The sale of a company is typically not one negotiation, but a series of negotiations – from negotiating the confidentiality agreement, to negotiating the term sheet and then the Sale and Purchase Agreement. There are often unexpected negotiations mid-course as well, such as may be necessary when the seller’s company does not meet the budget, or there is a currency exchange fluctuation or loss of a contract, which changes the value of the company. Negotiation is therefore one of the key competencies required for anyone selling a company, particularly for M&A professionals. And yet, at times I am shocked at how much money people leave on the table, simply through being unaware of, or not practicing, basic negotiation techniques. What are some of these techniques?

1. Before negotiating key points, get to know your negotiating partner

Ask lots of questions. What makes your investor tick? Why does he want to invest in your company in particular? What are his emotional drivers? What are his thoughts on the timing of the transaction? Has he made any acquisitions in the past? (If so, you might find out their valuations.) What is their internal decision-making structure? Who really calls the shots? Ask yourself whether this is the type of person or investor to whom you’d want to entrust your company.

2. Let your negotiating partner make the first offer

Always, without fail, seek to encourage your negotiating partner to make the first offer, on any particular issue. This often brings surprising results. Your negotiating partner, for example, might value your company at more than what you thought it was possibly worth.

3. If you must make the first offer, make it at the highest end of the defensible spectrum

If purchase price is what you are negotiating, for example, then start with the highest price you could conceivably defend for the sale of your company. Don’t be shy!

4. Concede in small increments

If you concede in large increments, your negotiating partner will sense a capitulation. By conceding in small increments, and even smaller increments as you go along, your negotiating partner will get the signal that there is not that much room for negotiation.

5. After asking a crucial question, hold your tongue!

Silence is uncomfortable. It creates a vacuum and nature abhors a vacuum. It’s amazing how many times, after I ask a key question (e.g. what is your valuation of the company?), there is a long silence. My own client has even answered the question, rather than the investor, so discomfited was he by the silence. A friend of mine, also an M&A advisor, developed a habit of stomping on the foot of his own client whenever his client spoke out of turn – until he broke the toe of his client! Of course, I am not advocating physical violence, but perhaps the story drives home the importance of staying silent at important junctures.

6. Every term of the deal also depends on every other deal

There are dozens, if not hundreds, of points that must be negotiated in an M&A transaction, in addition to price: scheduling of payments, representations and warranties, salary packages, non-competition agreements, to name a few. For example, stricter representations and warranties will warrant a higher price, and vice-versa. So do not get boxed in by agreeing to a certain price, only to find that the investor is negotiating an excessively stiff set of representations and warranties. You can use the above techniques for each of the many points to be negotiated in the course of selling your company.

Negotiating techniques will take you part, but not all of the way, in negotiating the sale of your company. These techniques are little tricks of the trade that help you improve price, terms and conditions. But one issue that you may wish to ask yourself even before applying the above techniques: is this an investor to whom you would wish to entrust your company? Might there be reputational risks to you by completing a transaction with a particular investor? Is he likely to honor contractual agreements, such as for deferred payment? Is he likely to be litigious, for example on representations and warranties? If you apply the negotiation techniques well, but fundamentally misjudge character, you may win the negotiation battle (e.g. close your deal), but lose the war.

Mezzanine financing may be used both as a way of raising expansion capital for an enterprise or for financing the acquisition of an enterprise. As the name implies, in the financial mix of a firm, mezzanine financing is located between the “ground floor” of equity and the “first floor” of debt (e.g. mezzanine finance is a hybrid instrument containing features of both debt and equity). In this article we will take a look at the option of mezzanine financing as a source of capital.

What is mezzanine financing?

There is no single formula for this hybrid instrument: it could be preferred equity with a guaranteed level of dividend, convertible to straight equity at the option of the preferred equity holder, or some form of debt, also convertible into straight or preferred equity. The conversion option gives the owner of the mezzanine instrument a higher degree of security than if he were a straight equity holder (e.g. higher priority in the event of the liquidation of the firm and priority in payment of dividends or interest compared to straight equity holders), while allowing the investor access to the benefits that an equity holder has (e.g. conversion of debt or preferred shares into straight equity prior to a liquidity event). A mezzanine holder will typically rank subsequent to secured or even to unsecured debt holders, often holding the shares of the common shareholders as security.

