Sell Side m&a

8/12/2019 Sell Side m&a

1/21


2/21

2

Amsterdam Barcelona Brisbane Brussels Frankfurt Milan New York Paris StockholmSao Paulo WarsawMoscowCharlotte

Overview

The approach Assistance across key stages of the disposal

process

Evaluation of options

Disposal planning and preparation

Competitive auction

Completion and post sale actions

Illustrative engagement letter procedures

Contents


3/21

3


Overview

DISPOSAL PLANNING & PREPARATION COMPETITIVE AUCTION EXCLUSIVITY & COMPLETIONEVALUATIONOF OPTIONS

POST SALEACTIONS

What are common issues for Sellers?

Many sellers underestimate the time and resources necessary to sell their business

The seller must take action to address potential risks proactively by taking the same approach in selling theircompany as a buyer takes in analyzing potential acquisitions

How does a financial adviser sell side assistance differ from that of an investment bank?

Investment bankers provide an invaluable service to potential sellers which is generally focused on strategy, position,

marketing and negotiation. Most investment banks are not staffed to perform the level of analysis necessary to checkand challenge information at the level due diligence will be performed.

A financial adviser sell-side assistance focus is geared towards:

Identifying the areas that management needs to address to avoid surprises and subsequent price erosion;

Providing deeper insights into the value drivers of the business ;

Uncovering favorable and unfavorable deal matters; and

Assisting seller in developing the optimal tax structure or transition services requirements.

How does a financial adviser work with Sellers to bring value to the process?

The scope of work is flexible and based on assistance with carve-out historical financials (if applicable), Targetsfinancial projections and due diligence assistance type procedures which focus on risks, issues and opportunitiesfrom the perspective of a buyers accountant, although sellers must consider the impact of the divested business on

the remaining business (e.g. stranded costs).

A financial adviser can provide assistance at every stage of the disposal:


4/21

4


Buy-side deals are becoming more successful

SELL-SIDE EXPERIENCE

35% of vendors completed their most recentdisposal at a price significantly below their ownvaluation

Of these, an average 20% price reduction fromvaluation to selling price was experienced

60% of all vendors suffer post deal issues

BUY-SIDE EXPERIENCE

Dealsaddingvalue

Deals thatdo not addvalue

Source: KPMG survey Increasing value from disposals A casestudy for professionalising the sell side - 2009

Source: KPMG survey Beating the Bears - 2008

but that sell-side activities are becoming more challenging

Value creation

17%

31% 34%

30%

38% 34%

53%

31% 32%

0%

20%

40%

60%

80%

100%

1999 2004 2007

Enhance value Neutral Reduce value


5/21

5


Vendor frustrations frequently mirror those of bidders

Inconsistencies in financialpresentations

BIDDERS EXPERIENCE

Poor quality, inconsistentinformation in the data room

A legal data room, no

commercial information

Inability to prepare basicanalyses

Lack of access to management

Poor project management

Unrealistic timetable leads tolack of preparation time

WHAT CAN GO WRONG

Lack of central understandingof the business being sold

Lack of effective qualitycontrol over data roomcontent

Lack of robust financial dataand adequatesupport/explanation

Inadequate resourcingdeflects management teamfrom running the business

IM issued before supportinginformation is gathered &validated

Leakage of value during salesprocess

VENDORS EXPERIENCE

Slow process

Too many surprises

Extended warranties &indemnities

Too much disruption

Initial value expectation notrealised

Good preparation is therefore key to addressing these issues


6/21

6


Managementpresentations

Address

purchaserenquiries

Transaction Services assistance

Validate financialmodel

Tax and accountingstructure

Draft sale agreement

Price adjustmentmechanism

Informationmemorandum

DISPOSAL PLANNING & PREPARATION COMPETITIVE AUCTION EXCLUSIVITY & COMPLETION

Negotiation

Assesssecondroundoffers

Accessindicativeoffers

Address value andtransaction issues

Historical

financial information

Internalapproval papers

Data room

Separation plan

Make contactand assessinterest

Deliverinformationmemorandum

Valuation

Identifypotentialpurchasers

EVALUATIONOF OPTIONS

POST SALEACTIONS

Sellers strategydevelopedinto M&Aagenda

Approvalsdelivery

Separation

Understandthe business

Collect/challenge

information

Pre-sale duediligence

Data room

Actionsrequired by

Sellercompany and

externaladvisors Review draft

agreements

Seller responsible for these dealstages

TS can provide assistance atthese deal stages

Key:

