Ready to Sell - Part IV: The Deal Timeline
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 IV: The Deal Timeline
A question we often hear from clients is “How long does it take to get an M&A deal done?”
We asked a number of friends and colleagues – bankers, lawyers, accountants, all seasoned M&A professionals – and these are the answers we got:
4-6 Months. 6 months. 6-9 months. Up to a year.
But it’s a trick question. The answer is longer than you expect. It takes time to get a deal done, especially if you’re not well-prepared going in. In this post we’ll talk about the phases of the typical M&A deal and suggest ways to keep the timeline as short as possible.
Momentum matters in transactions. Don’t allow the opportunity for something to change, for the market to move, for the buyer (or the seller) to re-think things, to walk away.
(But first, a practical disclaimer. As we often do, in this post we’ll focus mostly on potential sellers – but the points can be relevant to potential buyers as well. For additional perspectives on buy-side best practices, get in touch (details below). And we’re intentionally leaving out the post-closing and integration elements – so please forgive our gross oversimplification of the process.)
Almost every M&A transaction can be broken down into 4 major phases:
Planning and Preparation
Marketing
Due diligence
Negotiations and Closing
Each phase involves different tasks and objectives, and the time that each phase takes can vary widely. And advance preparation can have a significant impact on the time needed. Let’s take a closer look and walk through opportunities to save time through by investing effort now.
Phase 1: Planning and Preparation
Planning and preparation involves setting the groundwork for the transaction – making sure all the elements are in place before you start making contact with potential buyers, before you go through due diligence, before you negotiate the transaction terms. It’s common for much of this work to take place once you’ve made the decision to pursue a transaction, but there is no need to wait. A lot can be done in advance – and starting now can be very beneficial. Remember, momentum is important in transaction processes – if you’re not ready, don’t expect the buyer to wait.
For the Planning and Preparation phase, you should be focusing on elements such as these:
Transaction Strategy: What type of transaction process do you want to run? When are you hoping to close?
Financial Model: Building / Testing / Refining / Revising / Updating. How much work does your financial model need? How credible are your forecast assumptions? What adjustments can and should you make to historical results?
Due Diligence Documents: Have you started a central repository for key organizational documents and records from various business functions?
Marketing Materials: Do you have detailed company overview materials that frame the business highlights and detail the key operational elements?
Buyer list: Who are the likely buyers? Do you want to approach them? Are they likely to show interest? Why or why not? What deals have they done? Who is the key contact person – and how will you reach them?
Service Providers: Have you identified candidates to provide external support (banker/broker, transaction attorney, accountant, etc)? What’s your plan for selection?
Why start planning and preparation now, even before you’ve decided to pursue a transaction? Three main reasons:
You will be in a better position to react(quickly) if a buyer contacts you unexpectedly.
Advanced planning and prep will help you build and maintain momentum in the transaction process. Buyers may lose focus and interest if other opportunities arise, obstacles or distractions develop, or you simply take too much time.
Help keep your transaction plans quiet, while also allowing you to maintain focus on running your business, your core operations.
Phase 2: Marketing
The Marketing phase generally has 2 key elements: The marketing materials (teaser, information memo, company presentation, etc.) and the outreach process itself.
First, marketing materials. You need to have materials that describe your business, the key highlights, the operational elements – instead of focusing on selling your products or services, you need to focus on “selling” your business. If you’re working with a banker or broker, they can help you develop these documents and make sure they show your business in the best light, in a way that buyers will learn what they need to evaluate the potential acquisition opportunity – without exposing too much information too soon. Shorten the timeframe for preparing the marketing materials by developing initial drafts that you can use as working drafts. No one knows your business better than you do, so get a head start on drafting by capturing the elements that matter before you hand off the pen.
