Merger & Acquisition Series: Structuring an M&A deal in Australia - Step 3: Let the marketing (and bidding war) commence!
Over the coming weeks, the Business and Enterprise Team will take you through the process for structuring an M&A transaction in the Australian marketplace.
This next blog is dependent on whether you are running an auction style process for your sale transaction.
Much like selling a house, an auction style sale process is designed to engender competitive bidding among potential buyers to facilitate the sale of a business or company.
There are advantages and disadvantages to an auction style process:
Once the information memorandum has been circulated to those prospective purchasers who have signed NDAs, you should solicit and evaluate indications of interest and indicative bids by sending an instruction letter for those prospective purchasers submitting non-binding indicative bids (letters of intent).
Typically, an indicative bid will state the purpose and structure of the transaction, tentative purchase price, payment terms, how and when the potential buyer will finance the purchase, timetable of negotiations, timings of due diligence, and a tentative date of completion.
An indicative bid may include an exclusivity agreement to ensure that you (as the seller) is not entering into parallel negotiations with another prospective purchaser. If you are entering into this type of auction process, you need to assess whether this is in your best interests.
An indicative bid allows you to provide a “go/no-go” analysis with the prospective purchaser and whether you should move forward to the due diligence process with them.
These bids are normally managed by your adviser (investment banker/M&A adviser).
Letters of Instructions to Purchasers
Typically, the purpose of the bid instruction letter is to provide a framework for managing the potential bidders and the procedures and requirements for a successful navigation of the auction process. It also provides a shield for the seller and its advisers from liability in the case of a rejected bidder suing them over the auction process.
A good instruction letter makes the auction process clear, it governs the procedures for the next steps, it is clear how decisions are made and it creates a level playing field amongst auction participants.
Typical elements of an instruction letter includes:
- The seller’s adviser’s details for communication purposes.
- Date when bids are due.
- The number of expected bidding rounds (typically we see two rounds – the second typically being a binding final bid).
- Required terms of the bidder (e.g. settlement period etc).
- Bidder identity.
- Estimated valuation range – typically of the total enterprise value of the seller, together with applicable deductions and adjustments to the purchase price.
- Included in this valuation range, any valuation assumptions.
- The form of consideration (cash, equity or a hybrid).
- Financing sources and steps required to secure financing.
- Note, it is important to determine whether ‘clubbing’ is allowed – i.e. multiple financiers pooling their resources together. This is sometimes known as a syndicated or consortium investment.
- Timing and scope of the bidder’s due diligence review.
- Any required third party and regulatory approvals
- Any strategic plan for the seller’s business and transitionary provisions for the management team (if any).
- The bidder’s industry experience and synergies for the purchase.
Other elements of an instruction letter should include disclaimers and reservation rights for the seller.
There may also be non-financial reasons for a seller to continue the process with a prospective purchaser. This may include the reputation of the bidder, the difficulty in the negotiations process, the past performances of the bidder and financing certainty (i.e. much like selling a house, the less conditions to a contract, the less hurdles required for the contract to become unconditional).
Get advice on whether an auction process would be the most beneficial move forward for your business. If so, we recommend you receive expert advice on your instruction letter and managing the indicative bids for your business.
Who we are
R.B. Flinders’ Business and Enterprise Team predominantly represents founders of businesses who are looking to capital raise or alternatively sell-down from their business.
We know that no deal is the same and that no client is the same. For that reason, we get to know our clients at a personal level and take a pragmatic approach in our dealings with them.
We offer a wide-variety of services that assist our founder going forward, including assisting in their estate planning affairs as well as restructuring their property portfolio for a more advantageous tax position.