Completionmechanics


7/21

7


Evaluation of options

Sellers strategydevelopedinto M&Aagenda

Assistance at this stage

Commercial due diligence

Impact on parent: Assist Seller in understandingthe impact that the planned disposal may haveon the parent Company. Areas to consider couldinclude possible impact on customers and the

Parent Companys ability to deliverservices/products.

Value capture options: Assist Seller inunderstanding any further value capture optionsavailable to potential bidders that Seller hasidentified (e.g., areas of the business which maycreate synergy opportunities or opportunities foroperational improvement).

M&A Tax

Consideration options: Assist Seller inunderstanding the accounting and tax impact onconsideration options:

Cash

Acquirer Stock

Earn-outs

Installment sales

Disposal options: Assist Seller in evaluating theaccounting and tax impact on disposal options:

Sale of assets or stock

All or part of the business

Tax-free reorganization

Joint venture / IPO / spin-off

Benefits

Helps Seller uncover the valuepotential which the business mayprovide to potential bidders.

Helps Seller better understandthe impact of the disposal on the

Parent Company and thereforeanticipate and mitigate suchareas of risk.

Achieve Sellers objective ofexiting a business in the most taxefficient manner, whileattempting to maximize thevalue it receives

Typical TS deliverables

Slide pack outlining theimpact of potentialoptions

DISPOSAL PLANNING & PREPARATIONCOMPETITIVE

AUCTIONEXCLUSIVITY & COMPLETIONOPTIONS

POST SALEACTIONS


8/21


9/21


10/21

10



Slide-pack outliningpotential options

Tax basis study

Section 382 study

Valuation study to supportallocation of tax basesbetween retained anddisposed business assets

Status reports

Disposal planning and preparation (3)



Historicalfinancial information

Separation plan


M&A Tax

Optimal tax structure: Through discussion with Sellerconsider the optimal tax structure for the disposal,considering:

The most efficient tax and legal disposal structure tosupport the desired business objective

Sellers preferred form of consideration andsettlement

Whether the Seller is looking to cash out of itsinvestment in Target or maintain an interest in theTarget or acquiring entity

Whether Seller wants to structure the sale as a

taxable or tax--free transaction Whether the sale should be a sale of assets, stock,

or stock with a section 338 election

Offset sales gain: Consider tax attributes and Sellersability to use to offset potential gain on sale

Determination of the effective tax rate to be used innormalized financials, where;

tax schemes currently in place are not being

transferred

Target operates in several locations(countries/states)

legal entities are not being transferred

Accounting implications: Advise on the accountingimplications of the proposed disposal

Unwanted assets: Comment on whether Target shouldconsider disposing of unwanted assets or subsidiaries

pre-sale

Benefits

Seller retains control of the taxaspects of the transaction

Maximizes value from the disposal

Buyer pays additional purchaseprice for step-up in tax basis inassets

Seller is able to use historicalNOLs to offset gain on sales

Buyer pays additional purchaseprice for ability to use Targetshistorical tax attributes post-acquisition

Allows Seller to retain flexibility todeal with proposals from differentbidders (e.g. domestic vs.

international, strategic vs. financial) Potentially defer taxable gain



POST SALEACTIONS

Tax and accountingstructure


11/21

11



Tax/ accountingstructure


Historicalfinancial information

Separation plan


Financial and business due diligence

Key assumptions: Assist the seller in identifying andthinking through the key assumptions to be used inthe financial model to control disposal activities andexpected outcomes in the sales process.

Model due diligence: Perform business plan duediligence on managements financial model. Identifykey assumptions underpinning the model and highlightareas of risk where appropriate.

Benchmark assumptions to both historicalperformance and external third party data. Externalthird party data may be collected from Sellerscustomers, suppliers, industry professionals and

industry reports. Sensitivity analysis: Assist management in quantifying

possible sensitivity in key assumptions or areas of risk.

