Overview of Sell-Side M&A

Would love it if some of the senior guys on this site would share their take on the process from client pitch to closed deal, and add anything I may have omitted.

SELL-SIDE M&A

1 - CLIENT PITCH:

Meet with the Client and pitch your firm along with its teams & capabilities. You will often go through multiple pitches to a get to short list of IB's, where the Client will select the IB it feels most fit the execute the transaction.

2 - ENGAGEMENT:

If you get picked by the Client to execute the transaction, the client will sign an engagement agreement stipulating that company is to exclusively work with your firm as a sell-side advisory and stipulates what the firm is paid for its work (generally payment will include a monthly retainer fee [to cover monthly expenses & salaries] and a success fee upon closing).

BONUS - Pre-Selling:

Depending on the firm you work for, some managing directors will begin to pre-sell the opportunity. (ie. calling PE firms and strategic acquirers to share an opportunity in the space. This is valuable as you can garner interest in the opportunity & or flesh out concerns a buyer may have when pursuing an opportunity in that specific industry.)

3 - INITIAL DUE-DILIGENCE:

The firm then goes into initial due-diligence efforts with the company, where you will gather information from the company's executive team about strategic operations & strategy, including documents such as: Bi-laws, Amendments, Board of Directors, Minutes, Certificate of Good Standing, List of IP, Schedule of IP including patent #'s and Dates, Cap Table [list of shareholders & ownership share], investor rights agreement, equipment list, equipment schedule, depreciation list, lease agreements etc.).

4 - CONTENT CREATION:

Using the information you've gathered from due-diligence you will create a Strategy / Story around how to brand the opportunity in the market. It is common to write a Confidential Information Memorandum (CIM) detailing the opportunity in extensive detail (it is not uncommon for these documents to be 20-30 pages in length). Concordantly you will also put together a teaser and pitch-book to present the company to investors in a formal capacity, along with any financial models deemed relevant at that time. This is usually where you value the clients company and peg a market price to achieve in an auction.

5 - MARKET OUT REACH:

After the documents are created, the sales process begins. You will reach out to investors (whom fit the investments criteria), by contacting PE firms or strategic acquirers trying to garner interest in the opportunity. This step will involve numerous high level strategic conversations and follow ups.

6 - CALL FOR IOI's:

Indication Of Interest (an IOI) is a non-binding engagement between a buyer and a seller, detailing a general price the buyer will pay and the make-up of financing (ie. what portion is cash, a sellers note, a performance earnout, a debt obligation etc.). Setting a "Call for IOIs" date incentivizes buyers to submit an IOI by a specific date if they want to move further along in the purchasing process. It's a way of saying "Hey man, if you like this opportunity, show us how serious you are about it."

BONUS - Silent Auction:

Between stage 6 and 7, you are actively creating a silent auction where you reach out to multiple buyers (all of whom do not know who has bidder or at what price). Often times you will have to express to a buyer whether or not their IOI is far below / or within the price range you're looking for. Your goal is to use the silent auction to incentivize buyers to put more money into an opportunity for fear of being out bid by another pursuer. Remember that lovely business lesson on unit price and demand? The higher the demand, the higher the price.

7 - LOI SUBMISSION:

After the IOI call date, very serious buyers will submit and LOI (a Letter of Intent), this letter is a binding engagement that signifies that the buyer and the seller will exclusively engage in post transaction due-diligence efforts to close the offer (effectively taking the deal out of the market). Often times multiple firms will submit LOI's, so it is the job of the Managing Director to find the best price. Sometimes this means getting the buyer to increase their purchase price allocation, or formatting the makeup of the deal to the CEO's liking (i.e. more or less cash up front / higher or lower sellers note on the back end / especially performance earn outs for the CEO if he stays on as a minority interest).

8 - SELECTION:

You sign the most suitable LOI engagement, and begin closing due-diligence efforts with the buyer. Often times this process will include an audit or quality of earnings report. You will be in contact will law firms, accounting firms, and consultants representing the buyer who will try to ascertain if the company is in the working condition you portrayed it as during the M&A process. Sometimes during this stage there will be adjustments to the final offer, depending on a variety of factors (how much working capital is left in the business when sold, acceptable adjustments to the income statement, or even how the company is performing during closing due-diligence efforts). If the buyer and the seller find terms which are agreeable, they will draft a final Purchasing Agreement which will be signed by both parties sealing the deal. However, one final word of warning...

