project with a Discovery Session with the owners and key principles that are privy to the sale process.
This often includes a factory tour and explanation of key assets, intellectual property, expertise, knowhow, capabilities, capacity, and key personnel.
We also gather all key financial source information that will support our financial analysis and valuation.
Numbers speak for themselves
Market and competitive analysis: The next step in our process is to research and analyze the market opportunity and competitive landscape.
This involves sizing the addressable market, performing competitive analysis, conducting customer due diligence and essentially completing the analysis necessary to determine the company’s competitive position and potential sustainable market growth.
The market analysis provides the supporting information for conducting a reference valuation and for assembling the initial long-list of potential suitors.
Reference valuation: As noted above, valuation is in the eyes of the beholder. However, it is important to enter the process with a realistic idea of the value of the company. We use all of the standard models of valuation but rely most heavily on the Discounted Cash Flow (DCF) of future earnings.
The key to this method is projecting sales which is where our market analysis comes into play. We run sensitivity tests on the pro forma based on good, fair, and average scenarios. We also research comparable multiples of EBITDA for reference and look at parallel recent transactions.
The Confidential Information Memorandum (CIM): Packaging the opportunity takes the form of an offering prospectus or a Confidential Information Memorandum (CIM). After we have completed the market analysis and company due diligence and financial modeling, we package the company via the CIM.
The CIM serves to position the company in the context of the market opportunity and competitive context. It will include sections such as the following:
The long list: Based on our analysis of the company and market opportunity, we will determine the universe of potential buyers. Then leveraging our global office staff, we build a long list of target companies to receive our “Teaser Letter.”
This list-building effort will include compiling a brief profile of the target companies (and parent companies and/or subsidiaries) strategic focus along with contact information on key decision-makers.
We will prioritize this list based on criteria we develop along with the client to determine strategic fit.
The teaser letter: Our initial contact with the long-list of potential suitors will be via a “teaser letter,” which is typically a one or two-page description of the opportunity designed to catch the attention of potential buyers.
It is typically our practice to send teaser letters by certified or express mail directly to the C-Suite.
The teaser letter will ask for an “Expression of Interest” by those suitors desiring to learn more of the opportunity.
Expression of interest: We will not passively wait for expressions of interest. Having ranked the long list of potential suitors in terms of potential fit, we will follow up by email and phone with the higher-value targets to ensure they did not overlook the opportunity.
Once we have an expression of interest, we will execute a Non-Disclosure Agreement (NDA) and follow with a controlled copy of the CIM.
Each CIM will be numbered and logged; any suitor dropping out of the process will be required to return their copy of the CIM to Mid-Market Partners.
Information exchange: After suitors have had an opportunity review the CIM, there will be questions and requests for additional information.
Mid-Market Partners will monitor and manage the information flow and communications. For the more seriously interested suitors, there may be a need to arrange conference calls with the company principals.
We may also need to accommodate site visits to the company.
Request for Indicative Offer: After an appropriate period of information exchange, we will formally as for non-binding “Indicative Offers.”
These offers will provide an indication of the value the potential buyers place on the company and a rough idea of the deal structure that will be proposed.
Short list: Based on the indicative offers we will winnow the remaining suitors down to a short-list of high priority potential buyers with whom we will begin initial negotiations.
Preliminary negotiation: At this point, we will begin preliminary negotiations. Generally, this will involve more detailed discussion surrounding valuation and deal structure.
Through this process, we will further narrow the field and finally request formal offers from a very short-list of remaining suitors.
Offer/Suitor evaluation and ranking: We will then build a spreadsheet ranking the offers and the suitors against a set of criteria and review with your team to determine with which suitor we want to enter into a period of exclusive negotiations.
Final negotiations/LOI: We will ultimately proceed to final negotiations with the chosen suitor and summarize the value and terms of the deal in a Letter of Intent (LOI) which are typically non-binding.
Due diligence: Managing the due diligence process correctly is crucial to preserving negotiated value. We carefully control the exchange of information and to ensure any challenges to what was represented in negotiation are responded to promptly and appropriately.
Negotiated value can be lost in due diligence if the buyer has managed to get exclusivity and then finds issues that can be used to justify a lower value.
Final deal value and structure: Value and terms are still at risk post due diligence through final business negotiation and deal structure. We represent the sellers’ interest and prevent deterioration of value through the process.
Legal review and close: Finally, there will be a legal review and preparation of closing documents to finalize the agreement; while this step will largely be handled by the attorneys, our role is to ensure the final documents are consistent with the intent of the negotiations.