TAPPING THE BROAD UNIVERSE FOR BUYERS
This week on “In Process: Conversations about Business in the 21st Century,” we continue with the next podcast in our series dedicated to the topic of preparing your business for sale. This series leads up to the physical event we are hosting at 5:30 p.m., on Thursday, Apr. 19, 2018, in Atlanta titled, “Prepping the Princess for the Party: Is Your Business Ready to Sell?”
By many accounts, 2017 was a very successful year for transactions, especially for the community of merger-and-acquisition (M&A) professionals at large. The stars were very much aligned for very positive outcomes with multiple offers occurring for many transactions.
In terms of 2018, most M&A professionals see a continuation of this trend with people being in the market, being ready to sell their business, and, basically, having a series of willing buyers who are interested in this kind of opportunity. It seems, too, there’s plenty of money looking for a home, even though we’ve seen some dips in the stock market recently. Overall, there are a lot of buyers, particularly private-equity firms, looking for good acquisitions that involve smart strategic deals.
In the fourth installment of our six-part podcast series, show hosts Evelyn Ashley and John Monahon speak with FOCUS Investment Banking’s George Shea, partner and IT team leader, and Manan Shah, managing partner and leader of the Government, Aerospace and Defense Group, about how to find the right buyer for a business in the broad universe of prospects. FOCUS Investment Banking is a national middle-market investment banking firm providing merger, acquisition, divestiture and corporate finance services.
“Private-equity groups have so much money right now that they’re in danger of having to commit back to their limited partners,” said George. “That means they have to deploy it fairly quickly. We see this as a benefit to all sellers and certainly for investment bankers that represent them. There’s a real opportunity for those private-equity groups to outbid strategics for the first time.”
“Companies underestimate the need to keep on investing in a good team, a solid management team, along the way,” said Manan. “Often, when owners decide to sell their businesses―but haven’t made those investments―they will have a tough time marketing their business or getting the right buyer.”
During the course of the podcast, entrepreneurs, business owners and C-level executives will learn about the:
- Three categories of buyers along with challenges and opportunities for each
- Elements that make a business sellable
- Factors that make a business sellable
- Factors that business owners should focus on to get ready for their exits
- Key industries that buyers and investors are interested in now
- Important role both internal and external research plays in attracting buyers
Learn more about the steps involved with retaining an investment bank’s services by streaming the conversation in its entirety in the player below, or download it to your mobile device via iTunes. Don’t miss a single episode, subscribe to our show “In Process Podcast” on iTunes to receive this episode as well as future episodes to your smartphone.
Is Your Business Ready to Sell? Part Four:
Tapping the Broad Universe for Buyers
(c) Trusted Counsel (Ashley) LLC. All Rights Reserved.
Speaker 1: It’s time for In Process, conversations about business in the 21st century with Evelyn Ashley and John Monahon presented by Trusted Counsel, a corporate and intellectual property law firm. For more information, visit trusted-counsel.com. Now, with In Process, here are Evelyn Ashley and John Monahon.
John Monahon: Hello. Welcome to In Process, conversations about business in the 21st century presented by Trusted Counsel, a corporate and intellectual property law firm. I’m John Monahon.
Evelyn Ashley: And I’m Evelyn Ashley.
John Monahon: We are partners in Trusted Counsel. Today is the fourth episode of our six-part series, Evelyn, for Prepping the Princess: Is Your Business Ready to Sell?
Evelyn Ashley: Yeah. It’s a great six-part series, so two more to come after this, but what’s more exciting is, today, we’re actually doing the physical event that goes along with this series. Hopefully, some people that are listening earlier in the day will actually be at the event this afternoon.
John Monahon: Great. Yes. Of course, it’s focused for a lot of CEOs and entrepreneurs looking to sell their businesses and we’re holding that event with Aprio, Wilmington Trust, Newport Board Group, Carabiner Communications, and Focus Investment Banking who is here today.
Evelyn Ashley: This is our third time with George and Manan, recurring guests, always have a good time, always an upbeat conversation. We’ll try not to throw too many zingers to them, although maybe a couple. I don’t know.
