In this article Mark talks about running a formal process to sell his business. When it seemed a great offer had escaped him, he chose to enlist the help of an investment bank, with results beyond his expectations. Keep reading to learn how a formal process might make a huge difference to your final outcome.

Opening yourself for sale

There are few things more stressful than having a buyer go dark on you. After all your hard work getting very near a sale price, things suddenly go quiet. You begin to feel powerless as the hope you held for a successful and swift sale fades away.

This is what happened to us at the end of 2020 when we genuinely felt we’d hit the jackpot. We’d received a good offer from a large enterprise buyer and replied with a reasonable counter. All they needed to do was accept our counter and we’d be well on the way to closing. But nothing.

I’m not that great at sitting still when playing the waiting game. We’d decided it was a great time in the market to sell the company and if it wasn’t going to be to that outfit then we’d go and find someone else who wouldn't leave us hanging. So we decided to engage an investment bank to help us through the process. We now knew what the company could be worth so there was really no harm in getting out there and stirring up some competition.

From the moment we decided to do this, things moved at breakneck speed. We’d found an investment bank to represent us within five days of starting a whirlwind selection process. From there, the pace of the activity was truly amazing. A team of bankers swooped in and started working on several tracks at once. One team worked on preparing a view of our financials. A second team worked on preparing our sales presentation. A third team started reaching out to and scheduling meetings with potential acquirers. I would've said we had a strong start on each on our own, but with the bankers' help, I was blown away by how much better we looked.

Know your worth

On the financial view, the bankers created a really crisp way of showing our current year’s revenue and our confidence in hitting our goal. We were starting the process in February and would pitch our goal for 2021 at an attractive $126m. Each potential acquirer would want to dig in and understand how likely it was that we’d hit that target. To demonstrate, the bankers built a revenue waterfall:

• already recognized revenue - our completed work
• backlog - our sold, but yet to be completed work
• weighted pipeline - the value of each deal multiplied by the probability of winning it

The gap between all of these known items and the $126m was what we called our “Go get” number. We couldn’t name which clients or projects the revenue would come from, but we were sure that we’d find and close some new opportunities. I came to view this “Go get” number as one of the most critical stats for a growing firm. If it’s early in the year, it could be higher. As the year went on, it naturally needed to be a much smaller number. In Q1, it could be 15% - 20% and be believable. By Q3 or Q4, it needed to be in the mid to low single digits as a percentage of overall revenue.

Running a formal process

The team working on scheduling meetings found more than a dozen firms wanting to meet with us and hear our pitch. In normal times, we’d have needed to fly out to see many of these interested parties. But the world hadn’t really opened back up and we were able to do all of the meetings virtually. Normally, this would be a real disadvantage in selling a company, but we made it work well for us. We wanted to move quickly so holding meetings online meant we could schedule multiple pitches in a day. By the third week we were pretty deep into meetings with the lengthy list of acquiring firms.

The interested firms broke into two groups:

1. strategic buyers
2. private equity firms

Strategic buyers are larger firms looking to start a new practice area or strengthen a practice area they already have. Private equity firms are investors who take over ownership of the company, either combining it with a “platform” company they already have in their portfolio, or using the company as a new “platform” that they can add other acquisitions into. In our case, most of them saw us as a platform and would want us to continue on as a leadership team.

‍Narrowing it down

‍After more than 15 initial meetings, we started to identify the groups that were serious about moving forward. There were still a fairly large number of firms at this stage and we gave each of them a very in-depth presentation of the business. With this many repetitions, we got quite good at going through the presentation and answering all the questions that would come up. There is definitely value to doing this all within a formal process if it’s possible.

You might be wondering what happened to our original offer that had left us hanging. Well, at this point they came back. They’d had some internal issues to work through and had finally done so. Unfortunately for them a lot had happened in the three weeks since we’d last spoken. I had to tell them that since we hadn’t heard from them, we’d hired a banker and we were already in multiple conversations with other prospects. I told them I’d like them to join the formal process, and the next step would be to meet the bankers. As you can imagine this did not go over well. I think they felt they had a deal and would be able to proceed with a one-to-one conversation with us. In this case their delay was their downfall and although they joined the process, their interest seemed to wane almost immediately.

‍Bidding point

‍The bankers then asked each interested party to submit a bid. The two highest bidders were both strategic firms, which I was happy to see. Combining with a strategic buyer seemed like the best way to scale up our business without taking on significantly more risk. From a pricing standpoint, the top bid was 15% higher than our previous offer. Although their radio silence had at first caused some anxiety, it seemed that hiring a banker and going through a formal process was looking like a good decision. When we started the process we were hoping to get another 3% and even at initial bids we were well beyond this.

‍Chemistry or accountancy

‍Through all the meetings, we’d formed a sense of who’d be the best cultural fit for us. The firm that we felt would be the best fit were in second place after initial bids. I began to wonder how we’d resolve that if the order stayed the same in the final bids. Would we end up going with the highest price or would I be able to convince the board that it was better to go with the best fit for the company long term?

Luckily for me, when the next round of bids came in, the company we felt had the best cultural fit, NTT DATA, was also the highest bidder. This was another area where having a formal process had been really helpful. We had told the bankers what terms were most important for us and they had been sharing that along the way with the bidders. Because of that, getting a term sheet together that both sides agreed with was fairly easy.

‍Tips for success in the initial stages of sale

‍With the formal sales process complete, and an agreement to merge signed, a whole new process kicked off as we worked toward a close. Whether you’re looking to buy or sell a business, here are three tips to ensure the initial stages are carried out successfully:

1. Don’t go dark on a deal - If you’re a potential purchaser, going dark at a crucial point in time might force the target company to look for other options. They will find out what kind of demand is out there for them, and if the demand is higher than they expected, they’ll realize they’ve dodged a bullet and you’ve lost a great deal. In our case, it turned out there was a lot of demand for us. We could’ve agreed to something much lower if our initial purchasers hadn’t left us hanging.
2. If you have real interest, run a process - If you are selling your company and you get strong, inbound interest, you should strongly consider running a process. It can be a risky move, as you may find that there are no other players out there as interested, but you can at least talk with some bankers and test the waters. If you do, one of the key questions you should be asking the bankers is what other potential acquirers they could bring to the table. They will often have specific relationships that they can bring into the process quickly. Creating genuine competition will always raise your price.
3. Cultural fit is key - Selling your company is incredibly difficult. Whatever the ownership structure of your business, there will always be an obligation to optimize the price. But you also have an obligation to your team and your clients to put your company in good hands. Balancing these two objectives can be challenging. In our case, we got lucky that the best fit firm became the highest bidder in the final round, but if this doesn’t happen for you then consider quality over quantity for the long term health of the business.

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