The Sell-side: An Overview
In our last guide, we provided a detailed examination of M&A in South Africa, highlighting what potential targets and acquirers need to know about the process, documentation, and contextual distinctions. This guide dives deeper into the M&A world, dissecting the transaction into two categorisations: the sell-side and the buy-side. For M&A to exist, you need a seller and a buyer, and each side has different strategies, goals, and advisory specialists.
This guide will provide insight into types of M&A sellers, how to start the sell-side process, strategic ways to carry out the transaction, common documentation that you will need, and answers to frequently asked questions.
Mergers and acquisitions are not an easy pursuit. The transactions deal with a range of steps that can be challenging to overcome. As a seller, this is usually a one-shot moment, so there are crucial implications. Depending on what type of seller you are, the sell-side perspective focuses heavily on negotiation tactics and favourable deal terms, including conceptualising ways to increase purchase price and bidder interest. M&A consists of multiple legal, financial, and corporate knowledge, so hiring an advisory team that specialises in sell-side M&A should be the first box you check.
When a business is sold, the owner doesn’t always want to exit it for good. There are a range of reasons for selling a business through mergers and acquisitions, and these reasons are often defined by a strategic goal. Some of these include:
Owners of private businesses often have significant net worth attached to their company. To extract this capital, owners often seek to be acquired. The common reasons could be retirement, fatigue, lack of a succession plan, or unforeseen circumstances. Selling the company to an acquirer is a strategic way to liquidate the company, or parts of it.
If there are multiple shareholders in a company, internal disputes can become common. There is a possibility for conflicting opinions relating to finance or significant decisions regarding the company’s future. Sometimes, these disputes cannot be resolved, and shareholders could choose a buyout agreement (if applicable) or to dissolve their partnership.
An owner or acquirer may notice synergy potential that will increase competitive advantage and have significant financial capacity benefits. This may pave the way for a potential merger with a competitor, customer, or supplier. Strategic restructuring is carried out to achieve revenue or cost synergies, including diversification, and tax benefits.
Insolvency or distress
There is an assumption that selling a distressed business is a losing battle. This is not true. Businesses facing bankruptcy are commonly acquired by buyers who actively search for distressed businesses. In South Africa, Chapter 6 of the South African 2008 Companies Act promotes the rehabilitation of businesses that are under financial distress. Acquisitions of distressed or insolvent South African companies are increasing. However, there are disadvantages to the Act, which should be thoroughly examined.
Depending on the motive of the seller, each deal structure will be unique. Regardless of these motives, the seller and their advisory team should outline distinct objectives, negotiation tactics and strategies to receive the highest purchase price possible.
Alongside different motives for selling, sellers are also placed into different categories in the sell-side M&A process, depending on their goals, strategies, and type of business. Ultimately, the motives for selling and the categorisation of the seller will influence the deal terms. Here are common types of sellers:
As previously mentioned, selling a business does not necessarily mean exiting it for good. Sometimes, business owners sell off parts of their company, like their assets, divisions, or products. This is classified as a spinoff or divestiture, whereby a parent company, for example, spins off a unit of their business that is underperforming to focus on other units that have potential for growth. If a merger is carried out, there might be redundant operations of the business that need to be divested.
Alternatively, spinoffs can also be implemented when all units of the business are performing exceptionally and breaking them up promotes a higher chance of unlocking value. Creating a new, independent subsidiary could lead to higher profits than consolidating all the units.
• Changing ownership
Change is inevitable when it comes to business ownership. Owners may want to transfer all or part of their business for multiple reasons. These could be related to age, opportunities, or a life-changing event.
Change in ownership can be carried out by selling the entire business, adding new partners, or handing over the business to a family member. The way this transaction is carried out will have differences if you are a public company, or a private company with shareholders.
It is crucial to remember that changing ownership will affect multiple parts of the company, including its organisational structure, vendors, customers, and employees.
• Growth capital investment
Growth capital is an investment opportunity pursued by companies that are already established, have high growth prospects, a proven business model, and residual value. While you won’t sell your business, you do sell shares in return for equity funding. The company will sacrifice a percentage of their shareholding in return for a significant amount of funding to subsidise growth in the form of expansion and entering new markets.
How to Start Sell-side Process
Usually, the process begins when the seller arrives at their decision independently, or a buyer approaches the seller. No matter the reason, when you start a business, you should prepare it for sale. If the seller plays their cards right, they can have the opportunity to set the tone for negotiations, and ultimately, favourable deal terms.