M&A Tax

Tax calculation: Consider whether tax consequencesfrom the sale are correctly calculated inmanagements model

Compensation and benefits

HR costs: Consider whether HR separation costs areincluded in managements model

Accounting advisory

Accounting consequences: Consider potentialaccounting implications for the transition, e.g.impairment, gain/loss of sale, compensation etc.

Benefits

Highlights areas of inconsistencybetween the key assumptions in themodel and external marketconditions (e.g., projected marketgrowth or pricing assumptions) and

therefore be better prepared forquestions arising during buy-side duediligence.

Identifies areas in advance withaggressive assumptions and/or areasrequiring development of additionalsupporting documentation to satisfybuyer due diligence and negotiations


Status reports



POST SALEACTIONS



12/21


13/21

13



Draft sale agreement

Price adjustmentmechanism

Informationmemorandum

Internalapproval papers

Data room

Deliverinformationmemorandum


Financial and business due diligence

Data room information: Understand value drivers frombidders perspective and recommend financial,commercial, HR and taxation information to beincluded in the data room to support financial model.

Assist in development of data room index built around

value drivers

Assist with organization, collection and phasing of dataroom materials

Compare consistency of data room information andcontent with the information memorandum. Assistwith the development of a clear trail between theinformation presented in the informationmemorandum and the underlying financial records

Price adjustments: Provide input into SPA adjustmentmechanism for closing working capital, net worth orother

Assist in analysis of historical working capital forassessment of normal working capital levels

Assist with identification of potential purchase priceadjustments which bidders may use in pricenegotiations

Mitigation strategies: Consider mitigation strategies inresponse to potential bidder price adjustments

Consider potential representation and warranties andassess the impact to Seller

Benefits

Maintains confidentiality of certaininformation released later in theprocess to successful bidders

Limits the risk that commerciallysensitive information is disclosedinappropriately

Avoids bidder frustration by ensuringinformation disclosed to bidders isconsistent with previously releasedinformation.

Limits bidders opportunities forpurchase price reduction throughadjustment mechanism in saleagreement

Allows Seller to make informeddisclosure decisions


Suggested data room index

Comments on theconsistency and traceabilityof the data room materials

Comments on the financial,benefit plans and tax

sections of the sale andpurchase agreement

Status reports



POST SALEACTIONS


14/21

14


Managementpresentations

Address purchaserenquiries

Competitive auction

Data room

Review draftagreements


Financial due diligence

Data room: Control and co-ordinate multiple datarooms (e.g. data room rules, opening and closing,administration of admissions)

Collate and organize questions from bidders and theiradvisors; assist with responses and counter arguments

Assist Seller in dealing with reasonable requests frombidders for additional accounting and financialinformation

Manage disclosure of confidential or commerciallysensitive information

Support Seller in preparing for its managementmeetings and presentations

Draft agreement: In conjunction with Sellers legaladvisors, provide input into the completion,accounting, tax, HR and representations and warrantysections of the sale and purchase agreements

Identify and understand the value and warranty issueswhich bidders are likely to raise and assist Seller inestablishing a clear negotiating strategy

Assist Seller in understanding the buyer positions andtypical negotiation responses

M&A Tax

Tax consequences: Assist Seller with evaluating thetax consequences of different bids and structurespresented by the bidders

Benefits

Frees up management by reducingtime spent coordinating andresponding to bidder questions -allows continued focus onmaintaining the business being sold

Ensures that bidders requests are

dealt with efficiently Minimizes the number and scope of

representations and warrantiesrequested by bidder

Avoids major changes to the saleagreement late in the disposalprocess

Simplifies and avoids ambiguity inthe sale agreement

Provides understanding of taxconsequences of the different bidspresented


Comments and advice onsale and purchaseagreements

Slide pack outlining taxconsequences of differentstructures and bids

Status reports



POST SALEACTIONS


15/21

15


Completion and post-sale actions

Approvalsdelivery

Separationdelivery

Completion mechanics


Financial due diligence

Update procedures: Update due diligence proceduresprior to closing date to ensure financial results are inaccordance with expected budget/forecast andhistorical trends

Understand and document the impact on working

capital, pre-closing net worth, or other adjustments

Assist Seller in preparing responses to bidders closingbalance sheet due diligence issues

Closing statements: Perform due diligence and/orcoordinate with audit teams performing audit oragreed upon procedures on closing financialstatements/working capital statements for consistencywith SPA prior to submitting to bidder

M&A Tax

Assist Seller and bidder with understanding the taxtreatment of the proposed transaction

Assist Seller with understanding the tax itemsrequired for closing

Accounting advisory

Assist Seller with accounting issues arising fromchallenges to closing statements, working capital

statement etc.

