M&A Confidential – what they don’t teach you in school about mergers & acquisitions
…and how to sell your business for maximum gain and minimum pain

GILES SHIH
September 24, 2024

Special thanks to David Reilly of TrueNorth Capital Partners for his assistance with this post.

As an entrepreneur, you’ve worked hard on building, running and growing your business. At some point, you will be approached by other companies or private equity investors inquiring whether you might be interested in selling your business. That’s great! But as an entrepreneur who’s been totally heads-down running your business, how do you maximize the value of the enterprise you have spent blood, sweat and tears creating?

Having been through the process of selling my company earlier this year and having the past six months to reflect on it, I was excited for the opportunity to share some of my takeaways recently at a gathering of business leaders and directors organized by the Private Directors Association in Raleigh, NC. Here are five of my reflections from that evening’s conversation.

1. An uneven playing field?

Here’s the dirty little secret in M&A…the cards are stacked against you as the business owner or founder in a sale. Most entrepreneurs and founders only get to sell our company once in their lifetime – maybe twice or three times if we are lucky enough to be a serial entrepreneur. On the other hand, strategic buyers and private equity firms do this for a living and have dozens, sometimes hundreds of deals under their belt, and they are not afraid to exploit that knowledge gap to get the best terms. So how do you as a founder or business owner even stand a chance? In a word – competition. By being extremely prepared for and running a highly orchestrated sale process, you force buyers to compete for the opportunity to acquire your company; it’s the best way to ensure you sell your business on the terms you want and to the partner you want.

So how do you create the necessary “competitive tension” on selling your business? One tried and true way is to hire an experienced investment banker to help you prepare for and then run the sale process. OK, I know a lot of business owners out there are skeptical of these so called “freeloading” intermediaries and smooth talkers who work their way into a piece of the deal when you have invested a lifetime building a great company. Sure, it’s natural to be skeptical of what others bring to the table. But here’s something I learned: getting and closing a successful sale of your business is wholly different from running one. And if you don’t have a strong competitive process and an experienced investment banking M&A advisor on your side, you could risk giving up a lot of value even before the negotiations begin.

2. How do I prepare for an M&A process?

Start planning for the process years in advance by getting your financials and legal contracts in order. You will need audited or third-party reviewed financials for the past three years, and updated and signed copies of all your key partner, customer, vendor and supplier contracts. I estimate that we uploaded a couple thousand pages of documents into the data room during our sale process, which is fairly typical for a deal our size. It’s critical that you have all your t’s crossed and i’s dotted on all those documents before you get started.

Build your deal team early – the aforementioned investment banker, outside legal counsel, and CFO were the key members of my deal team. It’s best to interview several investment banking firms and call a few client references to make sure they have the experience and will commit the senior-level attention for a deal of your size; ask a lot of questions before you decide which one is the best fit for you. Your investment banking advisor will know how to position your company in a manner familiar to prospective buyers and recast your financials for private-company addbacks (e.g., those fancy cars, vacation “offices”, etc.), normalizations and pro forma adjustments, all of which are critical in maximizing value. They will advise you on the logical buyers to approach and negotiate all keys deal elements at the appropriate times, always in consultation with and subject to your approval.

While you likely already have a trusted corporate attorney, using a “jack-of-all-trades” lawyer could put you at a disadvantage against the buyer’s legal advisor. I would advise entrepreneurs to engage a law firm that has a practice whose attorneys specialize in M&A, along with all the other practice areas relevant to closing deals. In short, the investment bank has the expertise to harness maximum value from the optimal buyer, and the M&A law firm helps make sure that you maintain that value post-closing. It’s important to note that selling a business is not like selling real estate in that you will be indemnifying the buyer for breaches of representations and warranties that you will make, and an M&A attorney will help navigate through those and other detailed legal elements in the transaction documents.

Lastly, make sure you have people on your team to whom you can delegate managing day to day business operations while you are focused on preparing for the sale process, taking meetings with interested parties and being available to work intensely with your investment bankers. Running a process is like taking on another full-time job! Your goal as a seller is to deliver to the buyer a business that aligns as close as possible with the operationally efficient and financially responsible organization you pitched to them. That means you need everyone on your team doing their job to the best of their abilities. Plus, demonstrating you and the team are in a position to keep growing the business if the deal falls through gives you leverage throughout the negotiations.

A brief note about disclosing the sale process to your team. I would keep any discussion about the sale at the Board and executive level initially. It may go against your personal values,but resist the temptation to disclose the sale process to rank-and-file employees until you are confident the deal will close. You need to prevent rumors spreading in the industry, employees inadvertently disclosing information about the process, or having folks worried or distracted over their job security. For your key executives that will be involved in the process and whose workload will substantially increase, your legal counsel can help draft retention bonus agreements that incentivizes and rewards them for the extra effort and staying through the closing, as well as separation agreements that provide severance if the buyer terminates them within a certain period after closing.

3. Know your number and your purpose for selling

Obviously, you don’t need to tell anyone besides your Board (and maybe your spouse) what you are willing to sell the company for, but work with your financial advisor to know what number is good enough for you and your shareholders to clear the bar at the close. However, recognize that this “number” has very little to do with the valuation of your company. An investment banker can give you a general sense of the valuation range of your business, even before a formal engagement. Keep in mind that deal structure will be an important factor here, as there are different tax implications and cash/stock mix considerations if the buyer wants you to “roll” some of your proceeds into equity (i.e., keep some shares in the acquired company so that you are incentivized to keep working and help achieve the post-acquisition numbers). Also, an earnout structure with some portion of the valuation contingent upon achieving certain metrics or milestones can help bridge a valuation gap or provide additional value over the next highest bidder; but keep in mind these terms need to be structured very carefully.

Don’t forget to consider the intangible factors that are driving you to sell the business. I had both a personal and fiduciary objective for the sale of my business (some of which I shared in my previous newsletter “The Decision to Sell”). Having a clear and realistic purpose will help get you through some tough situations (and there will be tough situations!) during the deal negotiations.

4. Be prepared for a marathon, not a sprint

Selling my company was probably one of the hardest things I have done personally and professionally. You need to be prepared for the long haul. What helped me was having people around me who had been through the M&A process before (your Board and Advisors can play an important role here). Know that you will need to be ready to say “no” and walk away from unreasonable terms or various schemes/tactics to get you off your game (re-trading after the Letter of Intent is signed can be a particularly odious one), but running an effective process through your investment banker with competing bidders in the wings helps mitigate against buyers playing games. There is an adage that every sale dies at least three times before it closes, and we certainly experienced that dynamic. Having emotional resilience and mental fortitude go a long way. Do your best to harness your emotions and keep as focused as possible on why you are selling and why the buyer is buying.

5. Some resources and final thoughts

There are several resources that helped me to gain a perspective and also learn from others who had successfully exited their business. John Warrillow, author of Built to Sell, hosts a podcast by the same name where he interviews founders and entrepreneurs from all walks of life about their experience of selling their business. Peter Worrell’s Enterprise Value and Bo Burlingham’s Finish Big: How Great Entrepreneurs Exit Their Companies on Top were two books that also were helpful for me early on as I contemplated selling my business.

While selling your business may be a once in a lifetime experience for you as a business owner or founder, knowing that companies are bought and sold all the time under all types of circumstances should give you comfort. Just like in any sport, there is a language, rhythm and rules around getting deals done. Trust the process and those on your team and you too may one day enjoy life as an exited entrepreneur!