How Do I Sell My Company – NDAs

How Do I Sell My Company – NDAs

Many people ask us, how do I sell my company? There are many critical steps in that process; however, perhaps the most important one is a good Non-Disclosure Agreement. Most companies have Non-Disclosure Agreements or NDAs in order to share information with potential suppliers or other “partners.” However, most do not have a good M&A NDA. M&A NDAs are more specialized and cover some important items.

Before we explore what should be included in a good M&A NDA, it’s important to understand why this document is needed. The simple answer is obvious; the Company doesn’t want their data used for anything other than the exploration of a possible transaction. The less obvious reason is that the NDA is also for the benefit of the ultimate buyer. At the end of the day, the acquirer will have to face competitors and other buyers that just had a very detailed and in-depth look into the company being sold.

A good M&A NDA should cover the simple fact that none of the information revealed in the M&A process can be used for any purpose other than evaluating a potential transaction. It should also restrict the buyer from talking with customers, suppliers, employees, etc. Another important function of the NDA is to prevent potential buyers from hiring any of the employees, particularly the executives. This document should also prohibit the buyer from discussing the transaction with anyone other than the company’s advisors. It should be clear that any data shared with these other individuals is the responsibility of the buyer.

Some M&A NDAs also cover things like reps and warranties surrounding the preliminary information that is conveyed. It may also specify that the seller will cover the cost of its M&A advisor and that the buyer’s costs of exploring the transaction will remain as its responsibility.

From a seller’s perspective, the NDA should provide a reasonable layer of comfort. From a buyer’s perspective, the NDA shouldn’t be so restrictive that they don’t want to even look at the company for sale. Many buyers that are afraid of liability problems will only look at non-confidential data before proceeding. This can be detrimental to the seller’s goal of generating the highest possible bid and the best terms.

As they say, “good fences make good neighbors.” Yet, it’s important for the document to have balance between buyer and seller. Experienced M&A advisors know what to look for in an NDA. It is important that all parties consult an attorney before executing an NDA.

With a proper M&A NDA, a seller will have taken an important step in answering the complex question of how do I sell my company - NDAs.

How To Sell A Company

How To Sell A Company

Many company owners wonder how to sell their company. It’s a good question and certainly every business owner thinks about this topic periodically. In our mind, it’s not only a question of how to sell their company; it’s how to sell it for the maximum value and best terms.

The actual process is not that complicated, but there are many pitfalls. Many owners think that they know who the most logical buyer will be when the time comes. But, they’re always disappointed later when that buyer isn’t interested or makes an impossibly low offer. The other major mistake that’s made is to share information without a Non-Disclosure Agreement.

Versailles Group has handled a number of engagements where the owners had started the process themselves and then realized the problematic nature of that. Most business owners don’t have the time to devote to developing the buyer list, creating the materials that need to be shown, or to deal with the demands of the buyers. However, what has been even more astounding is to learn that these normally careful business owners have shared sensitive company information without any protection.

When selling, the most important thing is to have a Non-Disclosure Agreement (“NDA”) with the buyer. It’s always best to have an M&A NDA, which is different than a standard agreement. While a standard agreement may protect the information, there are many other items that should be included.

Beyond the NDA, the seller should have a strong list of potential buyers. An experienced M&A advisor or investment bank will know how to assemble a list of this kind. A good list will go well beyond competitors and known companies in the seller’s market. Versailles Group has sold a number of businesses to buyers that would be well beyond the normal lists created by others. We view the world as our territory, and we look for buyers that may be slightly outside of our clients business. This creates additional demand and these “other” buyers frequently pay more because they need to access to the market, the products, the technology, etc.

A strong buyer is one of the key ingredients. The other is clear documentation that shows all of the USPs or Unique Selling Points of the company. An M&A advisor will know what buyers are looking for in this type of presentation and know when and how to convey it. This is an art that is developed over the course of many transactions and many years of experience.
Once the buyers have the appropriate information, and if there are multiple buyers, an auction can be created. This is a silent auction and totally confidential. It enables the seller to derive extra value or enhanced terms from the transaction. Offers are usually stated by the buyer in terms of a Letter of Intent.

Once the Letter of Intent is executed, the buyer will conduct thorough due diligence. A good M&A advisor will be able to help their client manage this process. At some point, the buyer will produce a Definitive Agreement. Sellers should pay close attention to the terms and conditions, particularly the representations and warranties. This is a critical document in the process. Versailles Group, as a result of its years of experience knows what should and should not be in a document of this type. It’s also important to know how to negotiate these documents. That’s critical!

