On Deal Talk, we often hear from former business owners who have sold their companies or professionals who are dedicated to helping entrepreneurs sell their...
Working with an Investment Banker
Many of us already have a good idea of what an investment banker is, but how they differ from a business broker or other firms specializing in mergers and acquisitions may not be so clear. How can they help you get the maximum value for your company? What criteria do they use to determine which companies they will actually work with? How does the transaction process work, and how are you — the owner —involved? What are some of the common misconceptions about working with an investment bank? For answers to these and other questions, we turn to Ann Hanna, managing director of Schenck M&A Solutions. It’s a conversation you won’t want to miss on this edition of “Deal Talk.”
Questions Answered For You
- What are some common misconceptions that business owners have?
- What are the stages in the process of selling a business once you’ve decided to work with an investment banker?
- At what point in the process does financial due diligence take place, and how long does it take?
- What is the difference between a letter of intent (LOI) and an indication of interest (IOI)?
So there are just a variety of ways that you can increase the purchase price, increase the proceeds that you take home or decrease if you're not aware of all the nuances.
Key Takeaways To Remember
- Many business owners have misconceptions about the length of time it takes to sell a business. Often owners are surprised to learn that it generally takes approximately nine months to a year.
- The price of a business is just a component of the whole package. Price is important, of course, but structure is also important.
- Because selling a business is a long process, it is important to meet with an investment banker several times before committing. A business owner wants to be sure their interests are aligned with the investment banker’s, and that they’re both comfortable working together.
- Letters of intent are non-binding but very detailed. It is important that every major detail of the deal is included in this letter, because definitive agreements will be drafted off of these letters of intent.
Jeff: Considering working with an investment banker to help you sell all or a portion of your company? What can you expect? How do they work? And how can they help you get what you want? If you're looking for answers to these and other questions about investment bankers and working with them, you've come to the right place.
From our studio in Southern California, with guest experts from across the country and around the world, this is “Deal Talk,” brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
Jeff: Hello and welcome to the web's number one content source for small business owners committed to building a business for eventual sale. Here on “Deal Talk” it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
Using an investment bank to help you sell your company is a popular option. And today to talk a little about the process and the role the investment bank plays in the M&A process overall is Ann Hanna, managing director of Schenck M&A Solutions. Ann Hanna welcome to “Deal Talk,” good to have you.
Ann: Thank you for having me.
And then as the company goes into diligence, that CFO is really the quarterback of the process from the seller's side in providing information to the buyer.
Jeff: Tell us a little bit, first of all, really quick, about Schenck M&A Solutions. It doesn't necessarily say investment bank on the front of it, but there's a lot more going on over at Schenck than kind of meets the eye.
Ann: Yes, there is, Jeff. Schenck M&A Solutions, we are a group of seven investment bankers. We operate very much like an investment bank but we're within a large accounting firm. Schenck is a top 50 accounting firm in the country. We have over 500 employees, nine offices in the state of Wisconsin. Our group operates as a practice within Schenck. And so we bring the expertise of a boutique investment banking practice utilizing the resources of a large accounting firm. So we utilize the checks and accounting services, and professionalism that we find here.
Jeff: So really an extensive line of services that you can provide and that really is of tremendous convenience to business owners today and particularly during that M&A process. And I wanted to ask you first of all, one of the things we talk about here on “Deal Talk,” and it really is kind of right at the heart of what this show is all about. We try to help business owners improve the value of their companies. And oftentimes, as we know business owners who have been at it for a while have a pretty good idea, or at least they think they do, of the value of their company. What do you tell those business owners who come to you with the objective of selling their company at a premium price or premium value?
Ann: Well, hopefully, everyone who comes to us is coming here because they want a premium price and value, and that's really what's our objective here. For an owner who's looking for that, our interests are perfectly aligned. At the beginning, once you have an owner who's made a decision to sell their business, at the very beginning of the process we do an evaluation of that business. We never price a business. We go to market in a different fashion than a business broker, so we never price the business in the market. But what we do is an evaluation. And based on our experience, we have a conversation with the owner about the value of the business and what we believe this business will bring in the marketplace plus or minus 10%. And we do that, Jeff because we want that business owner to know that we believe their business is worth X, and so they can make the decision, do they want to go to market, are they a seller at that price? So if we do evaluations, say, and we have a business that we believe is worth around $20 million, and that business owner needs $30 million for an exit to make sense to him, then we need to re-evaluate and reconsider.
And he might not be ready to go to market at this time. Now, of course, we always try to bring a price greater than our valuation, but we like to bring reality to the process because it's a long and arduous process, and you don't want to go through it unless you feel like you're going to be successful.
