One of the most common things that prospective sellers ask us about early on is what the process of sale looks like, and how long it takes. We wanted to offer a brief recap here for all of our prospective sellers, so you will know a little more about what to expect.
In the beginning of any engagement, we spend time at two primary activities, simultaneously.
We begin development of information on the company that we will want to present to buyers. That information includes extensive financial info, including CPA-prepared financial statements at least 3 years back, internal financials for the most recent year end, and interim financials for the year in process. We also seek to pull financial info by meaningful segments, like sales and profitability info perhaps by customer type, by major customer for the top 5 to 10, sometimes by geography, and sometimes by product segment. At the same time we move forward developing info on people, technical capabilities, facilities, sales processes, and a wide range of marketing parameters.
As we are working on developing such information about our client, we also begin a very thorough process of vetting potential buyers who we think could be a fit. We try very hard to be creative, and really think 360 degrees around our client’s business, to find every major category of suitor likely to have interest. For each such category we call a great many possible buyers and explore their interests. We do NOT tell them anything which could identify our client. Instead, we ask about the buyer’s acquisition interests. We seek to learn what their “hot buttons” are for identifying favored targets. We ask about what they seek to avoid. We ask about growth target areas, and future plans. We ask if they have done other acquisitions, and ask who they bought and what they paid. We ask about general rule of thumb pricing they consider reasonable. For the average seller client, we will talk to 300-400 such possible buyers, with anything from 5 minutes to an hour of talk each. We learn a great deal. Usually, as we complete this pre-identification stage, we take a 300-company list down to perhaps 30 that we think are really strong prospects.
Months 3 and 4:
After we have reviewed our top buyer lists with our client, and have agreed on the favorite potential suitors, we call those suitors and tell them we have a company that they will have interest in. We give them a non-disclosure to sign, which has no client identification, but just a client number. When we have that returned, our next step is to send them some very brief overview information to see if it’s of interest. Such info normally includes a one page financial summary, and maybe a 2 page narrative overview.
If we have chosen suitors well, we know almost immediately, because they come back to us within maybe a day and ask for much more information. We listen to what they think they need, learn a little about how they think it fits for them, and then send out a much more comprehensive “core” package, with data on financials, markets, products, people, and facilities. This takes a little bit longer for them to digest, but commonly within the week, they call and ask for further information. In many cases they ask to visit the client. We don’t allow that, but we will arrange a conference call with the CEO if they feel they need that.
Usually by the end of the 4th month (sometimes sooner), we will have identified 10 or more suitors really enthused and eager to take next steps. At that stage, we will ask for a nonbinding letter of interest, for the buyer to tell us what price they expect to pay, and to describe any key terms. If there is any non-cash element to the proposal, that would be required to be identified at this time. (We generally won’t give serious consideration to any proposal less than 80 or 90% cash, unless it is a really unusually large and profitable total amount proposed.) We ask about transition terms for owners – how long they will be required to work in transition. If it’s an equity fund buyer, we ask about their desire for owner re-investment or owner incentives for ongoing operations.
From that point we will usually suggest that our client choose their favorite 2 or 3 suitors to invite for a visit.
Visits are usually arranged fairly quickly, and within a month all are likely to be completed. After those visits, we find that most of our clients know which suitor is their favorite. If that suitor feels similarly enthused about our client, we seek to move to next steps. Buyers will almost always propose a letter of intent, which will provide for exclusivity when signed. We are reluctant and slow to encourage our client to accept exclusivity. The moment other buyers are chased away, seller leverage for remaining negotiations drops dramatically. If the buyer is our client’s favorite, we typically ask for a nonrefundable deposit before we agree to exclusivity – usually in an amount of $250k to $500k. Some buyers are really resistant to such deposits. Equity funds in particular fear that step. We get such nonrefundable deposits for probably 1/3 of the companies we sell. When we have such deposit, it always closes successfully. (The buyer who is willing to put his money where his mouth is, has truly decided.) The next preferred step, if we can’t get a deposit, is to proceed to further due diligence, without committing to exclusivity. We do this probably for another 1/3 of the deals we take. This is a good mechanism to keep negotiations and due diligence efforts moving quickly and reasonably. Occasionally, no buyer is willing to proceed without exclusivity, and no buyer will make a deposit. In those cases we may recommend that our client proceed, and accept a letter of intent with exclusivity.
For any letter of intent we enter into, we will always a) work out all details of terms, specifically writing them into the LOI, b) provide fixed timelines for various stages of completion (letter to be void if those are missed), and c) provide for voiding of the letter in the event of any material proposed change in price or terms.
Due diligence begins in earnest at this stage. We ensure that due diligence continues with confidentiality maintained throughout. We do not allow interviews with employees, although the CFO may be an exception (sometimes absolutely required to get the info needed), and a top level manager, who may be the successor to run the company, may be required.
Somewhere between Month 6 and 8:
Generally we reach closure sometime during this timeframe. In the past 5 years our average has been about 8 months. However, some may be completed as quickly as 5 months, and some as slowly as 10-12. In our 25 years in business, we have closed over 98% of the transactions we have undertaken. Generally, if our client is honest and responsive, it can always be done!
This is a very brief overview of how the process works. If you’re considering sale, you need to have a sense that it’s not overnight, and does require significant time. Our average time input for an engagement is between 2,000 and 2,500 man-hours. It’s a lot of time, but it generates 10’s of millions of dollars in resultant proceeds for our clients! It’s worth it – we promise!