M&A Due Diligence (sellers’ perspective)

From a sellers and target’s perspective, M&A due diligence performed by the buyer implies the need for the sellers and the target to have great clarity, organization and control in their information and documentation, as well as sound knowledge as to the scope of information to be assessed by buyers’ counsel and advisors.

Equally as buyers, the sellers’ side of an M&A will have specific objectives and strategies to maintain negotiation leverage and a favorable deal outcome. This article will focus on the sellers perspective, detailing everything you need to know to complete the transaction successfully.

Sellers perspective in an M&A  certainly differs from buyers according to sellers particular situation, business type and objectives.  Nonetheless, it is a helpful starting point for those who wish to comprehend the multi-step process of selling a business through a merger or acquisition. It is relevant that the sellers and their advisory team are familiar with the flow of sell-side M&A, as this is likely a once-in-a-lifetime opportunity. Usually, the sellers will focus on the best possible deal terms through strategic tactics, a step-by-step timeline, marketing, and buyer identification, amongst other elements.

It is important to note that it is uncommon for sellers executing these types of transactions alone. M&A includes rigorous analysis of legal, financial, and corporate elements, so hiring a specialized M&A team should be on top of mind.

Selling a company could mean the owning shareholders want to completely cut ties with the business and pursue other goals. But this is not always the case. There are multiple motives for selling through mergers and acquisitions, and each motive has a specific objective.

Not all sellers wish to completely cut ties with their company. Strategic sellers can implement a divestiture, where they sell-off units of their business in an attempt to manage their asset portfolio. These can include assets, entire divisions, or products. For instance, a company can decide to sell off a division that is underperforming to focus on divisions that are profitable and growing. Likewise, selling a unit can generate cash that can be invested into other parts of the company. If a merger is carried out, it is common that certain operations or assets might duplicate, so these would need to be divested. Alternatively, spinoff can also be implemented when all units of the business are performing exceptionally. Breaking them up into independent subsidiaries promotes a higher chance of unlocking independent value and could lead to higher profits.

As to ownership change, change is a part of life, especially when you own a business. Motives surrounding this type of seller could be intentional or involuntary. Some of the reasons could be related to age, a new opportunity, or an unprecedented event that requires change in ownership. It can take the form of selling the entire business, incorporating new partners, or handing the business to someone in the family. 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 organizational structure, vendors, customers, and employees.

There are some sellers whose intentions aim to growth capital. This type of sellers are not interested in selling their company, but rather shares in return for capital. To qualify for growth capital funding, a business needs to prove that it is compelling through growth prospects and future profits.

There are different types of growth capital, and the cost of them will vary depending on the size and objectives of your business. For instance, it can be structured as a loan, which will charge specific interest rates. Or it can be structured as an equity investment, where the business would sacrifice a percentage of its shares in return for funding. Growth capital will not go directly into the owner’s pocket, but rather into initiatives for growth and expansion. These could be investing in new technology, expanding into new markets, creating a new product line, investing in research development, or increasing marketing and advertising initiatives.

The process of selling a company would usually commence when a seller decides it is time to sell. This could be strategic and planned, or it could be involuntary. An acquirer or investor could also approach the seller, kickstarting the process.  Regardless of how the deal starts, you should always be prepared to be acquired or merge with another firm. Meticulous preparation – even if you don’t plan on selling your business – will put you at an advantage.

As a starting point, begin by answering the following questions:

• What are the motives for selling your business?

• How will this impact your valuation?

• What are your ideal deal terms?

• Draft a business plan

• Clarify a timeline, separated into sections that are dedicated to each objective

Thereafter, decide who will form part of your advisory team. Depending on what you want from the 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.

Once a potential buyer is identified, an accurate business valuation is crucial.  A good sell-side strategy is the valuation of the business. A valuation on its own is a prerequisite with any business transaction, but how you implement it and present it can make or break your deal.

Advisory support is for both sell-side and buy-side M&A. As mentioned, M&A transactions include a significant amount of legal, financial, and corporate documentation, so advisors that specialize in these areas are often hired.  Sell-side advisory focus on different elements of the sale. For instance, lawyers often generate materials and reports that they can present to the buyer’s advisory team and will construct Non-Disclosure Agreements (NDA) and Confidentiality Information Memorandums.

As to legal documentation to complete an M&A transactions, this would depend on the jurisdiction whether the deal will take place.  In Mexico, although there are a few basic elements that are necessary to complete de transaction, mid-sized and high-sized market M&A’s tend to consider the execution of various transaction documents, such as stock purchase agreements, escrow agreements and other related or ancillary documentation.  That, besides the basics to complete a sale under Mexican laws; this is, endorsement of stock certificates, entries to be registered in the stock ledger of the target company elaborating or certifying on the respective transfer of shares, amongst others.

In conclusion, one of the key differences between the seller and buyer perspective is that, for the seller, this is likely a once-in-a-lifetime opportunity. To ensure that sellers get the best outcome from these transactions, it is vital to understand every layer of the process, from its preparation and required documentation, to legal frameworks and industry analysis.  Most importantly, sellers want an advisory team that will support them at every stage, including experienced, pragmatic, and responsive lawyers.

At Pani Abogados, we have extensive experience advising sellers in M&A transactions, as we focus on the relevant specifics and stratregies to be followed to achieve the best possible outcome for sellers.