Key Milestones and Documents in the M&A Process
by: Hayden Merritt
Merger and acquisition (“M&A”) transactions are complex, involving numerous legal processes, intricate negotiations, and many different stakeholders. To navigate these complexities and facilitate negotiations, due diligence, and ultimately the closing of a transaction, various documents are prepared and exchanged between the different stakeholders. More information on the sell-side process can be found here. Today, however, we will discuss each of the key documents involved in the M&A process, what is contained within, who prepares the document, and how it fits into the overall deal lifecycle.
The key materials prepared or exchanged in the M&A process typically mark the beginning or completion of a key transaction milestone. Below are the four milestones we will discuss throughout the article.
Key Transaction Milestones
Marketing Materials
Once an engagement has started your advisor will work with you and your core management to develop marketing materials. These materials will be shared with potential buyers and highlight the “story” of your business, detailing operations, market conditions, customer profiles, management, and financials. Three key documents are typically part of the marketing process: a Teaser, a Non-Disclosure Agreement (“NDA”), and a Confidential Information Memorandum (“CIM”).
The marketing process begins with identifying and contacting potential buyers about the opportunity via a document known as a teaser. A Teaser is a brief one- or two-page executive summary and high-level financial overview that introduces the investment opportunity on a no-names basis with the intent of generating interest. The teaser will be the first introduction a potential investor will have to evaluate the deal, and as a result, it must highlight the key points of the business, such as industry, description, financial summary, and general geographic location. As indicated by the name, a teaser only discloses certain non-identifying information regarding the company to protect confidentiality. Once investors receive the teaser they will review and determine whether they want to learn more about the specific opportunity at hand. If the investor is interested in learning the name of the company and getting a more detailed explanation of the investment opportunity, they will execute an NDA.
As discussed above, the initial outreach is done on a confidential basis to protect the identity of the company being sold from competitors, suppliers, and other industry players who could use that information maliciously. All potential buyers must sign an NDA before learning the name of the company and receiving more detailed information. An NDA is a legally binding contract between a potential buyer and the seller/investment bank that prohibits the sharing of confidential information with any outside parties. These contracts are prepared by the buyer or seller’s legal counsel and typically specify what information is confidential, the duration of the confidentiality period, and who is covered under the confidentiality agreement.
Once an NDA has been signed, or “executed”, by all applicable parties, the investment banker will send the potential investor a CIM. The CIM is the primary document used in the marketing process to convey all the important information relevant to the deal to prospective buyers. Prepared by investment bankers, the CIM outlines in detail the company’s investment highlights, growth opportunities, industry, history, operations, and financial profile. The potential buyers use the CIM to analyze how the selling company may fit within their current operations or investment criteria, and how they may be able to add value to the potential acquisition. If a potential buyer is interested in moving on to the next step in the deal process, they will submit an Indication of Interest (“IOI”).
Indication of Interest
An IOI is a non-binding letter that the potential buyer prepares and sends to the investment bankers to express their interest in the potential transaction. An IOI typically contains information regarding the range of the potential transaction value, the proposed structure of the deal, an overview of the buyer, and any major contingencies or conditions to closing. Given the limited information potential buyers have before submitting an IOI, deal terms and valuation are generally outlined at a high level, such as a range of values compared to a single point of value or deal funding guidance compared to specific amounts and lenders. The IOI is an important step in the deal process as it is often the first chance the investment bank has to gauge buyer interest in the deal and understand buyers’ valuation expectations. Following receipt of the IOIs, the investment bank will review and present the IOIs to the seller. Collectively, the banker and seller will select the strongest IOIs to move forward to the next step in the process, management presentations. The selected parties are those that most closely align with the seller’s goals or priorities, which often include valuation, continuation of legacy, ease of execution, and timing to close. Those parties that are not selected for management presentations will be informed and removed from the process.
Management presentations are a chance for the seller to meet with each potential buyer for the first time. During the meeting, management will discuss the highlights of the company, including growth opportunities, customers, vendors, products and services, intellectual property, and many other relevant topics in more detail with the potential buyer. The potential buyer is given a chance to ask questions of the seller to better understand the business, and the seller has the chance to ask questions of the potential buyer to better understand the buyer’s overall alignment with the seller and its post-close plans for the company.
Letter of Intent
Following the management presentations, potential buyers will have the opportunity to submit a Letter of Intent ("LOI"). A letter of intent is one of the most important documents in the transaction. Similar to an IOI, the LOI outlines key details of the buyer’s proposed bid. However, the buyer has had more time to learn about the company and meet with the management team, so the LOI details are more specific. For example, an IOI typically contains a valuation range, while an LOI pinpoints a single value, the buyer’s “best and final” offer. An LOI is generally non-binding, however, the LOI will contain an exclusivity clause that restricts the seller from negotiating with other parties for a specified period of time. Once the LOI is signed the buyer and seller enter exclusivity and start confirmatory due diligence.
Given the scope of this article, we will not dive into all the information exchanged during the due diligence process. However, the key areas reviewed during diligence include but are not limited to, a financial review, which may include a quality of earnings, HR, compliance, legal, customer, contractual, environmental, IT, and any other applicable information the buyer needs to understand and feel comfortable with in order to underwrite the transaction.
Definitive Purchase Agreement
The final document in an M&A transaction is the Definitive Purchase Agreement or Purchase Agreement ("DPA" or "PA"). The purchase agreement outlines and finalizes deal terms agreed upon by the buyer and seller. Generally, the buyer’s attorney prepares the first version of the document, and the seller's attorney and bankers will make edits until both parties mutually agree on the terms. Once executed, the purchase agreement is a binding document and deal terms, indemnification, transaction value, and any other agreements are final. The key items defined in a purchase agreement typically include the transaction value, deal structure (asset vs. stock deal), purchase price adjustments, representations and warranties, termination fees, indemnification, and earn-outs. Accompanying the DPA are disclosure schedules and other ancillary agreements, which include all items that qualify for representations and warranties and employment, transition, escrow, stockholder, and non-compete/non-solicitation agreements. Upon execution of the DPA, the buyer transfers funds to the seller, and the deal is closed.
The types of documents shared, how the documents are shared, and when the documents are shared are all critical parts of maintaining a disciplined M&A process and facilitating the efficient exchange of necessary information. The documents exchanged also mark key milestones throughout the process to allow for the management of both buyer and seller expectations, all leading to a smoother process. An experienced investment bank can help business owners navigate through the nuances and negotiations included in the various agreements, documents, and processes to ensure a successful outcome.