Sellers should take care to understand buyers' profiles both domestically and abroad.
Sellers must understand who buyers are and what they want before engaging.
- Develop a sale strategy to achieve your objectives
- Understand the priorities and needs of potential buyers
- Create competitive tension among buyers to maximize value and mitigate risk
- Consider alternative structures and implement a “multi-track” approach
- Proactively establishing a heighted state of readiness to divest is a best practice.
Many sellers patiently wait for market conditions to improve in order to “monetize” the true value of their company, subsidiary or division. Buyers are often hesitant to overpay or to assume unmanaged risks. Navigating an evolving market environment calls for strategic selling, keeping the following concepts firmly in mind:
Sellers need to understand the buyer’s perspective in the transaction. What are the key risks in the business? How is the business positioned relative to competitors? Is the growth plan viable? Are there customer, product or geographic mix concentrations? Are margins sustainable?
A carefully crafted message to buyers often enhances valuation and increases the probability of completing the transaction. Performing commercial diligence in advance will help the seller fully understand the competitive landscape and the position of the business in its market. This background is essential to properly position the business with prospective buyers.
Typically, the seller’s investment banker prepares a confidential information memorandum that presents to buyers the key investment considerations and a positioning thesis around which the “value story” is presented.
Sellers need to decide what type of sale process is most likely to achieve their speed, certainty, value, confidentiality and risk objectives. Does it makes sense to run a pre-emptive situation with a single bidder, a limited auction with a handful of the most likely acquirers, or a full auction process with dozens of prospective bidders? The sale process is directly correlated to the eventual outcome.
Targeting the most likely strategic and financial buyers is essential to creating a competitive bidding environment. Sellers should take care to understand buyers’ profiles both domestically and abroad and their unique information needs. Planning for and providing the relevant information or considering alternative deal structures can reduce buyers’ risk assessments by making the deal more attractive.
Effectively negotiating the form of consideration and the terms of the transaction are key elements of a successful transaction. Is it a cash for stock, cash for assets, stock for stock or stock for assets transaction? Is the buyer asking the seller to finance a portion of the purchase price by rolling over equity, accepting a seller note or structuring a contingent earnout?
What representations and warranties must be made to sell the business? How long will the representations and warranties survive the closing? What is the indemnification cap and exposure to the seller? Each of the foregoing are essential elements of the deal and require significant attention and a well-planned negotiating strategy.
Sellers should also consider and prepare for multiple transaction scenarios. In such a “multi-track” approach, sellers may consider various strategic alternatives, including: sale to a strategic buyer, sale to a private equity firm, sale in a leveraged Employee Stock Ownership Plan (ESOP), a management buyout, an IPO, a tax-free spin, a joint venture or selling in two or more transactions by breaking the business apart (to make the sum of the parts greater than the whole.
Proactively establishing a heightened state of readiness to divest is a best practice. Companies should undergo an exit readiness assessment well in advance of a live transaction to identify the risks, opportunities, complexities, preparation and timing in connection with a contemplated divestiture.
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