Preview Our Sell Side Process
Preview Our Sell Side Process
Introductory Meeting
The first step in the process of selling your business is an in-person or video conference meeting with you. We get to know each other, including discussing your business and objectives. We ask about any liquidity events you are facing or other considerations driving your pursuit of a transaction. Understanding your personal goals for the transaction aside from money is crucial to setting the deal process on the right path.
Learning about your business at a high level and establishing your basic objectives is an important first step. But a deeper understanding is required to make strategic connections between you and the optimal buyer. We gauge your perspective on risk concentration, transition and desired level of continued investment or involvement in the business after closing (full exit vs. financial exit), your interest in selling to family or existing management, and concerns about the transaction’s impact on the employee base, management team, and company/founder legacy. Different goals can steer the transaction toward different buyers, valuations, terms, and structures. We’ll conduct planning sessions with you to understand the strategic aspects of the deal, advise you on the various transaction opportunities, and develop a target deal structure best suited to your goals.
Your goals determine your exit channel (the possible buyer types), and different buyer types reward different value drivers. At Ravelin Pointe, we consider the exit channel that best matches your goals. Buyers can be categorized as:
- Strategic Buyers. This group includes both public and private companies in your industry. This includes corporate consolidators, competitors, and providers of up-stream products and services seeking to backward-integrate the kind of capabilities your company has.
- Financial Buyers. This is one of the more active buyer categories in the middle market, historically dominated by private equity groups (PEGs). PEGs can not only make acquisitions as platform or add-on companies, but many have a strategic focus of sponsoring LBOs, recapitalizations, minority investment, or other strategies that may fit your objectives.
- Related Buyers. Owners should consider potential interest from related buyers, including family members, partner buy-ins, and MBOs.
There aren’t bright lines between these categories. A PEG-financed MBO, for instance, combines the financial resources of a financial buyer with the manager/operator capabilities of a related buyer. A PEG acquisition made under the roll-up model is an example of a buyer traditionally regarded as a financial investor acting in a strategic capacity. Under this model, a business acquired by a PEG as a portfolio platform company becomes a strategic buyer in its own right, bolting on further acquisitions to obtain competitive capabilities and pursue growth. Some private equity funds are industry-focused, others focus on specific transaction types. The multiplicity of private equity funds and investors open a range of avenues to sellers with different goals.
In addition to the seller motives and optimal exit channel, we also talk to you about transaction types. In addition to 100% buyouts, majority and minority recapitalizations, partner buyouts, and MBOs may be viable avenues for companies above a certain size. Whichever path you target, we’ll familiarize you with the entire deal process and answer your questions.
We also confer with you early in the relationship on confidentiality techniques, including ground rules for contacting you at the office, and coaching you on communications with friends, customers, vendors, and employees. After entering an advisory relationship, as part of the deal planning process, we establish a timeline with you for announcing the contemplated transaction to key management and the broader employee base, and the use of retention bonuses.
Valuation/Competitive Market Analysis
We present a reasonable valuation range to you using industry resources. But equally important, we advise you about how to look at valuation in the private markets, and help you set reasonable expectations. The stock market is constantly performing the function of price discovery for publicly traded companies, and exiting an investment is as simple as a few mouse clicks. But the vast majority of U.S. businesses are middle-market and small companies. The key tenets of finance theory that underpin valuation for public companies do not hold true in private markets, where companies and their owners are much more closely intertwined. Whereas a public company has an indefinite live and is organized as a C corporation taxed at the company level, private companies typically live one owner generation, can be organized as any type of entity, and may have flow-through tax treatment. An owner of a public company is generally well diversified, has limited liability with respect to the company, and relies on the agency of management and a board of directors to run the company in their best interests with a profit maximization focus. In contrast, the majority of private company owners’ personal wealth is often tied up in their businesses, which they typically manage personally and whose obligations they usually must guarantee personally. Wealth maximization is typically the principal objective for closely held companies, but they have leeway to pursue non-financial imperatives as well, both in running the company and when contemplating transfer of ownership. These differences lead to different management decisions. Surprisingly, the implications of these differences are not widely understood, even among finance professionals. Even though middle-market and small businesses represent more than half of the economy, formal education approaches financial theory almost exclusively through the lens of the public markets.
