The three phases of selling a business, when it makes sense to do so, and how to prepare for it.
M&A is on everyone’s lips: Here, an entire industry of smaller players is being consolidated by investors on a buying spree. There, you hear about company sales not only on TV but also within your own network. As if that weren’t enough, there’s talk of testosterone-fueled multiples on revenue and EBIT. And finally, a prospective buyer knocks on your company’s door to ask, politely but firmly, when you’ll be ready to sell.
Falling in Love
The process begins, at the very latest, when the unspoken question of what the company’s succession might look like someday suddenly becomes a vocal one. This can stem from both rational and emotional reasons: The most important of these is undoubtedly the age of the business owner. Often—even among younger owners—there’s also the intention to find fulfillment once again through a completely different venture. Of course, the outrageously high purchase prices that are already being bandied about can also be tempting. After all, such prices are generally only achieved during specific historical windows of opportunity. Or—and this is also a plausible reason—certain tasks, growth, keeping up with the competition, etc., can be achieved more easily by merging into other companies or corporate groups than through one’s own efforts and, above all, investments.
Back in the day, people used to handle their own wedding preparations. The happiest day of one’s life was quickly brought to life—along with the complexity of writing out place cards. Today, in an era when wedding dresses cost more than a compact car and the right venues are booked up years in advance, it’s best to hire a well-connected wedding planner—or, rather, an experienced M&A advisor. The risk of a spectacular failure—with lasting damage to your own company’s market reputation—is simply too great. After all, investors who are rejected during the process or upset by a due diligence review will spread rumors, despite confidentiality agreements. In addition, the seller incurs high preparation costs. Furthermore, the seller alone bears the risk of losing employees and customers who, alarmed by rumors of a sale, may leave.
The preparations leading up to the sale of the company are time-consuming, yet it is precisely during this phase that the business owner’s full attention is required. “Marriage” here is a synonym for the conclusion of a contract through which the company is transferred. This contract encompasses not only the actual transfer of the company but also pre- and post-contractual rights and obligations. Of course, along the way, one should not forget to “prepare the bride”—ideally before the actual transaction process—the search for a suitable partner or “falling in love”—is professionally undertaken.
The most important tasks here are:
• A valuation of the company that is as objective as possible but aligned with market conditions. What are the sources of revenue and margins? The tax advisor can help, but due to their methodological approach, they are generally more of a supplementary than a leading expert.
• It must also be clarified whether the company is even transferable. Are there any pitfalls lurking in its history, finances, or products/services that would make a sale impossible or feasible only at a significant discount? Are the economic, legal, and tax conditions right for such a move?
• Who might be a suitable successor for the business? The owner’s children, perhaps internal management, or an outside buyer who will typically be willing to pay the highest price? What does an objective long list and short list look like? Time and again, it’s surprising to discover who qualifies as a buyer—people who are completely outside one’s own radar.
• If an internal sale of the business is preferred, the question arises of how to finance the transfer price. How can this be structured, if necessary, to be fair to both buyer and seller while also being optimal from a tax perspective? And yes, here too, an M&A advisor can provide better assistance than the in-house banker—who is then reduced to merely executing the transaction—because the advisor acts as a facilitator of the process and finds solutions for fair, internal transfer rules.
Only once all these questions have been clarified—perhaps with a few cosmetic adjustments (tweaking the P&L with a fineliner doesn’t always help)—typically one to three years before the actual search for a buyer begins, does it make sense to start looking for a partner. And once again: Even if there are internal succession options or children willing to take over, it makes perfect sense to also hold discussions with external prospective buyers. Concepts and approaches may emerge on the horizon that better serve the interests of everyone involved. From an investor’s perspective, a partnership involving what’s colloquially referred to as “bonus children” isn’t the worst thing—quite the contrary. Aside from that, it also provides an additional and very clear indication of the potential purchase price. Cash on the table—without concessions or long-term payment terms—can be a very compelling reason for all parties to choose a different partner.
The central, outwardly evident part of the M&A process begins with getting to know suitable merger candidates. Protected by non-disclosure agreements (NDAs), initial discussions are initiated between buyers and sellers, during which prospective buyers have already provided an indication of the enterprise value based on an information memorandum presented to them. Only if this figure is acceptable will they be included in the round of face-to-face discussions, knowing full well that this is by no means the final step on the path to determining the equity value. This approach is a pragmatic form of a “mini-bidding process”: Unfortunately, it is not possible at this point to cover all conceivable variations of the process—which depend on a company’s industry, size, and ownership structure—involving pre- or post-transaction due diligence with one exclusive buyer or multiple prospective buyers.
Engagement
Based on the
• economic factors (purchase price, purchase price components, payment terms, etc.),
• conceptual (synergies, type of buyer: buy-and-hold, buy-and-sell, buy-and-develop, etc.)
• personal (how well do the key individuals on both sides get along, etc.)
parameters, the list is typically narrowed down to two or three prospective buyers. It is important to keep the process on schedule and not wait too long for information from one or the other prospective buyer, so as not to lose the other interested parties. After all, chemistry can also arise in the moment: spontaneity, willingness to act, and commitment are key criteria here when deciding in favor of or against a particular party.
Based on the parameters mentioned,Letters of Intent(LOIs) are ultimately submitted, which define the framework conditions for the purchase or the purchase agreement. These are typically subject to exclusivity, meaning the selling company must decide with whom it will proceed. The M&A advisor can provide decision-making support at this stage: on the one hand, by summarizing the more or less objective criteria that speak in favor of the parties, and on the other hand, by highlighting their transaction experience with the individual parties. These insights primarily concern the parties’ behavior during due diligence and the purchase agreement negotiation phase. For their part, potential buyers may be able to cite references from previous acquisitions that round out the picture and sway the decision in their favor. Ultimately, however, the business owner must sign the letter of intent (LOI) and thereby clearly indicate that—provided all conditions of the LOI are met—he is willing to go through with the “marriage.” In other words: The selling entrepreneur is entering into an engagement. The problem here—or rather, the physical and psychological hurdle that must be overcome—is that premarital sex is off the table! There’s no room to test whether everything is a good fit!
Getting Married
What follows next is pure horror for many business sellers—a test of trust in reverse. For the potential—or rather, the purchasing—spouse reveals their worst and most intense side. They send hordes of advisors into battle in a specially created virtual data room, conduct the
• Commercial (business model) due diligence
• Operational due diligence
• Legal/Compliance Due Diligence
• Tax Due Diligence
• IT / Software Due Diligence
They never stop requesting additional documents, asking questions, and gathering information, etc. Since it is virtually impossible to keep the planned sale of the company confidential at this stage, employees can rarely be brought in on the matter or involved in the preparations for or execution of the due diligence process. The result is a period of extreme stress lasting approximately six to twelve weeks for the entrepreneur looking to sell, at the end of which their nerves are severely frayed. Yet it is precisely at this point that the purchase agreement must be negotiated—often by lawyers on both sides who give the impression that they would rather derail the transaction than facilitate it. This phase is undoubtedly the most critical of all; this is where most transactions fail. It is precisely at this point that the full commitment of the M&A advisor is required: to keep the process under control, day and night, even on weekends; to mediate the differences that are sure to arise; and to provide the appropriate content or arguments. On the one hand, they must stand firmly by their client; on the other hand, they must also keep the lines of communication open with the buyer. At the end of this process comes the mutual signing: the buyer and seller usually sign the purchase agreement before a notary—or, as the saying goes, “tie the knot.”