9 - CLOSING:

"The deal is never closed until the check has cleared." - To quote my Managing Director

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Comments (52)

Jun 16, 2017

Didn't read through everything but you've a few of the acronym meanings wrong.

CIM = Confidential Information Memorandum (not Company)
IOI = Indicative of Interest

What's been described is a standard two-stage auction process. Occasionally these go one step further with a Best and Final Offer (BAFO) stage when the sell-side is looking to get a little bit more juice out of the second round parties.

    • 2
Jun 25, 2017

Thank you for noting the vernacular change, and the type of auction process. I'll edit that in the post.

Jun 16, 2017

I think you've covered (most of) the key points. Depending on the firm / segment of the market the process might be slightly different. I've heard of a pretty reputable lower MM PE fund that organizes strategy workshops with management of the selling firm before submitting a LOI to garner interest and touch base.

    • 1
Jun 25, 2017

We've had a couple PE firms try and do this. If the client CEO is adept and good on the phone, we'll include him on calls with the Director of a PE firm so they can gain familiarity. However we usually restrict visiting the company's facility and engaging with the entire team until after an LOI is submitted (for fear of wasting our client's time). Always subject to one off cases.

Jun 17, 2017

What about the VDD and separation/integration consultants?

    • 1
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Jun 17, 2017

Where's the NDA?

    • 1
Jun 17, 2017

It's pretty common to create a 1-2-page teaser on the opportunity, and you'll send that to potential buyers. If they like what they see and want to see more, they will sign an NDA, and usually it's at that point you send out the CIM and perhaps the IOI date.

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Jun 25, 2017

This is very similar to how our firm operates. If there is interest in the teaser we will have them sign an NDA and forward over necessary financials / CIM. We will usually communicate the IOI date over the phone, verbally so we can frame the opportunity in a specific manner.

Jun 17, 2017

+1 Good write up. I'm at a MM M&A group and it's not unusual for us not to 'value' the company and set the price. It really comes down to the client. If we value it at $500m and the client says they want $550 or no deal, then it doesn't matter what our DCF / LBO / comps / transactions say. In this case, are you basically just corroborating what the client wants to make it not look unreasonable to potential buyers?

Curious about this point so any insight would be great.

    • 1
Jun 17, 2017

I've worked at two shops - the first I worked with an MD who was cautious to the max about not giving out estimated valuations. We'd talk about ranges of transactions we've seen but he'd always reiterate that the market will tell us what value is. Then I came to this new shop and the MD I work with most emphasizes multiples he or she thinks they can get and then subtly says something like "...oh yeah, but maybe the market will tell us." I highly prefer the first route because the second can set you up for failure and perhaps just piss off the client in the end. When all is said and done, we always have incentive to get the highest price, but emphasizing or promising a target is a bad idea, in my opinion.

I think modeling projections or valuation work for mature businesses is [most of the time] pointless if the seller wants to sell for an out-of-this-world price. I'd only do them if the client specifically wanted them, but I wouldn't suggest them otherwise. By doing so, you're probably going to be making X bullshit assumptions that any buyer is going to sniff out immediately. That might make me a bad banker, but I think I'd rather emphasize the selling points rather than try to oversell it with fake numbers. I value honesty a little more than others.

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Jun 17, 2017

I like this. The shop I worked at was much like the first MD you talked about, in that we didn't want to corner ourselves into giving a false representation of what the future held. Markets are fickle, after all. But we kept pitching against a firm that was like #2, who would tell clients "oh we'll get you ten times!" and then wouldn't, but it didn't matter, because they got paid at close either way. We were losing business to that firm because of their sales pitch.

So we started including more of a valuation model / approach more than an actual number, to arm our prospective clients to be able to poke holes in the bullshit valuations they were getting fed from our competitors. We could say "look, here's what will determine the valuation of your business, and here are some case studies that highlight some of those elements," and that competed better against the baseless claims they were otherwise getting.

Can't win 'em all, though. Some prospective clients just get dollar signs in their eyes and sign up with whoever tells them a higher number. At the end of the day, we were comfortable letting those clients go.

