With waste and recycling company owners facing increased opportunities to sell their businesses, we outline the steps involved in a successful transaction process.
Brad Page
Over the past several months in this series, we have explored several of the most important considerations that go into selling a company in the waste and recycling industry. In the October issue, we described the different advisors and other players that make up a successful “deal team.” Previously, we examined how valuations are determined for mergers and acquisitions of waste and recycling companies and provided tips for positioning a company for a successful transaction.
This month we are going to describe a standard sale process, with the goal of both maximizing value and finding the appropriate buyer. Nonstandard situations will have some similarities with the process described below but also some key differences, which will not be addressed in this column. While selling a company certainly is an important decision that involves many different considerations, the process itself is more straightforward than it may initially seem. To help explain the key framework, we outline the different steps of the transaction process and the decisions that are made at each stage.
#1: Motivation: Deciding Whether to Pursue a Sale
The most important decision in the entire sale process actually occurs well before any potential buyers are contacted, marketing materials are prepared or nondisclosure agreements are signed. Before any of those things can happen, the owner of the company has to decide whether he or she wants to sell the business.
There are many different motivations for exploring a sale, and these motivations vary depending on who the owner is and where the company is in its lifecycle. For family-owned or closely held private companies, the motivation for a sale could be the impending retirement of the principal owner or the family’s desire to generate liquidity to achieve some estate-planning goals. For companies that are owned by private equity firms, the driver could be that the financial sponsor is near the end of its desired holding period for the company.
Regardless of the ownership structure, sometimes external events serve as the catalyst for pursuing a sale. It could be that the owner unexpectedly received a compelling offer from a potential buyer. Other times the catalyst results from winning a new major client, which will require a major infusion of new capital, or losing a client, which changes the outlook for the business.
#2: Preparation: Gathering Information for Potential Buyers
Solid preparation is essential to a successful transaction. One of the most common mistakes that companies make is to rush into a sale process without being prepared to answer the difficult questions that a buyer may ask. While getting the transaction done quickly is important, it is better to invest the time on the front end to make sure the company is properly prepared before initiating the outbound portion of the sale process. Remember, the owner controls the timing of the process until that first contact is made. From that point on, it will be important to have a well structure process with a firm timeline to ensure the best competitive dynamic.
Most companies considering a sale will hire an investment banker or other third-party advisors to provide guidance on how to prepare for the sale. Investment bankers will help identify key diligence focus areas and lead the efforts to aggregate and prepare the information. Three important steps in this preparation typically include developing a financial model, creating a confidential information memorandum (CIM) and building a data room. The financial model will detail both past and future financial performance in a metrics-based format that is easy to follow. The CIM will include information about the company’s key highlights, growth strategy, operations, and management team. The data room is an online repository for company information that potential buyers will review during the due diligence phase. Completing this work up front and aggregating this information early is beneficial and helps ensure a smooth and efficient outcome. Additional steps are generally appropriate and will vary by company. The preparation stage usually requires four to eight weeks to complete.
#3: Marketing: Contacting Potential Buyers
Once the financial models, CIM, and data room have been prepared, the focus shifts to reaching out to potential buyers and gauging their interest. As preliminary interest is confirmed, nondisclosure agreements will be put in place and the CIM will be sent to potential buyers. Nondisclosure agreements ensure confidentiality that a potential sale process is underway and that information about the company’s financial performance, products, services, customers and other sensitive or proprietary information is kept private.
Investment bankers will field preliminary diligence questions from potential buyers and help clarify information in the CIM. After reviewing this information, potential buyers who are interested in exploring the opportunity further will submit an indication of interest (IOI). The IOI is a nonbinding document that will provide a range of values that the potential buyer would ascribe to the company and explain any assumptions that were used in arriving at that range. The IOI will also outline a proposed structure for the transaction and a plan for the ensuing due diligence.
#4: Due Diligence: Meeting Potential Buyers and Offering Details About the Business
After reviewing the IOIs submitted by interested buyers, the owner will work with third-party advisors to narrow that list to a group of the most attractive potential partners. These buyers will be invited to begin their due diligence.
Two early steps in the due diligence process include management meetings and reviewing the data room. Management meetings are a chance for each potential buyer to hear a detailed overview of the business from the company’s senior management team. During management meetings, key executives will provide a detailed overview of the company and answer questions from potential buyers in an interactive setting. There likely will be follow-up meetings involving the management team and outside advisors as due diligence progresses. The data room, described previously, enables potential buyers to review information related to the company’s legal, financial and operational background. Information in the data room may include historical and projected financial detail, customer and supplier information, human resources detail, and information about the sales history and pipeline.
#5: Best and Final: Identifying the Best Partner
Once they have completed their due diligence, potential buyers will submit their “best and final” offer letters. Unlike the IOI letters, the best and final letter will state a specific dollar amount that the buyer is willing the pay for the target company. The letter will also provide detail on working capital, evidence of financing commitments (if applicable), and compensation and employment information for the management team. Substantially, all diligence will be completed prior to submitting the best and final offer; there will, however, be some final negotiation on price and terms. Once that is completed, the seller will be in a position to choose the partner who provides the best fit and alignment for future goals.
While price certainly is a major part of this decision, it is only one of many potential considerations. Other factors that often are important to sellers include the timing of the deal closure, finding a buyer who is a good fit culturally, the opportunity to participate in the continued growth of the company via rollover equity contribution, certainty of financing and closing.
#6: Signing and Closing: Making It Official
Once final terms have been reached and a purchase agreement has been signed, it becomes a legally binding contract for both parties. After a purchase agreement has been signed, there is typically a period of between 15 and 30 days until the funds transfer. During that period, Hart-Scott-Rodino notifications with the Department of Justice and Federal Trade Commission to comply with antitrust provisions must be filed, and the buyer will complete any financing arrangements that are required.
While the signing and closing mark the last official step in the sale process, the selling owner still faces some very important decisions about how to use the funds generated by the sale. We recommend that the owner begin working with a trusted financial advisor prior to the start of a sale process to consider how the proceeds can be used to accomplish the owner’s retirement, estate planning and philanthropic goals in a tax-efficient manner.
Time and Attention
Selling a company is an important decision, but the process of achieving a successful outcome does not need to be daunting. A sale will require added time and attention from company management, but it is important to remember that you will not be going through these steps alone. At each stage, your team of advisors will be guiding you through the decisions and doing much of the heavy lifting in terms of gathering and analyzing the information.
Brad Page is a member of William Blair’s (Wilmington, DE) investment banking team and is the head of its environmental and industrial services practice. William Blair works closely with public companies, private companies, business owners, and private equity investors on transactions related to M&A, equity capital, and debt capital. Brad can be reached at (312) 364-8969 or e-mail [email protected].