As part of a disciplined sale process, there comes that exquisite moment when the seller receives multiple Letters of Intent (“LOI”) from potential suitors. The objective is to select the optimal partner/investor that meets the goals of the seller. Let’s examine the essential factors that inform that selection.
Who:
All potential partners are not created equal, so the most important criterion in selecting a partner is to determine who they are. The challenge is to identify the party who can best demonstrate that it will close on the agreed upon valuation and terms in the LOI. Here are some questions to explore to understand who the buyer is.
1. Does their interest in the acquisition make sense? What’s the acquisition rationale and strategic fit?
2. Do they have a demonstrated understanding of the industry? Have they made other acquisitions in the space?
3. How have they arrived at the determination of value and have they provided understandable and supportable assumptions for valuation?
4. What are the major contingencies? If the bid is contingent on financing, has support for such financing been provided? What are the outstanding due diligence risks? Do they require approvals (i.e., board of directors and private equity shareholders) that create undue risk of closing.
5. Does the transaction carry regulatory risk?
6. How committed does the bidder appear to be based on investment, or lack of investment, in the “process”,
7. Above all, do you trust them?
What:
What’s the deal? To what extent have the targets responded to the process guidelines. Of course valuation is critical, but perhaps as important are the accompanying terms and conditions. Is it a stock or an asset transaction (tax implications)? It would be a simple analysis if each LOI responded with consideration being all cash at closing, but often there are other consideration structures, thereby complicating comparisons. The most common forms of deferred consideration include seller notes, roll-over equity and earnouts. Also, aside from financing and approval contingencies, what are the future expectations from the seller’s management team?
Where:
Where a potential partner is located can become an important selection factor. If they are located near your company, it can make their due diligence smoother. Conversely, are the potential acquirers US based or are they international? Unless a foreign buyer has a significant domestic presence and regularly acquires U.S. based companies, they can add an additional degree of complexity to any transaction. More importantly, location becomes even more critical when there is real estate involved. Is real estate included in the transaction? What are the terms of any lease of seller’s real estate?
When:
Always obtain a timeline to closing. Upon the signing of a LOI the seller often provides the buyer with exclusivity for 60-90 days to close. However, sellers should know the key hurdles during exclusivity. Identify the conditions that could delay the closing such as due diligence relying upon third parties, financing contingencies and regulatory/board approvals. Remember that in the M&A world, time is never your friend, and the longer it takes the greater the likelihood of the dreaded “retrade” or worse.
How:
One important determinant to assessing the likelihood of a successful closing is to evaluate the quality of the buyer’s advisors including attorneys and accountants, the more professional, the better. Once convinced that the buyer passes the “smell test” the seller should try to envision what the future looks like for its major constituents (employees, customers and communities). Does the synergy rationale rely on expense reduction and, if so, what are the implications for the work force? Further, where there is real estate involved, what are the plans for the facilities (purchase, lease and terms)?
Final Thoughts:
In a business sale, as with most arms-length commercial transactions, there is no substitute for competition from multiple bidders to validate valuation expectations, ascertain market conditions and to develop options. A choice of one never tests the market, and a well-coordinated process results in options. So the importance of a thoughtful process in selecting an acquisition partner in a once-in-a-lifetime transaction cannot be overstated.
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