Most transactions are a simultaneous sign and close and that will be the day that the consideration is conveyed to the seller. If done properly, it’s a happy day for both parties.
More information on how to sell a company can be obtained by contacting Versailles Group directly.

Why Hire An Investment Banker?

Why Hire An Investment Banker?

Entrepreneurs and CEOs are driven individuals with a passion for their businesses. They are go-getters that take the initiative in almost every aspect of their company. For these reasons it is no surprise that when it comes to M&A, many entrepreneurs and CEOs feel they can do it themselves. These individuals have successfully run their business for years or possibly even decades and may ask themselves “why hire an investment banker?”

While some entrepreneurs and CEOs are capable of completing M&A transactions, the majority of these business leaders are not. The result is that they tend to complete deals for less than maximum value or end up with a transaction with less than optimal terms. An investment banker plays a crucial role in achieving the most value in a transaction and best terms in ways that are not always apparent to entrepreneurs and CEOs.

Appearance of Neutrality

When attempting to sell to another company, especially a competitor in the same industry, entrepreneurs and CEOs face the challenge of presenting themselves as genuinely interested. Many buyers shy away from dealing directly with entrepreneurs, particularly in the lower middle market because they know that they simply don’t have the proper experience to complete a transaction. An experienced investment banker can provide the seller with the appropriate guidance on how to conduct an auction, respond to offers, cope with due diligence, negotiate the terms and conditions, etc.

Better Relationships Post Closing

When a company sale takes place and the entrepreneur or other owner-managers stay with the business, both the buyer and seller management teams must learn to work together as fellow employees. If these two parties have been negotiating fiercely with one another during the merger, relations post-closing will be strained. An investment banker negotiating on behalf of the seller can act as a shield between their client and the other party. By utilizing an investment banker, a party has greater leeway in terms of the negotiating tactics that can be used because post-closing the “blame” for the use of those tactics can be placed on the investment banker, not on the seller. This is one of the critical roles that an investment banker plays as the true measure of a successful transaction is frequently the smooth integration of management teams post-closing.
Objectivity

During the sales process, there are bound to be unexpected challenges that arise, particularly for the seller. In these instances, it is invaluable to have a resource that can provide an objective opinion on what is the best strategy to proceed. Entrepreneurs and CEOs that are closely tied to a business may, understandably, take “bumps” in the process personally. Having an experienced advisor in these situations can help to ease tensions, formulate a measured response even in difficult situations, and keep the transaction moving forward.

Thus, we have the answer to why hire an investment banker. The M&A advisor can assist in many ways that most entrepreneurs or CEOs can’t envision. Careful management of the M&A process by the investment banker will result in higher valuations, better terms, and support better relationships between the buyer and seller post-closing. Therefore, sellers should hire an experienced investment bank with many years of experience. Versailles Group, founded in 1987, has completed a large number of successful transactions for entrepreneurs and corporate managers worldwide.

Regulation A – Regulation A+

Regulation A – Regulation A+

This blog offers a brief summary of Regulation A and Regulation A+ offerings. Obviously, this is a very complex matter with a number of issues that would have to be addressed by the issuer with a FINRA-registered broker dealer coupled with a well-experienced securities attorney.

Historically, Regulation A or Reg A offerings have been utilized. In fact, from 2012 to 2014, only 26 Regulation A offerings were qualified by the SEC. Reg A offerings have not been popular because of (i) the offering costs, (ii) the burden of an SEC review, and (iii) the necessity of complying with the state blue sky laws in each state where an offering is conducted. The other issue with Regulation A offerings is that they were restricted to offerings of less than US$5 million.

Regulation A+ or Reg A+ was adopted to implement the rule-making mandate of Title IV of the Jumpstart Our Business Startups Act (commonly referred to as the JOBS Act), which was signed into law in April 2012. One of the major changes of Regulation A+ is that it now allows an issuer to offer and sell up to US$50 million of securities over a 12 month period in a public offering, without complying with the registration requirements of the Securities Act.

Regulation A+ provides for two tiers of offerings; Tier 1 offerings of up to US$20 million in any 12 month period and Tier 2 offerings for up to US$50 million in any 12 month period. Each Tier has its own unique offering requirements which should be discussed with a registered broker dealer, for example, Tier 2 offerings of Reg A+ introduces an investment limitation for non-accredited investors. This limitation does not allow these investors to purchase more than ten percent of the greater of the investor’s annual income or net worth.

