Mergers and acquisitions (M&A) have become a crucial avenue for growth and exit strategies for many companies and for various reasons. For founders and owners of tech businesses, understanding the sell-side M&A process can illuminate potential business opportunities and guide them through successful transactions.

This article is an introductory guide to the sell-side process.

Understanding the Sell-Side Process

The sell-side M&A process involves a company or its assets being fully transferred from the seller to the buyer. Unlike mergers or joint ventures, this process aims to facilitate a complete ownership transfer. Founders need to comprehend each process stage to ensure a successful transaction.

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1. Preparation and Planning

Before initiating any M&A activity, it's essential to conduct thorough preparations:

• Gathering documentation: I start with this point, as an organized documentation is something that not only you, but other businesses should have regardless of whether they consider selling in the short term. Always keep an organized house. This includes having your financial statements, operational data, key metrics, documented processes, codebase (for tech companies), and succession plans in order.
• Another important point, especially when a founder plans on leaving the company post-acquisition, is having a team that can operate independently from the founder. This will mitigate founder risk, streamline the due diligence process later, and help you get better terms, showcasing professionalism to potential buyers from the start and building trust with prospective buyers as they percieve a company ready to sell.
• Assessing business value: Founders should determine how much their business is worth to understand if it makes sense for them to start such a process and align expectations. This means being on top of market conditions, industry benchmarks, and key financial performance metrics. Having a valuation carried out by a professional can provide insights into the company's worth and help the founder set realistic expectations while attracting the right buyers.
• Setting objective: Define clear personal and professional goals for the sale. Do you want to cash out and have a clean exit, or would you be open to remaining in the business? If you are open to staying post-acquisition, this could impact the type of buyers you might want to sell your company to (such as strategic buyers), especially if you have economic incentives—earnouts—to keep growing the business. Establishing these objectives will guide your preparation and strategy throughout the process. Knowing your goals will also help you navigate negotiations and make informed decisions.

Read: Annual Business Planning In 7 Steps

2. Building the M&A Team

Forming a strong M&A management team is vital before selling. This typically includes:

• Legal advisors: These professionals handle regulatory compliance, ensure that all legal documents are properly drafted, and help navigate any legal hurdles that may arise during the transaction.
• Financial advisors: Experts in valuations and financial modeling help you understand your business’s financial position and how it will appeal to potential buyers. They also assist in preparing detailed financial projections and analyzing the potential impacts of the sale on your business.
• M&A advisors: Professionals who provide strategic guidance throughout the process. Sometimes, the M&A advisor also fulfills the role of the financial advisor. Their expertise is invaluable in marketing your business to the right buyers and maximizing value by positioning and identifying potential synergies with interested buyers, as well as by creating competition among them.

3. Creating a Confidential Information Memorandum (CIM) and a data room

A well-crafted CIM that enhances the business's attractiveness and a well-assembled data room is essential in presenting your business to potential buyers:

• Content: The CIM should outline the company’s history, operations, market position, financials, and growth opportunities. It should include detailed financial projections, key performance indicators (KPIs), and a competitive landscape analysis.
• Highlighting unique selling points: Clearly articulate what sets your business apart. This might include proprietary technology, a loyal customer base, or unique market positioning. In the SaaS industry, having strong key metrics (revenue growth, healthy margins, low churn, and no risks such as customer concentration or platform risks) will increase your company's valuation. A compelling CIM that showcases all these factors in the right way will engage potential buyers and motivate them to learn more about your business.
• Maintaining confidentiality: Ensure that your CIM has appropriate confidentiality clauses to protect sensitive information. Only share it with serious buyers who have signed a non-disclosure agreement (NDA). This not only safeguards your information but also filters out less serious inquiries.

4. Identifying and approaching buyers

Finding the right buyers can significantly impact the sale:

• Buyer profiles: Identify potential acquirers that align with your objectives—strategic buyers (those looking to integrate your business into their operations), private equity firms, or family offices (who may be looking for profitable investments with growth opportunities), or aggregators looking to buy companies in a specific vertical.
• Researching potential buyers: Use industry contacts, M&A databases, and networking to identify suitable buyers. Having an M&A advisor proves particularly helpful at this stage, as M&A advisory firms usually have an existing network of buyers and professional tools to assemble a good roster of potential buyers to reach out to.
• Outreach strategy: Develop a structured outreach plan. This may involve personalized emails, networking at industry events, or leveraging introductions from mutual contacts. Engaging with potential buyers early can help gauge interest and lay the groundwork for future discussions.

5. Hold Q&As with potential buyers

After reaching out to several buyers and engaging them in the process, buyers will reach out to ask questions about the business:

• Know your business: For a potential buyer, knowing that the founder truly understands what’s happening in the business is very reassuring. Being able to effectively present business metrics and answer questions will help buyers feel confident in the business.
• Highlight opportunities, mitigate risks: Although, as a founder, you probably know everything about the industry, including its risks and opportunities, this may not be the case for some potential buyers. Communicating the opportunities while mitigating any risks that potential buyers might inquire about (e.g., market, competition, regulation) will help you convince more buyers to move forward.