There are legal and regulatory circumstances where public market finance theory is adapted to the analysis of private companies. Professional valuation practitioners utilize various structured approaches that are tailored to different private market use cases, with the aim on delivering a formal report with a single theoretical fair market value to an average buyer and seller. There are legitimate reasons for obtaining such reports (divorce, estate planning, etc.), but they are not useful in making investment and financing decisions. The reality for the seller of a private business is the concept of value relativity, whereby there is a range of values different buyers will assign to the opportunity. Determining your exit channel narrows the valuation spectrum considerably, but endeavoring to determine “the correct” value is a moot exercise, as there simply is no such number.
Whereas publicly traded companies have ready access to public equity and bond markets, private companies are limited to private sources of debt and equity capital that is allocated in decentralized pockets, more like a bazaar than a centralized market. Providers of capital, both debt and equity, have their own underwriting predilections, and are constantly shifting their investment theses. Not all capital options are available to all companies, and capital solutions need to be created one deal at a time. As a result, the securities of private companies are illiquid and not priced in accordance with efficient markets theory. The timetable for price discovery in a private market transaction is typically measured in months, not minutes.
At Ravelin Pointe, we familiarize you with the way buyers in private market transactions arrive at their valuations, and we discuss the levers both the seller and the advisor can pull before and during the marketing process to attract higher buyer valuations. Practically speaking, a buyer in the private market will value a company as a multiple of normalized earnings, typically seller discretionary earnings (SDE) for small businesses and earnings before interest, taxes, depreciation and amortization (EBITDA) for middle market companies. Mathematically, this is not conceptually different from discounting future cash flows, it just uses simplified earnings assumptions and math. But buyer attributes alone can have a considerable impact on the results. First, different buyers will rightly anticipate different levels of recurring profits they can earn with the company in their hands. Second, earnings multiples are just an inverted way of expressing risk-adjusted rate of return, both of which capture risk; and different buyers will justifiably recognize different levels of risk in their ability to manage the company in a way that successfully produces those earnings. Companies with higher earnings tend to sell at higher multiples, but the industry, company-specific factors, and the buyer’s ability to maximize the company’s potential all factor into the multiple a particular buyer will be willing to pay. These differences create considerable variability in the range of multiples buyers pay at all earnings levels. There are plenty of external value drivers that sellers can’t control, including the economy, interest rates, deal demand, and the company’s industry and competitive environment. But there are many internal value drivers the seller can control in either the short- or long-run that can increase value for your targeted exit channel—including size, growth, margins, management, sales force, employee mix, customer base, vendor relationships, systems, locations, geographic coverage, and R&D. Different buyers will value different elements. We work with you to identify company-specific factors that threaten to drag down the multiples likely buyers will assign to your business, and address opportunities to boot the most significant value drivers within your exit time frame.
Getting Your Company Exit Ready
Many sellers take for granted they have a valuable business to sell—perhaps even having a price target in mind—and regard finding the buyer as the challenge. The reality is that buyers have their own conception of what constitutes value. The estimated earnings, including synergies, can be different for each buyer, since they may place different weights on different strengths a target company brings to the table; and the earnings multiple can be different for each buyer because of their assessment of risk.
According to a recent Axial study, 66% of investment bankers say that less than one quarter of sellers are prepared for a sale before hiring them. Small and mid-sized businesses bear a heightened risk of a sale flat-lining because hands-on investment banking and consulting services to “right the ship” are cost-prohibitive.
Being “exit ready” can mean different things. At a minimum, it is a state somewhere on the acquisition target continuum where different buyers seek to find transactions (e.g., small business add-on, middle-market add-on, middle-market platform, etc.) free of weaknesses that would either kill the deal or drag down the transaction price significantly. But to sell for the best value, business owners should ideally plan for a transaction 3-5 years in advance to target a buyer that, at the targeted timetable for a sale, will see in the business the opportunity to generate the highest earnings and will perceive the lowest level of risk doing so.
Taking the latter approach:
- requires, of course, flexibility on your part as to exit timing;
- depends on your assessment of the effort, resources, and prospects for success of taking the business to “the next level”; and
- ultimately, requires your willingness to put in the time and effort and withstand the risk to bring your company to that state.
