The Seller’s Perspective: Mergers and Acquisitions

Building a business on your own takes a lot of hard work. The decision to sell it poses another set of challenges. Selling the business you worked so hard to build isn't easy, and it requires a lot of planning and professionalism. You’ll need a thorough understanding of all the terms involved in the deal.

Business owners and executives without experience in selling a business run the risk of negotiating a lower price than its actual value. Plus, they may not opt for more favorable terms due to their lack of experience in sell-side mergers and acquisitions.

Therefore, it is essential to understand the ins and outs of the process before you decide to auction off your business. In this guide, we will cover multiple considerations of mergers and acquisitions from the seller’s perspective.

The Seller’s Point of View

In the spectrum of mergers and acquisitions, the sell-side refers to the seller’s perspective of the deal that is agreed upon between the two parties. There are several reasons why a business owner might decide to sell their business. Whether the owner announces to sell their business or a buyer approaches them with an offer, both scenarios are part of the sell-side process of M&A.

Let’s have a look at some of the reasons why sellers may choose to sell their business:

• To liquidate their net worth: Usually, business owners have a significant portion of their net worth tied in with the value of their business. Therefore, they might opt for selling all or part of their business to liquidate their funds.
• Lack of succession plan: Business owners who have been running the company for decades might not have a clear successor that can carry the torch, which is why they might decide to sell the business to keep it running.
• Internal disputes: If there are multiple owners of a business, they might get into a rift regarding finances or company decisions, and they might decide to part ways. Therefore, to dissolve their partnership, one or all of the owners may decide to sell their portion of the business to another buyer.
• Joining forces with the competition: There may be a point in the business where owners might feel that there is no other way to grow the business than by joining forces with their competitors or a powerful acquirer. Therefore, it would allow business owners to scale up their business and profits while also penetrating new markets.
• Financial problems: Another reason for selling the business might be financial problems that can’t be resolved internally. Therefore, business owners would look to an external source that can bail them out and eliminate their distress.

Types of Sellers

When it comes to the sell-side process, several types of sellers dictate the terms of the deal, as well as how the sale will be conducted.

Spin-off

This type of seller refers to a company that is looking to sell a part or division, or they’re looking to divest a product line or certain company assets to another buyer. Normally, this involves the buyer creating a new and independent company with the new shares that it has bought from the seller. Since the company is completely independent of the seller’s company, it may have a higher value than it would have by being part of the larger company.

The seller would consider a spin-off part of its business or its product line only if it thinks that the strategy would increase its profitability or help the company restore its financial performance.

Moreover, the spin-off might take place if the company wants to better manage its resources or redevise its strategy. Secondly, businesses might also spin off parts of their business that aren’t doing so well.

Change of control

Another type of selling strategy is known as change of control, which refers to a change in company ownership. This happens when the selling company decides to sell all of its assets to another company or it decides to merge its company with another company. Alternatively, it can also mean that a certain amount of shares of the company are transferred to the buyer’s company, and the acquirer assumes control over the company’s decisions and finances.

There are also other scenarios in which the control of a company may change hands. For instance, if more than half of the board members of a company have changed, it would cause the control to shift. Moreover, if the shareholders who elect a majority of the board members change, it could tip the scales in their favor.

Last but not least, a change of control may also be performed if there is a change in the company’s management or if a competitor acquires one or all of your suppliers, thus enabling them to control your supply chain and production process. In a nutshell, a seller will conduct this type of transaction with a buyer if they think they need to let somebody else take control of the company to manage operations better and also turn the tide for the company.

Recapitalization

Another type of seller in the mergers and acquisitions sphere are those that perform the recapitalization method, also known as the recap. This method involves the seller removing a certain amount of capital from the company and replacing it with another one. For instance, a company may choose to remove some of its shares and replace them with bonds or another form of money.

The recapitalization method enables the seller to rebalance their finances by restructuring their debt and equity ratio. There are several other reasons why a company might decide to do so, which includes dropping the share price, preventing a hostile takeover, and filing for bankruptcy.

By implementing this strategy, sellers can reduce their debt against their equity. Although this reduces their earnings per share, it also increases the likelihood of selling those shares, and it also reduces the debt obligations upon the company. This way, the seller can also pay larger dividends to the shareholders.

