Preparation is the single most important weapon a business owner who is looking to sell their business can have in their M&A arsenal. The M&A process is stressful and time-consuming, but a little advanced preparation can save time and money while increasing the chances that the sale is successful. Here are nine things you need to do to get ready.
Devise an NDA
Potential buyers must sign a well-written and clearly worded NDA before initiating negotiations to buy the business. The NDA should also include an employee non-solicitation clause.
Meet With M&A Advisors
An experienced M&A advisor can greatly assist with the process. These experts act as intermediaries who can expedite the process and help set reasonable expectations. As you interview M&A advisory firms, ask for a list of potential buyers, carefully review the engagement letter, check references, and ask for a list of market comparables (“comps”).
Choose the Right Legal Team
Your in-house counsel is probably not sufficient. You need a skilled, experienced M&A attorney to help sell your company.
Know How to Negotiate
CEOs often want to take control of the process, negotiating terms. But this presents a conflict of interest and can allow emotions to get in the way. Instead, elect an M&A committee to negotiate the deal. For the best possible terms, your legal counsel should draft the first draft of the merger agreement. Many buyers, however, will insist on doing it themselves.
Sign a Letter of Intent
A letter of intent outlines the basic deal terms and establishes an exclusivity period. These documents usually protect the buyer’s best interests, not the seller’s. So have your legal team read through it, and keep the period of exclusivity as short as possible. Short periods of exclusivity help move the deal forward to completion.
Company Preparedness
Most sellers lack sufficient internal resources to navigate an M&A transaction. Some common issues include:
- Incomplete files with missing contracts and records.
- The inability to construct an online data room.
- Difficulty crafting and adhering to a complete disclosure schedule.
- Preparing for due diligence.
- Identifying contracts that require consent for assignment. Leases are often an issue.
Manage Staff Concerns
A well-executed M&A deal addresses a number of staff issues. Some questions to tackle include:
- How will the buyer retain and motivate your staff?
- How with the purchase address stock options?
- How with the purchase address stock options?
- Will any stock options be accelerated?
- Will a carve-out be necessary?
- How will you retain key management?
Negotiate Deal Terms
Deal terms can make or break a transaction. Some key issues include:
- Escrow holdback for violations of the merger agreement
- Amount of the escrow holdback for indemnification, and the length of the holdback
- Closing conditions
- Price adjustments
- Representations and warranties
- Scope of indemnity, and what is excluded
- The specific language of the disclosure schedule
- Management of employee stock options
- Management of pending or potential litigation
- Allocation of risk
- Apportionment of costs for government approvals and regulatory consents
Remaining Focused
Selling a business is a long and involved process. Some owners get distracted. Your team must remain focused on the goal, and never allow the sales process to take their attention away from running the business. Doing otherwise may jeopardize the sale by destroying company performance. The buyer will continually monitor financial performance as the sale proceeds, so work to ensure performance is consistent with or better than your projections.
