Bankers have a massive role in the M&A industry. Often, they help buyers and sellers connect and close deals. But regardless of popular belief, with the right amount of dedication and resources, a company can execute divestitures without a bank. Having done it multiple times, Russ Hartz, VP Corp Dev at Ansys, will be helping us understand the process and some of the best practices during this type of transaction.
"Successful divestitures require rigorous planning that could take many months. If you rush to sell a business, you significantly reduce the value of that business." - Russ Hartz.
According to Russ, companies have a responsibility to their shareholders to provide the best opportunities for the business. Sometimes, that also entails finding a particular business unit a better owner. Constant evaluation of the business is necessary to identify non-core and underperforming assets as early as possible to avoid rushing into a sale process. Rushing will reduce the value of your business, limit your potential buyer pool, and you may be stuck with a group of people you may not want.
The first step into executing a divestiture without a bank is to identify what product you are selling and what you need to retain while selling that product. Most of the time, there will be co-mingling with the contracts or intellectual property, and you will certainly need to maintain some part of those assets.
Specify the people necessary to operate the business unit, and who should be included in the sale. Key people are a massive part of the company's value, and you need to place retention plans to keep them on board during the process.
Timing of the divestiture is also essential. You might need time to clean up some of the mess inside of the business you're selling, or wait if there is a milestone coming up that would greatly increase the asset's value.
Lastly, perform due diligence on your own business. See your business from a buyer's perspective to avoid some surprises. Often, you also need to generate a standalone financial statement because the business for sale doesn't have one. After all, it is not reported separately from the broader business. Develop a confidential information memorandum (CIM), which is something that bankers would typically do for you. Put all your data and information into a virtual data room for potential buyers.
After much preparation, you want to maximize the value of your business by creating competition or an auction process that a banker would likely provide. You need to identify the potential bidders, and it starts by looking inside the ecosystem of that particular business unit. Notify everyone who touches or has relationships with that business unit of your intentions to sell (i.e., partners, customers, contractors). If none of them are interested, you can start branching out to other parties outside of the ecosystem.
Once you have started to collect interested parties, have them sign an NDA before you show them any confidential information such as your CIM. This will allow you to filter the more serious buyers and start the bidding process of collecting offers.
When it's time to select the buyer, there are three significant considerations to think about before you make your final decision.
In most cases, you will have a continuing connection between you and the business you are selling, resulting in an ongoing relationship with the buyer. Strategic relationships can be formed, which can be beneficial for you and the buyer.
This is probably the most critical consideration of all. A failed sale process could damage the business forever as employees might walk out or get disengaged. Make sure that you select a serious buyer and have the capacity to pay and close the deal.
Unless you never want to see the business again and have completely severed all ties from the asset, then the highest price should be a consideration. But in most cases, this should be the last thing on your mind.
For larger companies who have the resources and capacity, executing a divestiture without a bank is possible. With the right approach, you can maximize the value of your deal and run your auction process without paying external fees.