Reg A+ limits the securities offered to equity securities, including warrants, debt securities convertible into or exchangeable into equity interests, including guarantees of such securities. There are also other limitations, for example, an issuer cannot be an existing SEC reporting company, a “blank check company,” etc.

Another unique feature of Regulation A+ offerings is that issuers have liability with regard to offers or sales made by means of an offering statement or oral communications that may include a material misleading statement or omission. This liability is not present in offerings made under Rule 506 of Regulation D. Disappointed investors in a Rule 506 offering cannot sue, under the federal securities laws, for negligent misrepresentation. In these cases, the investor must prove actual intent to defraud, or reckless indifference to the truth of the representations made in the offering.
Regulation A+ securities are subject to FINRA Rule 5110, which prohibits FINRA members and their associated persons from participating in any public offering of securities unless they comply with the filing and review requirements of the Rule.

Raising capital is an important tool for entrepreneurs to maintain the necessary funds to grow and expand their businesses. That being said, as a result of a number of frauds, the US Government, the SEC, and FINRA have all developed a number of laws and regulations for the raising of capital. No entrepreneur should ever attempt to raise capital without using a FINRA-registered broker dealer. Versailles Group, Ltd.’s affiliate, VGL Global LLC is a registered broker dealer and has the expertise to assist companies in raising capital.

M&A Deals - 20 Years of M&A

M&A Deals - 20 Years of M&A

Listed below are two charts that show global M&A volume and value for the last 20 years. We thought that these charts would give our readers some insight into M&A over the last two decades.

Overall, it’s interesting to note the increase in M&A activity from 1985. Twenty years ago, M&A was not as popular of a tool as it is today. In the 1980s companies would take the time to identify a new location, design and build a factory, and start selling product. Over the years, management teams have realized that with less risk an existing business could be purchased and produce faster results.

One can also observe the cyclicality of M&A. There were peaks in deal volume in 1991, 2000, and 2007. The increasing activity from 1995 to 2000 was the result of Y2K and the dot com era, which became the dot bomb era!

The takeaway of these charts is that M&A follows financial cycles like all of the economies around the world. In down cycles, one can see that the value of transactions decreased more dramatically than the volume. This means that sellers received less value for their businesses.

We’re all hoping that the current strong M&A markets continue forever, but the reality is that like all cycles it will end. That’s certain. What’s uncertain is the timing.

Operational Due Diligence

Operational Due Diligence

Due diligence is an important aspect of all M&A transactions as it is a process that allows the acquirer to truly understand what they are purchasing. Mistakes during this process can prove to be costly and can make the difference between a successful acquisition and a failed one. The most common mistakes acquirers make during this process are failing to conduct operational due diligence and utilizing inexperienced people to conduct the process in effort to save on costs.

When conducting due diligence, most buyers tend to focus their efforts on financial, legal, and Human Resource due diligence. What is all too commonly missed during this process is the operational due diligence, i.e., studying, in detail, the customers, products, services, and business pipeline of the company to be acquired.

Most of the time, acquirers in the same industry don’t focus on operational due diligence as they feel they already understand the target’s business or customers. In reality, it is extremely difficult to truly “know” a company as every business is unique and competitors within the same industry will usually attempt to conceal their operations from one another. Operational due diligence should not only consist of asking customers about their satisfaction levels with the target company, but also thoroughly examining customer contracts to fully understand the risks involved with acquiring those customers.

Another common mistake acquirers make is using inexperienced people to conduct the due diligence process in an effort to save costs in the short term. This strategy can lead to substantial losses in the future as inadequate due diligence increases the likelihood of missing important red flags. Acquirers should always utilize employees that are qualified to conduct thorough due diligence. If such employees do not have the bandwidth to conduct the process or will slow down the transaction to a great degree, then the acquirer should always consider hiring a consultant that knows the industry and has experience performing M&A due diligence. While using more senior employees and hiring outside consultants will increase the cost of the transaction, this is certainly money well spent to insure that the acquisition will be valuable to the acquirer.

It is all too easy for acquirers to feel comfortable with targets in their industry. However, acquirers cannot afford to overlook operational due diligence and must treat every acquisition as a prudent investor. It is also imperative that acquirers are not “penny wise and pound foolish” in the performance of due diligence. Utilizing experienced employees and hiring outside consultants to conduct the due diligence process may increase the cost of the acquisition, but it will insure the acquisition adds to shareholder value.