Start off by clearly defining what you want out of this sale through a strategy:
Specify your strategy
You’ll need to ask yourself questions regarding the sale of your business. These can include:
- Reasons for selling your business
- What type of seller you are
- How this will impact your valuation
- What the deal terms will look like
- Preparing a detailed business plan
- Clarify a timeline, separated into sections dedicated to objectives
Most importantly, what will your advisory team look like? Depending on the type of deal, your advisory team will have M&A specialists like an investment banker, a broker, a lawyer, analysts, accountant, or tax advisor. This relationship should be solidified in your engagement letter, which will be discussed further on in the guide.
Define your buyer pool
You’ll need to comprehend your buyer pool and begin by selecting buyers that can not only afford the transaction, but also add value to your business’s future. What type of buyer and how many you’re looking for will depend on your strategy.
While having multiple bidders will give you negotiation leverage, you will also need to assess the value and quality of the buyers. Likewise, a broad buyer pool poses risks: some of these potential buyers may be competitors that may attempt to uncover secrets or extract sensitive information regarding your business.
Valuing your business
One of the most important considerations for a seller is the valuation of the business. If you put yourself in the buyer’s shoes, what would be a significant factor to influence your decision making? The value of the business. A valuation is not just concerned with the price tag of a business, but its potential for growth, its future trajectory, return on investment (ROI), and its synergy potential.
Although past financial details are important in a valuation, buyers and investors often look ahead, focusing on future financial projections. Understanding your valuation through the eyes of a buyer will be advantageous, and potentially highlight any cracks or oversights.
Understanding your valuation as the owner may cloud your objectivity and lead to overvalued calculations. In the same breath, you may not notice areas of your business that will drive up your value, so your advisory team should play a significant role in this part of the process.
Throughout the whole negotiation, ensure your business functions optimally. M&A transactions take time, so your valuation is bound to fluctuate. It would be counterproductive to neglect your business by paying too much attention on selling it.
Preparation is the most important part of the sell-side process, and it should begin before the thought of selling crosses your mind. Regularly brushing up your business - even when you don’t want to auction it - is in your best interest.
Apart from an attractive valuation, buyers and their advisory team are also interested in your business’s quality of earnings. They will closely analyse units of your company to see if there is an alignment, and if this value can be transferable. Factors they might consider are its market fit, cultural environment, and brand value.
Assessing your company to gain a deeper understanding of its functions from a buyer’s perspective is strategic. Are their areas that have significant potential? Or could they simply be developed from scratch? Assess your company through a framework guided by its market, products, finances, and organisational structure.
This will aid you in creatively conceptualising ways to make your business better and innovative. This is an opportunity for you to identify areas that could be revitalised, adapted, or updated.
This comprehensive understanding of the internal ebb and flow of your business is crucial, but the external ebb and flow of its market is equally important. Studying your market before and throughout the negotiation will put you at an advantage. For example, between 2014 and 2019, South Africa was a major player in private equity (PE) deals, alongside Kenya, Nigeria, Ghana, and Egypt. However, studies suggest that M&A activity is now focusing on restructuring and rebuilding through distressed M&A deals.
This external analysis should also include comparing similar businesses and examining industry trends that are impacting the market. This will provide a robust understanding of who your buyers are, what they are interested in, and what they are offering for businesses.
Preparing your Confidential Information Memorandum (CIM)
Whether you are looking to sell to a financial or strategic buyer, or you are searching for investment, the way you market your business is essential for sell-side M&A. Your CIM will promote your business and should provide buyers with a detailed picture of its value and potential for future opportunities. This will be your chance to tell the story of your company and defend and maximise its valuation. Some elements that could be included in the CIM are:
- Executive overview of your company
- Detailed description of what your company does and for whom
- Industry and competitor research
- Analysis of management structure
- Explanation of product or service
- Marketing and sales strategies
- Historical financial details
- Financial projections
- Supporting documents (resume, IP (intellectual property), permits)
M&A deals are not quick pursuits. Each milestone will take time to conclude, especially in the due diligence phase. However, it’s important that you and your team make a conscious effort to stick to your timeline to avoid deal fatigue or potential unwanted risks.
You’ll need to find a balance between taking each step carefully, but not prolonging anything unnecessarily. Once your CIM has been distributed, and potential buyers show interest in your company, you’ll need to provide them with a significant amount of documentation. To assist in compartmentalising your documentation, virtual data rooms (VDR) are a useful tool. These ‘rooms’ are helpful in facilitating due diligence and keeping your information secure.
