When it comes to selling a business, advisors can assist clients by introducing them to mergers and acquisitions (M&A) specialists and, once the sale transaction is completed, help clients manage the proceeds.
In order to be a useful sounding board, it’s important to understand the often complex process of selling a business. Here are highlights of a sale we completed for a B.C.-based client who leased specialty equipment to the film and television industry.
We first encountered the owners when we contacted them to see if they would be interested in acquiring a similar company based in Ontario. They told us they were actually planning to sell, so we followed up a few months later. After an explanation of the divestiture process and some negotiations, they hired us to sell their business.
The company had three owners, each one older than 70. Only one, the general manager, was active in the business. He managed more than 125 pieces of equipment with the help of two part-time support staff and one full-time maintenance technician. There was no management team per se.
The success of the business was highly dependent on the general manager, as he held all customer relationships. This posed a problem because he wanted to retire as soon as possible and there was no one to manage the business in his absence. This limited the type of buyer we could pursue.
With that issue in mind, we prepared a confidential information memorandum (CIM) describing the company’s business operations. This included the fleet list, ownership structure, real estate details, industry profile with competitor analysis, and the growth prospects, as well as an analysis of financial performance over the previous three years. Rather than focusing on the lack of a management team, we emphasized the company’s superb financial performance.
We then created a list with more than 40 potential buyers across Canada, the U.S. and the U.K. The list included strategic buyers, private equity firms and private buyers. Recognizing that the business would need a new manager, we focused on a subset of private buyers called search funds. These funds have a mandate to acquire one company and run it themselves, giving sellers the opportunity to exit after a short transition period.
While preparing the CIM and the buyer list, we populated a virtual data room, which is an online, secure, password-protected depository for confidential documents. In it, we categorized and organized the documents and financial information that would be required in the due diligence stage of the sale process.
Once the owners approved our CIM and buyer list, we began marketing the company for sale. This included contacting each potential buyer by telephone. We had those interested sign confidentiality agreements before sending a copy of the CIM. We then responded to follow-up questions and arranged meetings with the remaining interested parties.
Through our efforts, we received three letters of intent (LOIs) outlining the terms under which each party would be willing to agree to a deal. The LOIs came from two private equity firms and one search fund.
Although the LOIs from the private equity firms offered more, they required a management team in place to continue running the business. This meant the general manager would not be able to retire any time soon. We leveraged these two offers in our negotiations with the search fund (without disclosing specific details) and the search fund increased its price by 25%. The fund also agreed to a six-month transition period for the general manager.
After signing the LOI, the next three months were spent in due diligence where the buyer verified certain facts related to the company. This included material contracts (leases, customer contracts, employee files, supplier contracts and other documents), as well as legal, accounting, tax, banking and insurance records, aged payable and receivable listings, human resources information, health and safety data, real estate documents, fleet valuations and more.
Once the buyers were comfortable with their due diligence findings, they instructed their lawyers to draft the share purchase agreement. We helped our client’s lawyers negotiate this document, which finalized the terms of the deal. A happy general manager successfully retired at the end of his six-month term.
The advisor’s role
Selling a business is a time-consuming and stressful process. An M&A specialist can minimize the owner’s involvement so they can focus on their businesses’ day-to-day operations. In this case, our client was looking to fulfil two objectives—a price sufficient to meet their retirement needs and an attractive exit plan for the general manager—and both were met.
Although it’s not a financial advisor’s role to get involved in the day-to-day activities of the deal process, they can be a sounding board for the owner throughout the often lengthy sale process.
The advisor can also prepare an investment profile in anticipation of the completed transaction. Considerations may include major expenditures, charitable donations, updated investment allocations, tax efficiency strategies and estate planning. When the sale is completed, the advisor will be responsible for implementing the plan to achieve the client’s goals.
Mark Groulx is the president and founder of AIM Group Canada, a Toronto-based mergers and acquisitions advisory firm specializing in the sale of privately-owned businesses. Reach him at email@example.com.