We have the buyers bringing a variety of questions to us, and they're bringing the questions to us, the investment banker, not the client, because we want the client to really focus on running his business. So what we try to do throughout the process is take as much off his/her shoulders as possible.
Jeff: Are you able to then account for maybe some added time that it will take a business owner to bring the value up of his company but do it in a way that makes sense? Do you have those types of conversations? Do you talk about value drivers and how they might be able to improve the value or price that they'll potentially get for the company?
Ann: Yes, we do. And we oftentimes will talk with a business owner for years before they're ready for market. And we will talk to them about what we are seeing in the business. We'll talk about the positives. And we'll also talk about the negatives, areas where I think the value is being brought down because of different factors in the business. And if they can be resolved and cured in a period of time, then we'll work with the business owner to do that.
Jeff: You kind of pointed out that you're not really an investment bank per se, but you provide those types of services. With the understanding that investment banks can pick and choose their clients, what are the most important criteria that you look at to help determine which companies that you'll work with?
Ann: Actually, Jeff, I'll just make a correction. We actually do operate exactly like a boutique investment and we're licensed through FINRA and FTC, exactly like a boutique investment bank. The only way we're unique is that we sit and we're affiliated with a large accounting firm.
Jeff: Very good.
Ann: So really that's the only difference.
Jeff: The host stands corrected, and I appreciate that, Ann. Thank you so much.
Ann: And your question was about picking and choosing clients and what we're looking for. Specifically, we're looking for people who are true sellers, who have a motivation to sell and aren't just wanting to go out and test the market.
We're also looking for sellers who are realistic in regard to value and the effort that it requires selling such a major asset. So we look at all those factors because we're very much aligned with the business owner as far as the success. And our fees are aligned with their receipt of funds. So we're very much having an investment in the entire process. And it is a very long process.
Jeff: What are some common misconceptions that business owners may have? You sometimes have to kind of set the record straight with regard to working with investment banks?
Ann: When owners come to see us, I think maybe the first misconception they have is the length of time it takes to sell a business. Generally, it takes approximately nine months to a year. And oftentimes owners, they are surprised that it would take that length of time. But truly that is what it takes to go through a full marketing, a full vetting, bringing in buyers, bringing in site visits. And then working through all the due diligence in the legal documents and that sort of thing.
The next thing they're surprised at is really the number of different areas, and different facets with a business sale where they really can lose purchase price, and they can lose value. There's a variety of steps along the way. And often time business owners think, "Well, if I get my price that's all that matters.” But really price is just a component of the whole package. Because the price is important, of course, but structure is also important. How much of that is cash at close? How much of it is, is it a seller out? Is it an earn out? What are the terms of it? All areas that can be a little bit of a slippery slope for a seller if they're not aware of all the intricacies and options of the various items of the structure.
Then there's also networking capital calculations. Those are important and those can be big dollar variances in actual net proceeds. There's purchase price allocation if it's an asset sale, that can have a significant impact on you after tax proceeds. So there are just a variety of ways that you can increase the purchase price, increase the proceeds that you take home or decrease if you're not aware of all the nuances.
The only thing binding in a letter of intent is the exclusivity period that's required of the seller. Which means when a letter of intent is offered, the terms of it are not binding on either party legally, but the seller is required to take the company off the market, and to not talk to any other buyers while our chosen buyer is doing their due diligence.
Jeff: When you're meeting someone for the first time and there is an interest there and a mutual interest in working together, is that kind of a one meeting decision where they learn about you, you learn a little bit about them and wham bam, you have a contract, an agreement to start pursuing the process? Is this something that can take a while just to kind of establish a relationship with this perspective client, a business owner coming to you with the interest in selling their company?
Ann: It does take a while generally, although I like your idea of just one meeting and assigned engagement, that's all great. But no, for a seller it's very important that they talk to a number of people, they talk to a number of intermediaries and sources, and have a real comfort level with who they're working with. It's generally a very large decision, and for many business owners in the lower middle market, this is the largest transaction of their life. And they've got one shot. This is the business that they bought and grew for 30 years, or maybe it was a startup or a second generation. But they've got one shot to get it right and they need to get it right. Generally, we can work with clients for years before they make this decision to sell. As you referred to before, Jeff, we'll work on value drivers, on increasing value, on market timing, on timing for them personally before they come to market. And at the very minimum it generally is several meetings so that we can really vet out what we're trying to do, make sure their interests are aligned, make sure that we're both comfortable working together, because as I refer to earlier, it's a long process. We'll probably going to be together for a year working on this project, so it's important that we have a good understanding of what's involved and how well we work together.
