Four Elements of a Successful Sell-Side Process
A successful sell-side M&A process provides sellers with the best opportunity to command a premium price and to mitigate the risk of a deal not closing.
Four key elements help drive this positive outcome. While not all of them are necessary — or even possible on some deals — the more of these elements can be brought to bear in a sell-side process, the higher the probability of success.
Element #1 — Comprehensive Buyer Pool
We have a saying that if “you have one buyer, you have no buyer.”
At the end of the day, a sell-side M&A process (like the more conventional sales efforts) can be a numbers game. As you have more potential buyers on your list, the higher the probability that one or more of these potential buyers will not only be interested in consummating the deal, but will also have the capacity and willingness to pull the trigger on a timely basis.
However, it is important to also qualify the fitness of the buyers when building this list. The qualification process must address three critical questions.
First, can these potential buyers afford the transaction? A $10 million company may not afford a $100 million-dollar company.
Second, is the seller plausibly adding value to the buyer? It is one thing to send nVidia a prospectus on an energy technology company (nVidia’s high performance graphics processors are notoriously energy hungry). It is a different story to send the energy technology company to a private equity group focused on B2C lifestyle food brands. Finding and engaging less-than-obvious buyers is a virtue — and Crossroads has a systematic process for doing so. Spamming random companies is counterproductive, to say the least.
Third, would approaching a potential buyer cause the seller competitive concerns? Are they close competitors? Would the knowledge that a specific company is for sale be a game changer in this particular market? This does not mean that you do not contact them or keep them on the list, but instead, you need to be mindful of sensitive competitive concerns.
Element #2 — Competition Among Qualified Buyers
On its own, a comprehensive buyer list will not get a deal done. It is key that the sell-side process be designed to effectively engage relevant decision makers at the target organizations, peak their interest, and persuade them of a strategic case. Doing so will not encourage more bidding (helping up the price), but will also maintain deal momentum during the challenging moments of a deal process.
Element #3 — Timeline Discipline
A deal that moves at the buyer’s pace will be a protracted affair. This is problematic because it provides time for unexpected issues or contingent events to pop up and derail the process.
To address this problem, sellers should set a firm but reasonable timeline for the potential buyers to meet certain deal milestones such as initial review of the Confidential Information Memorandum or submitting a bid. Make sure the timeline is appropriate for the deal at hand that allows for reasonable time to review the opportunity in-depth, but not too long that it becomes open ended.
Element #4 — Preparation
Preparation is essential to a successful process in both obvious and subtle ways. Foremost, preparation enhances all the aforementioned elements. A well-prepared company will have done the research to create the comprehensive buyer pool. Such a company also knows how to best engage them to stimulate buyer interest. Similarly, an organized company with a well-managed deal process can help buyers maintain timeline discipline by providing documents and answering questions in a timely and responsive manner.
More subtly, your level of preparation during a transaction reflects intangible but important factors. If your one-in-a-lifetime deal process is disorganized, how well do you handle more run of the mill tasks? If the due diligence process does not produce the requisite documents fast enough, buyers may wonder what else you may be hiding. If the diligence process doesn’t run smoothly, what does this say about company culture, operational skill, or quality of leadership? These subtle factors affect your company’s attractiveness.
Finally, have you done the strategic homework? Is your company marketable (LINK to other post)? Is this the right time to sell? Do you have low hanging fruit that could minimize the risk of being hit with valuation discounts? A proper deal preparation process will address these challenges proactively before buyers point them out to you (also LINK to other post).
All sell-side processes experience challenges and pitfalls. However, the more of the four elements discussed a company has, the more likely it is to achieve a successful outcome.
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