Ready to Sell - Part II: The Deal Team
Our 5-part series Ready to Sell is designed to help start the conversation around things every business owner should be thinking about before they start the sale process.
Part II: Putting the Right Team on the Field
M&A is a team sport. Arguably, this is even truer for small business owners, who may be going through the process for the first (and maybe the only) time. As a business owner, you want to make sure you have the right expertise and experience at hand for your sale process. You need to strike the right balance between sharing information – about the company, about the sale process itself – while maintaining confidentiality.
To support the sale process, you will need help from internal team members for due diligence needs, but you also want to ensure the team maintains focus on the business and operations. And you’ll likely hire one or more external advisors to help with elements of the transaction process. There may be more people involved than you realize. Internally, it’s important to give careful consideration to whom you bring under the tent and when. Externally, you may benefit from building relationships and dialogues with potential advisors now - well before the process starts.
1. The Internal Team.
Most sale processes are going to require at least a few individuals in key roles to support the process – to provide information for due diligence, collect and organize documentation, manage various process elements, even interact with buyers, among other responsibilities. Keeping this “inner circle” tight is important – generally you want as few people as possible to know about the sale process to minimize disruption and manage confidentiality.
For most companies, the internal deal team should include individual(s) who can address key areas such as:
Finance
Sales
HR
Legal
Other(s), such as Operations, R&D, e.g. – depending on the nature of your business
More often than not, you’ll bring the leader(s) for these functions into the internal deal team. This process – thinking about who will join the internal deal team – is a good opportunity to take stock of your core team, their capabilities, their level of commitment, their trustworthiness. After all, if they won’t show well to a buyer, if they are likely to be concerned for their job security, if they don’t manage discretion, they may not be the right people to engage. Many small businesses don’t have fully built-out, formal support functions. You may not have a CFO, or a dedicated HR manager, or an internal company counsel. That’s not necessarily an issue – and many buyers will not be surprised or concerned. The key is to sort out who on the team can fill these roles in a transaction scenario. If the owner or president or CEO or VP of finance needs to fill more than one role on the team, so be it.
Finance. Typically a CFO, VP or Director of Finance, someone who can strategically speak to the historical financials, trends, the forecast model, as well as handle any financial due diligence questions and requests. If you don’t have a “financial expert” on staff, now is a good time to start thinking about how you’re going to tell the story of the numbers. There are external options to consider as well.
Sales. Sales is one of the most critical and sensitive elements of the business, because it encompasses customer info, sales pipeline data, sales strategy and team information. Some sellers opt to reveal sales info in phases or with some data protection (anonymity, redaction) until later in the deal process.
HR. HR data is particularly sensitive for a number of reasons, including requirements to protect personally identifiable information (PII). Externally, HR due diligence is often performed with a limited team and away from the scrutiny of a broader group to protect confidentiality and manage information risk – and may be held until later in the process when the likelihood of a deal is higher.
Legal. Buyers will generally want to understand the intellectual property of the business, as well as contracts and legal documents that capture the obligations and commitments of the business (as well as those of customers, partners, suppliers and other stakeholders). And of course they will want to examine legal issues – litigation, threats of litigation, potential and actual legal risk. Legal due diligence is often a very time-consuming process, and can easily derail the deal timeline, so proactive management can be critical. If you don’t have a separate internal legal team, you’ll want to determine the best way to collect and organize information so you aren’t caught unprepared when the questions inevitably come.
Other(s). The circumstances of your business and your sale process will have some impact on other internal team members who will need to support the due diligence process. If your company has an R&D function, buyers will want to perform due diligence on the team and the R&D process(es) as well as the intellectual property. If your business is heavy on manufacturing or production process, expect to need to bring in your Operations leader.
2. The External Team
External advisors are typically experts in transactions, or certain aspects of transactions, who engage at different points in the transaction process. The engagement of external advisors can help you navigate the complex details and minutiae of a transaction – and it can also be a strong signal to potential buyers that you are serious and surrounded by experts. Not every deal involves every type of advisor – but we strongly encourage business owners to thoroughly vet any advisor they engage with. You want to make sure they have strong credentials, that they are experts in transactions and ideally transactions that are relevant to you. Typically a transaction will involve some combination of:
Attorneys
Bankers / Brokers
Accountants
Other advisors, such as Tax advisors, Wealth Management professionals or external Transaction Support advisors
Attorneys. General responsibilities include drafting, reviewing and negotiating various transaction legal documents such as NDAs, term sheets, letters of intent and purchase agreements. They also support the legal due diligence function. An attorney is involved in the significant majority of M&A transactions due to the complexity of the documents involved.