John Monahon: They can handle it. Let me introduce our guests. George Shea is a Focus partner and IT team leader and has over 35 years of broad industry experience in acquisitions and divestitures, corporate finance, business development, strategic planning, marketing, sales and operations for public and private companies utilizing a unique combination of operating management expertise and major M&A, financing, and business development experience. He has acted as a principal or facilitator in well over 100 transactions. He’s been one of Focus’ top producers for many years. Also with us is Manan Shah, a Focus managing partner. He has over 18 years of consulting, management, and M&A advisory experience in the government, aerospace, defense, business process outsourcing, software, and information technology sectors. Leader of the Government, Aerospace, and Defense group at Focus, Manan has completed a number of M&A transactions for clients such as Avialec, Blue Canopy, Calibre Systems, among others. He has also represented numerous clients in the software, information technology, engineering, and other professional services firms in successful M&A and corporate finance transactions, and is an expert in cross border transactions between US and India. Gentlemen, welcome to the show.
George Shea: Thank you so much.
Manan Shah: Thank you.
Evelyn Ashley: Great to have you back. Here it is, it’s 2018. What’d you think of 2017? Was it a big year for transactions?
George Shea: I thought it was a very successful year for transactions, certainly for us, but I think for the community of M&A professionals at large. The stars were very much aligned, I think, for a very positive outcome. We certainly had multiple offers for all our transactions, including one that we did with one of your clients, which we’ll talk about perhaps during the course of this conversation.
Evelyn Ashley: Yes
George Shea: I think in terms of 2018, we’re looking for, I think, a continuation of this trend with people being in the market, being ready to sell their business, and, basically, having a series of willing buyers that are interested in this kind of opportunity.
Evelyn Ashley: It seems, too, that there’s a lot of money looking for a home still even though I know most recently we’ve seen some dips in the stock market overall, but it just seems like there is a lot of, particularly private equity, money that is out there looking for good acquisitions, good strategic deals.
George Shea: We’re seeing that more and more and the very last transaction we did in 2017 was with a private equity organization that really outflanked and outbid other suitors that we brought to the table for our client.
I think that’s symptomatic of the private equity world getting more and more specialized by industry. Certainly, we work with companies in the information technology industry, software, and IT services, and a lot of the private equity groups that we deal with have sought out and seek us out as potential players to work with. We have, basically, a specialization in our industry and have a number of portfolio companies that do similar things to what our client is doing. I think that’s very important to have that.
One thing about the private equity group that’s unusual is that they have so much money right now that they’re in danger of having to commit back to their limited partners. That means they have to deploy it fairly quickly, and that means, this is for the benefit of all sellers and certainly for investment bankers that represent them, that there’s a real opportunity for those private equity groups to outbid strategics for the first time, and that was certainly the case in our last deal last year.
Evelyn Ashley: Interesting.
John Monahon: What are some of the causes of them having so much money on hand? Is it that they didn’t make investments fast enough previously, or they took in more money?
Manan Shah: Yeah. If I can address that, in general, the private equity groups have been generating a lot of IRR or great returns for their investors, so all the money that they generate, the returns they produce for their investors, have to be deployed because what else the investors are going to do otherwise? The [inaudible 00:05:52] keeps on growing year over year because the private equity groups are outperforming all the other investment vehicles that are out there or the investment instruments that are out there in the marketplace. There seems to be a lot of growth and a lot of capital available.
In addition to that, we’ve seen quite a long, sustained, strong economical cycle, so that all the corporations are sitting on a lot of cash on their balance sheet. A lot of private investors out there apart from the private equity group as well as family funds and family trust. So all of that and the debt market has … That capital is also quite cheap, has been cheap. The interest rate has been historically low for a long, long time now. All of those factors are making the availability just easier and easier. That’s why I think [inaudible 00:06:42].
Evelyn Ashley: I think it’s really kind of interesting because I think, and we see this in the firm, I think many of our corporate clients that would like to sell don’t really even think that private equity could, ultimately, be their exit. They assume always that it’s gonna be a strategic, that a large corporation or someone else that’s in their market.
One of the things that we have been working more on in the last couple of years is educating them a little bit more about private equity and what that means because I think there is … Private equity, in many business owner’s minds, goes hand in hand with the concept of venture where they think, “Uh oh. They’re gonna force me to stay in, and I’m gonna have to run this company, and then my life is gonna be agonized because I’m gonna have to do board meetings and everything else”, which, ultimately, it might be that at the beginning, but it’s very different than venture. Hopefully, when you’re exiting, you’ve already performed.
Manan Shah: That’s right.
Evelyn Ashley: Yes. To make you interesting.
John Monahon: Are there different things that people in private equity are looking for in an acquisition versus, let’s say, a strategic acquirer? Does it change the deal at all?
Manan Shah: Yeah, I think the private equity groups, typically, are looking for a lot of diversification within the customer base. They generally are going to be very reluctant to invest in a business that is going to be highly concentrated. They’re also looking for stability with the management team. Generally, they would like to partner with the existing management team and work with them to take the company to the next level.
