The Process of the Sell Side Transaction

Mergers & Acquisitions (M&A) and Private Equity (PE) deals reached an all-time high in the year 2022. In the second quarter of 2024, India witnessed a total of 467 deals valued at US$ 14.9 billion. With the rise in M&A deals and the increasing availability of idle cash among private equity investors, business valuation has become more relevant. However, the process of valuing the business and facilitating the sale of the business is very complex. Given the complexity of the process and growing demands of M&A deals, businesses must be well prepared and must understand the challenges that can arise in the process of sell side transactions.Considering the complexity of the transaction, it is advised that the companies consult an investment banking firm which can help them to overcome such hurdles. Investment bankers ensure that business operations are not hindered, while the promoter continues to run the operations, the banker provides the company with a valuation of what can be expected before they look for a buyer in the market.At ILO Consulting, our team of experts help companies formulate a clear and precise strategy for M&A transactions to maximize the value of the business. This article provides an overview of the process of sell side transaction, offering a clear framework on how the sell side transaction operates.

Process Overview

Hiring an Investment Banker

Running a business is difficult, selling one is even tougher. To streamline the process and overcome the potential challenges, it is advisable that companies consult the right investment banker. The primary objective for the banker is to develop a customized strategy for the client that ensures a smooth transaction and maximum value for the business.

Projected Valuation

Once the banker is on board, the next step is to determine the projected valuation of the business to give a fair idea to the seller. A detailed analysis of the company’s financial statements, growth prospects and future outlook is conducted. The banker uses various valuation methods to determine a range of potential values for the business. These valuations also help the buyers by serving as a benchmark during the process.

Preliminary Due Diligence

Preliminary Due Diligence involves two components. First, a third party is hired to conduct an audit on the client to cover the financial, legal and operational details of the company ensuring that no fraudulent activities are being performed-This part is known as the Quality of Earnings report. As this part takes some time, the banker performs the second component which is to gain access to data from the client’s company. This data is obtained through Q&A sessions with top management. The data received is then compiled and stored into a secure online Virtual Data Room.

Marketing

A list of potential buyers is created who have an interest in the segment in which the client is operating. The data obtained is used for creating marketing material presentations which are:

• Teasers
• Executive Summary
• CIM (Confidential Information Memorandum)

These materials, starting with the teasers, are sent out to the potential buyers to generate interest and initiate the initial phases of discussion.The interested buyers will revert to enquire more about the prospect. A confidentiality agreement (Non-Disclosure Agreement) is signed, to gain access to the detailed information provided in CIM.Several weeks get passed during this phase. Buyers get filtered out based on their interest level after reviewing the CIM, communication is generated with the ones interested and are proceeded to the further rounds.

Bidding

After reviewing the detailed information materials and engaging in discussions with the team, the potential buyers are invited to submit bids. This helps the seller and advisory team to get an idea what is the fair value of the business. Eventually, helping the seller achieve the maximum valuation for their business.Potential buyers are provided with an Indication of Interest (IOI) Process Letter to be filled out which contains following information:

1. Due Date - Date and Time when the letter gets due.
2. Purchase Price - A range of prices depicting the maximum and minimum value of the enterprise.
3. Financing - The buyer has to present details on how he plans to fund the purchase, and what combination of debt and equity will be used.
4. Strategic Synergies - If there are any potential synergies which may arrive between the buyer and the seller, then they must be provided.
5. Required Approval - If any approval is required by the buyer to finalize the purchase, it must be disclosed.
6. Due Diligence Request List - A list of any further information required by the buyer.
7. Timeline - A tentative timeline to complete the purchase.
8. Post-Transaction Strategy - A description of the detailed plan post the acquisition of the business, including plans for employees and the management.

IOI Analysis

The advisory team then comprises and analyzes all the IOI’s received. When analysis takes place, the valuation is not the only factor, but several other factors are considered such as the time to close the deal and post-acquisition plans.Based on the analysis, follow up calls are scheduled to the top bidders to understand the details and validity of their IOI. Post the discussion, a brief presentation is designed to be presented to the seller’s management team to determine which buyers to proceed with.

Management Discussions

The buyers have their own motivation for acquiring the business whether it be strategic or financial and they will continue to evaluate the business by their own means. Meanwhile, few selected buyers move to the management presentations where top executives like the CEOs and CFOS of both the buyer and seller meet for a daylong session to engage in discussions and know about the business in more depth. Facility tours are also a part of this phase.Both facility tours and management presentations are quite interactive sessions giving the buyer a firsthand view of the company’s operations, business units, warehouses etc. This is a part of pre-liminary due diligence. The competitive nature of the process is maintained as the deal team brings in multiple buyers in this round.

Letter of Intent (LOI)

The second round of bidding involves the remaining buyers putting their final bids across. The process of LOI resembles the IOI process with respect to providing an outline of what is required in the final bid.The Final LOI’s are continuously reviewed by both the buyer and the advisory team to ensure all the compliance requirements. As the final LOI’s are received after months of hard work from each parties ends. These are almost the final confirmations on deal closure post the success of final due diligence.

Final Evaluation and Due Diligence

The advisory team along with the seller evaluates the LOIs based on various factors like the structure of the deal and the likelihood of finalizing the deal. Post reviewing and comparing the bids, the seller recommends a buyer to the advisory team.Finally, the buyer and seller sign an exclusive LOI for a certain period. During this time the buyer gets answers to all his questions by conducting a final and thorough due diligence. The buyer arranges the financing, and some final negotiations take place before a detailed and lengthy contract is prepared in the presence of legal teams from both ends.

Closing Day

While it could be wished that the closing day can be as simple as signing the contracts but unfortunately, it is not. Both teams have their legal team on reviewing the documents to ensure everything is as per regulatory requirements. There are several agreements like final purchase agreement and employment agreements which are executed. Once all necessary consents and signature pages are secured from both parties, the buyer contacts the bank to release the funds. The transaction is officially closed with funds reaching the relevant accounts.

Future Outlook

The year 2022 saw record-breaking M&A transactions, followed with the continued momentum in 2023. However, analyzing the first half of 2024, there has been a slow trend in the M&A sector. Seeing the fall in the number of transactions people start to wonder if it is going to be similar in the future, whether the M&A industry will revive or not.With factors such as economic growth pressure, continuous need of the businesses to undergo dynamic changes to achieve rapid growth and entering the new market segments to diversify, the question is not if the M&A Industry will revive but how soon it revives.Government initiatives such as providing favorable policies towards renewable energy sector makes it one of the most prominent sectors for M&A activity. Also, the healthcare sector continues to be one of the sectors gaining the maximum attraction. While India continues to position itself as the global manufacturing hub, many foreign companies are expected to expand to India, similarly like Apple and Toyota.While 2024 will continue to follow a similar trend, M&A activity is expected to revive beyond 2024 with interest rates projected to decline and the active participation of PE players contributing to developments within the energy sector.