Jeff: Who are the people on the sell-side team you are in contact with most often during the process of the transaction?
Ann: We have probably the most contact with the owners, whether it's one or several. We also work much of the time with the company president if that is separate than the owners, or sometimes it's the same person. Oftentimes we'll work with sales manager, operations manager, the key management team as we put together marketing materials, and as we do site visits with buyers it's very important to have those key members involved. And then of course the CFO. The CFO plays a tremendous role at the beginning of the process and at the end of the process. Initially at the beginning as we put together marketing materials, because of course there's a great deal of financial information in the marketing materials. And then as the company goes into diligence, that CFO is really the quarterback of the process from the seller's side in providing information to the buyer.
Jeff: Very good. Anne Hanna is our guest here in “Deal Talk” today, and she is managing director of Schenck M&A Solutions. We're talking a little bit about working with investment banks when we want to sell or divest ourselves maybe a portion of our companies, and we're going to talk a little bit about the process, kind of how it works from day one, from first contact all the way through the process of actually assigning and closing the deal. As you heard Ann talk about that could take nine months or as much as up to a year perhaps, but we're going to try to talk about that in just a couple of minutes when we return with Ann Hanna on “Deal Talk” right after this.
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I'm Jeff Allen with my guest Ann Hanna, managing director of Schenck M&A Solutions in Milwaukee. Ann, welcome back. I appreciate you're being with us on the show. I'd like to talk a little bit now about the process. I'm a business owner. I've just kind of come in. I've talked to all the M&A intermediaries that you've suggested that maybe I visit. And I'm settled on maybe doing business with you. So let's talk about what happens next and walk us through all of the stages in the process.
Ann: OK. Our first stage is a preparation stage. This is the point at which we talk about the value of the company and we come to a decision on that, and provided the client is comfortable with the valuation that we believe the company will draw in the market. Then we start putting together marketing materials. And marketing materials include the confidential information memorandum, which is about a 50-page document. It would tell a prospective buyer really everything about the business from marketing to sales personnel, and sales channels, to a history of the company, to growth ideas, and key investment considerations all the way through financials.
We put together confidentially a teaser sheet, which is a one-page company profile that does not disclose who the company is but will give a perspective buyer an idea of, "OK, we have a company in this industry in this part of the country." And this is a very broad overview of their financial performance if this perhaps some you might be interested in. And, of course, we'll put together the non-disclosure agreements, which are approved by the client's attorney and we’ll start to develop a buyer's list. This process takes one to two months, and once we're done with this preparation phase, then we move into phase two and we're ready to go to market, we hit the ground running. Of course, the client will have approved all the documents prior to us moving forward and we'll approve the buyer's list. Then we go to market. And when we contact all these potential buyers and we send out a teaser sheet and they'll come back to us and say, "Wow, this looks like a wonderful company. I want to see more." Or they'll say, "You know what, I'm not familiar with this industry. I'm really not interested. Thank you so much." And again, Jeff, this is just a basic process. It can change very much from company to company, but I'm just going through kind of a basic overview. Again, we're in phase two, we're in marketing, we have the buyers bringing a variety of questions to us and they're bringing the questions to us, the investment banker, not the client because we want the client to really focus on running his business. So what we try to do throughout the process is take as much off his/her shoulders as possible.
So this is one area where the seller is not involved. We're doing all this behind the scenes, all the interactions with the potential buyers. We're doing follow-up interviews, and gathering information, and getting information to the buyers. The marketing phase also lasts maybe one to two months. And then we have a deadline where we call for an indication of interest. And we basically say to all the buyers who have the information, we say, "Could you give us an idea, a one-page letter, give us an idea of what you see is the value for this business?” And they'll do that. And we'll receive letters. And then we'll sit down with the seller at that point and we'll review these indications. So that's really, and this is phase three, this is really our first indication of what the market is saying about the company and about the value of the company. And we sit and we look at these buyers, we look at the offers and review it with the client, make a decision on who we would like to bring in for site visits. Again, these initial offers are simply indications of interests. There's nothing binding about them on either part. It's just a little bit of a disclosure to say, “Are we on the same wavelength as far as value?”
Jeff: Hey, let me ask you, jump in here really quick … has there ever been a situation where you have just had a tremendous response from prospective buyers in a company that was almost overwhelming? What's the largest number that you can remember of offers coming in from buyers out there from a business that you represent?
Ann: Largest number it close to 30. And that's a tremendous response. It was a very nice business. It's a good, solid manufacturer, a pretty good size.