A mezzanine financier will typically negotiate various put or call options in order to help ensure the liquidity of his holding, help acquire control in case the company dramatically underperforms and help ensure an eventual exit.

What kind of returns are typical for mezzanine financing in Central Europe today?

Given that the degree of risk for a mezzanine holder is lower than for the owner of plain equity, yet higher than for a holder of plain debt, it stands to reason that the rate of return is usually also somewhere between that of straight debt and equity. For example, if holders of straight equity in a particular venture would expect returns of 25% or more and holders of debt would expect 6-12%, then a holder of a mezzanine interest might expect a return in the range of 15-20%. The precise yield would obviously depend on the debt/equity mix and the degree of risk absorbed by the mezzanine holder (e.g. whether the preferred dividends, if any, are 5% or 10% of the value of the mezzanine instrument, the precise nature of the put or call options, the strike price at which the instrument might be convertible into straight equity and the overall leverage level).

Why is mezzanine financing so much more expensive than straight debt?

Mezzanine lenders typically do not have a registered security interest in the assets of a company. This means that, in the event of default, repayment of the mezzanine may commence only after all senior obligations have been satisfied.

Another factor, and one of the difficulties faced by companies issuing mezzanine instruments, is the financial sophistication required in pricing the value of the embedded put or call options, or other aspects of the mezzanine financing, where the provider of mezzanine financing is typically much better equipped than the company making use of such financing.

When should the owner of a business consider mezzanine financing?

Mezzanine financing allows business owners to obtain financing or growth capital that permits higher leverage (e.g. an additional level of financing to straight debt), without burdening the company with extremely high debt service obligations (e.g. mezzanine holders may be paid by preferred dividends, payable only when the company is profitable). Such high leverage financing will either not require collateral against the company’s assets or, if it does, the collateral will be subordinated to more senior debt holders.

Mezzanine financing may require less cash payment of interest or dividend than junk bond financing, as the mezzanine financier may rely on his equity conversion option to boost his overall return, thus conserving cash flow for the company.

Mezzanine financing might be more appropriate than straight debt where there is a considerable degree of volatility in expected cash flows (cheaper debt might be available for a company where lenders foresee steadily increasing cash flows).

When should the buyer of a business consider mezzanine financing?

Private equity funds, management buyouts and other types of acquisitions that like to use leverage are frequent users of mezzanine financing. Mezzanine financiers are typically comfortable piggy backing on the due diligence of a private equity purchaser on a business and allowing the private equity firm to take the driver’s seat in managing the acquired company, at least while the business plan is being met.

In conclusion, mezzanine financing is not for everyone. It requires considerable financial sophistication in order to correctly price returns. However, for the financially sophisticated, it opens up a new source of financing and is a creative way of allocating risks and returns between the different stakeholders of a company.

This article is designed to assist company owners in understanding what is involved in preparing an Information Memorandum (IM), during the process of selling a company. It deals with four questions:

• What is an IM?
• Why prepare an IM?
• How should a company go about preparing an IM?
• How is an IM likely to be used by investors?

What is an IM?

An IM is a document provided by a company to prospective investors after the investors have reviewed a brief Information Summary, or “teaser”, and signed a Confidentiality Agreement.
Some business owners and financial advisors look at an IM as a marketing document which provides a selective overview of the attractive features of a company. In some countries, mostly Anglo-Saxon jurisdictions, an IM by law must contain a full, true and complete disclosure of all information which may materially affect the value of a company. Other jurisdictions may not regulate IMs as closely.

A company and its financial advisor must strike a balance when preparing an IM. The document should be a marketing document, in the sense that it should motivate investors to want to invest in the company – but it should be devoid of hype, exaggeration, or omission, and provide a complete disclosure of material facts. Hype or exaggeration will only diminish the credibility of the company and its management in the eyes of investors, and may also create legal liability for the company preparing the IM and its advisors.

