Surprise #1: Substantial Time Commitment
In the real estate business, once the owner engages the broker there is very little for the owner to do until the broker presents the various offers from the potential buyers. In the M&A business, there is a substantial time commitment required of the CEO/Owner in order to complete the sale properly, professionally and thoroughly. The following examples are worth noting:
Offering Memorandum:
This 30 + page document is the cornerstone of the selling process because most business intermediaries expect the potential acquirers to submit their initial price range based on the information presented in this memorandum. The intermediary will heavily depend on the CEO/Owner to supply him or her with all the necessary facts.
Suggestions of Potential Acquirers:
Chances are that the sales manager is the only person who knows the best companies to contact and those not to contact (competitors). Arguably, this information should be mostly supplied by the intermediary, but as a thorough team effort, the CEO/Owner should play a major role in this endeavor.
Management Presentations:
Assuming the intermediary conducts the normal process of boiling down the bidders to 4 or 5 potential acquirers, it is then customary to have management presentations before the final bids are submitted. In order to help extract the best offers, it is advisable that the CEO show the benefits of combining the acquirer and seller and/or the future upside for the selling company.
Surprise #2: The Need to Enjoin Other Employees in the Process
A number of owners selling their company are paranoid about a confidentiality leak regarding the sale of their company. In fact, some owners prefer that no other person in the organization is aware of the pending sale of the company. At a bare minimum, the CFO and Sales Manager should be informed. The CFO will be asked to pull all the financials together, to supply projections, to articulate reconstructed earnings (add-backs) and to supply monthly statements…all of which suggest that the company is being sold. The Sales Manager will be asked to supply the names of synergistic companies in or around the particular industry. And, perhaps, the CEO’s secretary will be asked to set up a “war room” where all legal and contractual information is assembled for the buyer’s due diligence team. In order to protect the company from confidentiality leaks and assure retention of key employees, the CEO/Owner should implement “stay agreements” for these key employees.
Surprise #3: The Need to Maintain, or Accelerate, Sales
The tendency for some owners is to become so distracted with the M&A process that they take their “eye off the ball” in running the business on a daily basis. Potential acquirers will be watching the monthly sales reports like a hawk to see if there is a turn-down in business. Acquirers become very apprehensive when they see a recent downward trend in the company they are about to acquire and may, as a result, want to negotiate a lower price.
Surprise #4: A Confidentiality Leak
Naturally, most CEOs expect the M&A process to go smoothly and usually it does. However, there should be a contingency plan in place for such occurrences as confidentiality leaks. The degree of damage determines what action should be implemented. On one occasion the draft of the Offering Memorandum was e-mailed to the CEO/Owner for his corrections; however, the sender from the brokerage firm used one incorrect letter in the CEO’s e-mail address. As a result of this misstep, the e-mail was rejected by the CEO’s computer and ended up in the company’s general mailbox which was administered by the employee in charge of IT. The employee was told by the quick-thinking CEO that the Offering Memorandum was being used to raise growth capital. Luckily, the incident went no further. Much more serious confidentiality leaks can occur, and it is wise to discuss ahead of time how the matter is going to be handled with those concerned.
Surprise #5: Unexpected Low Bids
Ultimately, the M&A market sets the price of the company. However, rarely does a seller go to market without having certain expectations of price. Let’s use a hypothetical case in which a company is growing at 15% annually. The CEO/Owner believes that it is worth $6 million based on $1 million of EBITDA. However, the top bid is $5 million cash or, obviously, 5 times EBITDA. Assuming the business intermediary has exhausted the universe of acquirers, the seller has two choices to reach his desired $6 million selling price. Either he can take the company off the market and return several years later when either the company’s earnings have improved or when the M&A market has heated up. Alternatively, the CEO can negotiate further with the top bidder by selling 80% of the company now and the remaining 20% in three years on a pre-arranged formula on the expectation that business will improve. Or, the CEO can sell the company now for $5 million with an earnout formula that might give him the additional $1 million.
Surprise #6: The P&S Agreement is Not What the CEO Expected
Numerous CEOs drive the M&A process to the letter of intent and then turn over the deal to their attorney to iron out the details of the purchase and sale agreement. While the CEO should not micro-manage his designated professional advisors in the transaction, he should be involved throughout the process, or otherwise the CEO will invariably object to the final wording of the document at the signing state. The area most likely to be overlooked by the CEO/Owner is the critical section of reps and warranties.
Surprise #7: Agreement of Other Stakeholders
While the CEO can negotiate the entire transaction, the sale is not authorized until certain stakeholders agree in writing, namely the Board of Directors, majority of the shareholders, financial institutions which have a lien on certain assets, etc.
Conclusion
For many CEOs, selling their company is a once in a lifetime experience. They may be very experienced, very talented executives, but they can also be blind sided by surprises when selling their company.