Jeff: Does that often result in any kind of a bidding war kind of situation when you kind of whittle it down to the final three or four, or maybe even two?
Ann: It does, but at this point we're not really whittling down that narrowly because we're just trying to make a decision of who's going to come in and see the company.
And there are so many circumstances out there that could in fact happen, because, again, all deals are different, all companies are different. But a lot of this stuff isn't really discovered until the digging actually starts to commence, and there's a lot of digging to be done.
Jeff: Very, very good.
Ann: But that is tough when you get that many indications of interest. It is difficult to make a decision because you can't bring 30 parties in to see the business. And in fairness to the buyers, it's really hard to say what you think the value's going to be without getting a chance to meet management, without getting a chance to tour the plant and really understand the business. So oftentimes, and sometimes we have to do follow-up phone calls with the perspective buyers. But what we do eventually is get down with the seller and we make some decisions. And we decide how many site visits we're going to have and who we're going to bring in.
And yes, you're right, the price can be a bit up during that process, because if I have a buyer who I say, "Thank you very much for your offer but the value that you see in the business is not enough that it would make sense for you to come to a site visit,” often times they'll increase they're offer in order to be included in the site visit stage.
Jeff: I may be asking you to jump around a little bit because I think we're still here at phase three of the process. But at what point does the financial due diligence come in with respect to the sell side?
Ann: We do an evaluation at the very start of phase one. And that is my valuation, our methods of what we believe the market will bear.
Jeff: Got it.
Ann: Now, as far as a formal valuation, and then the buyers are generally doing their own valuation and what they believe the company is worth. As far a formal valuation, unless you're an ESOP or perhaps you need a fairness opinion into your public company or some other parameters, there never really needs to be a formal valuation done.
Jeff: Interesting. OK.
Ann: Of course there's a tremendous amount of financial work done around this. And we're running valuation models as the investment bankers, and the buyers are running valuation models for them to see what the value is to them. And really, buyers see value differently. And if you're a strategic buyer, which means maybe you own a company in the same industry, you're going to have a lot of benefits to perhaps acquiring my client. And so there's going to be synergies where this company might be worth more to someone in my industry than to a pure financial investment buyer.
Well, hopefully everyone who comes to us is coming here because they want a premium price and value, and that's really what's our objective here. For an owner who's looking for that, our interests are perfectly aligned.
Jeff: Got it. OK
Ann: So at the end of phase three then, we ask for final offers, which is the letter of intent. Then I skipped a step here, actually phase three then, once we receive the indications of interest and we select who is going to come first, then we bring everyone in to meet management and see the company. And then we ask for letters of intent, which is stage four. Letters of intent are much more detailed. This is generally both sides, both buyer and seller are using their attorneys to make sure language is proper and correct because definitive agreements will be drafted off of these letters of intent. So it's very important that we have every major detail of the deal in this letter. And again, these are non-binding, either to the seller or the buyer. The only thing binding in a letter of intent is the exclusivity period that's required of the seller. Which means when a letter of intent is offered, the terms of it are not binding on either party legally, but the seller is required to take the company off the market, and to not talk to any other buyers while our chosen buyer is doing their due diligence.
Jeff: And how long does that due diligence process take?
Ann: That process, and that's stage five. So when we choose the LOI, then we move into stage five and we sign it. We've got our one buyer who's won the process. It can take anywhere from 60 days to 120 days, with the most typical being about 90 days. And during that time, and we had talked about this earlier, that's when the CFO is really in demand as far as providing information not only for all the financial diligence but for the legal diligence, and customer diligence, and vendor diligence, and HR diligence. Really that buyer is examining every area of this company to make sure that they're getting what they think they're getting, and that earnings are what we've stated they are and that the company is in a good position in all these various operational facets.
Jeff: And hopefully everything during the process throughout goes smoothly. And you've got a transaction that finishes, and both sides are happy with it, and then the transition takes place. But let me ask you this, and I know that you've been doing this a while and your company has a lot of experience in regard to helping business owners move into a different phase of their life transitioning their companies into new ownership. Do you have any stories, I'm wondering, and where maybe things didn't always go quite well, or they didn't go quite smoothly enough in order for the deal to consummate, that things kind of had to break down that you could relate to us that might serve as kind of a lesson to all of us about how important it is to be well prepared in order to sell your company?
Ann: Unfortunately, Jeff, I have all kinds of stories in that regard.
Jeff: I'd be asking you then, it's probably a tough job to come up with one of them but just share one of them.
Ann: Of course. I'll choose one that has a lesson behind it.
