The Seller’s Perspective
If you dissect merger and acquisition transactions (M&A) to their simplest form, they are essentially strategic arrangements between two sides: the sell-side and the buy-side. Diving deeper into the M&A process, this guide will provide a nuanced examination of the seller’s perspective (including the seller’s advisors) during mergers and acquisitions.
The M&A process is a complex procedure with multiple steps, and it can be exhausting. It has significant implications for the seller, as this is usually a once-in-a-lifetime transaction. The sell-side perspective of these transactions requires in-depth research, a solid understanding of terminology, tactical negotiation strategies, a comprehension of competitive dynamics, and an experienced advisory team to guide the process. To avoid a poor valuation, unfavourable deal teams, or hostility and regret, the seller and their team should take these requirements seriously.
There are multiple reasons a business owner can decide to sell or merge. Selling a business through M&A does not necessarily mean exiting it for good. It can also be a strategic move to grow whilst remaining a shareholder.
The seller of a privately owned business may wish to sell their company due to old age, fatigue, internal disputes, lack of a succession plan, retirement plans or an unforeseen circumstance.
The seller may want to cash out and liquidate their firm by being partially or fully acquired. The seller could have a strategic plan to develop or increase a competitive advantage, and is considering a merger with a competitor, customer, or supplier.
Or the seller is distressed and is facing bankruptcy. Each circumstance will be unique, and the deal structure will depend on the type of company and owner(s), including their strategies and reasons for selling.
Regardless of these circumstances, each seller needs to have clear objectives, and a specialised advisory team to assist in implementing these goals. Depending on the type of deal, an advisory team from the sell-side will often include an investment banker, a broker, an accountant or tax advisor, lawyers, and analysts – all of whom should specialises in mergers and acquisitions.
Find out more: Want to know more about the buy-side of M&A? Understand the buyer’s perspective in mergers and acquisitions.
Types of Sellers
The ‘seller’s perspective’ can incorporate multiple definitions of a ‘seller’. There are different categories of sellers in the M&A process, and each seller has a specific strategy that will dictate the terms of the deal. Here are the most common types of sellers:
Divestiture or spinoff
An owner may not want to exit their business but rather grow it by selling off certain parts of it – either assets, divisions, or products. This can be a strategic move executed for various reasons. For example, a parent company may spin off a unit of their business that is underperforming to focus on assets that are performing well or have higher potential for growth. However, spinoffs aren’t always implemented to sell an underperforming unit. If a unit of the parent company is demonstrating significant potential, a spinoff will create an independent subsidiary, allowing the unit to unlock its value independently.
Change in entity ownership
In this transaction, the owner seeks to sell majority (more than 50%), or all the company’s voting shares, so a change of control is initiated. This can be done privately or on an open market. A change in ownership could be structured through a merger, restructuring, or an acquisition, depending on the intention of the seller.
Usually associated with established companies, the seller does not sell their business, but rather its shares in return for growth equity funding. The company will sacrifice a percentage of their shareholding in return for a significant amount of funding to pursue targets. This is often a strategic plan executed by companies that are already established and profitable (or are likely to become profitable in the future), to enter new markets, invest in technology or fund acquisitions.
Starting the Sell-side Process:
The sell-side process usually begins when a buyer approaches a seller, or the business owner arrives at the decision independently. Regardless of the circumstance, you need to be secure in your decision, and prepare every element of your business before you even consider auctioning it. As the seller, you have an opportunity to set the starting tone of the negotiation process and, ultimately, the deal closing successfully. A good departure point is to review your strategy by answering these simple questions:
Define your strategy
Do you want to sell your business?
- How will this reason impact the valuation?
- Who will your external advisors be? (Your engagement letter will come into play here. The engagement letter is discussed in the document checklist section)
What does your buyer pool look like?
- Comprehend your buyer pool
- Can they afford the transaction?
- Will the buyer add value to the business and its future?
What is your business valuation?
- Business owners are proud of the establishment they have built. However, this can often cloud objectivity and lead to unrealistic valuations. You want to prepare your potential buyer based on realistic value drivers and market factors – not emotions.
What does the process look like?
- Understand that this process will require hundreds of documents and it will take time. Clarify the timeline and separate it into sections that are dedicated to specific projects and objectives.
Opportunity and success will not wait for those who are unprepared. This is particularly true for a seller engaged in a M&A transaction. Regardless of how you arrived at the potential acquisition or merger, this preparation will need to begin immediately.