Strategic, on the other hand, they don’t really have those hurdles. They can easily entertain a scenario where the selling owner wants to retire and move on.
There is a difference between strategic and their risk appetite is also quite different. The strategic players, they’re really going in with an objective to take that company, take those capabilities of those customer base and really double, triple, quadruple the business with their own strength as well. They are less concerned about the underlying risk factors associated with the business as an independent entity.
Evelyn Ashley: Let’s talk a little bit about what generally makes a business ready for sale. What do you think? What do both of you think are the factors that business owners, professional management team should be looking at to keep them focused on getting ready for exit?
George Shea: I think, in terms of preparedness, it’s critically important, but, essentially, one thing that’s overlooked in the emotional outlook of the seller, particularly the CEO of the business. Is he emotionally ready to go through the trials and tribulations of a process to execute a transaction?
Again, you’ve gotta be ready, and if you’re not ready, there’s always a chance, it occasionally happens, that we run into what’s called sellers’ remorse. We’re down the trail with a particular transaction, potentially and a letter of intent, and the sellers, for whatever reason, are having second thoughts because they’re not ready to give up their baby. I think the emotional consideration is a critical one.
In terms of the performance of the business, we’re looking at companies, ideally … The buyers are most attracted to businesses that are doing well, that have had excellent years, and where the future prospects for the business are strong, where there in, I think, a market that is potentially untapped or they’re the market leader in that situation, where they’ve got market leadership, and, certainly, I think, recurring revenue is a key thing. If they’ve been able to develop a recurring strategy of recurring revenue, that’s gonna be a critically important component. To the extent that they can minimize customer concentration, that’s critical, especially for the private equity groups.
Evelyn Ashley: Mm-hmm (affirmative). Sounds interesting. I’d like to continue with that ’cause maybe we can talk a little bit about your management team inside the business if nothing else, but we’re gonna take a quick break.
Speaker 1: And now back to In Process, conversations about business in the 21st century with Evelyn Ashley and John Monahon. For more information, visit trusted-counsel.com.
John Monahon: Welcome back to In Process. We are here with George Shea and Manan Shah of Focus Investment Bank. George, when we left off we were talking about what makes a business sellable. One of those things it the management team. How important is that?
George Shea: Well, the management team is definitely important. If we take a look at the three categories of buyers that we customarily utilize in any transaction, one would be strategic buyers, both public and private in North America. The second would be, again, private equity groups for the specialization industries that we serve. The third, and often the most overlooked, is international buyers. Each one of them have different objectives and different ideas about management retention. Strategic buyers, I think, can go along with a management transition, particularly if they have executive in residence, which is very common, someone willing to take over a business. The private equity groups certainly want management team to stay on, but if there are a number of people running the business and one of the founders wants to retire, that’s certainly something that can be accommodated, I think, pretty readily. Whereas, foreign buyers are looking for a U.S. platform company and definitely want management to stay on as part of the process.
Evelyn Ashley: Let’s talk a little bit about a first time seller, someone who’s never been through the process. What do you think are some of the things that they should be focused on in educating themselves? What should they be prepared for, in addition to the company having the structure and being in the right place I guess?
Manan Shah: Yeah. I think that’s a great question. In general, I think, certainly, the seller should understand the market they are in. There are various ways to kind of get an idea of what that company might be worth. One of them is investment bankers like us, we’ve done comps analysis all the time. We can give them a perspective on the valuation based on their current financial performance and what the outlook is.
In addition to that, they should understand the competitive landscape that they are in. Often the sellers decide to make a sale when they know that they have to make an investment, a new investment to grow and take the business further. That’s often when they decide to entertain exploring a sale opportunity because, instead of making those investments from their own checkbook, it would be better if they monetize now and have a new partner that brings either additional experience or capital or both that can take them to that next level.
They really need to start by educating themselves about the valuation, the underlying business considerations that the buyers are typically looking for. We published an article that’s called 12 Key Value Drivers. One of them … Those 12 value drivers typically include all the drivers that make a business attractive from a buyer’s perspective. They need to educate themselves around that.
That includes things like recurring revenue or revenue predictability, having those contracts or their customers and revenues, at least, for the next couple of years. Make them more predictable, having a good solid management team in place. If the owner is going to retire or planning to retire, having a succession plan in place is important. Having their financials ready whether it’s audited or reviewed. Making sure that they are, certainly, on a [inaudible 00:14:45] basis, they are available. These are some of the basic things that a seller should certainly keep in mind.
