Competitive bidding processes, once the preserve of big buyouts, are now a feature of M&A transactions of all sizes. As many acquisitive corporates and PE investors know, there is a game to be played in any auction process, and bidders will win or lose depending on the quality of their offers.
This month we identify five ways to distinguish your final offer letter and help seal the deal.
1. Make your case
An auction is referred to as a “process” for good reason, but don’t let the structured nature detract from what your offer letter really is – a sales pitch.
Clarity, distinction and vision will carry your offer letter a long way. Clearly state what you are offering to buy or invest in, explain how your current business, expansion plans or similar investment successes make your offer uniquely compelling, and explain what the future may hold for the business and how you are perfectly placed to realise those plans.
Play to your audience; cash aside (for now), a trade buyer should communicate how the management team will be incentivised, rewarded and (in particular if the management team would go from manager/owner to just manager) how those individuals will continue to have a say in the business’ operations and long-term evolution. An institutional investor will be able to sweeten its deal with equity incentives, operational and strategic influence through board seats, and can promise to grant the management team a degree of autonomy that may not be tolerable to a trade buyer.
2. All about the money
An offer letter should be a professional product, demonstrating clear strategic thought and ability to execute, and not just a readiness to name a high purchase price. That said, it is a mistake to make the quantum of your offer anything less than crystal clear. A buyer whose offer letter hides the purchase price at the bottom of page 4 will come across as lacking conviction in their valuation. A buyer whose offer letter splits the purchase price into multiple elements, each subject to variables, assumptions and ranges, will come across as disingenuous.
The basis of your valuation, purchase price mechanism (locked box/completion accounts/fixed price), timings and contingencies of payments (earn-outs, deferred etc) should all be clearly stated. Similarly, if reinvestment or roll-over is a key component in your offer, raise it now before the sellers start mentally spending their anticipated cash proceeds. Escrows, set-offs and other buyer protection mechanisms are not always flagged here, but expect to be on the back foot if these are important and only raised at a later stage.
3. Financing and structuring
Your final offer must specify how the transaction will be funded, in sufficient detail (and, if requested, supported by evidence) to demonstrate that you have the financial resources to close the deal.
The letter should indicate what stage you have reached with the financing process; this will be key in helping the sellers assess whether their (usually ambitious) transaction timetable is realistic. Tempting as it may be, under pressure from the sell-side’s advisers, avoid over-representing how certain/unconditional any external financing is. Trust and confidence in your ability to execute, and willingness to make compromises on other issues, will be undermined if you later confess that external financing requires a timetable extension or changes to deal terms/structure.
Even if you consider your proposed deal structure to be ‘standard’, your offer letter should set out your thinking, including the current status of any SPVs that need to be incorporated. This is particularly important if your offer includes any element of roll-over or reinvestment.
4. Timing and conditionality
Time is money but, more importantly in an auction process, time is certainty. The sellers will want to conclude the transaction at speed, and certainly before (i) the deal leaks into the press and (ii) other bidders – the sellers’ back-up options – lose interest.
Sellers will also be focussed on the deliverability of an offer. Therefore, the offer letter needs to demonstrate that not only can the transaction be completed within the sellers’ proposed timetable, but that the offer itself is realistically achievable.
If third party consents, or legal/regulatory clearances, are required, list them and specify the steps you have already taken to prepare the ground for the relevant approaches/applications. The sellers are likely to have anticipated these, so will be interested in your action-plan. Equally, if internal approvals are required (e.g. investment committee, board of directors) note these, together with your assurance that the relevant committee/board is fully up to speed, and that final approval can be co-ordinated without impact on the overall timetable.
If there is no reason to split signing and completion, make a point of this – it may be a comparatively strong card to play.
5. Beware the process letter
The sellers’ corporate finance adviser is likely to have provided a process letter, or at a minimum informal guidance as to the details and confirmations your offer should include. Consider it carefully, providing as many of the confirmations as you can; if your offer letter omits material details it is likely to be labelled as “non-compliant”, at which point your offer could – perhaps unfairly – be perceived as less robust than that of your competitors.
That said, it is common for process letters to resemble a wish-list, incorporating requirements that any bidder will struggle to comply with. Examples include a request for confirmation that no further due diligence is required (some late confirmatory DD is standard, and inevitable if sensitive DD materials are held back until exclusivity), that all internal and external approvals have been received (final IC or board approval is normal), and that external financing is unconditional (external financing will always be conditional on finalised transaction documentation, among other things).
So do not be unduly concerned if you are unable to tick every box in the process letter; instead focus on what you anticipate to be your relative strengths and challenges vs. those of your likely competitors, and then put your best foot forward.
With special thanks for their input to Smith Square Partners, corporate finance advisers to investors, management teams and non-executive directors on acquisitions, sales, capital raisings and restructurings.
Is this brief too brief? Do you need any help with your next acquisition or sale? Expert legal advice is on hand from MJ Hudson’s M&A and corporate law team.