In February the company that I co-founded in 2011 along with a NYC based private equity group, completed an M&A sale process of our company to a Boston based investment fund. While our growth strategy included a “buy-build” acquisition program where we completed several acquisitions in the preceding 5 years, the complexities of a “sell” side process can create a multitude of new demands for any CEO. This becomes a multi-dimensional chess board that every entrepreneur and CEO should be prepared to navigate.
Whether you are building a company today with Venture Capital or Private Equity in your capital structure, these lessons can be a guide to enhance enterprise value and ensure success along the way.
1. Hire the best banker: Start the selection process early and do a thorough vetting of 3-4 investment banking groups. Hire an investment bank [advisors] that knows your industry and situation and has good chemistry with you and your team—they are your fiercest advocate in a sale process! You need to start the preparation process months before you think you want to go to market as the IB is not an expert on your business per se and their team needs time to prepare the CIM (investment memorandum) and marketing process.
2. Negotiate legal & deal expenses upfront: The old adage that lawyers make money regardless of the outcome is true but having experienced legal and advisory representation is critical. Make sure you negotiate rates and fee structures with guaranteed maximums and also negotiate an upfront discount if the deal does not close. This is much easier to get out of the way before the process starts. Don’t retain employment counsel to handle the transaction—hire experienced transaction lawyers who have dozens of deals under their belt.
3. Prepare the CIM and data room months in advance: Always be prepared for an exit – start a data room and keep it up to date with audits, contracts, legal, tax, technology, IP, employee matters, etc. Get an organized and systems driven CFO as early in the company’s growth as possible that has lead a due diligence sale process before. This will make the entire process from start to finish go smoothly and enhance your relationship with the field of buyers.
4. Ensure the field of buyers has both strategic and financial buyers: Think of strategic buyers many times are large scale competitors—these buyers can pay a genuine premium because they have the ability to cut SG&A costs immediately otherwise defined as “synergies.” Build a good working relationship with your CEO counter-party and build the synergy plan in collaboration—this will boost your enterprise valuation! Financial buyers, in most cases private equity groups take a much more formulaic approach to valuation and do not have the ability to create value prior to the deal closing like strategics. Both types of buyers are vital to a competitive process.
5. Breakup fees are imperative: The most valuable (painful) lesson of my recent sale process was not getting a breakup fee in the first negotiation. Break up fees can prevent a buyer from re-trading on the terms especially when you are close to the end of the deal. Furthermore its an insurance policy that can protect sellers from the damage that a failed sale process can have on a company. Break up fees can be hard to negotiate if the deal value is smaller but in my experience it is vitally important to ensure that the buyer stays honest and committed to the deal. Never allow a buyer access to your key employees or your customers without a break fee!
6. The wolf in sheep’s clothes—the Highest bidder is not always the best value: Every seller’s goal is to maximize the enterprise value of the company. However the highest price offer might not be the best value. Premium priced offers can create an asymmetry in the deal dynamics and the seller should be careful not to allow a re-trade especially when the buyer is a much larger entity and thinks you have no other options. The best value is a combination of price, stock structure, cash or stock swap in a more liquid security, limited indemnification, mutual reps/warranties and attractive employment offers for your team. Be willing to walk away from any deal!
7. Run the business first: Managing both the business and the sale process is an enormous challenge that very few CEO’s are prepared for [including yours truly]. Keeping your operations team focused on the business and client satisfaction is paramount—good news and growth keeps the momentum going; bad news opens the door to re-trading. Many companies would be well advised to bring in a separate seasoned advisor that leads the M&A process and is a liaison between the CEO/CFO and the investment bankers and lets management stay focused on the core business.
8. Structure a change of control fee: CEO’s and management teams may not be in a position of leverage during the process as they have a primary fiduciary responsibility to shareholders. Make sure that before the process starts that a change of control fee is included in the deal structure to give management the appropriate incentives to drive the process. If a strategic buyer is ultimately the suitor, then it is very likely that the CEO and other senior executives maybe the first to be eliminated in an integration process.
9. Manage investor expectations: Investors, especially if they are private equity, need to be supportive of the process and need to understand upfront the risks and distractions. Selling a company can create numerous unforeseen issues that investors need to understand can/will impact the enterprise valuation. From top talent leaving the company in advance of the sale, or a client who bids out a large contract before close, and even tax issues that come up in diligence—investors need to understand the risks before the process starts and be supportive of the management team.
10. Manage your stress: A sale process is a grind and it requires incredible resilience and stamina from the CEO and the executive team. Take care of yourself and your team’s emotional fuel during the process. Take up yoga, cross fit and other endurance activities—you would be amazed at how it helps you focus with fresh insights and hones your negotiation skills and can become a great outlet for frustration.