What is a sell-side M&A process?
The sell-side M&A process is the organized auction process of selling a company. Investment Bankers usually drive such a sell-side process.
A typical sell-side process starts with preparing marketing materials, identifying potential buyers, collecting indicative bids that include an acceptable purchase price and driving due diligence with promising bidders. The final step is to negotiate the definitive agreement, the so-called "sale and purchase agreement" (SPA).
The average sell-side process takes about 6 to 9 months. 6 months is already on the shorter end. Some processes even take up to 12 months. Regulatory issues, such as antitrust clearance, can extend the timeline.
A business owner who plans on selling his company must go through quite a lengthy process until a deal is made. That's why hiring an Investment Bank to help with all the required work makes sense.
Sell-side M&A process strategies
There are typically four ways to organize the sell-side deal process:
Broad auction
The broad auction process includes the largest number of potential buyers. In this case, your Investment Banker would approach as many bidders as possible. The main goal is to cast a wide net.
By doing so, there is a higher likelihood to have more competing bidders within the auction process. As Investment Bankers, it's your goal to increase the purchase price and maximize shareholder value for your client.
On the flip side, broad auctions are very time-consuming. You need to deal with multiple parties during the sell-side process. Once the broad auction is initiated, there is no way back. Your target company's confidential information has been leaked to the entire buyer universe.
Limited auction
The Investment Banker approaches fewer potential buyers in a limited auction than in a broad auction. We are talking about 10–50 potential buyers.
Since the buyers' universe is smaller, not everyone receives detailed information about the target company. This improves confidentiality. The Investment Banker also has more control over the process because you can screen for genuinely interested buyers vs. just window shoppers.
The limited number of bidders decreases the chance of getting a high offer. However, multiple potential buyers are still in the process, giving the seller a competitive advantage.
Middle market businesses are best suited for limited auctions, as this type of process offers the trade-off between gathering as many potential buyers as possible and confidentiality.
Targeted auction
The Investment Banker will approach less than 10 potential buyers in a targeted auction.
The Investment Banker has tighter control over the selection of potential buyers, as only a handful are involved. The selected parties involved are pre-screened and usually display a strong strategic fit. This increases the likelihood of a successful sale with a high purchase price.
Larger companies prefer a targeted auction because it offers higher confidentiality.
Exclusive negotiation
Exclusive negotiation happens with a single potential buyer. In this case, the Investment Banker will only negotiate with one potential buyer at a time.
Companies seeking the highest level of confidentiality and minimal business disruption prefer this type of process. This dramatically reduces the risk of information leakage.
However, the lack of competition gives the potential buyer more negotiation power, which will lower the purchase price.
Steps of a sell-side M&A process
Step 1 - Pitching for the M&A mandate
Before starting a sell-side M&A process, you need a company up for sale. When the shareholders decide to sell their company, multiple Investment Banks will pitch to win the mandate.
Investment Bankers will present their sell-side pitch, which contains valuation analysis, a list of likely buyers, prior transaction references and the potential timeline.
Step 2 - Preparing marketing materials
You won the pitch and the shareholders hired your Investment Bank. They want your strategic advice. What happens next?
Confidential information memorandum
The sell-side M&A process starts with preparing the confidential information memorandum (CIM). This marketing document provides potential buyers with detailed information about the selling company and its business model.
A confidential information memorandum is typically at least 50 pages long. It includes extensive business and market descriptions and financial information, such as historical financial statements and future business plan. The Investment Banker will compile all this information into a neat, confidential information memorandum.
Teaser
The teaser is a short version of the detailed CIM. It usually has around 5 pages and is the first marketing document sent to a potential buyer. The information presented is similar to the CIM: a short business description and an overview of critical financial information of the selling company. It is just not that extensive compared to the CIM.
Buyers list
The Investment Bank will assemble a list of suitable buyers for the selling business. Each buyer is pre-screened by the Investment Bank regarding strategic fit and financial means. The list and the process strategy are then extensively discussed with the shareholders.
If the list of prospective buyers is small, it is a targeted auction process. On the other hand, a broad auction process involves many prospective buyers. Confidentiality might be an issue when approaching too many buyers. Before disclosing sensitive information, you don't know whether they are interested buyers.
Step 3 - Market approach
Approach potential buyers
Now, it is time to circulate the drafted marketing materials. Each company on the buyers' list will be approached. This is where the network of the Investment Bank comes into play.
Initially, prospective buyers will receive the teaser with a confidentiality agreement. To receive more information, the buyer must sign the non-disclosure agreement and maintain confidentiality throughout the process.
Next, interested buyers will receive a copy of the confidential information memorandum after signing the confidentiality agreement.
Receiving and evaluating initial bids
Each buyer now has a lot of detailed information about the business and is given about 6 weeks to submit an indicative offer. This is where the bidding process starts.
Ideally, all prospective buyers were approached at the same time. All interested buyers will then submit their initial bids at the same time. This will generate competitive pressure and give the Investment Banker options.
The Investment Banker then will collect and evaluate all the bids based on the financial terms, strategic fit and buyer credibility. The bids will also describe how the buyer intends to fund the acquisition and what kind of board approval they need.
Step 4 - Due diligence process
Access to the virtual data room
The best offers are selected and the due diligence process begins. The promising bidders will get access to a virtual data room, where they will find all the information on which the marketing materials are based.
They will get the opportunity to analyze the business performance in detail and to ask questions in the VDR. The buyer should get all the information to make informed decisions regarding the potential acquisition.
Management meetings
While the due diligence process is ongoing, the potential buyers will get the chance to meet the management of the selling company combined with a site visit.
The management presentations are an opportunity to put the business in the limelight and highlight its growth potential. On the other hand, the buyer seeks clarification and asks questions to gain a deeper understanding of the selling business. The buyer also gets the opportunity to conduct a site visit to inspect the facilities of the target company.
Management presentations usually can last several hours up to a full day. Therefore, the number of participating buyers is limited to the most viable contenders.
Step 5 - Final bids and negotiation of the definitive agreement
Once the due diligence process ends, the potential buyers will submit their final bids. This bid is now binding to the buyer, unlike the initial bid. The purchase price is ideally confirmed.
At this point, the potential buyers will try and negotiate an exclusivity agreement. This will grant the buyer exclusive negotiations with the sellers, which prevents the seller from talking to other potential buyers.
In the background, a law firm comes into play. The legal counsel of the sell side usually drafts a sale and purchase agreement. This is the definitive agreement that outlines the terms of the transaction. The deal is now finalized: deal structure, purchase price, payment terms and warranties.
At the end, there is one bidder left. The winning bidder is often the bidder that offers the highest purchase price.
Step 6 - Signing and closing
Once all the terms are agreed upon, the definitive agreement is ready to be signed. This is the signing part. Depending on the company's type of incorporation, signing usually requires notarization.
The closing part involves certain closing conditions, such as the transfer of the purchase price, drafting of financial statements or clearing all regulatory issues.
That is when two companies finally come together and the sell-side M&A process ends.
What does a sell-side M&A adviser do?
Investment Bankers provide critical deal execution and negotiation to the selling shareholders.
By deal execution capabilities, we mean everything that facilitates the transaction. The sell-side Investment Banker prepares marketing materials, helps the sellers identify potential buyers, coordinates due diligence and negotiates the deal terms.
This is all done to maximize the purchase price for the sellers by creating competitive pressure with multiple parties. You don't want to rely on just one buyer.
Investment Bankers are an essential component of a successful sell-side M&A process.
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