Description of the Process :

Selecting Advisors

At the beginning of the 1990s, just 10% of the transactions that took place involved proffessionals advisors. In 2001, 20% of mergers and acquisitions of medium-sized companies in Spain were carried out with the aid of advisors who specialize in the field. Even so, in neighboring countries, the proportion of transactions of this kind in which specialist consultants are involved is notably higher. In the United Kingdom, the country with the highest figure, 56% of transactions are managed by corporate finance advisors.

Why has this increase taken place? What do merger and acquisition firms add to the process? What pitfalls do they help avoid?

Selling a company is a complex process, which requires painstaking, time-consuming involvement in which disciplined, experienced leadership adds value. Shareholders who are also involved in management cannot neglect their normal management tasks and so need advisors who can professionally handle the whole process of selling the company.

In order to get best possible terms in the final agreement, it is essential to contact the greatest possible number of parties who may be interested in order to gauge the market's interest in the investment opportunity. The involvement of an advisor with access to all interested candidates in Spain and abroad on the company ensures that the terms of the final agreement will be in line with the market terms and the option finally chosen will be the most appropriate.

Selling a company often involves holding complex, stressful negotiations and taking decisions speedily. During these stages of the process, it is important for shareholders to be well advised and for intermediaries to bring the parties together.

In addition, the involvement of an advisor in the process makes it possible to ensure that it remains confidential, since direct contact between the company and potential buyers produces information leaks and indiscretions.

All in all, the professionalism provided by a firm that advises on the sale gives the transaction greater chances of success.

Strategic Analysis of Alternatives

The first stage of the sale process must be to establish the various possible sale alternatives, those which will be pursued and why.

It is essential to clearly define the kind of transaction that the shareholders are willing to consider in order to optimize the length of the process.

Aspects such as whether they wish to sell a minority stake, a majority stake or all of the company, whether they wish to contact financial investors or just industry investors, whether they will consider only foreign buyers or potential interested parties in the Spanish market too, whether they wish to sell the company's fixed assets to the buyers or wish to lease them, etc. are matters that need to be decided on right from the start.

Once all the alternatives that could be taken into account have been decided on, they can be placed in order of priority, even though they will all be carried out at the same time. Obviously, some alternatives to a sale to a company from the industry, such as an IPO, a MBI or a MBO, require a substantially different disinvestment process.

During this stage one must decide whether it is necessary to restructure or carry out improvements to the company prior to starting the next stages in the sale process. Sometimes past irregularities in the company's management need to be rectified first to minimize the potential negative effect on the terms of the purchase agreement.

It is also important to set out an appropriate work schedule for the project depending not only on internal matters such as those mentioned above, but also taking into account outside factors that have a bearing on the process.

Drawing up the Prospectus

The main purpose of the Prospectus is to provide potential buyers with all the information they need in order to decide whether the investment opportunity presented is in their interests and therefore, whether they wish to initiate negotiations and be provided will additional documents.

Information presented in a professional manner creates an atmosphere of transparency and dialogue that is very important for candidates that require in-depth investment analysis. The Prospectus must be an accurate document that provides a true image of the company's situation. Otherwise, it will turn investors off by creating distrust. However, the Prospectus is also the tool used to sell the company and therefore must highlight the business' potential and its most significant upsides.

The Prospectus need not contain the same information for all candidates interested in receiving it. Certain commercial documents, such as those which contain customers' details, must be left out for some candidates. Different versions of the document may also be drawn up depending on those aspects that need to be highlighted for different kinds of investors.

Valuation Study

One of the key aspects of the sale process is finding a balance between the price expected by the shareholders and the price that the investor is willing to pay. It is also essential to understand the particular aims of each of the shareholders and the conflicts of interest between them in a sale scenario.

An exit strategy that reasonably covers the interests of all the parties involved - the different shareholders and the new investor - may thus be defined with a greater chance of success.

Although the final price can rarely be explained by financial theory, the process of striking a balance between the interests of all the parties must start with a valuation range study that makes it possible to establish the dividing line between the reasonable and the unreasonable. In order to do this, the perimeter that will be included in the transaction must be clearly defined so that an objective value range can later be defined, based on generally accepted valuation principles.