Internal initiatives and management consulting services designed to improve your business should revolve around your exit channel, timetable, and intended positioning. Focusing on what real buyers are targeting and why they are paying different amounts will ensure your improvement efforts are sufficiently granular and targeted to reverse engineer your desired exit outcome. Planning for your exit early allows you to focus proactively on value building as a means to blazing the path for the sale process.
At Ravelin Pointe, we address these issues with you before beginning the marketing process. Acquiring an understanding of your business includes identifying any issues that could impede your chances of timely completing a transaction at your target price and other desired deal terms. We work with you to weigh the costs and benefits of actions to shore up those gaps before finalizing an achievable price target for your business. If your interests are best served by delaying your exit plans until you can put your best foot forward, we tell you that too.
Marketing the Transaction
Gaining an understanding of your company’s role and potential in the broader economy is a key part of targeting buyers. Investors in private equity include family offices, search funds, and HNW individuals. But the lion’s share of demand for middle market companies comes from corporate buyers and PEGs. When searching for acquisition targets, only the low-hanging fruit can be found in the upper-middle market. Cash on corporate balance sheets and PEGs’ success at fundraising has driven buyers to cast a wider net, moving their investment focus further down market. With nearly 60% of middle market companies having revenue between just $5-$20 million, the lower middle market has become a fertile hunting ground.
Corporate buyers will often see superior synergies in a deal because of their operational advantage in exploiting key capabilities of the target company. Large and upper-middle market companies often look to the acquisition mid-middle market, lower-middle market, and small businesses for cutting edge research, new products, and inorganic growth. According to an ACG/Pitchbook study, public company growth overall in the last 30 years has been derived from the acquisition of middle-market companies.
PEGs are another strong financial driver of valuations in the middle market. There are over 8,000 PEGs registered as RIAs in the U.S., and many have evolved in the last few decades to extract the same synergies as corporate buyers when targeting portfolio companies. By using a roll-up model, PEGs attempt to build sustainable competitive advantages by acquiring solid platform companies as a foundation, and then having those portfolio companies conduct add-on acquisitions. If your company already has a sizeable revenue base, a mature management structure, and scalable systems, then it may be an attractive platform company for a PEG investing in your space. If it is not yet at that level, your company may still figure strongly into the same PEG’s acquisition thesis as a bolt-on candidate. PEGs in particular have heavily shifted toward the add-on strategy. And although valuations for add-ons are generally lower than the much rarer platform-worthy companies, roughly 75% of PEG acquisitions are now devoted to just this kind of company. Value from the perspective of buyers is relative to the reason for the transaction, and the best way to position your business for sale changes dramatically based on the likely buyer and their investment thesis.
Different marketing approaches are appropriate in different circumstances, but our process is designed to prevent revealing your plans to employees prematurely, to casual buyers who are just kicking tires, or to competitors. At Ravelin Pointe, we respect your confidentiality throughout the process, and review our ranked list of potential buyers with you in advance of conducting any outreach. Increasing levels of detail about the company are disclosed to specific counterparties only as they are vetted. To that end, we work with you to prepare a blind teaser to introduce the opportunity to prospective buyers while concealing your identity and that of your business. Potential buyers include private equity buyers and experienced corporate development teams that review countless teasers every day, so a well-crafted teaser provides a critical chance to make a strong first impression. We also build a confidential offering memorandum (CIM) that provides a more detailed picture of the opportunity, and supply it to qualified buyers only after they have signed an NDA approved by your attorney. We get out in front of negative points with the CIM, highlighting these as opportunities for the buyer where appropriate. Further, we identify and gather from you the financial statements and other core supporting documents buyers need to review at this stage, and help you maintain your materials in a virtual data room only authorized parties can access. Based on the nature of your business, we also anticipate reasonable inquires buyers may make at this stage, and work with you to provide reasonable responses.
Using our approved buyer list, we generally conduct outreach with the blind teaser, and supply the CIM to those signing your NDA. We field calls to address basic follow-up questions, sometimes with your involvement. But depending on the volume of respondents, we often conduct a “boil-down” process to identify buyers with a serious desire to learn more, issuing them instructions to provide an indication of interest (IOI)—that specifies their likely valuation range, desired deal structure, key terms they are looking for, and any other details regarding their interest—in order to continue the process. In collaboration with you, we narrow down the IOIs, and coordinate management meetings for each potential buyer over the course of a few weeks to provide them the chance to become acquainted with you and your management team, and ask deeper questions. Following this, we issue bid instructions, asking interested parties to offer formal letters of intent (LOI) specifying purchase price, exact terms, and due diligence expectations.