Evelyn Ashley: Should be looking at. Yeah. I think it’s really critically important for founders, particularly that are the CEO’s, to understand that succession for them means, if they’re hoping to not stay on the other side, they have to have others that could operate that business, essentially, if they weren’t there. I think lots of people actually miss that as how they can actually transform their business and make it much more attractive for sale.
Manan Shah: That’s exactly right. I think people … Companies also underestimate the need to keep on investing in a good team, in a good management team, along the way because often, when the owner decides to sell the business but they haven’t made those investments, they will have a tough time marketing their business or getting the right buyer. If they do, there is inevitably going to be a discount to buy that.
Evelyn Ashley: Yeah. Actually, I think that’s really important because we actually represent a number of companies that have been around for 35 years, 30 years and have management teams that are actually starting to retire. They’re not necessarily refreshing with younger people. That’s a really important point.
George Shea: A related problem is companies that are going through a hyper growth cycle. That will require, in many cases, a refreshing of the management team or, certainly, an addition, a strong addition to the management team. A lot of companies don’t act quickly enough. The good ones are smart enough to hire, basically, capable people before their time, before they’re actually needed because they see what’s coming around the corner. I think that really will help with the valuation.
Evelyn Ashley: Well, particularly with technology based business and information technology companies, one would thing that they would always be looking at what’s the new thing, but I don’t think that always happens.
George Shea: Well, the pace of technology continues to accelerate, and we’re seeing business transformation. Really, the key industries that buyers and investors are interested in, in our space, it’s financial services, healthcare, and retail. Each one of those industries is going through a major transformation technologically. The companies that are basically addressing the needs of that transformation are doing well.
Evelyn Ashley: That’s interesting. Retail, information technology?
George Shea: Retail, financial services, and healthcare are the three key ones.
Evelyn Ashley: Okay. Okay. Retail, financial services. I see. We’ve talked a little bit about the emotional process. Let’s talk a little bit about, a company has decided we are ready and we want to retain Focus Investment Bank. What’s the first step in that process?
Manan Shah: Yeah. Typically, what we do is we would start by reviewing all of their financials and the information around their customer mix and the revenue by customer. We kind of do the basic analysis to make sure that the company has the right set of financial documents, and, also, we understand the makeup of their business.
We start preparing what we call a confidential information memorandum, generally, to begin with. We ask for a lot of data because this is a document that typically goes out to the market, typically, another non-disclosure agreement. That’s what the buyers use to evaluate whether that business is a good fit from an acquisition point of view or not. So it’s a very important document, so all the details, information that go inside that document, we initially start requesting from the company. Then, the other thing we start developing is a target list of potential buyers. Those are the two initial steps we take.
Evelyn Ashley: Some key steps. Then, how long would you estimate the time period from a company has decided I want to retain you, you tell them the 150,000 documents that they have to produce, and then there’s a memo that gets produced? Sorry to be [crosstalk 00:18:51]
George Shea: It’s not as scary as it sounds. believe me. It really isn’t because we’re not asking them to write anything but simply to share with us-
Evelyn Ashley: Information they have.
George Shea: Key documentation that they already have in place. Then, we can take that and meld that into a confidential information memorandum, which has really gotten a lot of kudos from buyers and investors that we’ve worked with over the years. It’s a pretty compelling document and tells the story, and it gets people’s attention.
Evelyn Ashley: Right. How long does that usually take?
George Shea: 45 to 60 days.
Evelyn Ashley: Okay. Just to get the memorandum put together.
Manan Shah: Yeah, and, generally, we don’t ask the clients to have all the information ready upfront. Of course, some clients are very well prepared, and they will have everything set up in a data room right from day one, but most of the companies don’t have that level of preparedness, so we help them along the way. But we start collecting some of the basic documents or basic information, and as we continue to make progress, they will start providing other information.
Evelyn Ashley: Right. We mentioned … You mentioned gap financials and also reviewed financials. Do you have a preference on this ’cause we’ve certainly spent some time with our sponsor, Aprio, who basically takes the position they probably should be gap financials.
Manan Shah: Yeah. The financials would be gap whether they’re reviewed or audited. If they’re audited, they would be a great thing to have. If they’re not, that’s certainly not always a requirement from the buyers, but having a reviewed set of financials certainly makes our task easier. Otherwise the buyers will end up spending a lot of time checking their books and doing a quality of earnings, which they may still do. It may add a lot more lead time to the process.
Evelyn Ashley: Right.