Ann: And it was especially painful for myself and for the seller. We had a company that we took to market and a wonderful, beautiful company, very well-received, a lot of IOI's. I think we had 23 or 24 indications of interest. So the market loved this company and it really was a beautiful company, site visits went beautifully, strong management team, just everything. It was just all sunshine and roses through the whole thing. But what happened is, as we went through the process from beginning through site visits and we got to the LOI stage. And we were at about month nine now and the company's earnings started decreasing. And one thing that all buyers, and what we will do as your intermediary is we'll be constantly tracking your trailing 12-month performance, so what is your sales, what is your gross margin, what is your EBITDA on a month by month basis?
So by the time we get to LOI stage, we're tracking that trailing 12-month statistics for nine months. What happened to this company is that their sales fell off, their margins fell off, and consequently their earnings fell off for a variety of reasons which are not really relevant to the story. But they're trailing 12 months EBITDA, it turned out to be about 50% of what it had been when we started the process. And so the strong downward trend caused the buyers by the time they got to the LOI stage to significantly reduce their prices. The IOI stage, they were still using financials from the beginning of the process. And by the time we got to LOI, of course before any buyer submits an LOI they want current financial information. Offers came down about 30%. So it was very discouraging because remember these sellers had seen offers at a much higher value. And now the offers are coming in about 30% less, which actually was not bad given the fact that we had fallen off 50%. So it wasn't a dollar for dollar decrease. And what the sellers ended up doing, it was such a blow psychologically, is they decided to take the company off the market at that point, and to work on getting their EBITDA back up and then go back to the market. And what's happened is there's not been a full recovery of that EBITDA, so the transaction has never occurred, and that was years ago.
Jeff: Oh my gosh.
Ann: Yes. That was grueling and it was a difficult situation for everyone involved. And the buyers still had an interest in buying this company because it was a beautiful company, but the sellers just did not have an interest in selling at that price. And that was not the price we had discussed at the beginning of the process going back to what we talked about earlier. But no one could foresee the fall off in EBITDA and sales. It was just kind of an anomaly that no one saw coming.
Now, of course, we always try to bring a price greater than our valuation, but we like to bring reality to the process, because it's a long and arduous process, and you don't want to go through it unless you feel like you're going to be successful.
Jeff: Wow. And have you seen anything like this since or anything near this in terms of just how surprising everything kind of came to a grinding halt like this?
Ann: Well, every deal has surprises. And I haven't seen a situation exactly like this, but I did have a situation where I had a deal, again, it went beautifully and our buyer was a large international corporation which I won't state the name, but if I stated it everyone would say, "Of course I know who they are." We got to the LOI stage and we were working with the president of the U.S. companies, and after a very long process we reached an agreement and we were in agreement on the LOI. And the letter of intent was sent over to Europe, to the corporate headquarters, to be signed at the board level, and found out when it got over there that the head corporate attorney realized that this company had a non-compete in place, and they actually legally could not buy my client because they were under a non-compete agreement on a deal that had happened in a different country years earlier. So that deal was stopped when it was almost at LOI stage. It was stopped because of a legal situation that no one was aware of until it got to a very high corporate level. So that was another surprise. It had nothing to do with the company or the buyer, it was just a set of circumstances. And it was a matter of the buyer not understanding his restriction.
Jeff: And there are so many circumstances out there that could, in fact, happen because, again, all deals are different, all companies are different. But a lot of this stuff isn't really discovered until the digging actually starts to commence, and there's a lot of digging to be done. You've got attorneys on both sides and you got so many different people advising and consulting. It's hard to imagine. Sometimes though I would think, and as you're getting down to the nitty-gritty and getting down to what you think are the final stages, that all of a sudden the wheels come off. But these are lessons to be learned by everyone. The importance is to be well prepared. And we could go on and talk about how all of that is done and maybe have you back on another show to talk a little bit about that.
But, Ann, what I'd like to do is kind of give you a little time right now to provide your contact information. No doubt we've got people in the mid-West and particularly in Wisconsin, maybe your part of the country who might be interested in coming by or calling you on the phone, talking a little bit about their particular situation. How can they reach you?
Ann: My telephone number is 414-465-5537. Again, that's my direct line, 414-465-5537, or they could email me at email@example.com.
Jeff: Well, when we were in touch with Anna about doing our show she got back to us and basically said via email that she could talk about this stuff for hours. So we'll probably hold her to that, but we'll do it over a series of shows.
Ann: Thank you, Jeff. It's been great being here.
Jeff: Ann, it's been a pleasure for us. Ann Hanna, managing director of Schenck M&A Solutions, has been my guest, and we hope that you enjoyed the discussion today.
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