The sale of a company is a time-consuming and intensive process. The sale process often takes many months to complete. There are many key constituents involved including the company’s owners, management, employees, customers, financial advisors, and legal counsel.
The selling company’s in-house legal team will be involved at all stages of the sale process. Regardless of whether the company is currently contemplating a sale or has not yet considered the possibility, in-house lawyers should have an intricate understanding of the dynamics involved in sell-side M&A.
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The seller will hire a number of sell-side advisors to navigate the sale process and negotiate favorable transaction terms. These professionals include investment bankers that perform advanced financial analysis. Lawyers also play a critical role throughout the process.
Sell-side advisors will tailor their advice to fit the seller’s specific priorities and objectives in the sale process. For example, certain considerations such as speed of execution, the certainty of completion, and value optimization may be weighted more heavily for a given seller depending on their unique circumstances.
The sale of a company is often structured as an auction. A well-run auction process encourages a competitive bidding process and has a positive impact on the selling company’s valuation. Depending on the relative importance of speed, confidentiality, and potential business disruption, the company’s advisors may recommend either a broad auction or a targeted auction.
A broad auction entails reaching out to as many potential buyers as reasonably possible. This is intended to maximize competitive dynamics and push up the deal value. Sometimes it is in the best interests of a selling company to run a more tailored auction process, only reaching out to a select group of potential buyers. A targeted auction is optimal for a selling company that wants to maximize confidentiality and execution speed. Alternatively, some companies decide to forgo the auction process entirely and instead opt for a negotiated sale with a single party.
Performing Due Diligence
The sale process begins with extensive due diligence. This typically involves in-depth sessions with the target company’s management, detailed analysis of the company’s documents, and evaluation of third-party market studies.
Diligence: Reviewing the Virtual Data Room
To facilitate the buyer due diligence process, the target company will upload a comprehensive set of information to a virtual data room site. The prospective buyers will evaluate the uploaded information to make an informed investment decision. These materials will include charters, bylaws, debt agreements, lease agreements, financial data, supplier lists, customer lists, employee pension plans, environmental reports, outstanding litigation reports, and industry reports.
Preparing and Reviewing Marketing Materials
Effective marketing materials will spark buyer interest. One of the main marketing documents in the initial stages of an auction process is the confidential information memorandum (CIM). This detailed written description of the target company is presented to prospective buyers. The CIM often comes in the form of a PowerPoint presentation.
While the CIM is typically put together by the bankers, in-house lawyers must review the materials with a critical eye. In particular, the company’s legal counsel should closely scrutinize the materials for any descriptions that could raise antitrust concerns. The CIM also contains detailed historical and projected financial information about the selling company. The lawyers should review these projections to make sure they are sufficiently defensible.
Negotiating and Executing the Confidentiality Agreement with Prospective Buyers
In-house lawyers play an important role in negotiating the terms of the confidentiality agreement (CA). The CA is a legally binding contract between the target company and prospective buyers that describes the parameters for using the target company’s confidential information. The agreement places limitations on the disclosure of confidential information for a designated time period. It also prevents prospective buyers from collaborating with each other without the consent of the target company.
The CA will often contain a standstill provision that prevents prospective buyers from seeking to control or influence the target company’s management for a specified period of time, usually six months to two years. For a target company that is publicly listed on a stock exchange, the standstill provision will prohibit unsolicited offers or purchases of the target company’s shares.
Sending Out the Initial Bid Procedures Letter to Prospective Buyers
An initial bid procedures letter is sent to all prospective buyers. This letter includes some or all of the following information:
- Purchase price and the key assumptions behind the purchase price
- Financing sources being used for the deal
- Overview of the diligence that must be completed
- Anticipated timing for closing the deal
- Key conditions for signing and closing
- Required board and shareholder approvals
- Required regulatory approvals
- Treatment of existing management and employees
- Contact information of the company and legal advisors
Preparing the Definitive Agreement
After many months of negotiations and detailed diligence, the sell-side advisors will work with the seller to evaluate final bids. Once a winner is selected, the sale process will wrap up with a final definitive agreement. The in-house lawyers will be involved in marking up and negotiating final terms to complete a successful sale. The legal counsel also has to make sure the company receives applicable regulatory and shareholder approvals in order to consummate the sale.