Sell Side M&A Process in Plain English

so you've heard about sell side m a deals but still have no idea how they work in real life let's walk through a typical deal as explained in our prior video investment banks offer four major services mergers and acquisition or m advisory restructuring advisory and debt and equity capital raising services within m a advisory the bank can help a client buy a new business this is called a buy side deal or the bank can help a client sell their business which is called a sell side deal in this video we'll walk through a typical sell side deal process although each deal is a little different sell side processes follow a fairly predictable sequence of events which breaks down into five phases pitch and engagement pre-launch marketing bidding rounds and closing these phases typically occur over a four to eight month period let's begin with the first phase pitch and engagement sell sides typically begin after a client offers a bank the opportunity to pitch to advise the client on the sale of their business the goal of the pitch is to get the client to engage with the bank senior bankers meet with the client to pitch and if the client agrees to work with the bank the client signs an engagement letter which states that the client will work exclusively with that bank on the deal and will pay a fee to the bank when the business is sold after the ceo signs the engagement letter the next phase is pre-launch in this phase the senior bankers map out the universe of potential buyers a marketing strategy and the deal timeline in parallel the mid and junior level bankers work on materials to market the client's company to potential buyers marketing material creation starts when the client sends over numerous files on nearly every imaginable detail about the company the analyst typically sifts through and cleans up the materials to create financial models and marketing materials that will be sent to potential buyers the analyst and associate typically work together to create the marketing documents with oversight from the vp there are three main marketing documents the first is the teaser which is typically a one to two page document that briefly describes the key attributes of the business without revealing the name of the business to potential buyers next the team creates a confidential information memorandum or sim which is a comprehensive slide deck that conveys details about the business the industry in which it operates why it's a good investment opportunity an overview of management and summary level financial data the third marketing document is a management presentation or management prez for short which is another detailed slide deck on the company that is often formulated from the sim slides these documents are created to help buyers better understand the business the deal team iterates on these materials for a few weeks typically with client input until the senior bankers and the client are satisfied once the strategy is mapped out and the teaser and sim are ready the deal team launches the deal and the marketing phase begins the deal launch typically begins with the senior bankers reaching out to buyers to gauge interest if buyers are interested the bankers will send them a teaser for review while the number of reach outs can vary widely let's say the bankers reach out to 50 potential buyers and 20 buyers decide to proceed with the process to continue each buyer will sign a non-disclosure agreement or nda in which they agree to keep everything about the sale process confidential once the nda is signed the analyst will send the buyer a sim for review the buyers will then review the information in the sim in detail to better understand the business let's assume that 10 of our 20 buyers decide to proceed with the process at this point in the process we move to the next phase bidding rounds each buyer that wants to continue will submit an initial or first round bid with a preliminary purchase price how they will fund the purchase and an overview of their sector expertise these bids are typically sent to the senior bankers initially and are then passed along to junior bankers who summarize them the deal team aggregates these bids and presents them to the client and while this may be surprising purchase price isn't the only consideration other key factors include certainty of buyer funding time needed to close experience with the company's market as well as the buyer's reputation let's say the client approves five of the bids those five buyers will now continue to the next and typically final round of bidding at this point we begin the second round and buyers will do deep research or due diligence to see if this company is right for them prior to the start of this round the analyst will have loaded the company's files onto a virtual data room or vdr for short the vdr is a secure online file storage system where buyers can access documents with everything from detailed company financials to legal documents when buyers enter the second round they are given access to the vdr so they can conduct further research after an initial review of the materials in the vdr buyers will typically submit a due diligence request list or dd list for short detailing the additional information each buyer would like to see the analyst then aggregates the requests and works with the client to gather the requested information and puts the materials authorized to be shared by the company into the vdr in the second round the investment bank typically offers management presentations during these presentations buyers meet individually with management teams these meetings allow buyers to hear management explain the business in more detail and ask questions after the management presentations and several iterations of due diligence request lists buyers will have to decide if they want to continue in the process buyers who want to continue will submit a final or second round bid which typically includes a final purchase price deal funding details and a list of remaining due diligence questions let's say that three of our five buyers submit final bids once again the deal team meets with the client to review the bids and to assess the relative merits of each bid at this point the client selects just one buyer to proceed in the process once that buyer is selected we enter the closing phase the bank will work with the buyer to finalize their due diligence requests then the bank advises their client in negotiating the purchase agreement with the buyer the purchase agreement structure is the sale of the business in excruciating detail around things like the date of the deal closing how the deal will be funded and how the company will be managed post-close once the parties agree they sign the document next the buyer and seller work on regulatory and shareholder approvals communication items like press releases and the bank creates a fund's flow analysis which shows how money will be transferred on the day the deal closes at the closing the buyer pays the seller and the deal is now done as part of the closing payments the investment bank is paid a percentage of the company's sale price as a fee afterward the deal team in the client's company's management team set up a closing dinner to celebrate the deal closing and then it's back to work to find the next deal so that's the sell side m a process the deal starts with pitching the client who signs an engagement letter to work with the bank then the bankers work with the company to build a strategy to create marketing materials that are used to market the business to buyers who eventually work through bidding and due diligence after several rounds of bidding the banker and the client work with one buyer to close the deal in the end the bank has paid a portion of the company's sale price as a fee and this whole process typically takes four to eight months from start to finish hopefully after this video the sell side m a process makes a little more sense now [Music] you