The M&A road is littered with casualties due to bad foresight, planning and preparation. It doesn’t matter whether you’re aiming to sell your company now or in the distant future, preparation is the key to a successful sale, and by understanding the process now you will be better able to plan your timing, mitigate the risks and maximise the value of your firm.
Nothing is much more exciting than the prospect of selling your consulting business and gaining financial security from the business you’ve worked hard to build. But the M&A road is littered with casualties due to bad foresight, planning and preparation. It doesn’t matter whether you’re aiming to sell your company now or in the distant future, preparation is the key to a successful sale, and by understanding the process now you will be better able to plan your timing, mitigate the risks and maximise the value of your firm. Read on to discover the nine steps that will take you all the way from valuation to company disposal – minimum stress guaranteed!
Step 1 – Initial valuation and market risk
This crucial first step is about establishing a target valuation and unearthing any show stoppers or issues that might harm your sale. Your initial valuation will be based on four main factors and by understanding these you will place yourself in a strong negotiating position with your bidders down the line:
1. Return on investment calculation based on your current financial performance and growth prospects
2. Buyer risk factors that may cause them to downgrade the value of your firm
3. A market premium based on current market activity – currently 30% to 40% in 2007
4. A synergy factor based on your ability to positively impact the buyers’ business
Use our ‘8 levers of Equity Value’ as the model to assess those risk factors that might cause problems or inhibit the maximum value. This model has been developed based on those issues that buyers consistently raise as focus areas that affect their valuation of a consulting firm. Once you have identified the issues, you can then put a plan in place to eliminate or mitigate the risks and maximize the value of your firm in the process.
Step 2 – Maintaining business as usual
While conducting the sale preparation, you must ensure that the business continues to grow on its current trajectory. This is a crucial issue and is one of the main causes that either delays a sale or reduces the price achieved. Your organization plan must ensure that there are sufficient resources to manage both the ongoing growth of the firm as well as the sale process. Of course one of the reasons to employ advisers at this stage is to reduce the management load of the sale process so that you can get on with ‘the day job’.
Step 3 - Building the buyer list
The buyer (or bidder) list is the group of target firms that on paper could be interested in acquiring your consulting company. You should be looking to build a list of 40 or more potential bidders and they are likely to come from two main sources. Your team will almost certainly have intelligence on potential buyers, but the majority will probably come from your M&A advisor. The list should be categorised into groups based on a view of their potential synergy with your firm. Synergy factors can dramatically affect the price achieved and so it is important that you develop a strong story about synergy, customized for each buyer group.
Step 4 – Preparation of sale documentation
While preparing the firm for sale your M&A advisor will be collecting the detailed, financial, operational and commercial information required to produce the sale documentation which comes in three forms:
The first of these usually called the ‘Blind Profile’. This is a short two page document that is used to generate initial interest in the firm with buyers. It includes financial, operational, service and client highlights without mentioning the name of your firm. It is a marketing document that must show the firm in the best light to differentiate your firm from others that may be for sale during the same time period. It should talk as much as possible about the potential synergy between your firm and the buyer. Several variants of this document will be required based on the different categories of buyers.
The second document is a rather longer Information Memorandum (IM). This 30-page document describes all the strategic, financial and operational information that is likely to be required by a buyer. It is meant to be a factual document and covers financial history and projections; service line descriptions; clients and markets; staff and compensation; assets and liabilities; firm strategy and reasons for the sale.
The third piece of documentation is a compelling management presentation that can be customised and used in initial meetings with bidders.
Step 5 - Lining up legal and tax planning experts
Issues that can take more time than you might expect relate to management organization structure and remuneration or share issues. By engaging lawyers and tax planning experts at this early stage you can make sure that legal issues relating to company incorporation, contracts, shares, liabilities and such like don’t delay the process later, or present nasty surprises! If you don’t have access to trusted legal or taxation experts, your M&A advisor will be able to recommend them to you.
Step 6 - Engaging the buyer list
Having worked on all those issues that might raise questions with buyers and possibly reduce the price achieved, and with all the background work completed, you can now begin the sale process and start contacting the buyer list. The blind profile is sent out, then followed up with telephone calls and emails to establish interest and pre-qualify buyers. Those that appear to be both able to buy and also express an interest are invited to sign a Non-disclosure Agreement (NDA) that prevents them from discussing the details of your firm with third parties. It also reduces the risk of them poaching any of your staff in the event they are not successful in buying your firm. Those that sign the NDA would receive a copy of the IM followed up with email and telephone calls to ensure that they are fully aware of the benefits of buying your firm.
Step 7 - Initial offers from interested buyers
Those that wish to progress further will wish to meet the Management team. This is your opportunity to impress bidders with the quality of both the firm and the Management, whilst also discussing those items of synergy that will increase the view of your value in the eyes of the bidder. There may be several meetings with each bidder before indicative offers are made. The offers will comprise of a total value and the proposed structure of payment. Of course the competitive nature of this bidding process will help to maximize the value of each offer.
There are many variables here and it is not unusual for bids to be accepted that don’t provide the maximum offer value but perhaps offer a higher value upfront with the remainder of the consideration in safer non-contingent financial instruments like bank-guaranteed loan notes. It’s important for you at this stage to understand the relative value of each offer as well as any contingent risks.
Step 8 - Heads of terms and due diligence
Once you feel you have received the maximum bids from each party the next stage is to decide which firm you would like to be the successful buyer and ask them for a ‘Heads of Terms’ document that describes the detail of the offer subject to successful due diligence (DD). You then enter a period of exclusivity where you are prevented from progressing a sale with any other third party. This typically provides the buyer with four weeks during which time they will perform their DD. This will include financial and legal DD but may also include commercial and HR. It is almost certain in a consulting business that they will wish to speak to one or more key clients and you will need to manage this part of the process carefully so as not to expose your relationship with the client.
Step 9 – Signing the sale and purchase agreement
DD ends with your lawyers drawing up a Sale and Purchase Agreement together with warranty and disclosure documents for signature. The legal process can be done in parallel with the DD if you are pretty certain that the DD isn’t likely to expose any problems and you don’t mind taking the risk on the legal fees if for some reason the sale doesn’t progress.
In summary
If you add up the elapsed time for all of the above activities then your firm could be sold within 6 months from the start of the process. It could be less if you find a buyer early on that is prepared to make an offer to ‘knock out’ other potential bidders. It could of course take much longer if you find some serious issues in Step 1. Then of course there are external factors that could cause a delay, like a market collapse, or a key client that stops doing business with you. Clearly, the longer the process runs on the higher the risk that something will come out of the woodwork for you or your buyer. That’s why with good planning and preparation you can limit the risks and run a smooth process that gets you from A to B, with a successful and lucrative completion in a controlled and speedy way.
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Paul Collins is managing director of consulting industry merger and acquisitions (M&A) specialists Equiteq LLP.
