- Timeframe: M&A transactions are typically at least a four-month process, six months is common, and eight months is long.
- Structure and Potential Buyers:
- Asset or equity deal
- An asset deal is a deal in which the buyer buys certain assets, and excludes certain liabilities, of the target seller. The buyer does not purchase the entire company.
- An equity deal is when the entire company and its equity is purchased, and either the target company merges into the buyer or becomes a wholly-owned subsidiary of the buyer.
- Buyers:
- Commonly either financial or strategic
- A financial buyer, like private equity, is purchasing to flip the target company or roll it up into a similar group of companies and resell. Private equity companies typically are involved in managing/running the company and have a timeframe in which they need to obtain a return to their investors (six years is common).
- A strategic buyer generally operates in the same industry as the selling target, and wants to grow, obtain synergies and/or obtain new market opportunities and is looking at the target seller as a long-term fit.
- Identifying a Buyer: Seller could rely on contacts or a known buyer, or could, but certainly does not have to, engage an investment banker. An investment banker typically charges fees and then takes a percentage of the sale price.
- Auction processes in which potential buyers are notified and submit purchase bids may maximize the sale price, though could add time and costs to a sale.
- Commonly either financial or strategic
- Asset or equity deal
- Legal Counsel: A seller should engage legal counsel before an auction starts or once the letter of intent is being drafted and negotiated.
- Letter of Intent: A letter of intent is typically a non-binding declaration of intent on the deal’s high-level terms, such as structure, price and closing date.
- Diligence: Buyer will review seller’s contracts, meet its people, conduct a site visit, etc.
- Closing:
- The parties will negotiate and sign a purchase agreement, and either sign and close simultaneously on the same date, or sign on one date and then close on a later date (i.e., three weeks later).
- Signing and then closing on a later date is common if a key deliverable needs to be obtained prior to closing, such as a customer consent to continue to work with the buyer post-closing.
- The parties will negotiate and sign a purchase agreement, and either sign and close simultaneously on the same date, or sign on one date and then close on a later date (i.e., three weeks later).
- Earnout: An earnout, in which the seller obtains some portion of the post-closing revenue or profit of the sold business, is a common way to bridge purchase price differences between the seller and buyer.
- Post-Closing:
- Sellers may have non-competition restrictions, employment agreements and/or other post-closing covenants to abide by.
- Integration: is one of the key aspects of a deal, and often underappreciated and commonly the one reason why many deals do not work. The parties should ascertain in the diligence period whether they are a cultural and business fit, review business systems (e.g., IT and ERP), and develop a tentative post-closing integration plan with timeframes.