    • 4
Jun 17, 2017

God, this rings so true. The MD I described by far brings in the most deals, but there is another MD there that I would much rather work with because he or she look at things from all angles rather than doing whatever it takes to win a client. I talk with one of the analysts about it all the time - what's better? Being more conservative and have a higher closure rate, get good reviews from clients, but maybe struggle with deal flow? Or aggressive, lower closure rate, perhaps risk relationships, but bring in the deals? One may not pay the bills until a deal closes, the other pays checks consistently but may not provide that success fee bonus. Obviously a generalization, but it's somewhat the trend.

I'm probably looking elsewhere soon and I'm going to ask all the questions they traditionally tell you not to ask in interviews. I hope a good banker (if that's the route I take) understands "due diligence." Clearly this chord struck home.

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Jun 17, 2017

I'm also throwing in that I feel bad for the analysts who get into investment banking and work with that type of group that is aggressive in the sense we discussed. They probably leave banking with a perception that all bankers are liars, snake oil salesmen, etc... There is another side to the coin.

Jun 25, 2017

We deal with the lower middle market, anything <$300M very small transactions comparatively for IB. For most of our deals we will do a valuation using transaction comparables. The valuation is usually shared internally so we can peg a market price, and we'll share it with the business owner to see if it matches up with their ideas. We are very careful with valuations because we don't want to back ourselves into a corner early on, which is why we wait to do a full valuation until after we've signed the client (in our client pitch we'll broach the subject by first asking the business owner for his idea on valuation, and then providing the business owner with a range of where we think it lies).

Our goal at the end of the day is to set up realistic expectations with the client because the market is always the great equalizer... we would love to tell our clients that we can get them a 20% premium (they would love hearing it), but realistically the market is going to pay what it's going to pay, and setting up unrealistic expectations doesn't bode well for a long term relationship. I've seen financially sound companies sell at or less than market, I've seen financially so-so companies sell at a 15-30% premium because its in a hot industry.

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Best Response
Jun 17, 2017

This pretty closely matches my experience (LMM IB), all things considered. A couple additions/edits:

  1. We would usually try to take a first pass at valuation as part of the pitch. A lot of our clients were privately-owned businesses with owner/managers looking for a cash-out, and a big thing on their mind was always "well, what's my business worth?" If we thought we had enough information to get to a ballpark, then we'd walk them through that in the pitch.
  2. CIMs are rarely reports anymore, and 20-30 pages would be very short. Somewhere between 5-10 years ago, CIMs migrated toward ppt decks, and I don't think I've seen a classic CIM "report" for 5 years. Our CIMs would usually end up around 50 slides, but I see decks now that are anywhere from 75-100 slides (those poor, poor Harris Williams analysts).
  3. I might be crazy, but to respond to the above commenter, I've never heard the term "Indicative of Interest." I've always heard them called "Indications."
  4. There's a step 6.5 in here for management presentations, at least on my end of the market. You noted above that the buyer would meet the management team after LOI, but I don't think I've ever been a part of a process where the buyer submitted an LOI without meeting the management team and going through an in-depth (half-day or full day) management presentation. You're right that there's some weeding out that happens after IOIs, because you don't want to do 25 management presentations, so you cut it down and do a single-digit number. The banker does have to "handle" the management team in some cases; sometimes they're a really strong team and they can portray the business in the best light, and other times, the more they talk, the less you wish they would.
  5. Selecting the "best" LOI can sometimes get complicated. Sure, sometimes it's just the biggest price. But along with structure, you might have a bid that waives a whole bunch of reps and warranties, or has a smaller all-cash offer, or any other structural change that offers a better risk-adjusted return to the seller. Path to close carries more risk than some might suspect, so a slightly lower bid that would be a breeze to close can win out over a higher bid that carries some hurdles.
  6. I worked on a process where the seller backed out the day before closing. Just got cold feet. I was crushed, and that scar runs deep. To build on your MD's quote, one of the partners I work for now likes to say, "the deal isn't closed until my wife has spent the check."
    • 13
Jun 25, 2017

I appreciate the edits and additions, you brought up some insightful points with LOI selection and deal structure +SB. You're always battling with valuation and deal structure throughout the process, and you're correct that sometimes it is not the highest price that gets selected but the easiest close.

Our process is always subject to one off cases, but we usually have the buyer and the selling team on conference calls throughout their engagement process to gain familiarity with one another. That being said, we almost always have the buyer meet with management in-person after submitting an LOI, for fear of wasting our clients time with buyers who aren't serious. It is also a time constraint on our end, because the client's management team usually requires a fair amount of coaching prior to the meeting.