Second, outreach. Unless you’re waiting for Prince Charming to come knocking – and it does sometime happen this way – you’re probably going to need to contact potential buyers. How you do this will largely depend on your transaction strategy and plan. This process often takes longer than expected: it can be hard to find contact information, people are not always immediately responsive (vacations, holidays, business travel, competing priorities – including other transaction opportunities), and negotiating NDAs with multiple counterparties can be time consuming. Reduce time spent here by having your “guest list” ready in advance – including key contacts and contact info, their transaction history. Focus the outreach efforts on the conversation instead of how to make contact..
Phase 3: Due Diligence
Every buyer will want to review records and documents to ensure that they know the business they are proposing to buy as well as they can, and this is often a time-consuming and intensive process. You can save time and be better prepared by starting a due diligence document repository now, and update it regularly, in ordinary course. Get started by working from a checklist of standard diligence documents – organizational, legal, financial, for example. Supplement that effort by doing some reflective work to anticipate likely questions from potential buyers and preparing documents and data to address those questions. If you know what questions are coming, and are ready to answer them proactively, the due diligence process can go much more smoothly and quickly. This will also indicate to the buyer that you’re organized and serious about getting the deal done.
So how do you know what to expect? As we talked about in a previous post, put yourself in the buyer’s shoes – if you were evaluating your business, what would you need to know before making a final offer? And beyond that, your internal and external transaction team (including Amplify) can provide perspective here.
Phase 4: Negotiations and Closing
The final stages of the deal process – Negotiations and Closing – primarily focus on final due diligence, negotiation of the deal terms, and the process of transferring consideration and ownership. With limited space to cover such a broad topic, we are going to focus here only on one item: deal structure.
As we’ve discussed in an earlier post, buyers will try to protect their investment when undertaking M&A transactions - limiting cash paid at closing, shifting consideration to contingent or deferred elements such as holdback / escrow, earnouts, equity rollovers, seller financing. It’s important to think about more than just the headline price – how much will you actually be paid, and when? What’s being paid at closing, what’s deferred, what’s contingent? What are the triggers to receive the deferred and contingent elements? What are the tax implications to you? If you are prepared for this and know what matters to you, you can have much more effective negotiations and keep the process moving ahead in the late stages.
Bonus Tracks: 2 Mistakes to Avoid
1. The Buyers List: Don’t set the aperture too narrow (or too wide).
If your list of potential buyers to contact is too small, you risk overlooking parties who may have interest and the means to undertake a transaction. If you go too wide, you’ll risk exposing too much information to too many parties – and potentially bog down your transaction process with managing communication among parties. There is a “Goldilocks” level for each transaction, and it’s important that you find it. That’s why we strongly recommend starting with a VERY broad list and carefully cutting it down to a manageable level, including the parties you have good levels of conviction on. Don’t be afraid to exclude parties you consider sensitive. Create tiers – Tier 1, Tier 2, etc – and take time to reevaluate, re-assess based on changes where possible. And include multiple trusted individuals in this review process, so you get varying perspectives, including an honest appraisal of longshots and wildcards as well as known tire-kickers.
2. Don’t Underestimate Due Diligence Requirements.
Buyers will go to incredible lengths to protect their investments. There are a lot of reasons – but one of the more obvious ones is the amount of money involved in M&A transactions. Due diligence is one of the key tools buyers will use to quantify and manage their risk in M&A deals.
As a seller, you should expect the list of questions to be rather overwhelming, detailed, invasive, repetitive – assume that it will take longer to satisfy the buyer’s due diligence needs than anyone predicts, it will take more data, more documents. Different buyers worry about different elements. That’s why we strongly recommend the introspective approach – list out all the questions you think any buyer may even remotely care about. Then determine which you can or will address proactively, and which you’ll respond to when they come. But at least develop the plan for how you will respond so you aren’t scrambling late in the process..
Share your thoughts, feedback and tips in the comments or get in touch to start your preparation process at info@amplify-cs.com.
In this series “Ready to Sell” we’ve explored:
Financials
Deal Team
Finding the Right Buyer
In our final installment of this 5-part series, we’ll get to the heart of the matter – valuation.
Share your thoughts, feedback and tips in the comments or get in touch to start your preparation process at info@amplify-cs.com.