Capital growth

Some sellers decide to issue more stocks or sell some shares of their company to a buyer with the intent of raising capital, which can then be reinvested into their business. In essence, the seller doesn’t sell the company or give up control, and the money from the sale doesn’t go to them. Rather, this increases the company’s stakes and also allows the company to raise more funding.

This strategy can be used by private companies for various purposes. For instance, it can allow them to expand their business to new markets or a larger customer base. Moreover, the money from the sale can also be used for extending a product line or starting a new product line, which can mean more sales and profits for the company. Alternatively, firms might funnel the money into scaling up their production capabilities.

These are some of the most popular types of sellers that you would come across in sell-side mergers and acquisitions. Sellers should be conscious of their motives for selling their business and clearly communicate these with potential buyers.

Beginning the Process

In many ways, the sell-side merger process is quite similar to the sell-side acquisition process, and it can be hard to separate the two. Regardless of which type of seller you are, the introductory process will be the same, more or less.

You need to consider a few points to develop a sound strategy. Firstly, the decision to sell, or merge, should be backed by a purpose. Then, you can move to the ‘who’ part of the strategy, where you can identify and outline potential buyers who may be interested in merging with your company or acquiring a product line or division of it.

The next step involves creating a valuation framework, which determines how much your company is worth, and how much your purchase price will be, including a lower limit for negotiations. Determining your valuation is a critical element of your strategy.

Once the strategy is in place, you can organize your finances and create reports and projections. You can use them to prove why your company is valuable and why any party should buy it.

If you already have an offer on the table, you can also prepare non-disclosure agreements to keep the deal and negotiations confidential. You may also prepare a confidential information memorandum (CIM). It is a document used by sell-side companies to market their business to potential buyers.

After this, the company can contact potential buyers and distribute the documentation that would tell them all about the business. Once the bids start coming in, the process of meetings with interested buyers begins, along with Q&A sessions, follow-ups, due diligence, and negotiations.

Overall, the process can take anywhere between 4 to 12 weeks, or a year, depending on the size of your business. To decrease the amount of time spent on analyzing documentation and terminology, hiring an investment banker is recommended.

Sell-side Strategies

There are strategies that your company can implement to maximize the deal value and get the most out of selling your company, or part of it. Here are some sell-side strategies that you could implement.

Maintain your valuation

The valuation of your company is a factor that will make or break the sale. Although it can be challenging to get both parties to agree on the company value, it is vital to maintain negotiation leverage throughout the process.

When you have a properly defined M&A strategy, make sure that it shows that your company is worth being acquired. When determining your valuation, also remember that buyers will look at certain factors that influence your financial performance, such as revenue growth and quality of earnings.

Discover your selling point

While deciding to sell your business, you might second-guess your decision from time to time. Since the market fluctuates day by day, potential buyers might not have the same idea of the business value as you do.

Therefore, you need to be very clear on the objectives of this sale, and market your business truthfully and strategically. Firstly, you need to discover what your strong selling point is. To do this, you should read up on usual points of consideration for sell-side M&A, as well as tips on how you can establish your company’s value in the sale process. The more prepared you are in this process, the better your chances of securing a deal that matches your objectives.

Considering Key Factors

You need to address all the steps involved in the sell-side M&A process. Here are some questions you need to address before you devise a strategy and take it forward:

• Who is the best buyer for your company?
• What do you need to do to secure a deal with the best buyer?
• Why should you avoid shortcuts and risks at all costs?
• Where can you find the best buyer?
• When will you be able to get the deal done?

Once you have a clear answer for each of these questions, your sell-side M&A strategy will finally start taking shape.

Document Checklist

Carrying out due diligence is essential when you consider the seller's perspective of mergers and acquisitions. You have to dot the I’s and cross the T’s so that you can maximize the value of your business.

You can hire an analyst to evaluate the terms of the deal before it goes through. Most sellers employ an investment banker or advisory figure to guide them in the M&A sell-side process, including determining the valuation, evaluating offers, negotiating with several potential buyers, and sticking to a timeline.

Of course, they will charge a substantial amount of fees, normally disclosed in the engagement letter, but their knowledge and experience will be invaluable.

Review this sell-side document checklist before you enter a deal. Likewise, research laws and regulations pertaining to M&A in the United States, and how they differ in each state.

