It’s understandable that a lot of people are intimidated by the process of selling a company, especially one holding most of the family’s net worth, generational legacy, personal relationships and employees that have become like family–it is a very intimate undertaking, and often, it’s not just about the money. Also, let’s face it–most people who run companies are typically not deal-savvy about buying or selling businesses–they are not trained to do that. They are trained to run businesses.
On the flip side, there are more “corporate” transactions with deal-savvy executives–whether it’s public companies undertaking a process, or private-equity owned businesses. In either case, the specific set of circumstances dictates the best process to undertake.
So far in our series on the changing landscape of Fashion M&A, we’ve talked about the accelerating pace of deal-making and the types of companies that are most in demand. In this article, we take a closer look at the process of selling a business. There are a couple of different directions that the seller can take, and we typically advocate for one over the other.
Keeping It Quiet: Philosophy #1
We believe that more often than not, it is best to keep things under the radar, run a highly controlled process and contact as few potential acquirers as possible. This is especially true for privately held and family-run companies. These may be businesses where there is no next generation to take over the company, a business founded and run by a baby boomer who is ready to move on, or a successful operator that simply wants to take some chips off the table and share the risk of funding future growth with a partner. For such businesses, the best process is one that’s going to achieve fair value and identify the right strategic partner where there’s a good cultural fit, while not over burdening the company or exposing confidential information.
We believe in a quiet process in which we strategically identify the few best buyers, sometimes it may only be one (we call it a one-off) and have a highly confidential conversation with the decision maker(s). For strategic transactions, cultural fit is of paramount importance as is the alignment of long-term objectives. Often the best buyer for a business is a direct competitor. The fewer companies that are contacted, the easier it is to control the company’s information and the less likely there will be a breach in confidentiality.
From start to finish, a sale process is typically a six-month to one-year undertaking during which the principals and/or operators cannot take their eyes off the ball. Running the business needs to remain the number one priority. And while a sale process can go on in parallel with the business of the business, the broader the process becomes, the less realistic this goal is to achieve. Not only is there a greater likelihood of confidential information leaking, but the process also becomes a bigger drain on the company’s resources.
Most often when a company contemplates a sale, only the owners and generally the CFO are aware of the impending process. While the investment banker is there to manage the process of the deal, it ultimately comes down to the CEO and his appointees to present the company to potential buyers—its products, its structure, its economics, organizational structure and so forth. Dedicating valuable time to marginal prospects is a poor use of time and an unwarranted business disruption.
Confidentiality is critical not only because the fashion sector is so highly competitive, but also because companies have lots of stakeholders–customers, employees, bankers, licensors and suppliers. It’s important not to create any concern among these stakeholders until a deal is imminent—then the owner can take people into his or her confidence. Until then, rumors and uncertainty around a sale process may create insecurity about the company’s future or unnecessarily impact employee morale.
When It Makes Sense to Run an Auction: Philosophy #2
While we believe auctions are over utilized, under the right set of circumstances, running an auction has its benefits. This is the method of choice for most investment banks, which includes preparing an executive summary on a company and sending it out to a large number of potential buyers in an effort to maximize value. However, auctions have their shortcomings, including alienating buyers that refuse to participate in auction processes, putting a big drain on management, and risking a breach in confidentiality.
As such, auctions need to be used strategically. For example, auctions work well for a company that is in trouble and needs to get sold quickly if such information is common knowledge—bad news may have hit the papers, or rumors are running rampant in the industry. If a public company wants to spin off divisions, as Liz Claiborne did very publicly with multiple divisions years ago — an auction is the best choice. If a company is private-equity owned and a sale is expected within four to six years of the investment, and cultural and strategic fit are less important than value, an auction process may be best.
Also, if selling to a private equity firm is the best option, then a mini-auction that exposes the company to those P/E firms that are the most strategically relevant, may be ideal. This way, the process ensures maximum exposure for the company. While this is the antithesis of the under-the-radar process described above. The difference in selling to a private equity firm versus a strategic is often that the cultural fit is less relevant, and calling multiple financial guys versus competitors presents less risk of a confidentiality breach. Knowledge of the auction doesn’t bleed through the industry in the same way that it would when talking to strategics. Among financial types there’s more confidentiality–and you’re not talking to your competitive set.
The Importance of Assembling a Team of Professionals
Buying and selling a business is a highly specialized skill set and art form. Managing a sale process to a conclusion is a team effort. There are three professional teams the seller needs to engage in order to make the process run as well as it can, capture the highest value, draft documents that will protect the sellers interest and minimize the taxes that seller will have to pay on the proceeds received from the sale–an investment banker, legal counsel and an accounting or tax advisory firm. Each has a key role to play.
The reasons business owners engage an investment banking firm to represent a sale on their behalf, are numerous. The investment banker will manage the transaction in its entirety, position the company for a sale, run an efficient process, find the right buyer, maximize the company’s value, spearhead negotiations, protect the company’s confidential information, coordinate the various professionals and manage the deal to a conclusion. The investment banker needs to maintain a level of objectivity on the deal process, keeping much of the emotion out of it, and be prepared to walk away from any deal that is not in the seller’s best interest.
It is also very important to retain an attorney who is transactional, deal-savvy and experienced in the industry—someone who understands the terminology, all the nuances of the fashion sector, and has a track record of closing deals. Rounding out the professional mix is a tax advisor well-versed in creating tax efficient structures, especially capital gains versus ordinary income tax.
With the right investment banker, lawyer and tax advisor, a well-rounded team is positioned to represent a company in the transaction, maximizing value, and protecting the shareholders’ best interests, which should be the only agenda in any transaction!
In our next article, we’ll look at ways of preparing a business for sale.
About the Author
Allan Ellinger is MMG’s co-founder and senior managing partner. In addition to his involvement in M&A, restructuring and crisis management, he serves as a strategic advisor to many fashion and consumer product CEOs. He can be reached at A.Ellinger@mmgus.com.
Now in its 25th anniversary year, MMG provides investment banking, strategic and financial advisory services to clients in the retail, fashion, textile, home, and jewelry and beauty sectors. The firm guides owners of both privately and publicly owned businesses through mergers and acquisitions, management buyouts, divestitures, strategic alliances, operational restructurings, valuations and business model analysis.