When you sell your business keep your advantage during the process
Trusted advisers can help facilitate the sale
- By Jason Northcutt
- Apr 13, 2011
For many small and middle-market government contractors, the most attractive exit strategy often is a sale of the company. After tailing off in 2008 and 2009, merger and acquisition activity in the government contracting arena began to exhibit signs of renewed vigor in 2010. Many industry insiders expect 2011 to be even more robust.
Why? First, the federal budget is under intense scrutiny and budgets for many key programs that have driven growth in the industry are expected to flatten or even shrink, creating an environment of uncertainty on the demand side. Contractors with a large backlog or in niche, mission-critical programs will be attractive acquisitions that command premium valuations.
Second, the large, publicly traded contractors are under pressure to beat quarterly earnings’ estimates. That can seldom be accomplished through organic growth alone. Upper-tier contractors will have to pursue strategic acquisitions to enhance stockholder value.
Third, private equity firms and large contractors have a lot of "dry powder" to deploy, and the large public contractors can benefit from the recent bull market by using their stock to finance acquisitions.
Finally, the credit markets have thawed substantially from the 2008-2009 credit freeze, further enabling acquisition financing.
Once you decide to put your business up for sale, a good way to maximize the price is to conduct an organized and efficient sale process. A well-run auction can maximize your negotiating leverage and minimize management distraction. And all this can be accomplished while maintaining confidentiality.
Choose Your Advisers
The first step is to choose your M&A advisers carefully. This typically means engaging M&A counsel and an investment banker. There are several good reasons why hiring specialists will maximize value for you.
First, business owners often have a specific potential buyer in mind. However, even if that buyer is the "best" buyer for your business, the mere existence or threat of other potential buyers shifts bargaining leverage in your favor. Also, business owners frequently ignore or are unaware of one of the largest pools of potential buyers – private equity firms. They recently have become more active in the government space, as they and their lenders are attracted to the relatively predictable cash flows. Good M&A advisers can create healthy competition among multiple bidders.
Second, although you as an owner might negotiate constantly running your business, the stakes in negotiating a company sale are much higher that those involved in day-to-day negotiations. M&A advisers have lots of experience in these types of negotiations, and can help find solutions that bridge gaps and get a deal done when the parties are at an impasse. Also, negotiating by yourself can be difficult. Having advisers negotiate has the advantage of allowing you to take positions that you might find difficult on your own.
Finally, your M&A advisers will bear much of the administrative burden of conducting an auction. For example, they often will act as the point of contact for potential bidders, disseminate information and drafts under controlled circumstances, facilitate the execution of nondisclosure agreements, and analyze and compare competing bids.
I have seen management spend too much time and energy on a potential sale to the detriment of running the business. If the sale process takes longer than initially hoped for – and it is not unusual – that can result in poor financial performance that devalues the business. By shifting much of the sale process burden to your advisers, you will have more time to run your business. Further, by having information flow solely through an outside adviser, you minimize the risk of sensitive information leaks.
Make a market, maintain confidentiality
Conducting an auction can be a good way maximize valuation but it also can have its share of pitfalls. Business owners need to restrict the disclosure of sensitive information. A poorly conducted process can expose sellers to liability and bad publicity if the participants believe the process was biased or unfair. By working with experienced advisers who properly conduct the auction process, you can balance those competing interests.
A controlled and efficient framework will allow you to analyze and compare competing bids, and thus narrow the field to the serious bidders only. A clear and definitive framework also mitigates the risk of spurned bidders litigating their complaints.
In a typical auction, the seller's advisers contact potential bidders who may be interested in acquiring the business. Meanwhile, the seller, backed by the advisers, prepares a disclosure document containing summary information about the business. Each bidder should be required to sign a nondisclosure agreement beforehand or before being provided with any confidential information.
Once the auction framework is designed, it must be communicated to the participants through bid process letters. The bidding phase is often divided into two or more phases, or bidding rounds, with each round narrowing the list of suitors further and closing in on a final price. The bid process letters should be crafted to make clear that the seller is in complete control of the process. This includes the right to negotiate with multiple bidders, to exclude any bidder and to change, suspend or terminate the process at any time. They should also make clear that there is no deal until definitive agreements are signed.
Remember, an auction can reap many benefits for a seller, but this common technique to maximize valuation also can backfire if it is not well-organized and efficient.
Jason Northcutt is a partner in the Washington, D.C., office of Sheppard, Mullin, Richter & Hampton LLP. He practices in the areas of corporate law, corporate finance, securities law and mergers and acquisitions.