After the in-person buyer / management meeting we'll try and use the added insight the buyer gains to our advantage by re-negotiating sticking points on the LOI before selection. At this point the buyer has gained a good familiarity of the business and is very serious about purchasing the company. Often times they feel more inclined to forgo some items to get the deal done because they're so far along in the process... at least that's the intention haha.

Love your MD's quote, too apt.

    • 2
Jun 19, 2017

What do you mean by "classic CIM 'report'"? Are you talking about a CIM that goes into great detail about the company and its industry? The MM I worked at put one of those together once because our client was extremely nichey and because we figured very few potential buyers would truly understand their business model and therefore would undervalue them. The CIM wound up being almost 100 pages long and was incredibly detailed. Luckily, other CIMs we put together were rarely more than 50 pages long.

    • 2
Jun 17, 2017

I just meant a CIM that was in word doc format instead of ppt.

    • 1
Jun 19, 2017

Ah, ok. I had to put one of those together once. It was painful to say the least.

    • 1
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Jun 17, 2017
  1. Hey there!
  2. 7.5 x EBITDA!
  3. ????
  4. Profit!
    • 5
Jun 19, 2017

I've never seen a CIM shorter than 35 slides.

And most of the time I look at maybe 10-15 of them.

Jun 19, 2017

Perhaps I'm reading your post incorrectly, so please do correct me if I am, but in my two years in IB and my time now in corp dev, I've never seen a binding LOI. LOIs are certainly seen as serious, and backing out without a legitimate reason is a huge no-no, but LOIs are not binding.

    • 1
Jun 19, 2017

FWIW, for non-competitive deal we typically go NDA --> some DD, full model built --> binding LOI, with IC approval --> full DD/model validation/SPA negotiation --> sign and close (sometimes sign and delay close). There's no real bid process, it's straight to a binding LOI and purchase price that typically gets turned a couple times, but is never considered a bid.

Competitive banker deals looks like NDA --> early DD/good model built --> non-binding LOI/bid --> as much DD as we can do during this time/model refined and validated/SPA negotiated --> binding LOI --> confirmatory DD/SPA locked down --> sign and close. So much closer to what you're talking about.

Jun 19, 2017

Interesting. Thanks for sharing. I assume your binding LOIs contain some clause that would allow you to back out? I imagine so since you have not conducted full DD yet.

    • 1
Jun 19, 2017

Correct, but I should clarify, most of the time we use a binding LOI is for a pretty small deal with low DD risk (buying literal assets/IP, US only smaller operations, etc). The medium to large deals have binding and non-binding elements in the LOI (price - in good faith, exclusivity - binding).

Jun 19, 2017

A couple of things I would note:

After you win the mandate (I guess step 2.5), you will typically put together a teaser (1-2 pager with high-level information and high-level financials about the company WITHOUT divulging the company name) to send out to prospective buyers to garner interest. After an NDA is signed you can send over the CIM.

Also, the CIM is much longer than 30 pages. This is intended to be a really robust overview of the business with complete financials so that the potential buyer can value the company to submit a Non-Binding Bid/LOI. After Non- binding Bid/LOI has been accepted then there is formal due diligence for the buyer. Also this is typically where you would have management presentations for those bids accepted.

Formal due diligence can take months and is a very lengthy part of the process in which purchase agreements are being negotiated in tandem and deep questions surrounding the selling company are being asked/documents vetted. After this is completed and purchase agreement is finished, typically there will be some concessions made and maybe some sort of adjustment on pricing due to issues found during formal due diligence (not to mention working capital true ups). You then sign the Binding LOI.

Full disclosure, I've never worked in banking but this is typically the process I see from the CD point of view.

EDIT: saw some of these points were already brought up.

    • 3
Jun 19, 2017

If your corp dev team is like mine, you probably see a lot more of the diligence process than someone in IB would, at least at the analyst level. In IB, the analyst simply passes off the technical requests that only management can answer. In corp dev, however, my team always scrubs the requests and formalizes them before submitting them to the seller, which forces us to first understand what the request is actually asking- there's no passing anything off here.

    • 1
Jun 19, 2017

Agreed, I mention it because it is a bit time consuming for the banker (even if they are just passing requests off). I also suppose that the bankers are probably loading new requests onto the VDR.