Finding a Buyer and Closing Your Transaction
The objective of a private market deal process is to identify the buyer who perceives the lowest risk to produce the maximal return from the acquisition. Our role as your M&A advisor involves negotiating price and terms, and the best negotiations come from robust deal processes that attract multiple potential buyers, who must be competitive to remain in the process. If your company draws interest from multiple buyers, our process lets them know other bidders are involved, and allows the bidding process to yield the best offer. Deal structures almost always involve considerations other than price. Distance between bidders on the mix of price and terms affords us leverage to negotiate the deal that best aligns with your interest. With your tax advisor’s participation, we evaluate the overall benefits from competitive offers before you select one, and work with your M&A attorney to ensure clear definitions are used and evaluate the impact of matters not explicitly addressed in the LOI.
The LOI should clearly outline its non-binding provisions such as: the nature of the deal (stock vs. asset); price and terms, including the type and timing of consideration; working capital and other adjustments to purchase price; the role of the CEO after closing; key employee agreements; legal expectations (caps, baskets, fundamental reps and warranties); expected indemnities, reps and warranties insurance, and escrow terms. It should also clearly set forth its binding terms which typically include exclusivity (no-shop) and confidentiality provisions, due diligence expectations, expenses (each party should be responsible for their own), and break-up fees, although these are uncommon in lower-middle market deals. While negotiating the LOI, we insert provisions to make exclusivity contingent on the buyer meeting deadlines for: delivering due diligence requests; completing due diligence; delivering the first draft of the purchase agreement, including reps and warranties; conducting interviews and providing agreements for key management; establishing an early understanding with third parties; and addressing license transfer and certification issues.
Carefully reviewing and negotiating terms before accepting an LOI is critical for at least four reasons. First, at this stage, other buyers may still be involved, so you still have negotiating leverage. Although it takes more time to negotiate thorough LOIs, it is best to pin down as many of the specifics you expect from the deal before accepting an LOI with a standard exclusivity provision and committing to the process with that one buyer. Second you shouldn’t gloss over the non-binding terms you don’t like here expecting to re-trade the deal later or that it will be simple to make them go away when drafting the final purchase agreement. Good buyers will stick to the non-binding provisions they include in good faith in their LOIs, and will expect you to do the same. Third, if the buyer attempts to insert legal terms into the final agreement that contradict the LOI, it is easier to push back. Fourth, there are some terms of the LOI that are binding, so you need to know the provisions to which you are agreeing and make sure you stay in compliance with them.
After selecting the buyer and securing a binding LOI, buyer due diligence begins. This can be a harrowing process, but it is critical to supply the buyer with the requested documents and address their questions. Due diligence is usually much more invasive than sellers expect, so we prepare you in advance for what to expect. We also help you understand why the marketing process, including calls and meetings with buyers before the LOI is accepted, needs to be frank and transparent as to weaknesses and problems. Significant negative issues that emerge through due diligence can result in significant price concessions and can easily torpedo the deal. We help you maintain a virtual sandbox and buyer data room to manage the flow of due diligence requests, and schedule due diligence meetings between you and the buyer. Contemporaneous with due diligence is the drafting and negotiation of the purchase agreement. We work with you and your attorney to start the drafts of the disclosure schedules once the purchase agreement draft is received and we know what schedules the buyer is requesting. Your attorney will manage changes to the purchase agreement with the buyer’s attorney, including various ancillary schedules, such as non-compete, employment agreement, escrow agreement, third-party consents (e.g., lease and other contract assignments), seller corporate consents, and buyer corporate consents. Widely available deal surveys can serve to help keep within norms such provisions as: seller’s and buyer’s reps and warranties; time, caps and baskets on seller indemnifications; certain employment/consulting terms for sellers; and escrows and holdbacks. We also work with you and your attorney to identify in advance and resolve loose ends that can cause unnecessary complications during closing, such as buying out minority shareholders, settling options, and resolving employee claims, including unforced errors that can kill deals.