A critical function of a sell-side advisor during an M&A transaction is the creation of a comprehensive buyer list. During the screening process of potential buyers, your M&A advisor must be thorough in their analysis of both potential strategic and financial buyers. This detailed analysis can heavily contribute towards the success of a sell-side M&A engagement. Several factors are examined when developing a buyer list including but not limited to the financial capacity of an acquiring firm, potential synergies, and current market share.

If the list of potential buyers isn’t well-researched, there’s a risk that the “right” buyer may miss the opportunity to bid on the company. This could be an expensive mistake for the seller.

It is crucial that the sell-side advisor understand the potential buyers and what might motivate them. Having a thorough understanding of their strategies, operations, and financial stability is essential in marketing the business for sale. Your M&A advisor must help potential buyers understand how synergies can be realized through the acquisition of a client’s firm. This is an important step as it will help the potential buyer to truly understand the value of the business for sale.

Boutique investment banks with a global reach are capable of developing a comprehensive worldwide prospective buyer list. A list that is not limited by geographies, language, or customs will allow the best possible acquirer to be discovered so that the best value and terms can be derived for the seller. M&A experience is equally important as investment banks with decades of transaction experience will be more capable of helping potential buyers understand the synergies that can be realized through acquisition, are better equipped to deal with buyers from around the world, structure the transaction, and know how to manage the process to a successful conclusion.

In M&A transactions, an escrow or a holdback is used to insure that certain conditions are met by the seller before an agreed amount of funds is released to the seller. If an escrow is used, an escrow agent, a third party, holds the funds until receiving instructions that certain obligations have been met and the funds can be released. Most of the time, the escrow agent is a large reputable bank that offers that service.

Despite the fact that the use of an escrow is very common in M&A transactions, the terms of such accounts can vary greatly. The average escrow amount usually ranges between 10 and 20 percent of the purchase price and the period that the funds are held ranges, on average, from 12 to 24 months from the date the deal is closed. Sometimes, in particular situations, both the amount and the time period are dramatically increased.

Escrows are held for some period of time to protect the buyers of a business against any unforeseen financial losses after the closing. Buyers are usually worried that undisclosed liabilities will appear after closing. Typically, the funds are released to the seller at pre-agreed times, sometimes as early as six months after closing. It would be highly unusual for the whole amount to be released after such a short period of time; however, buyer and seller frequently agree to release portions of the escrow after six or twelve months. The funds are only released if all of the agreed obligations are fulfilled.

The alternative to an escrow is a holdback. That’s where the buyer just holds back a certain percentage of the transaction consideration. The biggest risk to a holdback is if the buyer goes bankrupt or somehow can’t pay the holdback. While this is very unusual, it’s why many sellers prefer the safety of an escrow.

Escrows can reduce a seller’s risk of not being paid as the funds are held with a neutral third party and can only be released in accordance with the escrow agreement. Buyers do not expect to have escrow funds returned to them; however, if unknown liabilities appear after closing, the escrow protects them as the funds are there and available.

It should be clear that, provided the conditions are met, any funds in an escrow account are for the seller and most times will even earn interest. The funds are only returned to the buyer if unknown liabilities appear or if the seller doesn’t live up to certain pre-agreed conditions as outlined in the Purchase and Sale Agreement.

The decision to sell your business is one of the most difficult decisions a person will ever make. It is not only a major financial decision, but a personal decision as well. Each instance is unique and the selling of a business requires attention to detail on many issues, some of them complex.

 
There are several reasons why it may be time to consider selling.

• If it’s difficult to raise the capital needed to grow the business or you believe it is too risky to do so.

• If too much of your net worth is “locked” in your company, you may feel it is time to diversify this wealth.

• If you are nearing retirement or are experiencing health problems, you may want to find a new owner or partner to continue your legacy with your employees, customers, etc.

• If you want to pursue a new business or hobby, you may want to “unlock” the value of your company and be compensated for all the hard work and time you have put into it.

Versailles Group’s eBook, “When to Sell Your Business” has a more detailed look at these issues. It can be downloaded from our website.

After deciding that you may want to sell and have determined that it is a good time to do so, there are some important items to address: (i) What is the expected value of the company? It is important to have a realistic expectation of what a buyer will pay and always be mindful of the fact that this is an important decision for the buyer as well. (ii) How are you going to engage the right buyers and get them interested in your company? The best way to do this is through a broad based approach that searches for potential buyers around the world. The best buyer for your company may not always be the obvious one or one in your country or even on your continent.

M&A experts can help you address these and the myriad of other issues that come up when selling a business. Selling your company is an important process and it should be done professionally in order to maximize the value and terms. It is also important to have proper legal and accounting representation.

As one can see from the chart below, global M&A, as we’ve reported before, is flying high!

M&A activity for the 11 months ended November 2014 is at a record high since 2011 as buyers and sellers are coming together at a very rapid pace. Our belief is that many companies and entrepreneurs want to get deals done before interest rates increase, there is a change in US President, or there is another economic or political crisis. Many people remember the depths of the Great Recession and are taking the necessary steps to ensure their companies and personal net worth are better protected from any future economic downturns.
Buyers are strengthening their companies and sellers are paying off debt, diversifying, and in some cases retiring. What are you doing to increase or protect your shareholder value?