Volume 7 Issue 2, January 21, 2020
We're in that time of the year when business owners see their year-end financials and begin to make decisions for the upcoming year(s). Oftentimes, the succession planning you had in mind when you started the company, such as passing the torch to a family member, doesn't look as promising as you had hoped (if you even planned that far ahead). If succession planning isn't an option for you, there's one that almost certainly is: selling your company.
When I was contemplating the future of the provider agency I co-owned with my husband, I remember being told that we could sell the company. Not only that, but someone would actually pay us for it. I recall being stunned. This company that we started purely out of passion had become a company that had value to others. That was a big surprise.
We decided to sell — a decision that was based on the changing landscapes and desire for a larger organization to take our company to the next level. Others choose to sell because they are ready to retire, want to move into another line of business, or are looking to sell part of the company for a cash infusion and added expertise. If you're in a position to make the decision to sell now, or are planning well ahead (good for you!), below is an outline of what the process looks like when I, as a merger and acquisition (M+A) advisor, help clients sell their companies. I've also included some tips to help you make the sale process as streamlined as possible.
When I have my initial meeting after partnering with a new seller, the first conversation is a deep dive into the organization, its culture, and the owner's vision for the future. To create a complete confidential information memorandum (CIM), which is a marketing packet of your company, and help me effectively represent you to perspective buyers, I must know everything about your company — all the operational and financial details. That includes the good, the bad, and the ugly.
This is imperative for two reasons. First, it helps weed out the wrong buyers early and prevent the deal from hitting speed bumps ahead. Buyers are often looking for specific qualifiers for the company they want to acquire, and some are more risk aversive than others. You, as a seller, likely have a specific idea for the future owner. This information helps me to identify the buyers with the best fit for you. Second, when armed with insight into your company, I can address any matters early in the process. These can include issues you may have encountered operationally or financially; your personal plan after closing (staying on or a quick exit); and your vision of the future of the organization. The buyer wants to know up front if there are challenges that they may inherit. By getting in front of the discussion, this will reduce the likelihood of unwanted surprises in the future.
By collecting operational and financial information in advance of going to market, we can present a complete picture from the beginning, allowing prospective buyers to understand the opportunity right out of the gate.
Once the informational "blind teaser" about your company goes out to multiple buyers we identified in your industry vertical, and we receive requests for information from interested buyers, there will be a screening process to help narrow down those who are most qualified, both culturally and professionally. The market is full of strategic buyers, which are those companies that already provide the same or similar services as your company and want to grow by acquisition.
There are also private equity investors, which vary greatly, both culturally and professionally. Today's private equity field includes small family offices; large, multi-platform holders; and professional development investors. Each of these groups brings a different opportunity that can vary by the needs of the provider.
Once I have contact with and identified qualified buyers, calls are arranged for the seller and buyer to connect and exchange information. This call is not only for the buyer to learn if this is a desirable target, but also to ensure the seller feels comfortable with the buyer. Oftentimes there are multiple calls before an offer is made. These calls ensure that both parties have background knowledge and clear insight into the potential opportunities for both parties that would result from a transaction.
Once a level of comfort between buyer and seller is established, and some additional information is often shared, the prospective buyer(s) will submit a letter of intent (LOI). There are often several LOIs submitted for you to choose from.
Based on your priorities, and usually the weighing of an offer price, offer structure, and cultural fit, a buyer is selected. The offer structure can be confusing since a stock purchase may impact the seller differently than an asset purchase. Furthermore, some offers may include retained equity or a future earn-out that would greatly impact the final purchase price and your future with the company. In collaboration with a strong M+A lawyer, I help translate the language in the LOI to help you compare multiple offers and ensure you choose the best fit.
After you have weighed the options and chosen the buyer with whom you are most comfortable, the LOI is signed. Although the LOI is non-binding, it often contains language that prohibits entertaining further offers while under agreement. Now the due diligence process begins. This is the time when the buyer wants to review everything that has happened in your organization. The first step in the due diligence process is usually a review of a quality of earnings report or a verification of the financials presented at the initial review. The entire due diligence process is very daunting since it requires an extensive list of information that includes financial and legal details, staffing patterns, policies and procedures, quality assurance, and site review results. It is often helpful for sellers to pull one or two highly trusted team members in to help handle the gathering of information, specifically in areas of finance and human resources. An organized, electronic file system can also help ensure ease of use for both the buyer and seller while maintaining a secure method of exchanging information.
