Part VI – Management Meeting, Deeper Dives, and Letters of Intent
In our last discussion, we had narrowed down the pool of buyer targets and have decided to go forward with four to six potential acquirers that have provided indications of interest to you and your M&A advisor.
Now it is time to dig in, get to know the buyers, and pick one to go forward with.
Indications of Interest are Only an Indication
The key to remember at this stage is that buyers take various approaches in the amount of work they put into submitting an indication of interest, so prepare to be disappointed when one or more of them aren’t as serious as they first appeared.
While it is unfortunate, many buyers (particularly among Private Equity firms) take a fairly cavalier approach at indications of interest. Often, firms will submit IOIs without really giving the potential opportunity much thought and, therefore, shortly after getting started with this stage of the process, you’ll find one or more of your targets fall away without any obvious reason. Alternatively, the firm may have submitted multiple IOIs on varying deals and simply doesn’t have the bandwidth to continue at a more detailed level.
I advise my clients that, realistically, they should expect a third of the buyers that submitted IOIs to lose interest when asked to participate in more detailed discussions.
At this stage, I typically arrange for my client to meet with our four to six potential acquirers over the course of a week, with one or two meetings per day. Typically, buyers will bring several people to these meetings, and the meetings will last three to four hours. Don’t be surprised to see potential buyers bring investment professionals, operations people, and even lenders and other capital providers to these meetings.
While some sellers will make canned presentations at these meetings, I find that it is more useful to spend the time getting to know one another and letting the buyer ask questions. At this stage, these buyers have seen and studied the marketing package we provided earlier and have likely had at least one discussion with the ownership group as well as several detailed discussions with me. Consequently, the buyer should have a fairly good understanding of the potential opportunity and a canned presentation isn’t necessary.
Most buyers will focus on the issues that are core to them at this stage. Most often, the meetings center around the ownership group’s plans (for themselves and their business), the key risks inherent in the business, and the opportunities for the growth of the business. Also, the company’s sustainability will ultimately be a key issue, so the buyers will want to know about the depth, strengths, and weaknesses of the management team.
Inevitably, the management meetings will result in the target buyers having a series of questions that they will need answered in order to fully analyze the value of the company and to prepare a thoughtful letter of intent. Since it is best for everyone to remove as many risks at this stage of the process, I usually expect that buyers will ask for one to two weeks downstream of the management meetings to get additional information from the company, do their own further background research, and ultimately prepare a letter of intent.
It is usually in your best interest to grant this additional time and to provide whatever reasonable information the buyers are looking for. It is crucial to eliminate as much obvious risk at this stage as possible so that the rest of the transaction can go smoothly.
Letters of Intent
Eventually, the moment of truth will come and your advisor will ask the potential buyers to provide formal letters of intent (“LOIs”).
While letters of intent can take many forms, it is important to understand what they are and what they aren’t.
Most importantly, LOIs are generally not binding on the buyer. Typically, the only binding part of the LOI is that you will be agreeing to a period of time where the buyer has the exclusive right to work with you on a potential transaction, and that you will not seek other offers during that period. This exclusive period typically ranges from 60 to 180 days, depending on the perceived complexity of the transaction.
The reason for the exclusivity is that at this stage, the buyer will start spending significant amounts of time and resources to complete the transaction. It is not uncommon for buyers to spend hundreds of thousands of dollars getting a lower middle market deal across the finish line. The buyer you select will likely not want to proceed unless you are giving him an exclusive opportunity to work with you. This does not mean that you cannot terminate the transaction, but most LOIs require a formal termination of the document.
The rest of the letter of intent will contain an outline of the business terms (and some of the legal terms) of the deal. While it is good practice to be clear on the terms included, most of the time the parties are working with limited information about each other at this stage. Consequently, it is not surprising to have terms get added, subtracted, or changed over the course of the transaction.
With the execution of a letter of intent, you have gotten engaged, and it is time to start planning for the wedding.
At this stage, you will be getting significantly involved in the process, and the burden will start to shift from your M&A advisor to you. While your advisor can help you narrow down the potential buyers, you’ll have to decide on the pros and cons of each of your potential suitors. The engagement starts with the LOI, and like with true marriages, engagements can be broken off but usually not without hard feelings.
Next Month: Part VII – Due Diligence
Michael Schwerdtfeger is a managing director at Chapman Associates. Michael and his team are focused on providing exceptional results through sell-side mergers and acquisitions advisement to entrepreneurs and business owners exclusively. Michael leverages his 20 years of diverse experience handling complex business transactions to help guide his middle-market clients to the best possible deal outcomes.