Why prepare an IM?

In general, an IM allows the owners of a company to present a comprehensive, accurate, and attractive picture of a company. The alternative is simply to respond to investors' questions, but this typically does not allow the company to provide a comprehensive overview, and makes it difficult to present the information in the best light.

An IM also helps to ensure that all investors receive the same information. This is particularly crucial when a seller is running a competitive process. The more information that finds its way into the IM, the less need there is for investors to pose written questions, saving time for both buyer and seller.

From an investor’s point of view, a good IM demonstrates the sellers' professionalism and motivation to sell, as well as the quality of the management – all important factors when deciding whether to bid for a company.

How should a company go about preparing an IM?

Preparing an IM requires a high level of internal organization. The CEO or business owner should lead a small team of experts in the main areas (e.g. sales/marketing, legal and finance) that will need to be covered in the IM. Deliverables and deadlines should be decided for each member of the team. When this process is complete, the final version of the IM should be reviewed by the owner, CEO, and all members of the team, to ensure consistency, completeness and accuracy.

When we prepare an IM, we generally aim to provide investors with details of clients, market position, operations, finance, risks etc. – information sufficient for them to prepare a non-binding bid, with an indication of the bidder’s valuation of the company. A good method is for the sellers and advisors to ask themselves what information they would require if they were buying the company. Given that the IM is designed to solicit a non-binding offer on the company, with valuation, the omission of one or more key facts may give a distorted valuation, and provide an investor an opportunity to renegotiate their offer.

How is the IM likely to be used by investors?

An IM is the most efficient way of providing a large volume of information about a company to investors. Even though there may be one person or a small group of people performing due diligence on the company at its premises, there is also a need to communicate with a wider range of decision-makers (e.g. investment committees or boards) that may never appear on site. The IM is by far the best way to do this.

Conclusion

In conclusion, a high-quality IM is critical when selling a company: in the same way as a CV may go through many drafts in order to present the candidate in the best possible light, so too, an investment of time in producing a quality IM pays off. You do not get a second chance to make a first impression.

One of the crucial phases of selling a business occurs when the seller, usually supported by advisors, establishes a data room to permit one or more investors to perform detailed due diligence. Depending on the size and complexity of the company being sold, a data room may contain thousands or even hundreds of thousands of documents, including all relevant client, supplier, employee, financing, and other contracts, as well as title documents, board minutes, and many other documents. Indeed, any document that could have an impact on the value of the company should be in the data room.

As the establishment of a data room requires an enormous amount of work on the part of sellers and advisors, and often involves the disclosure of highly confidential information, most sellers insist that, as a pre-requisite to providing access to a data room, investors should have placed a non-binding offer, perhaps even signed a term sheet, acceptable to the sellers. The data room then provides the detailed evidence that then permits the investor(s) to provide a binding offer within days or weeks of the closure of the data room.

A data room may be in physical form (e.g. literally a room full of data) or the seller and its advisors may opt for a virtual data room, which means that investors may access documents via the internet. Sometimes the parties opt for a combination of virtual and physical data rooms, with the most confidential documents only appearing in the physical data room.

In a physical data room, a representative of the seller is usually present at all times to ensure that only authorized personnel from the investors are in attendance, that no one is making unauthorized copies or scans of information, and to coordinate legitimate information requests. A data room is often governed by rules set by the sellers, which investors must sign or acknowledge in order to gain access.

Because of the cost of running a data room and the need to observe time lines, each investor is usually given limited access to a data room, usually measured in days. For the seller of a business, the preparation and running of a data room is typically the most intensive phase of selling a business, given that in most sale processes management presentations and site visits are also usually concurrent with the opening of the data room. The complexity of managing this process is further augmented where there are multiple investors to be coordinated.

During the data room process, the seller and its advisors must typically be prepared to answer questions and provide supplementary information to investors. Answers are typically expected within one or two days, failing which investors may ask for an extension of the period during which the data room is open.