Pinpointing and Contacting Candidates

Using the alternatives selected beforehand, market research must be carried out in order to identify those companies that may be interested in acquiring the company for sale. Due to their in-depth knowledge of the sector, the shareholders (or the managers who know about the company sale project) must play an active role in this process, which will ultimately provide a list of national and international candidates

Closa M&A's International offices analyze their respective markets in order to identify international candidates. In addition, Closa M&A's external partners (finders) with extensive contacts in various industries are also used to help pinpoint candidates locally.

After the initial contact, the companies that are interested in receiving the Prospectus must sign a non-disclosure agreement before being told the name of the company for sale. Obviously, some differences to the usual means of contacting and providing information will take place in those cases in which the process began as the result of an unsolicited offer from a buyer, An ad-hoc document may even be produced for the candidate in question.

In addition, a MBO is another alternative that must be carefully considered if it is going to be competing with alternatives involving a sale to a company from the industry. Industry investors often shy away from competing with a MBO due to uncertainties about the future management of the business should the former succeed in buying it.

Negotiating Process

The negotiation stage starts with the first direct contact between the parties. During this stage, the seller must provide all the information that the interested parties may reasonably require. Depending on how it views all the contacts made and whether there are signs of clear interest from the market, the seller may ask for non-binding Letters of Interest from interested parties, subsequently plan a Data Room so the various buyers can access the information in a more efficient manner for the seller and finally set up a controlled auction process with the involvement of a shortlist of candidates that seriously intend to buy.

Alternatively, the seller may request indicative bids that will be used to draw up a shortlist of buyers with which to hold a round of negotiations.

In summary, the negotiating strategy will vary depending on the interest in the project and the abundance or scarcity of bidders.

It is necessary to know the background of each of the possible buyers in M&A and understand the strategic objectives that the purchaser is seeking to achieve through the acquisition (profit-generating potential, market share, access to a new market, diversification, access to technology, etc.) in order to better understand their negotiating strategy and establish points of agreement.

There are various ways of lessening disagreements between the parties regarding the price. One of the most usual is granting irrevocable put and call options over some of the shares, which must be exercised within a set period of time and at a price calculated as set out in the purchase agreement. Another possibility is to set up earn-out formulas through which the final price of a set of shares sold when signing the purchase agreement is calculated on the basis of a change in a certain parameter of the profit and loss account (which is usually EBIT or EBITDA). These two ways of getting the best sale price for the seller without overvaluing the company for the buyer are based on the seller's confidence about the company's future and on it staying independent after the purchase takes place.

It is essential for both parties to use advisors during this part of the process, as this avoids direct confrontations between parties who will later have to work together to manage the company, at least during a transition period. In addition, as they are less involved, advisors can more easily suggest realistic negotiations, better understand the interests involved and the other party's limitations, and ensure an orderly and efficient negotiating process.

The result of the negotiation tends to be set out in a Letter of Intent, which although it is generally not a binding document, establishes the basic terms of the transaction and is the raw material used by both parties' legal teams to draw up and agree on the contents of the final purchase agreements.

Due Diligence Process and Closing the Transaction

So as to ensure that the transaction is carried out once the Letter of Intent has been signed, it is advisable for it to include an approximate schedule for each action that needs to be carried out before the transaction is completed.

Professionals from other disciplines are involved in this final stage of the process. They are unaware of the background to the negotiations and therefore may easily interpret the agreements reached mistakenly, not understand the nature of the negotiations and thus cause misunderstandings that could even lead to the transaction being called off. Therefore, it is advisable for the seller and its advisors to continue hold the reins of the process and interact with all the parties involved (auditors, lawyers and the buyer) in order to nip all the problems that may arise in the bud and speed up the process.

One of the key tasks that the buyer must carry out in this stage is the Due Diligence process to check that all the information it has been provided with about the company is correct. It is essential for all the documents provided during the divestment process to provide a true image of the company's situation. It is important to ensure that the buyer is aware of all sensitive aspects that need careful explanations from the seller prior to signing the Letter of Intent. Substantial differences between the information delivered during the sale process and in the Due Diligence report often sew distrust between the parties and lead to a breakdown in negotiations.

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