We can’t stress enough the importance of working with a qualified attorney WHO SPECIALIZES IN M&A. Your deal is not the time for your real estate lawyer cousin to “give it a shot”. Get someone who does M&A deals all day every day – so they know what terms are standard, what pitfalls to watch out for, and generally ensure the deal you’ve agreed to is the deal you actually get.
Bankers / Business Brokers. General responsibilities include marketing the business for sale, managing buyer contact, organizing and leading due diligence, negotiating deal terms – but these can vary widely based on the situation and the transaction process. They typically work as a “deal quarterback”, in conjunction with the internal deal team, the lawyers, accountants and other deal advisors. Bankers or brokers are involved in many transactions – especially sale processes where multiple potential buyers are approached with the opportunity to acquire. Banker or broker fees are often largely contingent on a successful transaction closing but can be a significant percentage of the total deal value.
Key decision criteria in selecting a banker or broker should include their direct experience in your sector, their experience working with companies of your size, and knowledge of / relationships with the potential buyers you want to target.
Accountants. General responsibilities include preparing and presenting the Company’s historical financial statements and supporting the financial due diligence process through detailed review of the accounts and schedules. Not every business needs to be audited – but if your business is audited annually or if your accountants compile your annual financials, your accountants can help with financial due diligence.
You also may consider engaging an accountant to develop a Quality of Earnings report. It’s more and more common for companies to commission a sellside QofE report, but that doesn’t mean a buyer won’t undertake their own.
Others. Depending on your circumstances and the nature of the business, you may also consider hiring a tax advisor to help manage the tax implications of your transaction. Or you may engage a wealth advisor to help manage the proceeds when the deal closes. No two deals are exactly alike, nor are any two companies – so who’s on your team may vary based on your needs. Here are some other professionals often involved in M&A deals:
a). Tax Advisors. We believe every business owner should have a trusted tax advisor on speed-dial. Because the tax code is constantly changing and evolving. Because the tax advisor can help owners retain more of the transaction value. And we believe that every business owner should be in regular discussion with their tax advisor – not just when it’s time to sell. Ensure things are structured and organized properly now, before it’s too late for some options and possibilities.
b). Wealth Management Professional / Financial Advisor. a qualified professional who will work with you to manage and protect your current and future net worth – and align your asset allocation based on your objectives and risk parameters. Someone who understands how sale proceeds figure into your financial picture and can help you plan for your future after the deal. If tax advisors help you keep more of the money, wealth managers can help you keep more of the money for longer.
c). Transaction Support Advisors (such as Amplify). Perhaps a bit disingenuous and self-serving to make a comment here, right? Nah. You might consider hiring an outside transaction process specialist to ensure you have the resources and capacity to manage due diligence preparation, and to ensure you are getting the best possible guidance and advice from your external advisors. In fact, get support on selecting your advisors! Get help running a formal selection process for your banker / broker and lawyer. Understand the motivations and potential conflicts of interest your advisors have. Have an independent and objective sounding board to help you navigate the deal process – supplement your internal team with an expert in transactions and due diligence.
Bonus Tracks:
1. Avoid making the circle too tight.
Some business owners try to “hide” the deal process from their key staff members and “manage” due diligence without direct support. That can work up to a point, but requesting too many documents or analyses from the team, or having repeated urgent information requests to respond to buyer questions may tip your people off that something is happening. The fear, uncertainty and doubt that comes with this may be more problematic than you know. Better to plan for what information you need to support a due diligence process and sort out whom you’ll rely on to get it before you lose control of the narrative.
2. Don’t be afraid to ask for - and check - references.
Your deal is important to you - but for external advisors, it’s maybe one of several they are working on right now. One of dozens or more they may work on this year. There’s nothing wrong with asking to speak with references, so you know how they work with their clients, what they do to help get deals done, what clients wish they did differently. Some bankers play a game where they won’t share references before signing an engagement letter. Don’t fall in to traps like this. If an advisor won’t provide references, that’s a red flag. You want advisors whose clients rave about their work and don’t mind an occasional request.
Share your thoughts, feedback and tips in the comments or get in touch to start your preparation process at info@amplify-cs.com.
Up Next: In Part III of this series we’ll talk about finding the right buyer - making sure your business gets the right new home and you get the right deal. Go to Part III.