Once the owners of a business have overcome the obstacles that lie in their way to the exit door, what is actually involved in going through that door?
Businesses that have previously been on a “buy and build” strategy will be well used to the acquisition process, but many owners will only ever be involved in one sale process. Business owners in this situation often rely heavily on friends and contacts that have been through the process before. In many cases, those friends and contacts can paint an unflattering picture! So what is actually involved? Is it as time consuming and stressful as many indicate?
Generally, the various stages in any acquisition or disposal can be broken down into six main phases:
- Pre- due diligence
- Due diligence
- Pre- completion
- Post completion
In this part, we look at the first three phases and some of the key considerations.
Pre- due diligence
Before letting a potential buyer inside your business, it is important to establish at the outset the price range they are prepared to pay, or at least the method by which the price will be calculated. From a combination of financial information that is publicly available and additional (non-sensitive) information supplied by the business owner, a potential purchaser is usually able to give an idea of likely price. There are likely to be a number of assumptions being made when calculating this price and it will be important for the business owner to understand the nature and extent of these assumptions.
In addition to the actual headline price, how (and when) that is payable is a key consideration for a business owner, and should be discussed at an early stage with a potential buyer. An owner will usually want to get as much consideration in cash as soon as possible. A buyer will usually look to defer as much of the price as possible (issues in relation to deferred consideration and “earn outs” will be covered in future publications). Given the number of issues that need to be considered if consideration is deferred or subject to an “earn out”, it is vital that a business owner understands whether this is the buyer’s intention.
Knowing your buyer
Every business owner understands that a buyer will want to know as much as possible about the business it is buying before the sale completes, but not every owner will realise the importance of knowing the buyer. If there is any deferred consideration, will the buyer be good for the cash? If there is an earn out, do you trust the buyer to act in good faith during that period and not manipulate the short-term profits to reduce the price payable? If the owners are continuing in the business for a period after completion, can they work with the buyer? Consider speaking to the owners of previous businesses that have been bought by the buyer.
Later topics will cover this subject in more detail but, in essence, this is the process where the potential buyer takes a very close look at the business it is thinking of buying to make sure it is getting what it expects and that there are no nasty hidden surprises lying in wait that will reduce the value of the business after completion.
The process itself is likely to involve the business owners' advisers setting up a “data room” where the key information that the buyer has asked to see is provided. These “data rooms” are now frequently online virtual data rooms. This can be a very time consuming process and the more organised the business is, generally the easier this process will be. Usually, during this process the business owner does not want too many of its employees knowing about a potential sale. This can have an impact on the information gathering and often puts a greater burden on the owners. It is usually worth considering bringing some colleagues into the process to help ease that burden (it is only so often you can use the excuse “the auditors need the information”!).
Some key things to bear in mind for a business owner during this phase:
- Always have robust confidentiality agreements in place with the buyer BUT remember - if there is any sensitive confidential information that could significantly disadvantage the business if the buyer does not buy the business, don’t disclose it to the buyer until you are happy that a sale is very likely.
- Don’t try and hide any of your skeletons. Trust is very important to buyers. If they think they can’t trust you, there is a real risk of the deal not proceeding or that the due diligence is much more detailed and prolonged that it might otherwise have been.
- Have clear lines of communication and responsibility.
- Know what you are passing across. If there are any skeletons, make sure you know you are passing across a skeleton!
- Try and have the documentation/information a buyer is going to look for prepared in advance of the buyer's request. The more a picture can be painted that the business is well organised and run well, the easer the process becomes.
Assuming that due diligence has progressed well, the buyer will then move to producing the first drafts of the main deal documents. Depending on timescales (and the buyer’s confidence that it won’t uncover any nasty surprises), the documentation is often produced at an early stage in the due diligence process so that negotiation of the documents can take place whilst the due diligence is ongoing. In most cases it is going to be the buyer’s lawyer who produces most of the deal documents.
Don’t underestimate just how much documentation is going to be involved and how long it might take to agree. The main document is of course going to be the acquisition agreement but ancillary documents (particularly those that rely on third parties' consent, such as banks or other funders) can play a very important role, and failing to address issues arising in relation to these documents can have a dramatic impact on the timetable. If possible, you (and your advisers) want to avoid negotiating key documents at the last minute – preparation and planning is critical to avoid this and a detailed timetable and responsibility list should be prepared – and adhered to. When appointing advisers, it is worthwhile asking them for a list of documents that are likely to be required. This will give you an idea of what is likely to be involved and may also indicate to you how experienced your adviser is regarding disposals or acquisitions of businesses.
Negotiating the documentation is often the most stressful part of the process. It clearly has the potential to bring the sellers and the buyer into direct conflict. This may be less relevant where the sellers are leaving the business immediately following completion, but in many cases it is important that the two parties are able to establish/maintain a good working relationship. You (and your advisers) need to be aware of this and it is at this point that experienced advisers should be looking to deflect/minimise the effects of some that tension/conflict.
Establishing how some of the key/controversial areas are going to be dealt with at the outset in a detailed heads of terms document can also help to avoid wasting time later in the process – the last thing either party wants to do is waste time, effort and cost on due diligence only to find that when the detail of the documents are being dealt with, there is a fundamental gap between the parties that can't be bridged. Understandably, many sellers don't want to engage in difficult conversations at the outset for the fear of putting the buyer off. The consequences of not doing this however, need to be clearly understood. If approached in the correct way, it is possible to deal with some of these potential hurdles at the outset.
- Ask your advisers for a documents list early in the process so you can understand what is going to have to be agreed.
- Always consider entering into detailed heads of terms setting out the key aspects of the deal.
- Make sure your advisers are able to deflect some of the tensions away from you in the negotiations.
- Make sure you understand the main documents and what they do. Your advisers should be able to explain them clearly to you and highlight the key aspects. If you don't understand make sure you ask your adviser. Effective communication between client and adviser is critical at this stage.
Click here to access our M&A Glossary, where we have tried to set out a "jargon buster" to help you understand more about your acquisition or disposal.