The process for selling a company
Selling a company is a complex process that takes about 6 to 12 months on average. The process for selling a company is different in every case, but there are key phases that most transactions have in common. In this article, we take you through selling a company, process-by-process, from the very first cup of coffee to popping the champagne at the moment of transfer.
1. Getting to know you
At Marktlink we often meet entrepreneurs who have already decided to sell all or part of their company. At the introductory meeting we discuss their specific wishes and plans. Why sell? What is the plan for after the sale? How can we make the sale a success? We also discuss the possibilities for sales arrangements and transactional structures: sell to strategists, sell to investors, a pre-exit, or an MBI-candidate? If the prospects for a sale look good, and the entrepreneur and the consultant ‘click’, the process for selling a company can begin.
2. The information memorandum
The process for selling a company is similar to the sale of a house, in that everything needs to be properly mapped out before we enter the market. An information memorandum (‘bid book’) is like a sales brochure in which all the ins and outs of a company and the market are described, so that possible buyers can understand the potential of the company. It will include pages about corporate structure, business activities, the staff, the role of the director and major shareholder, clients, suppliers, financials, and future expectations. Marktlink requests the relevant information and thoroughly examines the company and its sector before drawing up the information memorandum –a stylish document intended to inform and enthuse potential buyers and/or finance providers.
3. Value assessment
Entrepreneurs often have a price expectation for selling a company before they start the process by visiting Marktlink. This price expectation is often based on the ‘multiples’ in transactions of comparable companies highlighted in the media. These multiples can create false expectations around the process for selling a company, so Marktlink offers its clients an indicative value assessment based on the available financial figures and the company’s position in the market. This value assessment also examines future growth potential and/or synergy benefits. Marktlink has its own Registered Valuers (RVs) at its disposal who use the most recent valuation methodologies to determine an indicative range for the expected price. Ultimately though, the market determines the price of the company, and the value and the price obtained are seldom exactly the same.
4. Longlist
We then draw up a search profile with suitable buyers. Does the client’s company fit well with other strategists or better with an investor with well-aligned interests? Perhaps the company is suitable for an MBI buyer with a lot of experience within the industry? A selection of different types of buyers will help the client consider all their options. The purpose of this analysis is to identify buyers who best match the company and will assign it the highest value, and knowing the market well is key to ensuring suitable buyers are not overlooked. After careful screening, a longlist is drawn up and discussed with the client in order to jointly arrive at a shortlist of parties to be approached.
5. Approaching potential buyers
The time has come to enter the market. We use telephone conversations to gauge the interest of potential buyers, and thanks to the extensive network Marktlink has built up over the years, we almost immediately get in touch with the owner, CEO, or CFO. This saves an enormous amount of time and saves us from having to reach the right person via the reception desk.
At this stage we often make use of a teaser – an anonymous company profile which specifies key indicators such as turnover and EBITDA margin, the number of FTEs, the region where the company operates, and a brief description of its activities. It goes without saying that we carefully check that the data are not so specific that potential buyers can easily guess which company it is. The teaser allows the persons concerned to decide if they need further information.
6. Non-disclosure agreement
The interested parties will then receive a non-disclosure agreement (NDA). This NDA has been drawn up by Marktlink’s lawyers and obliges parties to handle received information with care and discretion and remove all information if the process for selling a company does not lead to a transaction. After signing the NDA, the parties will be told the name of the company and given the information memorandum.
7. Management meetings
Buyers nearly always have additional questions based on the information memorandum and there is often a need to get a feel for the organisation through a conversation with the seller. Buyers are therefore given the opportunity to schedule a “management meeting” at a neutral location (e.g. one of our offices). Here the buyer and the seller can get to know each other and explore specific issues.
8. The bidding phase
After the management meetings, parties are asked to make a bid (or “non-binding offer”). We indicate which subjects we expect to see in a bid and will always try to obtain multiple bids from the market. On the basis of the bids received, we work out the negotiation strategy with the client. The purchase price is an important aspect, but the party with the highest bid does not always become the ultimate buyer: conditions and trust are usually just as important. All things having been considered, one party is chosen to continue the process for selling a company exclusively.
9. The Letter of Intent (LOI)
The next stage in selling a company is the process of laying down agreements in principle in the form of a letter of intent (LOI). This is a preliminary purchase agreement that includes the purchase price, the payment mode and payment terms, guarantee obligations, a non-competition clause, a due diligence, management agreement, resolutive conditions, and so on. During this process, the lawyers are called in and negotiations take place to reach broad agreement. There is still a possibility that the deal will not materialise once the LOI has been signed, but this seldom happens in practice. In 95% of cases, signing an LOI leads to a transaction between the parties.
10. Due diligence
After signing the LOI, the purchasing party, possibly in cooperation with an accountant, tax consultant or lawyer, will conduct an investigation into the accuracy and completeness of the information provided on which the LOI is based. This due diligence investigation may vary from a short procedure to an extensive process in which the entire company is critically examined. Additional information will be requested by the buyer to prevent “skeletons in the closet” appearing after a possible acquisition. In order to avoid an unexpected price adjustment, the LOI will include provisions in respect of possible consequences arising from the outcome of the due diligence. In this phase, Marktlink will negotiate with the buying party about the due diligence results and ensure information requests are handled correctly.
11. Purchase agreement
After going through the due diligence results, the lawyers can negotiate and draw up the final purchase agreement (Share Purchase Agreement). This document contains all detailed arrangements as set out in the LOI, possibly supplemented with new provisions. Often several additional agreements are added, such as a lease and/or management agreements.
12. Closing
The purchase agreement is recorded and signed before the civil-law notary, the shares are officially transferred, and the purchase price is paid. This completes the process for selling a company and the champagne bottles can be brought out. Depending on the agreements made in the purchase agreement, a transfer period (often no longer than one year) may start for the seller, during which the entrepreneur gradually transfers operation of the business to the new management.
And then at last, the seller can finally enjoy a well-earned pension or focus on new challenges.
