Determine Acquisition Strategy
- Identify and define acquisition criteria and strategic rationale
- Identify potential targets (or acquirers)
- Approach (or receive approaches) targets or their advisors
- Sign non-disclosure agreement(s) (NDAs)
- Review high-level information on the business (usually contained in an information memorandum)
- Consider strategic rationale and potential synergies of the target
- Produce (or receive) an indicative non-binding offer
- Dialogue with the management team
- Consider due diligence streams and initial high-level due diligence
- Consider deal structuring
- Evaluate further information and potential synergies
- Make a best and final non-binding offer
- Agree Heads of Terms/Agreement (HOTs / HOAs)
- Commence final due diligence streams (e.g. financial, tax, commercial, legal, technical etc.)
- Finalise any funding requirements
- Finalise deal structure
- Finalise any management incentives
- Agree on a completion mechanism (locked box vs completion accounts)
- Negotiate and agree to a Sale and Purchase Agreement (SPA)
- Integration of the business
- Delivery of synergies
- Finalise and agree on completion accounts (if applicable)
Non-Disclosure Agreements (NDAs) are typical of M&A transactions, whereby potential acquirers are required to sign a legally binding document that safeguards the release of confidential and potentially commercially sensitive information. Releasing this information is often a concern for most sellers, however, they should be assured that this is a standard practice within M&A and they are protected by NDAs that are in place. NDAs are often standardised with common clauses including restrictions over the use and distribution of information provided and limitations regarding approaching customers, suppliers, and employees. The time period that NDAs are binding is varied, but often they’re a minimum of 12 months.
Offer Letters, Heads of Terms and Exclusivity
During the process, potential acquirers are asked to submit a letter of intent through a non-binding indicative offer (NBO) for the target. These offers are often discussed and tweaked between advisors, sellers, and acquirers. If the offer is accepted, the bidder (alongside other bidders) will often be invited into a second round whereby they will gain access to more detailed confidential financial, commercial, and legal information often contained in a virtual data room.
Following the release of this further information, bidders are asked to confirm their final second-round bids which the preferred bidder(s) will then be selected from, with reference to the price, deal and consideration structure, management incentivisation schemes and deliverability to enter into the completion phase.
Often, a single party will be granted a period of exclusivity to complete the transaction with reference to the ‘Heads of Terms’ (HOTs) or ‘Heads of Agreement’ (HOAs). However, the process could involve a ‘contract race’ whereby two or more bidders will compete to agree on a deal. These HOTs grant an agreed-upon period of exclusivity with reference to the agreed-upon deal to conduct due diligence and for legal advisors to draft and agree on a definitive SPA.
The Auction Process
During a sales process, there are two techniques which can be employed by advisors:
- Limited or a controlled auction (whereby a selected targeted number of candidates are selected);
- Open auction (open to the world).
Limited auctions can often be completed quicker due to their targeted nature and the threat of an open auction can often be used to keep up bids and transaction process timelines. Open auctions can often threaten a business due to the uncontrolled nature of the process being so wide, however, the release of information can often be limited.
A controlled auction process is a type of sales process where one or a small number of potential targeted buyers submit purchase offers for an acquisition target. An open auction consists of many parties bidding for a business simultaneously. Controlled auctions are differentiated in that the process unfolds in a carefully planned sequence designed to build and maintain a strong negotiating position. In a controlled auction, the opportunity is presented to a select group of qualified buyers in a manner that stimulates a competitive process.
A controlled auction process is a time-tested method to maximize value when selling a business. The primary objective of a controlled auction is to generate the best possible cash purchase price for the sellers. However, in addition to price and deal structure, another important aspect of the controlled auction process is the ability to manage the deal terms with the use of a seller-friendly sale and purchase agreement.
The two most important keys to a successful controlled auction process include:
- Fully understanding what the seller’s objectives are; and
- Having the ability to maintain strict control over the process.
If you would like to learn more about how member firms of Pandea Global M&A can support your business, or if you are an advisory practice interested in joining the network, please contact Callum and Connor.
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