    • 1
Jun 19, 2017

You should make clear the step where you get the data room going with the provider with the hottest reps (we all know which one has the best reps).

Jun 19, 2017

Merrill anyone?

    • 2
Jun 20, 2017

When would the sellside advisor perform an LBO valuation when the client is being purchased by a sponsor. If an lbo model should always produce the lowest valuation, what is the value add when sponsors are agreeing to other valuation methods?

    • 1
Jun 20, 2017

Someone correct me if I'm wrong, but my understanding is that an LBO is done here in order to set a floor for valuation aka the lowest possible price of the valuation range.

    • 2
Jun 19, 2017

Best for when the selling bank wants to lead the financing for the deal. Usually done as part of the first step and thrown out there (sometimes included in the mandate).

Jun 20, 2017

Both make sense. Is that possible to lead the financing as a sellside advisor? Would think there's a huge conflict of interest

    • 1
Jun 19, 2017

If selling to a PE shop, who better to lead the process? The data room, model and diligence has all been done by the team already and can quickly make a lender deck from management pres materials. Best part about banking is plagiarism is almost a requirement.

Of course there can be conflicts, but that's why the buyers, sellers and company all engage legal counsel to avoid this, not to mention the countless compliance checks within the bank.

Jun 20, 2017

This is quite comprehensive. I'm buy-side, so it's interesting to see the collection of steps presented as the other side sees them. As far as the LOI goes, not all LOIs are binding. Price range, working capital adjustments, structure, etc. are non binding till a definitive agreement is reached. I think in many cases, only a section of the LOI is binding - dealing with confidentiality, exclusivity, etc.

Array

    • 1
Jun 23, 2017

It would be helpful if you could elaborate buy side process in a similar manner. Thanks in advance.

    • 1
Jun 20, 2017

The steps aren't too dissimilar from where I sit. They are well articulated here, and feedback from contributors has already been incorporated in the form of edits.

Array

    • 1
Jun 20, 2017

I think we miss the most important step 0. How do you get access to the clients?

Working in Big4-Data analysis/Healthcare/Med/Biotech/LifeSci-PE/VC. Enthusiasts in High-Tech Startup.

    • 1
Jun 25, 2017

Sometimes by being in contact directly with business owners. However, most business comes through referrals: from either larger banks, accounting firms, lawyers, even marketing firms and other business services.

It's important to establish a firm and wide network.

Jun 25, 2017

Shout out to everyone who contributed to this discussion on Sell-Side M&A (I've been dolling out +SB's like crazy). As the young monkey's can see, Sell-Side processes vary from bank to bank but follow a very general pattern. Knowing the pattern will help you formulate questions in interviews to better understand each banks sell-side operations.

As an interviewer for my firm, I can say confidently that if an SA or 1st year candidate could discuss this process in detail (or ask questions about how our banks process was different), you would significantly stand out from the pack.

    • 1
Jun 23, 2017

Great overview.

Part of our "content creation" is generating a potential buyer/investor list, sometimes split into tiers (strategic vs financial buyers, relevance, etc.). The client has to approve of this list before we proceed with the reach out.

Some clients want specific firms(s) off that list, such as a direct competitor or if they operate in a niche market where "everyone knows everyone".

With larger strategic players such as a conglomerate, this process takes a (very) long time, due to bureaucracy and a "trying out" period of the product with their product managers or technical team.

    • 1
Jun 24, 2017

I'm a self taught investment banker and today own one such firm. I have both sell-side (start-ups to 14 years old company) and buy-side ($250 million) mandates across E-commerce, Logistics and Software companies

Oct 20, 2017

Great overview!

Can someone do a similar overview for buy-side M&A?

Oct 20, 2017

hell of a lot better than buy-side, cause you usually always get a deal out of it.

Oct 20, 2017

I was told that the action pertaining to deal flow is astronomically better on sell-side than buy-side!

Oct 20, 2017

Sell-side has a higher hit rate, assuming the company is attractive and the bank does its job and brings bidders to the table. Some banks would prefer a buyside mandate for the simple fact that sometimes they can do some staple financing, syndications, etc. to go alongside the transactions thereby making even more fees for the bank.

Oct 20, 2017

true, banks can sometimes prefer buy-side, but as an analyst I always prefer to be on sell-side.

Oct 20, 2017
Oct 20, 2017
Oct 20, 2017