John Monahon: So if somebody comes to you, is it normally, “We’ll go back. Get your books in order before we’ll do the confidential memorandum”, or do you sometimes go out the gate with their current set of books?
Manan Shah: We will certainly review the books, and if we feel like the books are, they do require some work, then we will advise them to have some help in that direction and get the books in order because there is no point in going to market when your own numbers are questionable. People just lose trust in the company in the process, so it’s very important to have those numbers.
George Shea: You only have one chance to make a good first impression as part of the sale process. To the extent those financials aren’t in shape, we encourage our potential sellers to get them in shape before we start executing a transaction.
Evelyn Ashley: Right. That makes sense. I think that’s very, very important. I do think we’ve stressed this in a number of our conversations already, the whole concept of generally accepted accounting principles, which private companies do not often follow those. They might have consistent process that they use in preparing their accounting and their financial statements but not always gap. We certainly have seen situations where clients have been caught by potential buyers in that process of, “Well, we require gap, and it’s going to clip you, in a lot of ways, on your sale price.”
John Monahon: Well, we need to take a quick break, but we will be back with Focus Investment.
Speaker 1: And now back to In Process, conversations about business in the 21st century with Evelyn Ashley and John Monahon. For more information, visit trusted-counsel.com.
John Monahon: Welcome back to In Process. We are here with Focus Investment Bank. We have George Shea and Manan Shah here with us today. We are talking about the sale of your business. We are actually going through the process of how you attract buyers and help the sellers out. Then we were talking about the confidential memorandum that you distribute. Can you tell us, once you have it prepared, what’s the next step?
George Shea: Well, really, I think there’s a congruent process of preparation of the memorandum and preparation of the target list of potential buyers. The way we prepare the target list, our research organization works in concert with us and uses our contacts, people that have bid on our transactions, people that have actually closed transactions with us, and people that we’ve encountered that we think are potential buyers.
We spend a great deal of money on both internal and external research to get, I think, a very broad list of market players that we think could be attractive buyers for our client. Once we have detail, preliminary detail put together, we put together a full list, we present that to the client for their review. There’ll be some competitors on there, and we’ll counsel them and work with them as to approach those competitors now, leave them off the list, or basically save them for the hill when we’ve got some offers in place and then approach those competitors, which is common.
But it’s a very broad list, and basically, we are the ones who execute that list, prosecute the buyers, and work with our client, basically, from first approach of buyers to closings, as their counsel and definitely help them close the transaction effectively.
Evelyn Ashley: I think that’s interesting. Business founders particularly tend to be fairly opinionated and self-directed people, so do you ever find any pushback when you produce this list of here’s who we think it should go out to? That, “No. I don’t want to” or …
Manan Shah: Yeah. We have all those cast and characters all the time, so we have to go from one extreme to the other. But most of the clients, I would say, do tend to listen to our advice, which is to allow us to really scan the broad universe. We are extremely cautious about sharing confidential information, so we do enough background work and homework around different buyers that we are reaching out to so we are not necessarily putting them in a difficult situation by any means.
Evelyn Ashley: Right. Any risk.
Manan Shah: Yeah. There are certainly clients that we’ve had where they are just super cautious about who we are approaching. In that case, we would start with a limited set of buyers and see how that goes and then move to the next batch of buyers-
Evelyn Ashley: Move to the next level.
Manan Shah: Exactly. It’s not a very efficient process, though.
George Shea: The thing that helps us the most, I think, in gaining trust for our clients is the fact that Manan and I and our IT team are all former CEO’s of the industries that we represent in software and IT services. We’ve run and sold companies before becoming investment bankers, so we’ve had the same kind of-
Evelyn Ashley: Been through the process.
George Shea: Whole process. Been through it ourselves. So we’re able to advise people because we’ve been in their shoes, and I think that’s very helpful.
Evelyn Ashley: Yeah. Absolutely.
John Monahon: Do most of the people that you’re contacting, do they have an officer or someone who is a point of contact for heading up acquisitions or sometimes they don’t have a dedicated person ’cause it’s a competitor and a strategic, and maybe you have to find an alternative person?
George Shea: It’s one of three people. Typically, for very large companies, we often would contact the person in charge of what’s called corporate development. That individual is the M&A liaison for that firm or potentially a CFO, who will take M&A responsibility. We always, though, try to get to the CEO of a company, whatever size, as quickly as possible and make sure he or she buys into the process and the opportunity.
Evelyn Ashley: I think it’s … Okay. Let’s say you find … What is that like? A buyer says, “Yeah. I might be interested in this.” What happens next?
