An insightful discussion with local IT business owner Ted Schuman and corporate M&A attorney Garth Stevens
By: Ted Schuman, Founder & CEO, PlanetOne
There might not be a hotter topic in the IT space today than mergers and acquisitions (M&A). The private equity world has descended upon us and the buzz is everywhere. Here at PlanetOne, we just came off an exciting event, P1 Network News, which featured a discussion with corporate/M&A attorney Garth Stevens, Partner with Arizona law firm Snell & Wilmer. The segment was an attendee-favorite, packed with substantive advice that our partners, and all business owners, need to know when it comes to selling their businesses.
For those of you who are being asked about an exit strategy, pay attention. The decision can be lifechanging and there is much to be considered.
According to Garth Stevens, while the sale of a company can be exciting and normally leads to a positive outcome, “the M&A process can be quite confounding and stressful.”
He shared three key considerations when preparing for a potential M&A event:
Have you set your goals and expectations?
The most important thing for someone contemplating a sale…what are your goals and expectations from a sale transaction? As a seller, you will want to be sure that your goals and expectations are aligned with reality. This is particularly important in terms of aligning your perspective on what your company is worth relative to what the market says and how you intend to be paid. Most buyers these days are private equity firms that do not pay 100% cash at closing and may expect you, as the owner, to retain a portion of ownership, and even remain employed, for a period of time after the sale closes. They may also want to pay a (small) portion of the purchase price by giving you an unsecured promissory note.
What can you be thinking about in anticipation of the sale?
First of all, if the business is owned by more than a single owner, you should work to get buy-in from all owner parties as to moving forward with a sale, or at least from those owners who comprise a majority of the company’s ownership. Second, you should do your best to get your house in order. Organize your documents and records. Update your financial records, including if possible, having your most recent annual financial statements reviewed or even audited. If you have operational, customer or supplier issues that need fixing, get on that. The more organized and ‘clean’ your business is going into the sale process, the easier the process will be. Buyers can lose confidence if a company targeted for acquisition is in administrative disarray, has poor financial accounting or records, or has a pattern of unresolved operational problems.
What to expect in the sale process?
A typical M&A deal takes anywhere from 2 months to 6 months from start to finish. Phase 1 is the most exciting phase, which may be viewed as the “dating phase.” During this phase, sellers are having discussions with prospective buyers and getting a sense of what a deal is going to look like.
Once you have selected a buyer and the basic terms have been agreed to, the deal terms and structure are summarized in a non-binding Letter of Intent (LOI), which serves as menu of the key terms for reference by the deal parties throughout the transaction process. After the LOI has been completed and signed, the buyer will undertake an in-depth “due diligence” process under which the buyer and its advisors will thoroughly examine the company or business being acquired. The buyer will kick over every rock, look at every document, and may want to talk to key employees and customers. The goal for the buyers is to really understand what it is buying and to identify any material risks or concerns.
During the due diligence phase, the parties will negotiate a comprehensive purchase agreement and any related transaction agreements. The purchase agreement will ultimately replace the LOI as the key document for the deal and, unlike the LOI, the purchase agreement (once signed) will be binding on the parties. This stage involves a great deal of work and will require a lot of your attention. It can be a grind, and about a quarter of the time, and Garth has to remind some of his clients from time to time to “keep your eye on the prize.” Deal fatigue is common at this point.
Ultimately, if everything goes according to plan, the purchase agreement and other ancillary agreements are signed, the deal gets closed and you’re off and running.
The most important takeaway
In speaking with Garth, the key to a successful and less stressful M&A deal is to find qualified and experienced advisors (especially legal and accounting) and assemble your internal team from management. Make sure your outside advisors have meaningful experience working on M&A transactions. “You don’t go to a general practitioner for brain surgery,” stressed Garth. “If you don’t use someone who really knows the process and what is ‘market’ in terms of what goes into the deal documentation, you run the risk of agreeing to terms that you shouldn’t have and you may leave money on the table.”
The M&A conversation means something for all of us, whether you’re contemplating a sale or not.
By the way, PlanetOne is not for sale.
PlanetOne is the IT channel and telecom industry’s preferred business partner for identifying and delivering cloud-based and connectivity solutions to small and midsize businesses and enterprises. To learn more, visit www.planetone.net. Follow us on Facebook, Twitter, LinkedIn, and YouTube.
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