What is the Sell-Side Process in M&A?
In M&A, the “sell-side process” describes the deal process from the seller’s (and its financial advisors’) perspective.
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Sell Side Definition in M&A Finance
There are a variety of reasons why a company might decide to sell:
- To cash out: Owners, particularly of private illiquid businesses, often have a significant part of their net worth tied up in the business. An acquisition – either partial or full – is a way to liquidate.
- There’s no clear succession or there are internal disputes: Owners who are getting older without a clear management succession plan may look to sell, as may owners of a closely held businesses who are in conflict.
- Strategic rationale: The business might decide that it’s more likely to sustain or grow its competitive advantage if combined with a strategic acquirer. For example, joining forces with a competitor, customer or supplier could help scale, create synergies or open new markets.
- Distress: The business might be distressed, facing liquidity problems that it cannot resolve on its own through a financial or operating restructuring.
The sell-side process might begin when an unsolicited buyer approaches the seller or when an owner independently arrives at the decision to sell, but ultimately, the seller has 4 ways it can organize the deal process:
- Broad auction
- Limited auction
- Targeted auction
- Exclusive negotiation
A broad auction is designed to maximize the probability of a bid at the highest possible purchase price.
In a broad auction, the seller’s investment banker will reach out to many potential bidders and invite them to participate. A broad auction is designed to maximize the likelihood of receiving bids from multiple parties and to increase the probability of a bid at the highest possible purchase price.
Advantages of a broad auction
- It maximizes purchase price: The primary advantage of a broad auction is that it casts a wide net. More competing bidders = higher maximization of purchase price.
- It increases the seller’s negotiating leverage: By controlling the bidding timeline and soliciting many bids, the broad auction tilts the in the seller’s direction and places the seller in the driver’s seat for negotiations.
- It satisfies the seller’s fiduciary responsibility to shareholders: The broad auction process satisfies owners’ fiduciary responsibility to maximize shareholder value. For companies in which the management and board are the primary shareholders (smaller privately held business), this is less of an issue than for companies with a broad shareholders base (common for large public companies.) That said, broad auctions are often not suitable for large public companies because of the limited buyer universe and difficulty of maintaining confidentiality (more on this below).
Disadvantages of a broad auction
- It makes it difficult to maintain confidentiality: In a broad auction, the seller must furnish potential buyers with enough information to solicit bids. Even though the seller will demand a confidentiality agreement, private information about the seller’s business can leak to competitors. In fact, competitors themselves may participate in the process in bad faith with the goal of gaining access to private information about the seller.
- It’s time consuming and disruptive: A broad auction presents a larger time and resource drain on the seller than a less formal, more targeted negotiation. More potential bidders means more time the seller must spend marketing and preparing, which can shift management’s focus from other primary responsibilities. This is why sellers often find it helpful to retain an investment banker to advise them early on in this process.
Middle market businesses are best suited for a broad auction
Middle market businesses with under $100 million in equity value are best suited for a broad auction. That’s because the buyer pool is smaller for larger companies. Larger sellers tend to be better suited for limited auctions (see below).
A limited auction is preferable to a broad auction for larger company whose buyer universe is small (i.e. 10-50 potential buyers including both financial and strategic buyers). For obvious reasons, a company with a purchase price of $500 million will be dealing with a smaller buyer pool than that of a middle market company. For such a large company, a limited auction is the logical choice for running a formal process while containing the disruption of a broad auction and preserving as much confidentiality as possible.
A targeted auction makes sense for larger companies that seek to maintain confidentiality and reduce business disruption.
In a targeted auction, the seller may reach out to 2 to 5 hand-picked potential buyers. This approach makes sense for larger companies that seek to maintain confidentiality and reduce business disruption while at the same time still retaining a formal process and soliciting enough buyers to meet the seller’s fiduciary responsibility to shareholders. For example, in our, Linkedin, along with with investment banker Qatalyst Partners, invited Microsoft, Salesforce, Google, Facebook and another undisclosed party to participate via a targeted auction. A targeted auction made sense for LinkedIn, who realistically has only a handful of potential buyers and for who transaction confidentiality was of utmost importance. Of course, the risk of a targeted auction is that leaving uninvited potential bidders out of the process does not maximize purchase price potential.
At the other end of the spectrum from a broad auction is an exclusive negotiation, in which the buyer negotiates exclusively with one partner. The primary advantage is the maintenance of confidentiality, the speed of getting to close and the minimal business disruption. The disadvantages are apparent: One potential buyer means lower negotiating leverage for the seller and an increased probability that value isn’t being maximized for shareholders.
Sell side auction timeline
A company’s decision to sell is often triggered by an unsolicited approach from a buyer. When that’s the case, the seller can either continue to negotiate exclusively with the buyer or attempt to take control of the process by retaining an investment banker and implementing an auction.
When the seller is running an auction process (broad, limited or even targeted), the M&A process is generally broken into four discrete stages:
Sell side auction process and timeline
Preparing for sale: 4-6 weeks
- To whom? (Identify potential buyers)
- For how much? (Create a )
- What kind of process do we want to run? (Define the process and timetable)
- Organize financials
- Create projections
- Produce marketing material like the CIM
- Prepare non-disclosure agreement (NDA)
Round 1: 4-6 weeks
- Contact buyers: Exchange NDAs and distribute the CIM
- Receive initial bids: Non-binding indications of interest used to narrow the buyers list
Round 2: 4-6 weeks
- Hold meetings with interested buyers, conduct Q&A and answer follow-ups
- Set up for interested acquirors
- Draft definitive agreement
- Receive final bids/ )
Negotiations: 6-8 weeks
- Negotiate with buyers submitting bids
- Circulate draft of definitive agreement
- Enter into exclusivity agreement with one bidder
- Continue to facilitate due diligence
- Present finalized deal terms and to seller’s board, get board approval
- Sign definitive agreement
Note that in an exclusive negotiation the phases are less defined. For example, the seller may not define a clear timetable or distribute a CIM. There might not be a clearly defined Round 1 and Round 2, etc.