The M&A Cheat Sheet

As a founder, going through an M&A process can be a stressful, but extremely rewarding process. It involves a lot of planning, preparation, and coordination to ensure a successful outcome. In this article, we will discuss what you can expect during a full M&A process run by Discretion Capital.

Pre-Diligence:

Pre-diligence is a crucial step in the M&A process as it allows us to ensure your company is well positioned for a sale. This process involves a comprehensive analysis of your financials, intellectual property, SaaS metrics, and other relevant data that we know buyers will be evaluating. It helps us to identify any issues that need to be addressed before going to market and can increase the likelihood of a successful sale.

During pre-diligence, we will review your financials, including your revenue, profit margins, and cash flow. This review allows us to assess your financial health and identify any potential issues that could impact the sale of our company. It’s not uncommon for buyers to bring in the likes of KPMG or EY to review financials so we want to make sure you’re in good shape here.

Intellectual property is also a critical aspect of pre-diligence, and allows us to ensure that there aren’t any significant issues related to ownership of the software or IP prior to going to market.

SaaS metrics are another important area of focus during pre-diligence. We want to showcase the best side of your company, and we know that an acquirer will deep dive into metrics like churn, NRR, CAC and LTV.

Overall this stage helps us identify opportunities for improvement that we may highlight as beneficial to execute on prior to going to market. This proactive approach can increase our company's value and make it more attractive to potential buyers.

The length of the pre-diligence process can vary, but it’s typically 2-6 weeks. We know that the time invested here can pay dividends later on.

Create Marketing Materials:

Once everyone agrees your company company is in good shape, we create marketing materials, including a Confidential Information Memorandum (CIM), a no-name teaser, and a financial package.

The no-name teaser is a short overview of the company that does not disclose its name. This is what is shared with all potential acquirers identified in the next step, and ensures that information about your company is restricted to those interested enough to sign an NDA to get more information.

The Confidential Information Memorandum (CIM) is a critical document in the M&A process. It is a detailed deck that contains all the pertinent information about the target company that prospective buyers need to assess the business and their willingness to bid for it. The CIM typically includes a detailed overview of the company's history, operations, financials, products or services, market position, and growth potential. It may also include projections for future growth and other key metrics.

As the name suggests, the CIM is confidential and is only shared with prospective buyers who have signed a non-disclosure agreement (NDA). This is to protect the target company's sensitive information and ensure that it is not leaked to competitors or other parties.

The CIM is an essential tool for prospective buyers in the M&A process. It helps them to assess the target company's value, growth potential, and competitive position in the market. It also allows them to identify any potential risks or issues that could impact the value of the company - it’s important to provide a full picture of the business here to avoid buyers re-trading (reducing their offer) based on “new information” discovered during due diligence.

Identify Acquirers:

Using our proprietary systems and existing network of buyers, we usually identify 100-150 potential acquirers that may be interested in your company. Our systems continuously analyzes data from numerous sources and identify companies that have a strategic interest in your company.

In addition to using these proprietary systems and our networks, we also rely on your knowledge of your niche to identify strategic buyers. Founders often have a deep understanding of the market they have operated in for years and by working closely with you, we can leverage your knowledge of your niche and existing partnerships to identify additional potential strategic acquirers.

Go to Market:

Once the marketing materials are prepared, we start the process of marketing to prospective buyers. This process can generally be divided into two key stages and takes approximately four to six weeks to complete. During this time, the founder is not expected to be heavily involved in the process, allowing you to focus on your day-to-day operations.

The first stage involves sharing a no-name teaser with potential buyers. A no-name teaser is a brief and anonymous document that provides an overview of the target company's strengths, industry, and value proposition without revealing its identity. This approach is used to pique the interest of potential acquirers and gauge their initial reactions to the opportunity without disclosing confidential information.

The second stage commences once potential buyers express interest and sign a Non-Disclosure Agreement (NDA). Once signed, they gain access to the Confidential Information Memorandum (CIM) and financial package.

Throughout this marketing process, the founders involvement is minimal, allowing you to keep running your business as normal. However, expect to be required to respond to questions and requests for additional information from potential buyers as they evaluate the opportunity.

Management Meetings:

A subset of potential buyers, after reviewing the CIM and financial package, may show a strong interest in further exploring the acquisition opportunity. At this stage, we coordinate management meetings between you and these interested parties. These meetings are designed for an acquirer to get to know you and provide an opportunity for both parties to assess the cultural fit of a transaction.

Management meetings generally take place over a period of one to two weeks and involve discussions between the you (and perhaps your management team) and the prospective buyers - including potentially their PE backers. These meetings allow potential acquirers to clarify any questions or concerns they may have regarding your company, its financial performance, and future growth strategies. Additionally, they provide an avenue for you to gauge the seriousness and abilities of a potential acquirer.

In situations where there is significant interest from multiple potential buyers, an intermediate Indication of Interest (IOI) step may be introduced prior to the management meetings. IOIs are non-binding expressions of interest that outline the prospective buyer's preliminary valuation, deal structure, and other key transaction terms. This step helps us screen and prioritize the most promising candidates, ensuring that the management meetings are manageable and focused on engaging with the most suitable potential acquirers.

LOI Deadline:

Once we have a gauge of interest, we set a deadline and push potential acquirers towards it. This adds competitive pressure and helps focus buyers on the opportunity at hand. Otherwise, particularly strategic buyers can take an inordinately long time to make an offer (sometimes this is a deliberate tactic to see how competitive a situation this really is..)

Due Diligence (this takes a lot of time..):

After evaluating multiple offers and selecting the most favorable one, you typically sign a no-shop or exclusivity agreement with the chosen buyer. This agreement prevents you from actively soliciting or negotiating with other potential acquirers during a specified period. This exclusivity allows the chosen buyer to conduct a comprehensive assessment of the company, known as due diligence, without facing competition from other interested parties.

The due diligence process usually lasts between 45-90 days, though it can sometimes take longer depending on the complexity of the transaction. During this period, the buyer conducts a deep dive into your company's financials, operations, legal and regulatory compliance, and other aspects of the business.

To assist with the due diligence process, the buyer often engages external consultants and professional services firms such as KPMG or EY. These firms perform various analyses, including a Quality of Earnings assessment, which evaluates the sustainability and accuracy of the target company's reported earnings. This is where the work done during pre-diligence can make all the difference.

It is important to acknowledge that the due diligence stage can be highly demanding and stressful for you and those of your management team you wish to involve. The exhaustive nature of the process requires you to provide extensive documentation and respond to numerous inquiries, all while continuing to manage the day-to-day operations of the business. Having us by your side can significantly alleviate the burden by guiding you through the process, managing expectations, and addressing any potential issues that may arise.

Close:

You did it! :)

After due diligence, the deal is closed, and the target company receives the agreed-upon amount of cash on close. Depending on how the deal is structured, you may now be working for the acquirer.

In conclusion, going through an M&A process can be a complex and time-consuming process for a founder. By understanding what to expect in each stage, you can prepare yourself and your company for a successful outcome. Hiring a reputable M&A team to manage the process can also help ensure a positive outcome, get in touch today for a no-obligation chat.