Market View - June 2012
Making your IT company more valuable to a Buyer - Part II: Ensuring the deal closes
Having spent more than the last twenty years as an M&A practitioner focussed solely on the IT mid-market Jeffrey Jenner now passes on some of what he has observed about maximising the chances that the deal will actually close. This article is best read in conjunction with “Part 1: Maximising Value” available from him or directly from the company’s website.
The basic principle is to ensure that the Buyer is made comfortable through the process of due diligence and negotiating the Sale and Purchase Agreement (“the SPA”). This means ensuring you are well prepared, your company is clean and you are well organised. The period where due diligence is undertaken and the SPA is being negotiated puts a great strain on management’s priorities and resource usage. You should do all you can prior to entering this phase to be prepared. Here are a number of suggestions which not only will ensure you will be in control but will provide comfort and confidence to the Buyer thus ensuring a clear route to a successful Close.
1. Create the right environment now and ensure your house is in order
- Create a Virtual Data Room
- Engage lawyers to perform contract reviews 6–24 months before Exit
- Review Customer, Supplier, Employee agreements, from a Due Diligence perspective
- Have your accounts audited as soon as it is affordable
A virtual data room is an online repository of information that is used for the storing and distribution of documents used, in this context to facilitate the due diligence process, during the sale process. It is cheaper and easier to manage than a traditional physical data room and also has the added advantage that access to it is better controlled and the Seller and Seller’s management can monitor what might be of particular interest to the Buyer. It is also has advantages for the Buyer who can access information without having to make expensive and time consuming visits to physical premises. Broadly it will contain all the information on the company including but not limited to statutory and management accounts, customer and supplier contracts, staff contracts and HR policies, details of the products and services offered, details of disputes, government returns including VAT, NI and Corporation Tax history, insurance and property details and much more.
To set up a Virtual Data Room is a lot of work but there is no reason to wait for an exit strategy. You can begin creating it well before any consideration of your exit and that way you spread the workload. Another advantage of doing this is that you have a data room always available should a Buyer approach you unexpectedly and outside your sale process.
Most law firms can be persuaded – indeed some are motivated to do so – to perform the review to for a modest fee with the expectation that it will generate income for them improving and correcting situations subsequently identified. You might very well be surprised at the findings but you will have ample time to take action before Buyer due diligence commences. It is better to be in good shape than have issues appearing late in the day.
Having your accounts audited may appear to be an unnecessary expense if there is no legal obligation to do so but should be considered. They instil confidence in the Buyer and ensure clean and more accurate records. Audited accounts position the company well for a smooth due diligence process.
2. Heads of Agreement
- Ensure they are clear and appropriate
- Exclusivity with the selected Buyer
Once you and your preferred Buyer have decided to marry the broad terms of the intended transaction should be recorded and signed by each party. This document is often called a “Heads of Agreement (“Heads”) or Memorandum of Understanding (“MoU”). It is mainly non-binding but considered a good faith document in the sense that items considered key by the parties should be included and unless some significant new development occurs or new information is discovered these terms will not be changed. Typically included would be the purchase price, details of any earn-out, the intended timing of the transaction and due diligence, when the consideration is to be paid, responsibility for costs and any special terms.
The Heads should not be too detailed –that is the job of the contract itself – and should exclude mention of matters which do not need to be dealt with at this stage. If something is really important to you though ensure it is included.
In conjunction with the Heads – and sometimes included within them – will be an Exclusivity Agreement. This is an agreement that for a defined period of time the Seller will not in any way or form deal with any other potential buyers in regards to the business. The Buyer normally – but not always – insists on such an arrangement for they are putting a lot of time and manpower in performing due diligence and expense on employing professional advisors and they seek that protection. The period will vary according to the circumstances but it is typically around two months for the majority of most mid-range transactions.
3. Be Practical
- Timing: Best when you’re bubbling – Buyers pay for the future
- Tell the Truth: (Otherwise it will come back to bite you!!)
- No “Shockers” to the Buyer after you’re into the process
- Time is the Enemy of the Transaction
- Engage an advisor
When to sell is possibly the most difficult decision and will depend on many factors including shareholder circumstances and motivation as well as market conditions. If the business is doing well and has a strong forecast it is very tempting to delay any exit until the company has achieved another successful year or two. And that may be the right decision but it also has to be measured against execution risk and a potential change in market conditions. In general it is best to sell when you are “bubbling” and market conditions are at least reasonable and you have a strong story to tell about the future. A premium will be paid for businesses seen to be going places. Selling a business at the peak of its cycle is too late; something has to be left on the table for the Buyer. The buyer needs to buy into your vision for growth to justify paying a premium.
Tell the truth –Do not be a hostage to fortune. Do not lose the confidence and trust of the Buyer. Be transparent. Trust lost cannot be regained and at the minimum will extend the process and loose goodwill.
Let there be no shockers. If there is something bad to disclose this can always be handled. It is just a matter of how and when you do this. Little is worse for a Buyer to get a shock late in the process and it is totally unnecessary.
Timing. The longer the process takes the greater the risk of it not happening even for reasons of no fault to either party (e.g. industry/sector bad news, act of terrorism, unexpected bad economic news, event to buyer/seller (sudden illness, key employee leaving, Buyer receiving approach, etc). Keep momentum going and the timetable tight. Purchasers can lose interest if information is not available or if milestones are not achieved. Try to manage expectations so you can over deliver on promises.
Engage an advisor. An advisor will be motivated and focussed on the project. The advisor will have more deal experience than you. He will protect the management from time wasting and will allow you to focus on running the business. The advisor will assist you in deciding timing and exit strategy produce the necessary sales documentation including the information Memorandum, create a Buyer list, manage the competitive process and help you to evaluate the Buyer proposals and transaction risk. The advisor will also manage the process and is more likely to drive the transaction to a successful Close. Lastly the advisor can monitor any post closing events particularly if an earn-out is part of the consideration. Finally, and probably most importantly of all, he is there to host the celebration dinner.
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