Before you consider any auctions, meetings, due diligence, or documentation, you’ll need to ‘suit up’ the value of your business so buyers can see a quality of earnings.
Buyers and their advisory team will scrutinise aspects of your company, like its brand value, market fit, cultural environment, and other opportunities for potential growth and transferability.
Another significant factor that a seller and their team should consider are external market conditions and industry trends. Your advisory team should continuously analyse factors like downturns, recessions, foreign investment, contextual specificities that impact economic conditions (like Brexit or COVID-19), social responsibility requirements (like ESG) and more.
Understanding Your Valuation
While other variables are considered, a buyer’s decision is heavily reliant on the valuation of the business. For an acquirer or investor, this valuation will reflect potential for growth, long-term security and trajectory, and a return on investment (ROI). These factors will either be glowing indicators or bright red flags. Likewise, each buyer will perceive the synergy value of your business differently, so the valuation will be different from yours.
You will need buyers to see the valuation the way you see it and focus on financial projections rather than past ones. Remember that the M&A process takes several months, so your valuation will fluctuate. To avoid a drastic decrease in value, ensure that your business functions at its full potential during the negotiation.
Find out more: Need an accurate, trustworthy valuation of a business? Try our free, online valuation tool.
Assess Your Company
When a potential acquirer assesses a target, they will identify areas of your business that have potential for strategic growth. Would it be more strategic to buy it or simply build it from scratch?
Acquisitions and mergers require a granular assessment of the specific business in a framework defined by its market, products, finances, and organisational structure. As a seller, you can objectively evaluate these by looking at how well you fit within this framework. This is an opportunity to conceptualise creative ways you can make your business more innovative, identifying areas that can be revitalised, adapted, or updated.
Study Your Market
Understanding the internal mechanisms of your business is important, but studying the external environment is equally significant. Familiarising yourself with market conditions will give you a competitive advantage.
You can do this by studying similar businesses, trends in technology, and understanding your industry’s M&A market. This will shed light on who your buyers are, what they’re looking for and how much they are offering.
Confidential Information Memorandum (CIM)
Whether you are looking to sell to a financial or strategic buyer, or you are searching for investment, the way you market your business is essential for sell-side M&A. Your CIM will promote your business and should provide buyers with a detailed picture of its value and potential for future opportunities. This will be your chance to tell the story of your company and defend and maximise its valuation. Some elements that could be included in the CIM are:
- Executive overview of your company
- Detailed description of what your company does and for whom
- Industry and competitor research
- Analysis of management structure
- Explanation of product or service
- Marketing and sales strategies
- Historical financial details
- Financial projections
- Supporting documents (resume, IP (intellectual property), permits)
While M&A deals take time to conclude, prolonging the process can introduce unwanted risks related to finances, performance, budget, customer and supplier demand and employee retention. To avoid this, ensure that deal milestones are taken seriously by both yourself and the buyer. However, rushing the process will be detrimental.
The deal timeline needs to be appropriate and reasonable, ensuring that every step is taken into consideration. For example, once you have distributed your CIM, and received bids from potential buyers, establish a timeframe for holding meetings, setting up a virtual data room (VDR), facilitating due diligence, drafting agreements, conducting the negotiation stage, and closing the deal.
A lot of sell-side strategy develops in the preparation, but there are strategic ways to organise the deal, depending on what type of seller you are. Obviously, M&A deals include sensitive and confidential information and are usually carried out privately. Sellers want to receive the highest price possible, favourable deal terms and beneficial outcomes, so they are strategic about the way they auction their firms.
There are four strategic ways a sellers can organise a deal to meet their objectives:
Broad auctions are best suited for high value businesses, usually in the middle-market category. The role of a broad auction is to maximise purchase price. To do this, a seller’s advisory team (usually an investment banker) will cast a wide net by inviting multiple potential bidders to participate and compete in the auction. By soliciting multiple competing bids, the seller can tilt the scales in their favour, gaining an advantage in the negotiations.
However, strategies often have risks, and a broad auction has its disadvantages. Maintaining confidentiality can be challenging, as the seller needs to provide enough information to attract bidders. This can create an environment where competitors attempt to uncover trade secrets by gaining access to the seller’s private information. In some cases, competitors can even poach imperative employees to extract information.