6. Receiving Letters of Intent (LOIs)

As potential buyers review the CIM and data room materials, some will start expressing interest and submit Letters of Intent (LOIs) or Indications of Interest (IOIs):

• Evaluating offers: Assess the LOIs based on pricing, terms, and the buyers' strategic fit. While the highest price is attractive, considering the buyer's ability to close the deal and their intentions for the business is equally important, especially if you will receive additional compensation based on future milestones (earnouts). This is where your M&A advisor can assist in evaluating the long-term value of the offers.
• Engaging with interested parties: Once you receive LOIs, engage in discussions to clarify any questions and assess the seriousness of each buyer. This can also be an opportunity to negotiate preliminary terms, such as the structure of the deal and any contingencies.
• Prioritizing serious buyers: After assessing all the LOIs, you move forward with your selected buyer, providing an exclusivity period for due diligence.

7. Conducting due diligence

Once a preferred buyer is selected, the next step for a successful sell is due diligence:

• What is due diligence?: This is an in-depth examination of the business by the buyer to verify the information provided in the CIM and data room. It typically covers financial, operational, legal, and market aspects.
• Preparing for scrutiny: Sellers should prepare for due diligence by organizing documentation (i.e., uploading additional information to the data room) and being ready to answer buyer inquiries. Transparency can foster trust and facilitate smoother negotiations.
• Common due diligence areas:
  • Financials: Buyers will closely scrutinize historical financial performance, including revenue streams, profit margins, and forecasts. Be prepared to justify any anomalies or fluctuations in performance.
  • Operations: Examination of operational efficiencies, supply chains, and customer contracts. This can also include reviewing your technology stack and intellectual property.
  • Legal: Review of any pending litigations, compliance issues, or contractual obligations. Legal advisors should conduct a thorough assessment to identify any potential liabilities.
• Managing Due Diligence Requests: Focus on creating a centralized data room (if you haven’t done so already) for due diligence materials. This can facilitate easy access for buyers and streamline the review process.

8. Negotiating the purchase agreement

Negotiation is a critical stage of the sell-side process:

• Key Elements: The purchase agreement will outline the terms of the sale, including purchase price, payment structure, warranties, and representations. It’s essential to clearly define what is included in the sale—assets, liabilities, intellectual property, and customer contracts. There are usually two types of purchase agreements: Asset Purchase Agreements (where the buyer only acquires the assets) and Share Purchase Agreements (where the buyer acquires the entity). You should check with your tax advisor regarding the impact of each type of agreement based on your location.
• Negotiation Strategies: Engage with your advisors to negotiate terms that align with your objectives. It’s essential to strike a balance between achieving favorable terms and maintaining a positive relationship with the buyer. Both buyers and sellers at the best price possible.
• Common Negotiation Challenges: Be prepared for negotiations to include discussions on purchase price adjustments based on findings during due diligence, payment terms (cash vs. equity), and potential earn-outs (future payments based on performance).
• Finalizing Terms: Once terms are agreed upon an a value has been settled, ensure that all parties and companies involved are aligned before drafting the final purchase agreement. This can help avoid misunderstandings later in the process.

9. Closing the deal

After landing on a definitive agreement, the final step is to close the transaction:

• Finalizing Documents: Ensure all legal documents are signed, and the transfer of ownership is executed smoothly. This may involve coordinating with your legal counsel to finalize the closing process (e.g., reviewing documentation, setting up an escrow account, etc.) and addressing any last-minute issues.
• Post-Closing Considerations: Prepare for the transition post-sale, which may involve support for the new owner or transitioning operations. This can help maintain goodwill and support future networking opportunities. Prepare a transition plan in advance that outlines the handover process, including key contacts and operational details.
• Celebrating Success: After closing, take time to celebrate the successful sale! It’s an achievement worth recognizing and the culmination of your efforts as a founder, especially if you got the desired outcomes.

The role of an M&A advisor

As you can see from this article, navigating the sell-side process can be complex and time-consuming. For that and various reasons, an M&A advisor can provide significant advantages:

• Expertise and experience: Advisors understand the nuances of businesses and the M&A management landscape, allowing them to offer tailored strategies and insights. They are well-versed in industry trends and can provide critical advice on market positioning.
• Network access: Advisors have established connections with potential buyers and investors, facilitating introductions and discussions that may not be accessible otherwise. Their existing relationships can accelerate the process and enhance deal visibility.
• Negotiation skills: Experienced advisors can negotiate effectively on behalf of the seller, ensuring that the deal aligns with the founder's objectives. They can manage the dynamics of negotiation, helping to resolve conflicts and drive the conversation toward a successful outcome.

At Boopos, we specialize in helping tech founders who are considering an exit. If you are contemplating a sale in the near future, do not hesitate to reach out to us, and we can guide you throught the whole sell by looking at the financials of your company, contacting a qualified buyer and providing you with a business valuation all the way to a successful sell.