What Founders and CEOs Wish They Had Known Before Selling Their Company / Part 1 of 2
Navidar | November 30, 2021
Over the years, Navidar has been involved in many types of M&A transactions, capital-raising assignments, and strategic undertakings for our clients. We thought it would be interesting to share some of the recurring themes and lessons learned from the perspective of the founders and CEOs whom we have worked with during the sale process. This is part one of a two-part post that touches on some of the biggest surprises that can arise when you decide to sell your company.
Surprise #1: Deal Valuations Matter, but Legal Terms Can Be Equally Important and Sometimes More Important Than the Valuation
Understandably, founders and CEOs place a significant focus on the valuation offered by the acquirer. However, it is not until they are well into the negotiation of the purchase agreement that they begin to really appreciate the importance of the deal terms. By deal terms, we are referring to representations and warranties (reps and warranties) and indemnification provisions contained in the purchase agreement between the buyer and the seller.
Sometimes these terms might appear to be the exclusive domain of attorneys, and the part of the purchase agreement where deal terms are explicitly spelled out is sometimes referred to as “lawyer land,” but every CEO and founder needs to pay close attention. It is here where the buyer could come back after the deal has closed and ask for money from you and the other shareholders.
For example, in one of our sale transactions, a private equity firm was insisting that intellectual property and employee benefit claims be a fundamental representation. That means that even if the statute of limitations had expired the acquirer could seek to obtain the entire purchase price from the sellers. When we could not resolve this issue through negotiations, we advised our client to terminate the proceedings. Within a week, the acquirer conceded the point and eventually closed the transaction.
Key Takeaway: Your investment banker should take the extra time needed to negotiate a letter of intent carefully and thoughtfully with the final bidder that is appropriately detailed and fleshes out the key deal terms, especially with respect to the indemnification framework and representations and warranties. Doing so will ensure that you and the buyer are on the same page regarding both valuation and the other key deal terms.
Surprise #2: The “Best Buyer” May Not Really Be the Best Buyer at All and May Not Even Participate in Your Sale Process
We often say at Navidar that we wish we had a nickel for every time the supposed “best buyer” or “most logical buyer” ended up not buying our client, despite the initial hope that the buyer would be the ultimate winner in the sale process. By “best buyer” or “most logical buyer,” we are referring to the idea that a particular buyer is viewed by the company’s management as being an ideal acquirer of the selling company for any number of reasons, including, for instance, that our client believes that it would be a strategic, profitable, and highly synergistic add-on to the acquirer’s business. But, sadly, very frequently the “best buyer” ends up:
- not even being interested in the company;
- not being willing to pay an equal or higher price that other buyers are willing to pay;
- being distracted by internal priorities such as integrating a previously acquired company; or
- being busy evaluating other acquisition opportunities.
In addition, it is important to know that very frequently the first parties to express interest in buying your company are often not the ones to ultimately acquire your company at the end of the day.
Key Takeaway: You never really know who is going to buy your company, so it is wise to make sure that your banker does not just focus solely on the “best buyers” or “most logical buyers” during the deal outreach process. Do not let your ideas about the “best buyers” cause you to allow those parties who may have contacted you earliest get too far ahead of other potential buyers because doing so will result in a disjointed, poorly synchronized, and potentially unsuccessful sale process.
Surprise #3: The Variety and Range of Bids and Other Deal Terms Can Be Very Broad and Different
Many founders and CEOs have expressed surprise at the range of valuations offered by different buyers for their company. We have discussed this phenomenon before and explained why it happens in “Unlocking the Secrets to a Successful M&A Process: Outlier Valuations, Re-trades, and Other Key Considerations.” Therefore, it is critical to think broadly about the different buyer types and to tailor the company story to each group of buyers. Furthermore, creating the most comprehensive list of “hidden” company assets creates more opportunities to generate interest from different groups of buyers. Finally, remember to customize your synergy model for each buyer as one size does not fit all.
Key Takeaway: To maximize your chances of getting the best deal for your company, your investment banker should take several key steps. First, they should think broadly and strategically about the universe of potential buyers with particular attention paid to those buyers that could pay a high valuation for your company. This list could include strategic buyers directly in your industry as well as strategic buyers in adjacent industries and private equity firms looking to make acquisitions in your industry. Second, your banker should sequence outreach to buyers in such a way that allows all the interested parties sufficient time to participate in the M&A process. This may mean contacting international buyers ahead of other potential buyers so that they have sufficient time to analyze your company and make a compelling offer. If your banker strategizes, customizes, and tiers their outreach to potential buyers, they will be maximizing your chances of getting the best valuation and the best deal terms.
In part two of this post, we offer three more “surprises” that founders and CEOs often experience when making the decision to sell their company.
If you would like to discuss any of the advice provided above, or if you are currently seeking counsel on a potential M&A transaction, please contact Stephen Day at [email protected] or (512)765-6973.