Another disadvantage is that broad auctions are large pursuits, so they are time consuming. They require a great deal of preparation, marketing, and management. This can be detrimental to the seller’s principal responsibilities – like running their business at its full potential.
Limited auctions are suited to large companies with a significant equity value. It is different to a broad auction, in that the buyer pool is limited. Buyers are usually financial and strategic and are searching for large acquisition targets that have potential for growth and ROI. Because the company has a large value, the buyer pool is exclusive, and the deal processes need to be formal and structured to avoid any disruption to the operational functioning of the company.
If a company has a purchase price of £600 million, for example, its confidentiality needs to be preserved and its day-to-day operations cannot be affected by the auction, hence why a small buyer pool is a strategic choice.
Advantages of limited auctions include the ability to maintain confidentiality and refine buyers, so you can clearly identify a strategic fit. Day-to-day operations will also experience less disruption. However, a disadvantage is that it is - as the title indicates – limited. This means that your negotiation leverage decreases, and favourable deal terms may not be as easily achieved.
Targeted auctions are extremely specific and are usually carried out by businesses that have a significant equity value ranging between millions and billions. Financial buyers, like private equity groups, are often excluded from these auctions, because the seller is looking for a qualified strategic buyer. The buyer pool is targeted, usually consisting of around three to ten buyers that fit the expectations of the seller.
The advantages of a target auction include the potential for a high business valuation. These handpicked buyers will need to compete for the business and will attempt to outperform other bidders by raising the bid. This leads to the next advantage; because each bidder tries to demonstrate their suitability for ownership, the seller is in control. By setting the terms and conditions for buyers, the seller can sway the negotiations in their favour.
Similar to the disadvantages of a limited auction, having an exclusive buyer pool can be a risk as it is limiting and could lead to potential losses. For example, bidders that were not invited may have driven up the purchase price.
An exclusive auction is the opposite of a broad auction. In an exclusive auction, the seller negotiates exclusively with one buyer. There are clear advantages with this type of auction: maintaining confidentiality, closing the deal in a short space of time, and few disruptions to the operational functions of the business.
The disadvantage is that the seller’s negotiating leverage is drastically minimised, and the buyer will have control over the purchase price. There is a high probability that the value of the business can be minimised to meet the buyer’s needs.
As previously mentioned, a seller will have their own reason for selling the business. Some may want to grow the business and take it to new heights, so post-sale strategies are important. However, those wanting to exit the business to retire, travel or disassociate from the company may think a post-sale strategy is irrelevant. This should not be the case.
Wealth management is an integral post-sale strategy. It is a significant steppingstone to prepare for long-term goals, even if you want to completely exit the business. Considering how to optimise your cashflow, transfer your wealth strategically, invest your earnings or increase material gains through philanthropy are some strategies you can implement post-sale.
Sell-side Document Checklist:
The sell-side document checklist will incorporate hundreds of elements, specifically for the due diligence phase. These elements will range from legal, financial, sales and marketing, assets, contracts, intellectual property, and organisational documents.
In the beginning stages, you’ll need to start off by clarifying and signing an engagement letter. This is an arrangement between you, the seller, and your M&A advisor, who should guide and support you through the entire process. This letter will outline a fee structure, services, objectives and ultimately lay the groundwork.
Secondly, get your supporting documentation in order, including your Confidential Information Memorandum (CIM) and Non-disclosure Agreement (NDA).
Your documents may vary depending on your business and the deal terms. This phase of the negotiation is where your legal fees will come in handy. It is imperative that you do not neglect your business during the sale, so your legal team should take ownership of this phase. Your document checklist should include these common elements:
- Business incorporation documents (tax structure and entity form)
- Your business’s bylaws (name, location, shares and stocks, details of Board of Directors)
- Organisational chart
- Security regulations (your legal team should scrutinise these documents closely. For example, the new National Security and Investment Act 2021 gives the UK government considerable say over M&A transactions, including the power to issue sanctions. Will this impact your deal?)
- Details on stock agreements, including shareholder arrangements
Your legal team should closely analyse your tax profile before beginning the sale. This is to understand your business from a buyer’s perspective. They should be familiar with areas of tax risk or benefits. For example, if you identify tax attributes in your business, you can negotiate a higher price because of its potential value.
Intellectual property is a significant value driver. If your business owns innovative technology or software, including its protection, your legal team should make a conscious effort to include this in documentation. Intellectual property can include patents, copyrights, trademarks, domain names, trade secrets and licenses.