Purchase price valuation support and valuation forbuyer

Benefits

Protects Seller from shiftingallegiances of Target managementduring the exclusivity andcompletion phase (e.g. defendagainst bidder attempt to influenceTarget management in closingbalance sheet adjustments)

Protects Seller against bidderattempts to negotiate pricedownwards through working capitaladjustments

Provides an understanding of the taxprocedures and items necessary forclosing


Input into responses tobidders closing balancesheet procedures

Tax opinion

Purchase price allocation

Tax elections, notices

Status reports



POST SALEACTIONS


16/21


17/21

17


Illustrative engagement letter procedures (2)

Financial due diligence (contd)Assistance with analyzing the financial track record

Assist management in preparing an analysis of historical sale trends byunderstanding:

Sales by core division

Customer Churns

Volume/Price mix by services & products

Product Line and/or key customers for the most significant businesscentres

Organic growth vs. acquisition growth

Sales by major customer

Backlog by quarter

Assist management in preparing an analysis of the change in EBITDA yearover year by understanding

Changes in sales

Change in gross margin

Changes in overheads and impact of cost reduction programs;

EBITDA by division and Business centre

EBITDA generated from organic growth vs. acquisition

One off or unusual items impacting EBITDA

Assist management in preparing an analysis of the cost structure and

breakeven analysis by considering:

Cost of goods sold

Direct and indirect labour costs

R&D costs

Other Selling and General administrative costs, variable vs. fixedcosts by division

Assist management in preparing an analysis of capital expenditures byunderstanding:

The breakdown of Capex by maintenance, growth and IT Capex.

Managements view of normalized capex by division

Managements estimate of the sensitivity of capex to businessgrowth

Assets by geographical location / legal entity

Assist management in presenting historical working capital movements by:

Analyzing inventories into quantities by product line, valuation andprovision methodology and turnover.

Analyzing accounts receivable into the composition of tradeaccounts receivable, reliance on key customers, ageing, bad debtsexperience, normal trade terms and credit control, receivable

turnover and specifically consider the timing of the recovery ofsignificant receivables, if any

Analyzing trade payables and accrued expenses to understand agingof trade creditors, key supplier relationships and turnover/paymentterms

Analyzing other liabilities

Analyzing working capital seasonality by month and division for200X, 200Y and 200Z


18/21

18


Illustrative engagement letter procedures (3)

Financial due diligence (contd)

Assistance with analyzing the financial track record (continued)

Analyze information on commitments, contingencies and litigation, andconsider

contractual commitments, including share purchase agreements,capital transactions and operating lease obligations;

employment related contingent liabilities including post retirementbenefits, pensions and compensation agreements, on the basis ofthe calculation made by local management and local actuaries, if

any;

nature of outstanding or threatened litigation;

any potential environmental threats and litigation in this area.

Completion assistance

Read closing balance sheets prepared by Seller

Analyze actual to budget variances for the period between initial duediligence (e.g. financial year end) and latest available financial information,

identify and understand reasons for significant variances Analyze capital expenditures in the period to closing and compare to

managements capital expenditure forecast

Identify and document issues identified in the completion accounts

Consider issues raised by bidders due diligence teams and assistmanagement in preparing explanations or mitigating responses

Analyze preliminary working capital calculation based on provisions of saleand purchase agreement for discussion with Seller

Understand the basis for pre-closing working capital adjustments (e.g. bonusaccruals, capital expenditure accruals)

Understand the basis for corporate adjustments in the closing balance sheetsand discuss with Seller


19/21


20/21


21/21

21


2010

+32 475 44 46 32www.clairfield.com

Syncap Management gmbh, member of Clairfield Partners

Hans Buysse, Partner

Sell Side m&a

Documents