Manan Shah: Yeah. Typically, what happens is they will sign a non-disclosure if they’re interested. We start with a blind teaser on a company that doesn’t reveal the identity of the client.
Evelyn Ashley: Of the company itself.
Manan Shah: There is enough information on that teaser that allows a buyer to make a decision if this is in their sweet spot, is this something they are interested in pursuing further or not. If they are, then they will go through an NDA process and get a signed NDA back to us, at which point, we will release that confidential information memorandum.
At that point, they will share, probably, that document with whoever is going to be involved in the evaluation process on their end. Sometimes, the larger acquirers, we have sold companies to Fortune 10, Fortune 50 companies, as well, where there’s an army of people evolved even in evaluating a small opportunity. A lot of people in the organization would look at that confidential information memorandum.
Then, as a result of their review, they often will come back and ask us a lot of clarifying questions that we would then start addressing.
Evelyn Ashley: So is that primarily financial information that they’re looking at? They’re running their own evaluations internally? What is it? What specific information do they typically ask about?
Manan Shah: They will have information about customer mix, about the organization, the rolls, financials, balance sheet, a P and L. It could be on a number of different areas.
Evelyn Ashley: Wide range.
Manan Shah: They would have a lot of different types of questions across the business they are evaluating. Everybody has a different set of eyes in terms of how they look at the business, so we often figure out, based on the type of questions we receive from the buyer, how interested they might be and what would be the nature of their questions. Often that becomes a very useful instrument for us evaluating if the buyer is serious or not.
John Monahon: So how many potential buyers are you usually dealing with at that point?
Manan Shah: Generally, in our process, we try to, on an average, approach 100 to 200 buyers for any client. But that’s the initial target list. We know that if we approach 100 to 200 there is gonna a 30 to 40% of that universe that would actually take an interest in signing an NDA and receiving the book. Then, a lot of people, once they review the book, they very quickly figure out this is not a right fit for them. Very quickly it will come down to probably 10 or 15% of that overall universe. From there on, then we start to get them involved in management presentations and ask for offers, letters of intent, and work our way down from there.
John Monahon: Those numbers are really interesting to me ’cause I think if you were to ask a business owner how many people they thought would buy them, they might be able to name about three people at any given time. So the numbers work very much in their favor if they hire an investment banker ’cause your universe is so much bigger.
Evelyn Ashley: Much more expansive.
George Shea: That really is an enlightenment factor for our clients. One of the biggest mistakes our clients make and companies make is taking the first offer that comes down the pipe. That’s a horrible mistake because that buyer has all the leverage, can change the deal. There’s no backup if indeed that deal is changed or the comfort level decreases with the buyer and the chemistry sours over a period of time prior to closing.
Our process is designed to create multiple offers at the same time, so our role is basically getting the buyer puppies in the basket at the same time and making sure we can leverage those offers, one against the other, to get the best value for our client.
Evelyn Ashley: Okay. Let’s say we’ve come down the road. Maybe we have three prospective buyers that are looking at the target. What happens if you’ve got a seller who says … It could be any one of them. Does the seller usually say, “I got a preference”? What have you seen in that kind of dynamic?
George Shea: Once we’re there, once we have the finalists, the final decision point, more often than not, is not predicated on price. It’s predicated on culture, chemistry, and fit and how they’re gonna treat my employees. Once that dynamic is in place, then we really have the leverage, and we can basically bring those buyers in, let them meet the management team, and talk about what they plan to do with the company if indeed they’re the successful buyer because, at that point, we have the leverage, not they. We can pick the best fit assuming the offers are roughly equal.
John Monahon: How do you go about getting the offer? How do you bring that to a head? One thing that we’ve seen with some of our clients who try to do it themselves is, actually, they’re not very good representatives for themselves ’cause they don’t know how to actually pull out an offer from an acquirer. How do you bring this to a point of, “Hey, guys. Put your offer on the table”?
Manan Shah: Yeah. This is all our business, so we are pretty direct when it comes time to asking for offers, which most other companies are really not …
George Shea: We’re not tricking [inaudible 00:31:46]
Evelyn Ashley: You’re not shy?
Manan Shah: We’re not shy about it. We put … When we start the process, and most of the market knows when an investment banker approaches with a book to a company, there is inevitably going to be some timeline, some process, some steps, and we make sure that we put that timeline ahead. As soon as they receive the book or the confidential information memorandum, then we have a timeline for a process letter where that process letter, when we send it out, basically is going to ask for a preliminary indication of interest. From there on, we go into management presentations. Again, with the management presentation, we’ll set the expectation that we are expecting a final letter of intent by XYZ date, after which our client would make a decision. It’s basically guiding the market towards our direction, and I think the buyers appreciate that. That there is a timeline and they can organize around that.
