A well planned and executed divestiture is designed to achieve maximum transaction value and minimize transaction risks. The divestiture process is comprised of strategy, preparation, documentation, marketing, negotiating, due diligence and closing.
Setting the divestiture strategy involves a clear understanding of the owner’s objectives, motivations and concerns, establishing a range of expected market values, evaluating the strategic and financial buyer market and establishing internal and external divestiture team members.
Preparation is comprised of a thorough review of company operations and the industry to identify strengths, risks and opportunities. Company strengths and opportunities are identified for marketing to potential buyers and risks are reviewed to identify mitigating factors and potential pre-sale operational changes. The tax structure is also reviewed to determine the optimal sale structure and recommended pre-sale tax transactions.
Documentation includes preparation of a confidentiality agreement (CA), summary fact sheet (Teaser) and a confidential information memorandum (CIM). The CA provides legal protection against unauthorized use of confidential information and non-solicitation of employees and customers. The Teaser is used to pre-qualify target buyers based on their level of interest and ability to transact while maintaining maximum confidentiality. The CIM is the primary marketing and information document issued to qualified buyers.
Marketing begins with the identification and qualification of potential strategic and financial buyers. Peter Day reviews all potential buyers with his client for approval before they are contacted. CIM’s are distributed to qualified buyers. The number of CIM’s issued is highly dependent on the nature of the buyers (strategic versus financial), the level of confidentiality risk and the size and nature of the opportunity. Presentations and site visits are arranged with qualified buyers to highlight the investment opportunity and respond to questions. The marketing process is tightly controlled over a narrow time frame in order to create maximum competitive tension resulting in premium offers.
The objective of the negotiation phase is to improve on initial offers expressed by way of a letter of intent (LOI). Acceptable LOI’s are reviewed and negotiated with potential buyers resulting in a second round of offers to enhance offer values and terms. Final negotiations are conducted with the selected buyer to optimize all deal terms while negotiating leverage is still in favour of the seller.
Due diligence begins after the execution of the LOI. An electronic data room with password protected access is used to efficiently and effectively control and manage the due diligence information required by the buyer. Peter Day’s role as M&A advisor is to maintain the deal price and terms negotiated in the LOI by pre-empting due diligence issues, proactively responding to buyer questions and minimizing the due diligence period which represents the greatest degree of risk to the seller. All information requests, site tours and pre-authorized employee meetings are strictly controlled to ensure confidentiality is maintained. Peter Day also manages and coordinates the internal and external divestiture team.
Closing documents including the asset or share purchase agreement will be prepared by the buyer during or after due diligence. Further negotiations are required by both the M&A advisor and legal counsel to minimize the deal risk to the seller both at closing and post-closing, particularly with respect to price adjustments, holdbacks and representations and warranties. The M&A advisor is also responsible for managing pre-closing deal conditions to ensure that the deal is successfully closed on the target date. Post-closing, the M&A advisor assists in finalizing price adjustments. As M&A advisor, Peter Day leads and manages the divestiture process including strategy, preparation, documentation, marketing, negotiating, due diligence and closing.
Successful acquisitions drive growth and profitability. Strategic acquisitions may be targeted to increase market share, penetrate new markets, diversify product or service lines, vertically integrate suppliers or customers, reduce seasonality, utilize excess capacity and capitalize on operating cost savings.
The acquisition process is comprised of strategy, targeting, valuation, negotiating, financing, due diligence and closing.
An effective acquisition strategy is based on a clear understanding of the transaction objectives, target criteria and resources of the buyer including the availability of existing or potential capital to fund the acquisition and an assessment of management capacity and experience to execute the transaction and integrate the target operations.
The acquisition strategy is used to narrow the investment required to research, identify and qualify acquisition targets. Targets may be contacted directly by management or indirectly through the M&A advisor. Opportunities may also arise from sellers or their intermediaries.
Valuation of the target will be based on preliminary information provided in the CIM from the seller’s M&A advisor or from information obtained by the buyer through discussions and requests for documents. Valuation expertise combined with a strong knowledge of market conditions, an understanding of the seller’s motivations and objectives, the degree of competitive bidding expected for the target company and the target’s financing capacity will form the basis for the offer price and terms.
The objective of negotiations is to obtain an exclusive agreement to acquire the target on the most favourable deal terms. Fully understanding the seller’s motivations, objectives and sensitivities will assist in creative deal structuring and will minimize the need to offer more than is necessary to secure the deal.
The need for external financing will be driven by the buyer’s existing resources and the leverage potential from the target company. Acquisition capital may be sourced from banks, mezzanine providers or private equity. See Capital Raising for a description of the financing process.
The objective of the due diligence phase is to verify the information used to form the offer, uncover previously unidentified operational issues and business risks, substantiate the value proposition including management and customers, quantify acquisition synergies, prepare for integration planning, identify integration issues, and to obtain additional information to negotiate price adjustment provisions and other terms and conditions contained in the transaction agreements. As the M&A advisor, Peter Day will lead and coordinate the internal and external due diligence team with the objective of identifying any major deal issues early in the process.
After sufficient due diligence has been conducted, transaction agreements are prepared by the buyer’s M&A lawyer with the goal of minimizing post sale transaction risks and providing effective remedies for potential price adjustments and breaches in representations and warranties.
Successful transaction closing is achieved after the execution of transaction agreements and satisfaction of all deal conditions.
As M&A advisor, Peter Day leads and manages the acquisition process including strategy, targeting, valuation, negotiating, financing, due diligence and closing.
The desire to reward existing management with an ownership opportunity and the ability to avoid the disclosure risks and divestiture process involved in an external sale can be an effective succession solution for owners. Depending on the strength of management and the owner’s tolerance for risk, the availability of multiple sources of debt and equity financing often provide sufficient capital to fund management buy-outs.
Both the owner and the management team should be represented by separate transaction teams comprised of a minimum of an M&A advisor, tax advisor and M&A lawyer to achieve the following benefits:
The M&A advisor representing management leads the transaction process, advises management on the market value of the company, negotiates transaction terms and conditions, sources and negotiates the best financing options and coordinates the transaction team to ensure a timely and effective closing.
In a management buy-out, Peter Day acts as the M&A advisor either for the owner or the management team.
While the strategic objectives of a merger may be the same as an acquisition, the primary difference is that ownership is maintained by both parties in the newly merged entity. The currency of the transaction becomes the relative value of the merging entities rather than cash or other forms of consideration.
A merger adds complexity to the transaction as it represents both an acquisition and a divestiture for the shareholders of the merging companies. Generally the focus is on relative value but all of the issues and considerations relevant to both an acquisition and a divestiture need to be addressed. As with a management buy-out, the involvement of an M&A advisor:
As M&A advisor for one of the merging entities, Peter Day leads and manages the merger process.