Building a team of trusted advisors is an essential first step in a successful sale process. We look at the role of different advisors and how each is involved in helping with an ownership transition in the solid waste industry.
All owners and CEOs in the solid waste industry understand the importance of building a strong team. To successfully grow a business, you need to surround yourself with people whom you can trust and who have the specific skills and experience necessary to execute on your business initiatives; from hiring and training to sales and route optimization, each position is important to seamless execution.
This team dynamic also applies when it comes to selling a business. As we have described in previous articles for Waste Advantage Magazine, there are various decisions involved in a sale process. Building a team of trusted advisors is the first—and one of the most important—steps in this process. This month’s article will identify the different players who make up the seller’s team of advisors in a typical sale process in the solid waste industry and describe the roles that each advisor plays.
Assemble the Roster Before Opening Day
Business owners should begin putting together their team of advisors well before a sale process actually starts. You want to give yourself plenty of time to meet with different advisors to settle on the team with the right experience, that understands your business and objectives, and that you trust and want to work with; take your time and feel comfortable with the decision. Getting the right investment banking team in place can be an appropriate first step, and this group will be able to make recommendations to help round out your broader deal team, as necessary.
Positions and Roles on the Team
No two sale processes are alike, and the number of specialists involved may go up or down depending on the nature of the seller’s business model and the complexity of the transaction. The following list, however, provides a good starting point for understanding the core members of the team and each advisor’s role for a typical transaction in the solid waste industry.
The investment banker serves as the “quarterback” of the deal team. This team of individuals will oversee all aspects of the transaction, including determining an initial valuation range, positioning the company in a way that is most attractive to potential partners, leveraging relationships in reaching out to the most likely strategic and private equity acquirers, and leading the preliminary and final negotiations. Much of this will hold true in the context of a capital raise (either debt or equity) and is not limited by the decision to sell your business. Investment bankers typically coordinate the efforts of the other advisors who make up the deal team. One of the most important roles for an investment banker is providing guidance and advice to business owners throughout the sale process. Bankers are generally the only advisors who remain involved in every aspect of the transaction and are therefore uniquely positioned to help the owner understand how all of the specific steps and pieces of the process fit together.
Most companies will have trusted outside legal counsel or an in-house general counsel, and that individual may play an important role in the transaction. However, it is important to have outside corporate transaction counsel, as well. An attorney who has extensive experience serving as counsel on mergers and acquisitions and other corporate transactions will be an extremely important part of the advisory team; this attorney will have a skill set that is specific to M&A advisory. Attorneys are most deeply involved once the transaction begins to take shape, with the buyer and seller acknowledging a range of values and the buyer starting the diligence process. Drafting the purchase agreement is an important work stream for the seller’s attorney to complete. That is followed by negotiating with the buyer’s attorney about legal details in the agreement and managing the legal-related work streams that arise as the transaction reaches signing and closing. Depending on the nature of the transaction, the seller may also want to engage an attorney who specializes in employment counsel. This can be particularly important when the seller’s management team and other key employees remain with the business after the acquisition. An experienced employment attorney will understand the standard practices in the industry and negotiate fairly on your behalf on issues related to employment contracts, non-compete and non-solicitation agreements, bonus compensation and requirements, and equity ownership and option programs.
Traditionally, accountants have played a vital role in the transaction process by providing audits of financial information and specific tax advice. Detailed knowledge of the tax attributes that come from the transaction and thoughtful structuring can have a significant impact on the dollars that accrue to the owners. In addition, accounting firms today also are often asked to prepare a quality of earnings report, which is a detailed review and assessment of the selling company’s historical financial statements. This report is generally used to give an independent view of the historical earnings (defined as adjusted EBITDA—earnings before interest, taxes, depreciation, and amortization) of the business. A quality of earnings report will be performed by all private equity acquirers and is increasingly common for strategic acquirers, as well. A seller preparing the report benefits from advantages of confidence and speed. Confidence comes from the knowledge that there is limited opportunity for materially differing viewpoints on adjusted EBITDA (the metric that will drive valuation). The conclusion of one independent third party will likely mirror that of another. Speed comes from having a detailed roadmap for the acquiring company’s quality of earnings provider to follow; in fact we suggest that the CFO prepare a separate folder with all of the information that was used to complete the report so that it can be quickly provided to potential buyers. In our experience, this can save several weeks of diligence, therefore reducing risk to the seller.
Environmental exposure can be a critical issue during a sale process in the solid waste industry. Many sellers choose to address these questions proactively by hiring an environmental lawyer or consultant to analyze any potential environmental liability and provide a report detailing any areas of potential exposure, or lack thereof. All buyers will complete an environmental assessment as part of their diligence process. Identifying areas of potential exposure in advance of work that a buyer will complete gives the seller a period to remedy any potential liability. Environmental reports are not a one-size-fits-all proposition for solid waste companies. Businesses with different service offerings could have exposure to different types of environmental liability. For example, a hauling business that does not own or operate a landfill or transfer station would not be open to RCRA Subtitle D exposure.
Increasingly common in the M&A process is the use of representations-and-warranty insurance policies as low-cost tools to maximize the seller’s proceeds at close and to reduce the buyer’s risk. A rep-and-warranty policy transfers the financial liability of a breach of reps or warranties from the selling shareholders to an insurance carrier. The use of this insurance product has been popular in Europe for many years and is increasingly popular in the U.S.
A rep-and-warranty policy provides coverage to the seller of a business for indemnification claims against the seller for the breach of any reps or warranties in a purchase agreement. Sellers benefit from a rep-and-warranty policy because it maximizes the amount of upfront proceeds received upon closing a transaction. Buyers benefit from a rep-and-warranty policy because it gives them a strategic advantage in competitive negotiation. Buyers also like the policies because, in the case of a breach, the buyer has recourse to a large institution rather than an independent seller. The cost of the policy is modest, generally between 3 and 4 percent of the coverage amount, with coverage generally in a range of 10 to 20 percent of the purchase price.
A business owner, his or her family, and/or associated investors and executives are engaging in what may be the largest financial transaction in their lives. Thoughtful pre-liquidity planning can save capital gains and estate taxes while working to maximize earnings from the new liquidity. A thoughtful approach may help to recreate income, organize investments, and manage personal financial matters such as philanthropic endeavors, gifting to the next generation or future business investment opportunities. A financial planner will work with the broader team to understand the various potential aspects of the transaction (e.g., cash, stock, earn-outs and carry), coordinate asset structuring and provide a personalized plan to maximize the financial benefit.
The Owner’s Most Important Role on the Team
The last—but certainly not least—member of the deal team who needs to be discussed is the business owner. In addition to articulating his or her priorities for the outcome of the transaction, the owner’s most important role during the sale process is to continue running the company and maintaining the focus of the broader management team.
Selling a business will require time and attention from the business owner, but managing the company needs to remain the owner’s top priority throughout the process. This is why having an experienced team of advisors whom you trust is so critical. The advisors—particularly the investment bankers—will manage the day-to-day logistics and operations of the sale process, so you can stay focused on managing the business. Remember, selling a company is a major undertaking, but your advisors do this for a living and they are here to help.
Bradford Page is a member of William Blair & Company’s (Chicago, IL) investment banking team and is the head of the 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. Bradford can be reached at (312) 364-8969 or via e-mail at firstname.lastname@example.org.