Strategies for Sell-side M&A
Sell-side strategies exist throughout every step of the transaction. Understanding the transaction through the buyer’s eyes is a strategy and preparing for this once-in-a-lifetime event before you think of selling is a strategy. However, there are strategic ways you can organise your deal to ensure you get the best purchase price and negotiation leverage. The way firms are auctioned are strategic. Depending on your objectives and business size, the way you present yourself to potential bidders could have a significant influence on the deal outcome.
Here are a few strategic ways different businesses could present themselves to bidders:
High value business are a good fit for broad auctions, as the purpose of the auction is to maximise the number on the price tag. The seller’s investment banker will invite a large group of potential buyers to participate and compete for the target. By soliciting multiple competing bids, the seller will gain an advantage in the negotiation.
But like all business strategies, there are risks involved. Because the buyer pool is so large, preserving confidentiality can be challenging. To attract multiple bidders, the seller needs to provide granular insights of the business. This could result in competitors infiltrating the buyer pool, attempting to uncover sensitive company and personal information, or, in some cases, poach top employees to extract valuable information.
Another disadvantage is that broad auctions are large pursuits, so they are time consuming. They require a great deal of preparation, marketing, and management. This can be detrimental to the seller’s principal responsibilities – like running their business at its full potential.
Companies with a large equity value are best suited to limited auctions. The buyer pool is limited (around 10 – 50 buyers), and they are often financial and strategic buyers searching for larger targets that have significant quality of earnings. Companies with a value of R800 million, for example, cannot run the risk of operational disruption or pose risk to confidentiality, so the procedure needs to be formal and highly structured (hence the limited buyer pool).
A risk of this type of auction is in its definition; it is limited. Your negotiation leverage can decrease if you are not familiar with negotiation strategies, and favourable deal terms – while still achievable – may be more challenging.
These auctions are best suited to companies who have a valuation ranging between millions and billions of Rands. Companies that implement this auction are likely well established, have a proven business model, and potential for high growth.
The seller will likely have specific expectations of the buyer, so the buyer pool will only consist of about three to five buyers who have been internally vetted by an investment banker. These buyers will need to compete and outperform one another, once again, giving the seller negotiation leverage and control. Businesses with such a high equity value will also need to concentrate on preserving their day-to-day operations and maintain the highest forms of confidentiality, so a targeted auction is appropriate to ensure these factors.
However, because the buyer pool is specific, this strategy runs the risk of neglecting potential bidders that could have contributed significantly to increase the purchase price.
On the other end of the spectrum, there is an exclusive auction. The seller negotiates exclusively with a single buyer, and this collaboration has likely been discussed pre-sale. Because the process is so private, confidentiality, efficient timeline management and minimal disruption are often taken very seriously. Likewise, the relationship between the buyer and seller is likely guided by integrity and mutual trust.
The risk is that the seller’s negotiating leverage decreases significantly. The buyer, in this case, will have the most control over the negotiation and purchase price, but it is likely that their offer will still be of high quality.
Sell-side Documents to Consider
The sell-side document checklist will incorporate hundreds of elements, specifically for the due diligence phase. These elements will range from legal, financial, sales and marketing, assets, contracts, intellectual property, and organisational documents.
In the beginning stages, you’ll need to start off by clarifying and signing an engagement letter. This is an arrangement between you, the seller, and your M&A advisor, who should guide and support you through the entire process. This letter will outline a fee structure, services, objectives and ultimately lay the groundwork.
Secondly, get your supporting documentation in order, including your Confidential Information Memorandum (CIM) and Non-disclosure Agreement (NDA).
Your documents may vary depending on your business and the deal terms. This phase of the negotiation is where your legal fees will come in handy. It is imperative that you do not neglect your business during the sale, so your legal team should take ownership of this phase. Your document checklist should include these common elements:
- Business incorporation documents (tax structure and entity form)
- Your business’s bylaws (name, location, shares and stocks, details of Board of Directors)
- Organisational chart
- Security regulations
- Details on stock agreements, including shareholder arrangements
Your legal team should closely analyse your tax profile before beginning the sale. This is to understand your business from a buyer’s perspective. They should be familiar with areas of tax risk or benefits. For example, if you identify tax attributes in your business, you can negotiate a higher price because of its potential value.
Likewise, there a specific tax provisions and legislations in South Africa. You may be required to seek approval or report something to the South African Revenue Service (SARS), so your advisory team should be knowledgeable of these procedures.
Intellectual property is a significant value driver. If your business owns innovative technology or software, including its protection, your legal team should make a conscious effort to include this in documentation. Intellectual property can include patents, copyrights, trademarks, domain names, trade secrets and licenses.