Acquirers should always ask their M&A advisor how to organize their diligence. M&A advisors cannot perform the actual diligence as they have a conflict of interest. However, most well-experienced M&A firms have seen the diligence efforts from both sides of a transaction. Consequently, they have the unique ability to help organize the efforts and to avoid common pitfalls, particularly with neglecting operational due diligence. Versailles Group, a boutique M&A firm that has over 25 years of experience helping buyers and sellers knows how to guide a client through this very important process. They have seen, first hand, how to and how not to conduct proper due diligence.

M&A Deals – Sell Side Considerations

M&A Deals – Sell Side Considerations

With regard to transactions in the middle market, when an entrepreneur begins the sales process of their company, he or she can easily become consumed by the process. This should be one of the most important sell side considerations for an entrepreneur, i.e., how not to get over involved in the process.

In order to complete a successful sale, the entrepreneur must maintain his or her focus on what’s most important, that being the business. This is why it is so critical to have a well-experienced M&A firm handle your transaction. Typically, boutique M&A firms offer middle market companies the best level of service for their transactions. They know how to mitigate the time and effort that an entrepreneur will have to make to the completion of a successful transaction.

The continued strong performance of the company plays an important role in a successful sale, which is why it’s one of the more important sell side considerations. When entrepreneurs neglect their companies during the sales process, they are putting the value of the company at risk. During the sales process for the company, potential acquirers will watch the financial performance of the company closely and will react negatively to any “slip up” in revenues. While a buyer may fully understand that this hiccup in performance was because of management’s focus on the sales process, they won’t hesitate to use this as an opportunity to negotiate a reduction in the value. The best way to avoid this scenario is to make sure that the M&A firm is managing the sales process so that the entrepreneur can stay focused on his or her business.

A knowledgeable financial advisor or boutique M&A firm will be able to tell entrepreneurs what materials potential buyers will want to see and may even populate a data room with such data. Getting this information ready in advance will reduce the stress of numerous data requests from a buyer once due diligence is in full swing.

Throughout the sales process entrepreneurs should always expect the unexpected. An experienced M&A advisor will be able to guide entrepreneurs through the M&A process, which is not always a straight line. As a buyer conducts its due diligence, unforeseen flaws are likely to be discovered. When this occurs, the most effective way to ease a potential buyer’s fears is to present a company that is continuing to perform well. This will not only keep the sales process moving, but will also preserve the value for the business by preventing a price negotiation.

Entrepreneurs selling their business can often times feel like they are performing a juggling act and it may seem as if there are too many things to keep an eye on. This is actually another one of those very important sell side considerations. An experienced boutique M&A firm can be the extra set of hands the entrepreneur needs to maintain the company’s financial performance while also executing a successful sale. With this type of teamwork, the highest value for the business will be obtained and the sales process can be completed in the most efficient manner.

At the risk of being redundant, it’s important for the entrepreneur to make sure that they are hiring a well-qualified M&A advisor with years of experience. They will know how to guide the entrepreneur through a variety of circumstances that always creep into M&A transactions, but are not fatal to completing a successful transaction. There are many sell side considerations and Versailles Group, a boutique M&A firm or investment bank would be happy to explain how to accomplish the best possible results in the sale of your company.

How Do I Sell My High Tech Business

How Do I Sell My High Tech Business

A frequent question is: How Do I Sell My High Tech Business. There are several steps that should be taken to maximize the value and obtain the best terms. These are outlined below.

Marketing the Company for Sale

Selling a high-tech business is a unique experience and special expertise is required to ensure a successful sale. High-tech businesses have many unique selling points that must be effectively highlighted to potential buyers in order to derive the best value. These unique selling points are the primary focus of the Confidential Information Memorandum (“CIM”) which is a detailed report on the company for sale. It outlines the opportunity for the prospective buyers. An effective CIM will clearly describe the company’s strengths, technological advantages, growth prospects, financial data, etc.

Preparing a Global Buyer List

When selling a high-tech business, contacting buyers across the globe is vital. Technology is always in high demand and foreign buyers may be willing to pay a premium for a high-tech business, particularly if a specific technology is not available in their home country. Given the fact that technology is continually changing, the technology portfolio of your company may be attractive to some buyers but undesirable to others. For this reason, it is essential to utilize a broad based, global list of buyers when selling your high-tech business.