Assets are an integral part of sell-side M&A, as the total value of these will increase your valuation. Your team should also consider if they have any debts or liabilities. These can include:
- Your stock
Owning and running a business individually is very rare. Throughout ownership, a seller develops relationships between customers, suppliers, employees, real estate agencies, and shareholders. These relationships are documented through legally binding contracts, which will vary depending on the size of your business and its industry. Some common contracts include:
- Contracts with customers and suppliers
- Contracts with banks, like loans or credit agreements
- Contracts associated with any partnerships
- License contracts
- Employment contracts
This is a general checklist with common documents. However, these documents will vary according to the specificities of your business and deal terms, so your advisory team should provide a more comprehensive checklist.
Sell-side M&A FAQs
Is M&A advisory sell-side?
M&A advisory is both sell-side and buy-side. Both the seller and acquirer need advisory teams, but they will focus on different elements of the transaction.
The sell-side advisory team often focus on marketing the target, making it attractive to potential buyers. Sell-side advisors, particularly bankers, are heavily involved in generating materials that promote the firm to buyers that fit specific requirements. An investment banker, for example, will be responsible for achieving the highest valuation possible, finding strategic investors, constructing an appropriate Non-Disclosure Agreement (NDA) and developing an attractive Confidentiality Information Memorandum (CIM).
Is financial advisory sell-side?
Again, it is both sell-side and buy-side, but advisors will have different roles depending on what side they associate with. On the sell-side, the financial advisor’s role is to convince investors or bidders to buy products, stocks, or the company, depending on the seller’s objectives.
When it comes to building the M&A model, banking specialists will focus on presenting a financial model that is appealing to the buy-side. Some services will include:
- Developing a strategy and prepare the business for sale
- Identify and approach investors or buyers
- Prepare and refine all marketing documents
- Initiate the bidding process
- Coordinate the due diligence process alongside other advisors (like a lawyer)
- Supporting the preparation of documentation
How long do M&A deals take?
This really depends on the objectives of the sale, and whether it is a merger or an acquisition. There is no concrete timeframe for M&A deals, but usually, it can take up to three to six months or even several years.
This timeline ambiguity is because of the multi-layered process. You need to execute a strategy, find buyers, plan, and evaluate the process, negotiate, and proceed to due diligence, analyse contracts and documents, discuss financing, and close the deal.
Should you buy stock before a merger?
There are always risks and benefits in buying stock, and these will shift according to the characteristics of the merger, if it is carried out effectively, and assumptions of volatility.
Usually, the target company’s stocks will rise in the short term. This may be related to the acquiring company paying a premium to incentivise the shareholders. This means that the acquiring company’s stocks may drop for several reasons:
- Financing the premium would exhaust their cash reserves and incur debt
- Integration challenges
- Power struggles
- Unforeseen expenses
However, these drops could be short term. If the acquiring company has executed a well-researched valuation and quality of earnings, and integration is reenergised, stocks could rise significantly in the long term.
Who must approve a merger?
While the company’s shareholders will need to approve the merger, there are specific regulations that pertain to mergers in the United Kingdom. The Enterprise Act 2002 (EA 2002) is the primary legislation body that governs mergers in the United Kingdom.
However, you are not obliged to seek clearance from the Competition and Markets Authority (CMA) before or after a merger has commenced, and there are no sanctions for proceeding without clearance either.
Is asset management buy or sell-side?
Asset Management is buy-side. Asset management companies usually make investment decisions on behalf of their clients to increase and diversify their finances and portfolios. They are responsible for making well-informed purchasing decisions that are in the client’s best interest.
What BusinessesForSale.com offers
Typically, sell-side intermediaries consider traditional methods of research and outreach to find potential buyers, and this can be an arduous task.
BusinessesForSale.com noticed a demand in the M&A market: from a sell-side perspective, intermediaries searching for buyers interested in higher value targets, and from a buy-side perspective, experienced investors looking for acquisition targets in the middle-market range.
MergerVault, which has been built and tested over the last year and a half, is a product that addresses these demands. To support expansion into a sophisticated buyer pool, MergerVault connects both sides more seamlessly, enhancing the process by providing an advanced toolkit for sell-side and buy-side M&A intermediaries.
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.
BusinessesForSale.com focuses on supporting buyers and sellers through quality connections, consistent communication, and educational resources dedicated to specific perspectives. For more information and further support, you can contact our dedicated team.