The due diligence process will also include an on-site review by the buyer. This is an in-person process to help review information that is more difficult to share through documentation, such as an intake process or billing practices. This process is conducted before most sellers have disclosed the transaction to their staff, so meetings are often conducted off-site or under other pretenses.
It is during the due diligence process where deals are most likely to fail because buyers can discover information that either was not disclosed or was improperly reported (such as exaggerated projected revenue or improper billing practices). That's why it's vital to disclose all of your information to your advisor, who will ensure the information is shared constructively and will offer explanation for any potential red flags early in the process.
During the due diligence process, a purchase agreement (PA) is drafted and shared. The PA is the legal document that will become the backbone of the transaction. It outlines the terms, purchase price, and reps and warranties (defined as "the assertions that a buyer and/or seller makes in a purchase and sale agreement"). You and the buyer are relying upon each other to provide a true account of all information and supporting documents to close the transaction. The reps and warranties outline these requirements.
This is the stage where it becomes imperative to have an M+A lawyer who understands the important points of a PA. A good attorney will help identify what items are standard and what points are most important to argue for the seller.
Similarly, this is the time when I, as the M+A advisor, negotiate with the buyer's lawyer(s) and help maintain a positive relationship between you and the buyer by buffering some of the stress that naturally develops over the course of a transaction.
When all lawyers have agreed on the PA, you and the buyer agree, and the due diligence has concluded positively (meaning the buyer believes it has enough information to feel confident about the purchase), then there are two ways that the closing can happen: all at once or as a "sign-then-close." Particularly when an organization is dependent on state contracts or a knowledgeable workforce, a buyer may require the latter: signing the PA, but "closing" or paying for the deal 30 or 60 days later. Some states require a delay in closing so that they can approve the transaction. This is a common structure in healthcare to ensure that buyers are able to ensure a smooth transition.
A big question you will need to answer: When do you tell your staff of the changes that will occur with your company? The approach taken varies greatly by seller. It is often heavily dependent upon the culture a seller has with its team.
I usually suggest waiting to tell anyone else on your team until you see the PA draft. There are so many places before this moment that the deal can fall through. There is no value in involving more people on this potential rollercoaster. Wait until you are confident that the deal will likely proceed. Even then, I advise sellers to only tell those key staff members who are trusted and can help with the on-site and data collection. Once you have an agreed upon PA, you should begin to discuss the transition plan with the buyer to ensure a smooth integration. This includes messaging on how things will change (for the better, of course).
When the PA is signed, funds are released, and integration is proceeding, it's a good time to start embracing your new role in the company, which is no longer as owner. This can often be a difficult transition since the role has been clear for you in the past. For some sellers, it's difficult to watch someone else run the company they created. Others embrace the renewed opportunity to build while someone else bears the burden of ownership.
When you begin the process of selling the company, think about the role you envision for yourself, specifically how long you want to be involved in the company with someone else in charge. This might determine if you take an employment contract with the new owners or exit quicker.
There are different ways that the sale process can proceed, but, in my experience, the majority are similar to what is described here. With smaller, highly organized companies, this transaction can sometimes take 90 days, while larger more complex organizations can take up to a year or even longer.
There is no hard and fast rule to how long a sale must take. If you have the right professional representation, are honest about your business and its situation, and are willing to maintain flexibility, this process will usually run smoothly and efficiently. You spent years carefully building your company into the impressive service provider it is today, undoubtedly impacting the lives of many people along the way. Taking the same vigilant approach to the next step of your company will help ensure it continues to positively affect lives for many more years to come.
As Co-Founder of LifeShare, a multi-state human services and healthcare organization, Rachel has a unique background of over 20 years of successful operational and executive experience, in addition to an MBA in Healthcare Management. She began her professional life as a home care provider, an experience that created the foundation for the innovative quality and success of LifeShare, while also changing her life. At LifeShare, she managed their Operations (Adult Day/Residential; Child Therapeutic Foster Care; HCBS; Child Therapeutic Day/Diversion Services, and Educational Programming), Finance, HR and Quality Assurance (facilitating COA accreditation and policy/procedure implementation). After selling LifeShare to Centene, Rachel remained during the transition of management and helped to provide outcome measurements and COA compliance reporting. At VERTESS she is a Managing Director providing M+A advisor and consultant services, specifically in the I/DD, behavioral health and related healthcare markets, where systems are rapidly evolving, and providers are striving to adapt strategically to diverse challenges.