Evelyn Ashley: We haven’t really talked about it, but it seems like, as you’re preparing the confidential memorandum, you’re probably talking to the accountants for the company and then, as you approach the letter of intent stage, I would assume that the lawyers are starting to get involved in this also. Talk a little bit about that dynamic. How does that work on the exit side first? It’s you and the client and the lawyers having a conversation about the content of the letter going forward?
George Shea: That’s true. We’re involved with counsel on both sides as the transaction proceeds. It’s our job, basically, to act as intermediary, not just for the client, but between the lawyers, particularly if there are some difficulties and we’re dealing with [inaudible 00:33:34] people on the other side, which is often the case.
Evelyn Ashley: Right. Makes sense. We’re gonna take a quick break, and we’ll be right back.
John Monahon: Welcome back to In Process. We are here with Focus Investment Bank. George Shea and Manan Shah. Once you have the letter of intent and the documents start getting drafted by the attorney, what’s the overall arc of the deal and your involvement from that point on? What’s the timeline?
George Shea: It typically is 60 to 90 days. We’re seeing the time period really be a bit longer than it has been historically. Buyers are being more careful, and, certainly, I think, for those firms that are not audited, there is a much more prevalent [inaudible 00:34:45] of earnings that we see taking place, people being more cautious in these situations than they have previously.
We’re involved in the entire process, making sure that final due diligence takes place. Typically, that proceeds the issuance of the legal documentation for closing. Our job is to get the legal docs in our client’s hand as quickly as possible and to truncate or shorten the due diligence period and make sure that our client is prepared for that.
Manan Shah: One other dimension to this timeline is, if the buyer happens to be an international buyer, then it will generally be a longer duration. We close deals with clients in Europe. For example, in Germany, a German client we close a deal with, from letter of intent to closing the deal took us six months. Just because they have to go through various approval process internally, within their corporate governance structure, as well as the government approval in some cases and things like that.
Evelyn Ashley: Right.
John Monahon: And I know, for me at least, the time is never as much of a factor as much as the pace. I don’t know. There seems to be a certain forward progress that you can sense. Even if it takes longer than the timeline, as long as it’s moving forward, I feel good about it.
Manan Shah: Yeah. That’s something that we really watch out for. We want to make sure that we see a continued activity and momentum. During that phase of the process, we are generally very concerned when we don’t see questions or requests coming through from the buyer during this phase. If there is a long silent period-
Evelyn Ashley: Could be something wrong.
Manan Shah: One of the things that we do, in this case, is we also have this virtual data room facility that we offer to our clients where they park all their documents. Through that, we are also able to monitor the activity, if people are talking infrequently and checking out documents as opposed to there is no activity. It’s a good indicator.
George Shea: The good news for our clients, if indeed a situation were to occur as Manan is talking about where the process, the pace slows down and the buyer is really is at a point where, ultimately, says, “I’m not gonna do this deal.” That does happen. If it does, we have buyers A, B, and C right behind the chosen buyer because we’ve had multiple offers. We’ve got people that … Basically, our job is to stay in touch with those buyers. We can’t negotiate, and we don’t, but we apprise them of what’s going on and let them know, basically, when our lead buyer is faltering, and, when it’s appropriate, bring them into the situation.
Evelyn Ashley: Well, I also think that it’s important to stress, certainly, if you’re going through as a seller, if you’re going through this process for the first time, leverage is really critical. Whether the buyer goes quiet or the buyer is overly aggressive, a lot of times time on the sellers’ part can actually be a benefit, particularly when you have a highly incented buyer. To be able to pause, make sure this is really the way I want it to go, a lot of times, strategically, that’s a great negotiation position.
I also think that the other thing that we see is it’s really important that the client understand every step of the sale document. We’ve talked about representations and warranties and indemnifications and that’s often the … If it’s going to create paranoia in a client, it’s often tied to the fact of, “Well, wait a minute. I thought I was selling, and I’m not gonna have any commitment on the other side”, but that’s not always the case based on …
Manan Shah: Yeah. And, again, that’s an area where we make sure that we’ve educated our client early enough in the process so they’re well aware of what’s usual and custom in this market when they’re selling the business. It’s really not over until they are really out of that indemnity period and also the reps and warranties period that they should consider the sale is really done. Even if they have the money in the bank at closing, until you get past through that period, you should be really careful and cautious making sure that that phase doesn’t come back.
