Effective Divestiture Process
This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.
In previous articles we discussed various liquidity alternatives and how to prepare for a liquidity event. This article focuses on one liquidity alternative, the divestiture, and discusses factors that are critical to making the process effective, ensuring optimal outcomes are achieved.
An effective divestiture process needs to accomplish the following:
Create competitive tension and incentivize purchasers to maximize their offers
The divestiture process can be structured as a targeted approach directed at one potential buyer, a broad auction, or anything in between. Compared to a targeted approach, a broad sales auction exposes the company to the largest number of potential buyers and maximizes competitive tension. However, one must weigh the benefits of this process against the following risks:
A broad auction exposes confidential information about the company to a larger number of potential buyers. This is particularly challenging to manage in circumstances where the most likely buyers are also the company’s most direct competitors.
A broad auction processes typically take anywhere from 6 months to more than a year to complete. Targeted processes can typically be completed in a much shorter timeframe.
Ensure the most relevant buyers are approached
A broad auction process involves ensuring “no stone is left unturned” and all relevant acquirers are identified. Potential acquirers are vetted for strategic fit and financial capacity.
In a more limited auction process, acquirers are vetted and ranked (based on financial capacity and synergistic interest) to determine which should be included in the short-list that will form the limited auction process.
Ensure the most relevant information is presented to potential acquirers
The sale process involves providing potential acquirers with adequate information to articulate an expression of interest, while maintaining confidentiality around key critical competitive elements of the business.
Information should be released in a sequenced manner, with the more sensitive information being released in later stages, subsequent to potential buyers demonstrating their commitment to the process and acceptable transaction terms.
The information should “put the company’s best foot forward” and guide potential purchasers to understand the vendor’s value expectations. In addition to running an efficient process, other important issues that need to be dealt with / negotiated to ensure optimal outcomes include:
- Deal structure and form of consideration
The form of transaction, (asset or share deal), and form of consideration (vendor take-back and earn-out arrangements) can significantly impact the quantum of cash proceeds received on closing and overall after-tax proceeds in the hands of shareholders.
- Retained ownership
Investors often demand owners “roll-in” 10%-40% of their ownership as confirmation of their “bullish” outlook for the company and confidence in the strategic merits of the transaction, as well as a means of ensuring alignment of interest between the parties and lowing their up-front cash investment.
- Representations, warranties and indemnities
Vendors should focus on limiting their exposure and having potential risks identified and capped during the acquirer’s due diligence process.
In summary, the divestiture process needs to be carefully designed and executed to ensure optimal results are achieved. The existence of many important process and agreement related issues make having experienced M&A, legal and tax advisors by your side during the process critically important.
Contributed by Nathan Treitel, MBA, CBV, from Segal LLP. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore North America.