Prepared sellers make the deal process much easier, says Edward Chan, a principal at 1315 Capital.
When buyers consider where a company would fit in its portfolio — as a standalone investment, a platform, a bolt-on acquisition — having the value proposition laid out clearly makes the acquirer or investor’s life easier. In that sense, preparing your company for a sale is at least in part about considering the people on the other side of the deal table.
“If you're trying to maximize value, understand the value proposition to the buyer,” Chan says. “Be succinct about it and have a two-minute elevator pitch so you can get the point across and understand how it fits in our portfolio.”
As a seller, having an end in mind is important. But there’s also value in having flexibility — both in how you achieve the end you have in mind and how you prepare for it.
“In some ways, the conversation’s a lot easier if an owner-operator says, ‘I expect X million dollars in my pocket, and I don't care how we get there — I'm not going to do this unless I get that.’ That can be a very easy conversation because we just walk away,” Chan says. “To some degree, it’s better when they're like, ‘We're open to rolling over equity, we’re open to a seller note, we're open to a tranche deal or an earn-out,’ then we can play with that. Then we can get creative.”
At the Dealmakers Conference earlier this year in Philadelphia, Chan talked deal prep — who to hire, when not to hire, how to prepare and how not to prepare.
How professionals affect value
Who you hire — or don’t hire — to prepare for a transaction is a critical decision. There are cases when a seller hires a professional who is too inexperienced to handle the process, which can create headaches, animosity and deal fatigue and potentially sacrifice value for the seller.
“If the buyer is ultimately trying to maximize value and have no part of the business afterward — I'm going to sell this, I'm out of here — hire a banker who has good relationships, understands your business and can run a process because you want other buyers in there who are interested to really get the value up.”
Bankers, he says, are always looking for deal flow and are often willing to have conversations about the process and next steps. There's no harm in talking to them — and you should talk to a lot of them. Then get references to make sure you're choosing the right person from that firm’s team, that they actually have relationships with buyers, that they’re respected in the industry and have run processes before.
However, sellers who want to retain a big equity chunk in the parent company post-transaction should take a different tact.
“You might not need an adviser,” Chan says. “You actually just might need good counsel. If your plan is ultimately to roll over a lot of equity, you're only going to sell to this particular person because of the synergies, because you believe in the ultimate vision of the combined entity, then there's no reason to shop it around. Maybe hire an adviser to keep him honest, but frankly, in those situations, we've seen a transaction attorney being enough for that.”
Interestingly, from Chan’s perspective, there can be such a thing as being too prepared for a deal.
“We've been in situations where, put it this way, if everything is lined up ready to go in the diligence, in the data room, to some degree it's almost — I don’t want to say a red flag — but we’re like, wait a second, they are so prepped and ready to sell, who else is bidding on this? And maybe this is pre-LOI stage, but they are really ramped up and they're just trying to get every penny out of there.”
While he says 1315 is willing to pay up for certain deals, when everything is ready to go, it’s almost too perfect. Still, he’d rather have some suspicion because a seller is overprepared than have a deal stumble because the seller’s team is underprepared or too new to the process to be effective.
“I think there's an 80/20 rule, where it's kind of like, spend a good amount of time to get it ready, but until you know what the investors are really hung up on, you don't need to spend your time chasing every angle.”