2021 was a historic year for middle-market M&A with over 14,000 transactions in the US, the highest on record over the last ten years. That trend is expected to continue through 2022. Gennari Aronson counsels both buyers and sellers in negotiating and structuring transactions. Entrepreneurs and management teams considering a transaction frequently ask similar questions:
I’m getting multiple calls weekly about selling my business. How should I be thinking about these?
Private equity buyers want to deploy capital and they are competing to acquire “quality” companies. Strategic buyers are also on the hunt for opportunities to expand market share, grow in new markets, and secure new talent. What to do? Potential sellers should consult with their board advisors, accountant, and legal counsel, and also consider engaging an investment banker to help manage a discreet and competitive process.
I have an offer, now what?
Negotiating and finalizing a letter of intent (an “LOI”) is critical. Usually, the most important terms of the LOI are: price, overall terms, including post-close employment, and exclusivity period. This is especially true if any portion of the purchase price is contingent on post-closing operational performance. In addition, Sellers should focus on how they might have to give money back, post-closing—instead of simply stating that the sale will be “on customary terms and conditions for similar deals.” Hammering out details upfront in the LOI will save legal and accounting fees later on and also reduce the risk of the deal blowing up later if the parties can’t agree on what’s “customary and standard.” Representation and warranty insurance should be considered.
What happens after the LOI?
Typically, the transaction proceeds with the buyer delivering the draft purchase agreement while conducting due diligence, including a quality of earnings review, in parallel. With an NDA in place, the seller should be prepared to provide access to the company’s contracts, accounting records, and other non-public information. Access to key employees and customers should be carefully considered and timing for the same, mutually agreed.
How long is the “typical” M&A process?
Most transactions can be completed within 30-90 days, depending on if regulatory or contract assignment approvals are required or whether any other hiccups occur during due diligence. Advisors can help sellers to anticipate roadblocks in advance, even at or before the LOI stage, and as we often tell potential sellers: “better to address potential problems on your own and in advance instead of in the middle of a transaction process.”