Focus Buyers on Future Performance

High-tech businesses can often times have volatile historical financial performance, especially during phases of new product development and introduction. An experienced financial advisor will be able to focus buyers on your company’s future and how your technology can be utilized in tandem with a prospective buyer’s strategy. Framing the acquisition in this way will achieve a higher valuation for the business and better terms.

Maintaining Confidentiality

Confidentiality throughout the sales process is paramount. An experienced financial advisor will ensure that strict Non-Disclosure Agreements are in place before sharing non-public information with potential buyers. When selling your high-tech business, it is critical to protect your technology as it is often the key factor that distinguishes your firm from your competitors. A financial advisor will be able to control the sales process in such a fashion that enough information is revealed to prospective buyers to garner interest and derive value, but not enough to copy your firm’s technology portfolio.

An experienced financial advisor will guide you throughout the process of selling your high-tech business. By focusing prospective buyers on your company’s unique selling points and growth prospects, the valuation for your high-tech business can be significantly increased. This approach, completed by firm with years of international experience, will always answer the question: How Do I Sell My High Tech Business.

Why Conduct Due Diligence?

Why Conduct Due Diligence?

Many buyers ask, Why Conduct Due Diligence?

Due diligence is an audit of a potential M&A investment, which takes place prior to the closing of a transaction. Due diligence plays an important role in every M&A transaction. It is a discovery process that helps buyers understand the financial statements, potential synergies, cultural differences between the companies, and possible risks of a particular target.

Financial Diligence

It’s imperative for a buyer to conduct thorough due diligence on the target company’s financial records, particularly the income statement and balance sheet. A buyer needs to test the income statement to make sure that revenues are not inflated and that expenses are not understated. Similarly, the balance sheet items, or the value related to said items needs to be verified. In many cases, a buyer will test the inventory or even do a complete physical inventory to determine if it has been corrected stated on the balance sheet. In many cases, a buyer will also conduct a “quality of earnings” examination to determine if the earnings of the company match their understanding. Last, but not least, the buyer will want to make sure that they understand the cash flow of the business. This goes well beyond EBITDA!

Evaluating Potential Synergies

Synergies are the main motivators for many M&A transactions. Generating returns above and beyond what the two companies could achieve as separate entities is usually the goal of an acquirer. One of the most common pitfalls of M&A transactions is overestimating possible synergies. This results in buyers over paying for target companies and, in many cases, a failed acquisition. The due diligence process is a chance for buyers to do their “homework” on a target to see if these potential synergies can be realized. While potential synergies with a target company can be very appealing, it takes thorough due diligence to develop a roadmap to take these synergies from theory to reality.

Understanding Company Culture

Understanding a target’s company culture can be the difference between a successful acquisition and a failed one. In most cases, a company’s greatest asset is its employees as these are the people who manage the day to day operations and develop the strategies which define a company. The employees are a vital asset that is going to be acquired and a potential buyer should take the time during the due diligence phase to understand the culture. The culture in the workplace is one of the critical factors in determining the success of an acquisition. Differences in company culture are not always a negative as the two cultures can learn from one another; however, cultures that are radically different and cannot be managed properly will create a toxic work environment that destroys value. Due diligence gives the acquirer a chance to evaluate a target’s employees and will give the acquirer a better sense of whether these employees can be successfully integrated.

Discovering Potential Risks

Due diligence gives the buyer assurance that it is not assuming undue risk by acquiring a target company. Before signing a definitive agreement, every acquirer should have a full understanding of the risks that an acquisition poses. From a legal standpoint, the buyer will use due diligence to understand any potential litigation the target company could face in the future and if the acquirer could be liable for any damages resulting from that litigation. Due diligence also gives buyers insight into operational or financial risks of an acquisition. Debt covenants, supplier contacts, integration costs, possible off-balance sheet liabilities, etc. should all be thoroughly examined before committing valuable resources to purchasing a company.

Conclusion

Acquisitions are essential to almost every corporate strategy. They can be an effective way of building shareholder value and save companies time when trying to break into new geographies or product lines. Due diligence is an opportunity for acquirers to obtain a better understanding of the potential returns and risks of an acquisition. If utilized properly, due diligence can insure the completion of a successful acquisition.
While there are conflicts that prevent your M&A advisor from actually completing the due diligence, a good financial advisor should be able to advise their client on how to conduct the diligence process, what to expect from the process, and how to mitigate the risk of any negative findings by making adjustments to the Purchase and Sale Agreement. Versailles Group has over 25 years’ experience in advising both buyers and sellers in executing successful transactions.

We hope that this answers the question: Why Conduct Due Diligence?