At the time of negotiating the sale and purchase agreement, investors will usually ask for a representation and warranty that the data room was complete, and that all of the documents in the data room represent a true and complete reflection of the state of affairs of the company. It is therefore vital that the seller and its advisors ensure the completeness and accuracy of documents in the data room. We are aware of one situation, for example, where a seller (whether deliberately or inadvertently) withheld a document from a data room, resulting in millions of euros of potential liability.

As we can see then, the quality of a data room, and how the process is managed, can make or break a sale process, as well as dramatically affect valuation, as investors often use shortcomings in the data room to drive down price. It is important that no one person become a bottleneck in the process, but that the seller establish a multidisciplinary team covering each major area (sales and marketing, legal, production, finance, taxation, etc.)

In a nutshell, there are just three words of advice when it comes to data rooms: preparation, preparation, and preparation.

Retirement for a business owner can be like going from full speed to full stop from one day to the next. Some business owners get cold feet when they are selling their businesses and withdraw from or even sabotage a transaction because they cannot come to terms with retirement. As with most things, the two principles of “know thyself” and “plan for tomorrow” can go a long way towards making the transition to retirement a success.

Know thyself

None of us are immortal and, alas, the human body diminishes in capacity over time. This makes it important to develop a realistic forecast of how much longer your body can take the vigorous pace of business life. Has your body slowed down over the last five years? Count on it slowing down at a somewhat faster pace over the next five years. Have you been for a full physical examination lately? What are your health risks? How old are you? Are you still able to work long hours, focus and concentrate as much as you need to? Is your motivation as strong as it was? Can you see yourself running your business three years, five years, or ten years down the road? Answering these questions honestly will help you plan for the transition to retirement much more successfully.

Also, it is worth remembering that retirement is considered an excellent motive for selling a business, one that any investor can understand: if a business owner waits too long and illness or incapacitation becomes the motivation for sale, then investors will typically sense the distress and drive a much harder bargain.

Some owners have pursued their businesses with such singular focus, that they have neglected other interests, and hence have trouble contemplating any transition. For these owners, the “know thyself” principle is all the more important in developing those activities that could be pursued outside work. Children or grandchildren? Consulting? A few board positions? Charity? Social life? Travel? These are all potentially valuable things you can pursue after you have sold your business and play a key part in our other key principle.

Plan for tomorrow

Planning future activities can help prevent that feeling of going from full speed to full stop. Pre-sell a book title to a publisher. Plan that round the world trip you have always wanted. Would you want to reactivate some of your old hobbies or start a new one? Take up golf or a musical instrument? Or start attending Rotary meetings? Check out if these are things you could imagine spending more time on. There are many facets to you, and life beyond your business is a chance to explore these, but planning is the only way to ensure you will successfully be able to do this.

You should also make plans for a time when it might be necessary to exit the business, as well as for an orderly transition. Do you want to take time to enhance the value of the business in order to optimize value before selling? Remember that the sale might not be successful at the first attempt, perhaps due to changes in market conditions or simply if your first negotiations with an investor do not produce anything solid, for whatever reason. Most business owners who have never completed a transaction underestimate the complexity and duration of the process to sell their businesses. It generally takes between one and three years to prepare the business for sale and complete the transaction, and then another few years of activity for an orderly transfer to the new owners, in order to truly maximize business value.

During the planning process, remember that shareholders’ strategies seldom perfectly coalesce with those of a business. For example, a shareholder may want to begin taking more money out of a business just when a business might be demanding ever more capital. Make sure that both elements of the strategy or planning are taken into account. Remember, there are many alternatives to selling your business, ranging from selling a minority interest to raise capital, passing the business on to the next generation or to its managers or selling to minority shareholders. The costs, benefits, and risks of each option should be analyzed in light of the shareholder and corporate strategies.

For most business owners, selling their company is the most important business decision of a lifetime. Most business owners have an imprudently high percentage of their net worth tied up in their business and therefore the successful sale of the business will need to fund a comfortable and rewarding retirement, as well as possibly also providing for the next generation.