Three Moves Ahead

The selling process may be set in motion in a number of ways. Your client may have been considering selling and decides to test the waters. Perhaps a buyer has approached your client to discuss the possibility of a deal. Or with your understanding of the market and the life-stage of your client, you bring up the possibility of a sale yourself. In any case, the owner discusses it with his family and decides that it’s a go. This is the decisive moment for you: the point at which, by adroitly assuming your proper role in the process, you can secure the client’s post-sale investment business.

Simply put, your primary role is to advise your client in how to assemble the M&A dream team–an investment banker, lawyers, and an accountant–and by doing so greatly diminish the likelihood that the team will recommend someone other than you to invest the proceeds from the sale. For most middle-market deals, even relatively small ones, the services of these professionals are absolutely essential. You should interview and screen candidates for these roles and help guide your client to the right choice.

The investment banker is the coach and quarterback of the team. Middle-market deal experience is an indispensable qualification for this leading role in the entire sale process. In interviewing a candidate for the role, you should not only probe for experience but also ask for a preliminary estimate of what the banker thinks the business might bring on the market, understanding, however, that in a truly competitive process the market is the ultimate barometer of value, not an investment banker’s pre-engagement valuation. In a down market, where valuations are lower and the room for error is smaller, it’s doubly important to have a highly experienced investment banker. For example, in a down market the price elasticity can be significant: a 5% shrinkage in demand can trigger as much as a 20% decline in price. In such a climate you want an investment banker who can make sure your client gets the most out of the deal and, on the other hand, can help manage the client’s expectations.

A highly specialized and experienced “deal” lawyer is also a critical component of the team. These transactions are highly technical and cannot be left to amateurs. It’s certainly not like selling a house or arranging estates and trusts, and you will need a lawyer who specializes in the area. Their fees may be higher than those of a generalist or those of your client’s personal or company lawyer, but in the long run they will save your client money. Inexperienced lawyers often insist on the wrong things, may make time-consuming mistakes, and in the event that they are unreasonably obstructionist, may cause a deal to blow up. In addition to the deal lawyer, an equally important member of the legal team is a trusts and estates (T&E) lawyer who specializes in high-net-worth, pre-sale tax planning and asset protection (see sidebar).

Choosing the accountant often involves no choice at all. Your client likely has on the payroll an accountant or an auditor who thoroughly knows the business. The accountant’s role in the sale process is to compile the due diligence data that the buyer will need in order to evaluate the business and make a fully informed offer. Your client’s current accountant is likely in the best position to assemble that data efficiently and comprehensively. If, for some reason the current accountant isn’t suitable, you should seek an outside accountant from a mid-to-large regional firm, which is well suited for middle-market transactions and, most importantly, well-equipped to handle entrepreneurs and closely held businesses. In interviewing candidates, the key consideration will be their experience with such deals. What outside accountants may lack in first-hand knowledge of your client’s business, they should be able to make up in experience and expertise in deals of this kind.

Once you have assisted in assembling the team, you have essentially completed your role in the sale process. During the sale period you should be working on preliminary post-sale investment planning, as well as tax-optimization tactics. Perhaps the most valuable contribution you make at this stage, however, is to help keep the client focused on what should be his number one priority during the sale process: running the business to the best of his ability. The seller will certainly have some sale-related work to do, but the worst mistake he could make would be to spend his time selling, rather than running, the company. It was his business acumen that attracted interest in the first place, and the buyer certainly doesn’t want him to take his eye off the ball during the six- to nine-month period typically required to consummate a sale.

The Sale Process

Responsibility for the sale process lies with the team, and it’s helpful for you to understand it as your client goes through it. Throughout the process, the investment banker’s team interacts closely with the seller, the management team, the seller’s accounting and legal professionals, and a host of potential buyers. Assuming that the investment banker has the requisite experience, expertise, and market savvy to conduct this highly technical and complex process, it should typically unfold in highly structured stages, as follows:

Preparatory. During this stage, the investment banker conducts the initial meetings with the accountant and lawyers on the team, interviews management, and undertakes financial, operational, and industry analysis in order to arrive at a valuation of your client’s business. From this work there should emerge a marketing strategy, some price parameters, an outline of the Offering Memorandum, and the early identification of any red flags that might adversely affect the sale, such as potential environmental liabilities, technological obsolescence, management deficiencies, capacity constraints that would require large sums of capital expenditures, and others.

Developing the Offering Memo. Working from the initial outline, the team develops the Offering Memo, a legal document that provides a narrative of the company’s industry and a lengthy description of the company and its operations, including products, markets, growth strategy, and historical and projected financials. The team also prepares a detailed financial pro forma and gathers backup data to support the claims made in the Memo and the pro forma.

Compiling the Buyers’ List. The investment banker conducts additional industry analysis and combs through its network of contacts and proprietary databases to arrive at a list of potential buyers, including strategic and financial investors who might be interested in the business.

Legal. At the same time, the team creates a legal dossier containing the corporate charter, shareholder agreements, necessary consents from other shareholders in the client’s business, a confidentiality agreement, and other legal documents.

Marketing. The investment banker contacts potential buyers and distributes confidentiality agreements and the Offering Memo to those who express interest. Management presentations and facility tours are then conducted with the bidders who emerge. From these bidders, a “finalist” and a “runner-up” are selected. Negotiation of major terms with the finalist begins, while the runner-up is held in reserve as an alternate, should the finalist not work out.

Transacting. This is the end game. The parties negotiate a definitive purchase agreement, due diligence is completed, the financing and other deal documentation is locked down, and the deal is closed. With the stroke of a pen, your client’s valuable, illiquid asset has been transformed into a sizeable liquid asset.

Let the Fun Begin

When the deal is done, the investment advisor once again steps to the fore. Having played an exemplary role in assembling a top-notch sale team and in discreetly letting them do their work while you remained close to your client, you will have strongly cemented your relationship with your client. You can then continue to do what you have always done best: help the client grow his money. But one thing will likely have changed dramatically: the way you think about the relevance of mergers and acquisitions.

Nimi Natan is a co-founder and managing director of Aquetong Capital Advisors (www.aquetongcap.com), headquartered outside Philadelphia. Combining the traditional functions of investment banking and strategy consulting, the firm provides strategic advice and transactional services to middle-market companies in the manufacturing, distribution, service, and technology segments of the economy. He can be reached at [email protected]. Erik Rudolph is a partner and managing director with Aquetong Capital Advisors. Using his legal and financial knowledge, he has worked on numerous assignments involving the formation, sale, and recapitalization of privately held businesses in a variety of industries. He can be reached at [email protected].