Preparing for a Transaction – Things to Do Before Approaching Buyers

 

davidstevenson
David Stevenson
Vice President
Arbor Advisors

The more prepared you are, the better your company will look to buyers.

Whether you are raising money or selling your company outright, it requires a significant amount of preparation. The following is a general guide on how to best prepare yourself and your company before going to market.

Know ‘Why’ You Want to Do a Transaction

First of all, know why you want to do a transaction – whether it’s to raise growth capital, provide liquidity to current shareholders or sell your business entirely. Know your motivations and be able to articulate them succinctly. If you are raising growth capital, know how much you want to raise and what the uses of capital will be. If you want to provide liquidity to current shareholders, it helps to know the percentage of the company you plan to sell. If you are selling the entire business, you must be able to succinctly answer the questions – Why are you selling your business? and Why now? An advisor can help you formulate answers to these questions. Know that if you are selling the business entirely you will likely be asked to stay on for a period of time, typically one to two years. It’s a big “red flag” if you say anything that indicates you might want to “cut and run” from the business. Buyers always drill down on why entrepreneurs want to sell their businesses now.

Formulate a Thoughtful List of Buyers

Second, you will need to compile a list of buyers depending on what type of transaction you want to do. An investment bank can compile the initial list for you and a good investment bank will listen to your criteria carefully, rather than starting with a generic list. Once the initial list is compiled, the bank should develop a specific strategy for approaching each buyer and coordinate with the client on the outreach.

Things to consider when compiling the list of strategic acquirers:

  • Strategic Rationale – Strategic rationale can be either vertical or horizontal. There might also be a defensive rationale (buy your company before the competition does), but these types of acquisitions are less common. A specific synergy analysis should be done for key buyers.
  • Ability to Pay – Judging the ability to pay often depends on whether or not the acquirer’s financials are public. If so, one would look at the cash balances, debt capacity and/or ability to exchange equity for cash. If the acquirer needs to use equity to complete a transaction, the banker should do a probability assessment. Private acquirers are generally less attractive, and your banker can help determine which ones might be worth pursuing.
  • Track Record of Successful Acquisitions – The Company’s track record of acquisitions, or lack thereof, is important to consider as it may not be the best use of time approaching buyers that do not have a history of making acquisitions.

Things to consider when compiling a list of financial investors:

  • Size of Fund & Amount of Cash – Find out how much capital sponsors have raised and how much is remaining as “dry powder.” Sometimes funds do not have sufficient capital to invest in your company, so they need to partner with a third party for additional capital. If the fund does not have the cash readily available, it significantly decreases the likelihood of a successful transaction.
  • Typical Check Size – Funds often represent that they invest in a broad range of investments, both type and size. Rather than simply accepting their marketing pitch, it is important to find out what the actual amounts of their recent investments have been.
  • Industry Focus & Track Record of Related Investments – Make sure the fund is invested in your space, or better yet, has a well-established track record making investments in your space. If a fund has to familiarize itself with your market before investing, it greatly decreases the likelihood of a successful transaction.
  • Related Portfolio Companies – It is good to find funds that already have investments in companies that are similar to or related to your company. These funds will already be familiar with your space and may be looking for new platform or “add-on” investments. It’s also important to know if there are any portfolio companies that compete directly with your company, as you will want to be careful in releasing sensitive information during diligence.

Prepare for Due Diligence

Third, you will need to anticipate what investors or acquirers will ask for during due diligence and be prepared to provide documentation and divulge certain information.  Additionally, there are security and logistical issues that should be considered before going to market.

Diligence Information and Documents

You need to be prepared to share information with buyers in advance of going to market. The more prepared you are, the better your company will look. Being prepared also helps create the perception of competition amongst buyers. For example, if a buyer asks for a certain piece of information and you are able to provide it quickly, it may be perceived that a competing buyer has already asked for this information. Investment banks can help collect and organize the information required for due diligence.

Some of the more important documents to create, collect, and organize before going to market:

  • Financial Documents – One of the important components of any buyer due diligence process will be financial diligence. Buyers will want to see both historical and projected financial statements.. Among other things, they will be looking at metrics and trends, including revenue growth and margin trends. You will want to include audited or reviewed financial statements (if available), budgets, tax returns, loan agreements, and historical financial statements.
  • Operating Model – In addition to the financial documents, you will want to have an Excel-based operating model with both historical financial statements and forward projections. The operating model should start with the revenue model and pricing structure, and then go down through several cost line items down to EBITDA, if not Net Income. A full three-statement model (income statement, balance sheet, statement of cash flows) is not necessary in most cases, but is ideal. The model should be dynamic enough to show how the revenue model works, in addition to how the expenses tie into operations.
  • Corporate and Shareholder DocumentsThis category of documents includes articles of incorporation, capitalization tables, shareholder agreements, and equity incentive plan documents.
  • Product, Technology and Intellectual PropertyThis category of documents includes patents, copyrights, trademarks, technology architecture, product roadmap, and 3rd party IP rights.
  • Sales & Marketing This category of documents includes customer contracts, partnership and reseller contracts, press releases, marketing materials, sales pipeline, commission structure, and product KPIs.
  • Human Resources and OperationsThis category of documents includes the company organizational charts, employee census (hire date, job title, compensation data, etc.), employment agreements, property contracts, and vendor and supplier contracts.

Security and Logistical Considerations

Before sharing documents and information with a buyer, it is important to reasonably protect your company and employees. It is also important to be as efficient as possible when sharing the documents.

Here are two things that will help enable you to share documents and information securely and efficiently:

  • Virtual Data Room – It is safe and efficient to share documents via a centralized, cloud-based data room. There are several good vendors at various price points. Be sure that the vendor you choose enables only a select group of administrators to manage access down to the individual folders and documents. It also helps to have a vendor with good tracking and analytics.
  • Non-Disclosure Agreement – The NDA helps protect your company’s intellectual property, trade secrets and employees. Be sure to have a well drafted NDA prepared before going to market so information sharing can begin as soon as possible. The NDA is especially important if you are sharing information with a potential competitor.

Create Marketing Materials

Finally, you will need to develop marketing materials specifically designed for a sale process. There are three main documents you will need to prepare including a teaser, a confidential information memorandum (“CIM”), and a management presentation. Investment banks generally produce these documents for their clients.

  • Teaser – As part of the initial outreach to buyers, you should have a very brief business summary, typically no more than three pages. The teaser is a persuasive synopsis of the business, its product(s), services, differentiation, and typically contains some engaging financial data and other KPIs in graphs and charts. The main purpose of the teaser is to create initial interest from the buyer.
  • CIM The confidential information memorandum, also known as the “pitch book,” or just “the book,” is one of the most important documents prepared in the sale process. The purpose of the CIM is to help buyers understand your business, and the unique opportunities it presents. The CIM should provide prospective buyers sufficient information to analyze and value the company on a preliminary basis, and determine if they want to move forward in the process. Well prepared CIMs tend to contain the following organization and details:
    • Executive Summary
    • Company History
    • Product Overview
    • Sales and Marketing Strategy
    • Growth Opportunities
    • Market/Industry Outlook with Competitive Landscape
    • Management Team Overview with Management Structure
    • High-Level Financials
    • Risk Factors
  • Management Presentation – A management presentation is generally a Power Point deck delivered by management at the first meeting with a prospective buyer. The deck should contain similar information to the CIM, but formatted in a way so the buyers are listening to the presenter, versus reading the slides. The management presentation is an opportunity for the management team to establish rapport with the buyer and ideally it is an interactive discussion. In addition to sharing company information, the management team should use this meeting to learn about the buyer.