Assets are an integral part of sell-side M&A, as the total value of these will increase your valuation. Your team should also consider if they have any debts or liabilities. These can include:
- Your stock
Owning and running a business individually is very rare. Throughout ownership, a seller develops relationships between customers, suppliers, employees, real estate agencies, and shareholders. These relationships are documented through legally binding contracts, which will vary depending on the size of your business and its industry. Some common contracts include:
- Contracts with customers and suppliers
- Contracts with banks, like loans or credit agreements
- Contracts associated with any partnerships
- License contracts
- Employment contracts
This is a general checklist with common documents. However, these documents will vary according to the specificities of your business and deal terms, so your advisory team should provide a more comprehensive checklist.
Sell-side M&A FAQs
Is M&A advisory sell-side?
Yes, but it is also buy-side. M&A transactions include hundreds of legal, financial, and corporate documents, so both the seller and buyer will have advisory support. However, each side’s advisory team focus on different elements.
Sell-side advisories focus on making the target attractive to acquirers and investors. Bankers, for example, will be involved in generating materials and reports that buyers will find appealing. Investment bankers are responsible for achieving the highest valuation possible, finding strategic investors, constructing an appropriate Non-Disclosure Agreement (NDA) and developing an attractive Confidentiality Information Memorandum (CIM).
Is financial advisory sell-side?
Again, it is both sell-side and buy-side, but advisors will have different roles depending on what side they associate with. On the sell-side, a banking advisor’s role is to build a financial model that can be presented to potential buyers or investors. Other services that they should provide are:
- Developing a strategy and prepare the business for sale
- Identify and approach investors or buyers
- Prepare and refine all marketing documents
- Initiate the bidding process
- Coordinate the due diligence process alongside other advisors (like a lawyer)
- Supporting the preparation of documentation
How long do M&A deals take?
There is no clear-cut answer to this question because there are multiple factors that will influence the timeline, including whether it is an acquisition or a merger, and what the objective of the sale is. Usually, M&A deals can take anywhere between three to six months, or years.
Should you buy stock before a merger?
A target company’s stocks usually experience a short term rise when a merger is announced, so it can be beneficial to purchase stocks in the target company.
This rise can be attributed to the acquiring company, who usually pay a premium to incentivise shareholders of the target firm. However, the acquiring company’s stocks may experience a drop for these reasons:
- Financing the premium would exhaust their cash reserves and incur debt
- Integration challenges
- Power struggles
- Unforeseen expenses
These drops can be short term if the acquiring company attends to them in a timely manner.
Who must approve a merger?
If a company has shareholders, they will usually need to agree to the merger. In terms of regulatory laws in South Africa, mergers are regulated by Chapter 3 of the Competition Act, 1998. Specialised bodies who implement this control are the Competition Commission, the Competition Tribunal, and the Competition Appeal Court.
Is asset management buy or sell-side?
Asset Management is buy-side. Asset management companies usually make investment decisions on behalf of their clients to increase and diversify their finances and portfolios. They are responsible for making well-informed purchasing decisions that are in the client’s best interest.
What BusinessesForSale.com Offers
Sell-side intermediaries usually pursue traditional methods of research and outreach to find buyers, and this can be a difficult and exhausting task.
Through close observation and research, BusinessesForSale.com noticed a demand from both sell-side and buy-side intermediaries: from a sell-side perspective, intermediaries were looking for quality buyers interested in high value targets, and from a buy-side perspective, experienced investors were searching for acquisition targets in the middle-market range.
BusinessesForSale.com addresses these demands through MergerVault, a product that has been built and tested over the last year and a half. MergerVault supports expansion into a sophisticated buyer pool, allowing both sell-side and buy-side intermediaries to connect more seamlessly. To enhance this process, the product provides an advanced toolkit that both sides can utilise to find quality leads.
Our enquiry process has been reengineered to include a Verified Buyer Profile, where acquirers elaborate more on their background and investment rationale. At present, MergerVault has a marketable list of over 10, 000 buyers that are internally vetted.
Is M&A advisory sell-side?
If you are on the sell-side of the M&A process, this will likely be a one-time opportunity. Your level of preparation will determine how favourable your deal terms are. Remember that this is a multi-layered process that will take time to complete. When you search for an advisory team, make sure they take your objectives and future seriously.
BusinessesForSale.com is dedicated to supporting both sellers and buyers, including their advisory teams. For more information on how BusinessesForSale.com can support you, contact our team.