Article: Three Phases of Selling a Business

by Tom Decosimo & Paul Cheney

For nearly forty years, Decosimo has advised and assisted business owners wishing to sell their companies. For the majority of owners, selling a business is a once-in-a-lifetime event, so it is important to leave as little as possible to chance. Executing a well-devised plan is critical to maximizing the ultimate proceeds from the sale of the business. Based on our experience with over $20 billion in transactions, we developed a three-phase process intended to maximize sale proceeds and benefits to the current shareholders and to minimize the time to closing and the likelihood of busted deals. The following paragraphs describe our process in more detail.

Phase One – The foundation on which the sell-side process rests is an understanding of the company’s value. The valuation process begins with a request for information about the business, followed by a detailed interview designed to provide information about the company’s history, management team, ownership, products and services, markets, customers, competition, suppliers, facilities, manufacturing processes and capacity, capital structure, contracts and licenses, as well as current and expected trends, along with issues in the industry and the economy. Once we have an understanding of how the business works, we analyze historical and prospective financial statements.

The valuation is an independent opinion of value prepared by an experienced business appraiser. The valuation is prepared in accordance with industry best practices, including the Uniform Statement of Professional Appraisal Practices (USPAP) and the business valuation standards of the American Society of Appraisers and the American Institute of Certified Public Accountants. The valuation provides the opportunity for frank discussion between the current owners and their sell-side advisors regarding the value of the business, including areas of financial or operational concern to potential buyers.

Phase Two – The second phase of the project involves preparing to solicit buyers. This phase includes research to determine who is interested in companies with the investment characteristics of the subject business. While companies who have made investments in the subject industry in the past are candidates, the investment community changes fast, and so does the universe of interested parties. If appropriate, we also look for international companies that may be interested in making an investment in the industry.

Once potential buyers are identified, we prepare a confidential information memorandum (CIM) that explains the investment opportunity. The CIM is based in part on the information gathered in performing the business valuation. The CIM is a marketing document designed to summarize important information about the business in order to limit negative surprises during the due diligence process. Based on the CIM, we also prepare an executive summary—a teaser document designed to pique the interest of potential buyers. The executive summary does not disclose the company’s name; it provides only a broad description of the business and the market, as well as enough summary financial data to provide a sense of scale for the transaction.

Phase Three – The third phase involves conducting a controlled sale process for the business, analyzing and comparing competing offers, hosting buyer due diligence, and closing the deal. Potential buyers are contacted by phone and qualified in a discussion consisting of questions about the party’s history of acquisitions, their business lines, their capitalization, and their ability to close a transaction. If a potential buyer lacks the necessary components to complete the transaction, they may be eliminated from the list of top prospects. Should the potential buyer meet the criteria of a serious buyer, they are emailed an executive summary, along with a non-disclosure agreement (NDA). Once the NDA is returned, the CIM is sent, along with the procedures letter, which gives clear instructions concerning the letter of interest deadline and the details relating to the letter’s required terms, should the potential buyer wish to proceed. 

The letter of interest addresses issues including:

• A specific value range
• Acquisition structure such as cash, stock or seller financing
• Management issues such as employment agreements, covenants not to compete, and consulting agreements
• Capital sources
• Closing contingencies
• Due diligence
• The approval process
• Timing

Concurrently, the data room is prepared. This room contains the backup information that a serious interested party (who ultimately presents a letter of intent) will want to review during the due diligence process. Much of the information for the data room will have been acquired and organized during the valuation. 

Based on the number and quality of the letters of interest received, as well as followed-up inquiries, negotiations will begin with selected potential buyers in order to determine one or more interested parties that may be invited to the data room and to engage in management interviews. The goal of the process will be:

• To narrow the list of interested parties to only those that have the ability to close and to do so promptly
• To ensure the seller understands the letters of interest terms
• To assure that these terms will ultimately be transferred appropriately to a letter of intent

The two or three potential buyers (finalists) who have submitted the most compelling letters of interest are invited to conduct due diligence, which takes place in the data room—a physical room either off site or a virtual room accessed electronically. Many potential transactions have fallen apart due to poorly prepared data rooms or due to data that conflicted with the CIM. By properly organizing the data in Phase One, this risk is substantially reduced.

On completion of due diligence, a single letter of intent is negotiated from the finalist. The letter of intent resembles a written contract, but is not completely binding. The portions of the letter that are binding include such items as non-disclosure agreements, a covenant to negotiate in good faith, or a “stand-still” or “no-shop” provision promising exclusive rights to negotiate. This letter’s negotiations ultimately drive both sides toward closing. 

Closing involves the selling company’s attorney, as well as a specialized transaction attorney hired specifically for this process. Of course, the selling company’s accountants will play a crucial role throughout this process.

Phase Three can take up to four months, as it is not unusual that the selected potential buyer will want between 45 and 60 days to close. Therefore, as a rule of thumb, we tell our clients to be prepared for a nine-month process in total—Phase One through closing. Of course, process timing can vary either way.  

Selling a business requires a disciplined process executed by experienced people. Decosimo Advisory Services professionals have been involved in assisting clients buy and sell hundreds of businesses. We believe there is no substitute for our expertise in valuing businesses, our understanding of both sellers and buyers needs, our experience assisting with financing, and our adherence to a disciplined process. To discuss the potential sale of a business in confidence, please contact us at 800.782.8382.