These are common documentation, and they will be different depending on the structure of your deal, so your advisory team should be aware of the intricacies.

• Legal documents: These documents allow buyers to gain a sense of the entire legal framework of the company they are going to buy, and they include shareholder certificates, business, and occupational licenses, construction and land use permits, tax registration, and legal fees.
• Financial documents: These include tax returns, audit statements, banking statements, loans and credit agreements, company investments, capital structure, financial projections, budgets, tax and pension liabilities, and several others.
• Sales and marketing documents: This section includes sales and marketing strategies, coordination protocols, customer-specific revenue, and existing sales contracts.
• Human resources documents: For this department, sellers should provide potential buyers with a list of current employees and contractors, as well as the employee handbook, employee disputes, employment terms, labor union policies, and training details.
• Property and equipment documents: These documents may not be a part of every business, but they include details about company equipment, property, real estate, and inventory.
• Contracts: Sellers should also provide their prospective buyers with details of customer and supplier contracts, as well as partnerships, agreements, settlements, franchises, accounts receivable and payable, leases, and non-compete agreements.
• Intellectual Property: This section involves all the trade secrets, IP claims, litigation, domain names, patents, copyrights, licenses, and company trademarks.
• Good standing and organizational documents: Lastly, this section deals with the organizational structure, as well as shareholder details, voting trusts, securities, state of incorporation status reports, company minutes, bylaws and amendments.

It is crucial to take care of all the strategies and requirements listed above so that you can sell your business smoothly and without any interruptions. Moreover, it allows you to maximize the deal value of the M&A agreement with the buyer.

FAQs

Is M&A advisory sell-side?

Advisory teams are part of sell and buy-side M&A. Sell-side M&A advisory focuses on marketing the company to be sold at the best possible price. Moreover, they create a business plan that compels buyers to acquire the company.

Is financial advisory sell-side?

It is both sell-side and buy-side. Sell-side financial advisory involves investment bankers and dealers that prepare the marketing documents and determine the company valuation.

How long do M&A deals take?

The timeline for M&A deals spans 12-16 weeks. It depends on the number of potential buyers and the length of the negotiation and deal closing process.

Should you buy a stock before a merger?

Most investors buy stocks of a company before they announce its merger or acquisition. The whispers regarding the deal cause volatility in the markets, which can cause the stock prices to rise. Therefore, buying stocks before a merger is considered to be profitable.

Who must approve a merger?

Board of directors for both the target and the acquiring company approve a merger. The U.S. Department of Justice and the FTC approve mergers that have a much higher value.

Is asset management buy or sell-side?

Asset management is a buy-side company or firm that manages a portfolio of shares and stocks for its clients.

Final Thoughts – What BusinessesForSale.com Offers

Each seller will have their own circumstances, objectives, and reasons for selling their business. However, one factor that may be the same for every seller is that this is a once-in-a-lifetime event. There are several risks to consider from the sell-side, so an advisory team is essential to navigate this complex environment.

Sell-side intermediaries are assigned with multiple challenges in the M&A world and pursuing conventional methods of research and outreach can be a time-consuming task. To address this challenge, BusinessesForSale.com developed MergerVault, a product that has been built and tested over the last year and a half. From a sell-side perspective, research demonstrated that intermediaries were looking for quality, sophisticated buyers interested in high value targets. From a buy-side perspective, BusinessesForSale.com noticed that experienced investors were searching for acquisition targets in the middle-market range.

To connect these demands more seamlessly, MergerVault supports expansion into a sophisticated buyer pool, providing an advanced product that both sell-side and buy-side advisors can utilized to find quality leads.

Our enquiry process has been reengineered to include a Verified Buyer Profile, where acquirers elaborate more on their background and investment rationale. At present, MergerVault has a marketable list of over 10,000 buyers that are internally vetted.

Business takes a lot of hard work and determination to build, and it can be even more challenging to find a suitable buyer who realizes its value and future growth. If you’d like to gain a deeper understanding of the buyer’s perspective, and what they look out for, explore the buyer’s point of view.

To support this process, BusinessesForSale.com offers an accessible platform that connects buyers and sellers, offering innovative services and products to support both sides. For more information on how we can support you, contact us today.