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Ready to Exit – From deal sheet to close

Sian Bolitho

Apr 29, 2024

Exot Strategy 2

The third of our three-part series examines the final stage when moving forward with exit and sale of your company: Deal sheet to close.

Author: Sian Bolitho

Sian Bolitho

Our previous blogs ‘Ready to Exit – conduct a feasibility review first! and ‘Ready to Exit- Engage with potential buyers‘ discussed the need to ensure your company was ‘fit for sale’ and how to select who might be the most appropriate target buyers.  Having targeted and engaged with your potential buyers, what happens when one of them is serious about moving forward with acquisition of your company?  Here, we further discuss the next steps.

The process of selling a business, is about getting the price right at the beginning: pitching in an effective manner to identified buyers; managing all parties through the steps of converting the Letter of Intent (LOI), which constitutes a Non-binding Offer (NBO) into a confirmed agreed term sheet; supporting closure.

The functions of finance and legal play a significant part in ensuring that fact-based information is always presented to support the offer from the buyer.  This gathering and presenting of data forms the process of due diligence and will take 4 broad forms:

  • Commercial due diligence – covering sales, purchases, customers, marketing, supply channels (including distribution and OEM), supply and purchase agreements, NDAs, website, IT etc.
  • Technical due diligence – covering manufacturing processes, SOPs, instrumentation, R&D, QC, quality certifications, regulatory requirements, operations, inventory, environmental health, Hazardous materials etc.
  • Legal due diligence – covering real estate, insurance, HR, IP, company articles and officers, stock divisions, trademarks and licenses etc.
  • Financial due diligence – Covering P&L, balance sheets, assets, sales forecasts, tax, loans, costs etc.

To manage so many facets, and the associated questions raised by buyers, a project management approach with a single point of control is essential to ensure the process moves continually and smoothly and that any red flags are raised, discussed and addressed as efficiently as possible. 

It is often of great benefit and support to the seller to engage a third-party consultancy before or at the point of negotiation of the LOI and deal sheet.  Consultants will work on your behalf to maximise the value of your business, assisting in the negotiation to obtain the best possible outcome for both parties.  It is often not as simple as being presented with a single price for your company.  Deals can include earnouts if targets are met over defined time periods, requirements to complete tech transfer to trigger a second or third tranche of money after an initial upfront cash payout, roll-over offers to retain equity in the new business and many more formats.  Navigating this complex deal negotiation and deciding what is best for you can be challenging if a seller has not been through the process before.

Above all, company owners and operators must be free to maintain the day-to-day running of the business, ensuring that sales targets are met as forecast.  One of the biggest dangers to a successful transaction completion is failure to deliver forecast sales and so alongside all the additional demands placed on a senior management team during an M&A process, focus must be maintained on continued company growth.  For this reason, working with a third party to ensure senior leaders are only involved where essential is often a great reassurance to a seller.

Towards the end of the due diligence, the buyer is typically asked to reconfirm the deal offer in a “Term Sheet”, covering most areas, and allowing accurate instruction of the legal parties to (internal or external) to construct and negotiate the contract of sale. This stage of the process can be demanding on time and is most efficient for the seller when led by the legal team, supported by your consultant. It often involves regular discussions with the buyer in closing queries, issues and topics that form part of the final contract of sale.  At this stage in the process, a seller must also begin to consider post transaction activities including, but not limited to, working capital and completion accounts, transition activities and communications to customer and market.  The concept of integration and the start of this process with the buyer will also be considered at this point.

From engagement to close, M&A transactions can vary significantly in timelines from a few months to a year.  It is obviously in the interests of the seller to make the process as swift as possible, as smooth as possible and as flexible as possible. A working assumption of 9 months with an aim for 6 months would be reasonable.  Key to success is finding the right buyers, providing accurate and comprehensive information in due diligence, and having the right people and plan to close. The process will need an accountant (finance owner), lawyer and owner of process, which can be the company owner or a third-party consultancy.  All three/four organisations must work and communicate effectively with one another.

If you are interested in our M&A services or wish for us to work on deal structure, management, or indeed manage your company sale entirely, please contact us.

Over the past four years, PSL has undertaken 19 M&A ‘sell’ transactions and completed over 40 ‘buy-side’ projects. We have presented over 500 companies as potential targets and conducted at least 180 ‘deep dives’ into companies, allowing buyers to focus their M&A activities on the right targets.

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