George Shea: This takes a lot of handholding. We’re dealing, typically on the sell side, with entrepreneurially led and owned businesses where the management and stockholders have not been through this process. There’s not smart money in the deal. They’ve built this baby themselves. It’s a process, particularly near the end, where they’re getting tired, worn down, and they don’t understand a lot of the stuff that’s in the legal docs. Our job, together with counsel, is to educate them and help them through the process.
Evelyn Ashley: Right. What the impact of that is.
John Monahon: I know, sometimes, talking about the indemnities can be a little bit scary, but one thing … We have to explain the risks as attorneys. I think at the end of the day, we try to tell them, “Well, you’re not gonna sell a business without this.” It’s not like you can go to seller B and this won’t be the same issue.
There is, as you were saying, Manan, usual and customary provisions. These things, they’re an issue in every deal. The goal is just not to take on undue burden and risk.
Manan Shah: That’s why we also recommend our clients to use a good M&A attorney that is experienced with transactions, they know what’s customary. Sometimes they make a mistake of using a corporate attorney that has no M&A experience, and then it further-
Evelyn Ashley: Slows things down.
Manan Shah: Exactly.
Evelyn Ashley: Yeah, breeds that paranoia a little bit more. I think, also, the key to all of that is that, if the process prior to exit has included things like, particularly when you’re selling a technology company: do I understand my network? Do I know that it’s never been breached? What are the steps that I’ve taken to make sure that this business has process that looks like a buyer would probably have? Formalities. Also, a peace of mind that I’m protecting my assets, so they actually, when I get through that process and people are saying, “You’re gonna have to indemnify us if there’s a breach or we find that there was and it was while you were in charge”, at least they’re prepared. They know, “I have taken care of this.” You can never protect against those things absolutely, but at least you can have the confidence to know I’ve done what I could.
Manan Shah: That’s correct. The education upfront about all these issues becomes very important and critical so that … Generally, we would like to start our discussions with the prospective clients two to three years ahead of them thinking about running a process, so we can provide all the guidance and coach them in terms of things they need to implement. Usually it takes two to three years of time if they really wanna do it right.
Evelyn Ashley: Right. To be absolutely ready. How ’bout some war stories. Anything you’ve seen that 20/20 hindsight says, “Oops. Could’ve done this”? Anything of interest you think that might actually present itself and be helpful to sellers?
George Shea: One thing, I think, that might be interesting for people: very often, the ultimate buyer for our client situation is what we call a market outlier. By that I mean a buyer that is not in the same industry of our client.
By way of example, about a year ago, we sold an IT services company, a leader in its field, which is basically IT services and consulting for major retail organizations globally. Well-known company. All the usual suspects were interested and made offers, and we found out that a telecommunications company that you wouldn’t ordinarily think of them as a buyer for this opportunity had, not only a retail practice, but they also had an IT services component, which was hidden. We found that out as part of our research process. They ultimately outbid everybody else for the deal because they were interested in expanding and getting this kind of company.
Evelyn Ashley: Getting into that area.
Manan Shah: Yeah. Another story that comes to my mind is we were engaged, two years back, in a process that was run by a law firm, who was acting as a custodian because a two share holding group were fighting with each other, and there was a big dispute. The custodian was appointed by the court of Delaware, and they hired us to run the process.
It was an interesting experience because, while we found a lot of interest in the company, the two groups of shareholders also started to compete with each other in the process. They wanted to outbid each other as well, but still try to buy the business below the market value. Of course, that’s something the custodian wanted to prevent from happening.
Through our process, we were able to, ultimately, get the value even though one of the shareholding group, one of the ownership group, prevailed in acquiring the whole business. Ultimately, we were able to get the conclusion, but that was an interesting experience.
Evelyn Ashley: That may have been a little stressful for everyone involved. Manan and George, as always, thanks so much for being here and sharing your information and educating our listeners. It’s been great.
George Shea: Our pleasure, Evelyn. Thank you.
Manan Shah: Our pleasure. Thank you so much.
John Monahon: For more information on Focus Investment Bank, please visit focusbankers.com. We hope you enjoyed In Process today. If you have any questions on the topic, please reach out to email@example.com. Thanks for joining us.
Evelyn Ashley: See you next time.
Speaker 1: This has been In Process, conversations about business in the 21st century with Evelyn Ashley and John Monahon, presented by Trusted Counsel, a corporate and intellectual property law firm. For more information, visit trusted-counsel.com.