by permission from M&A Today
The divestiture of a business may be the most important economic
event of a seller’s life. Unleashing
the value which has been built up over a period of years may be an
owner-seller’s only opportunity to provide for future income and
retirement, and to build an estate. Even
a company divesting one of its own businesses is responsible to the
shareholders to maximize the value which has been created.
Yet most sellers, in spite of the importance of the event, miss a
significant opportunity in the divestiture process to enhance the value
they will ultimately receive.
divestiture process involves thousands of hours of work.
First, there is the analysis leading to the decision to sell,
examination of the potential market for buyers.
Then a seller may make a significant effort to choose a
representative intermediary in the transaction process.
There will be the inevitable valuation process, pricing decisions
and preparation of an offering document.
Potential buyers will be targeted, suitable approaches decided,
confidentiality agreements executed, a data room prepared, due diligence
scheduled and conducted. Bids
will be evaluated, negotiating strategy and deal structure will be
decided. Then, when the field of buyers is narrowed, numerous drafts of
selling documents will be prepared, financing issues addressed when
necessary, government approvals secured when required, and ultimately a
transfer of title and purchase price. And each transaction will have its own variants of the above,
requiring creativity, flexibility and responsiveness at each stage.
Buried in this process, between the
transmission of offering documents and the final due diligence, is the
prospective buyer’s first encounter with the selling management who
intends to remain with the company after it has been sold. Often this
first encounter is during a series of presentations by management in a day
long meeting, rehashing the offering memorandum, showcasing management’s
own capabilities and vision, and responding to the inevitable zinger
questions from prospective buyers. It
is during this part of the process – the management presentation –
that tremendous value is built or destroyed in the buyer’s eyes.
Yet, sadly, very little appropriate preparation is done by most
sellers to maximize the value they can achieve by preparing well for the
who participate in the selling management presentation are usually the
head of the business and his or her direct reports, or at least those in
the most crucial roles. Depending
on the nature of the business, the key management may include the head of
Research & Development, Marketing/Sales, Manufacturing, and/or the
CFO. Often the Human Resources head, Legal Department, or
Controller’s office will also attend, although most sellers will make an
effort to limit the number of participants.
Beyond limiting the number of attendees, our experience is that
most sellers do very little overall strategy development for the
management presentation. The
presenters are usually seasoned business people, qualified in their areas
of expertise, and possibly even with superior presentation skills.
Therefore, it is tempting to rely on them to just draw on their own
capabilities to make an effective presentation.
Such reliance usually results in a rehashing of the offering
memorandum, which often has been read in advance by the buyer’s
attendees. This results in
the buyer’s “half-hearing” the words of presentation, as they wait
for the appropriate time to begin questioning.
The occasional seasoned buyer will throw a team off completely by
stating that they do not want to hear a presentation, they just want to
ask questions. The selling
shareholder thus loses a tremendous opportunity to do a true “selling”
presentation, which builds on and is consistent with the offering
memorandum, which anticipates the buyer’s questions and provides an
answering presentation in a proactive rather than reactive mode, and which
showcases the capabilities of the selling management, rather than just
their presentation styles.
To understand why this problem exists,
one needs only to focus on how particularly difficult is the position of
selling management, torn between loyalty to the selling owner, yet wanting
to be attractive to the potential buyer.
For most selling managers, their usual business and trade
presentations are very much different from the kind of presentation which
will be required in the situation of selling a company.
Questions will be asked which they have never had to answer before,
and a dress-rehearsal rehash of an offering memorandum does not prepare
selling management for a question such as “If you think this business is
so terrific, why aren’t you leading a management buyout?”
is Phantom Due Diligencesm?
There is another
approach to preparing the management team for success.
We have developed a process called Phantom
Due Diligencesm to enhance the results of the management
preparation only from publicly available information and the offering
memorandum, our team “appears” as a buyer would in order to hear the
management presentations, and to react as prospective buyers would likely
react. Of course, we are identified as “phantom” buyers, but
that does not prevent consistency and continuity in role playing.
The benefits to the selling management are significant:
Phantom Due Diligence brings
a fresh view to the process.
It is difficult for anyone engaged in the process, including the
intermediary who wrote the offering memorandum, to conduct any more than a
dress rehearsal. The
intermediary becomes so intimately familiar with the property that it is
difficult to ask questions to which he or she knows full well the answers,
and it is difficult to create questions that are meaningful when the
questioner is too close to the trees instead of viewing the forest.
Phantom Due Diligence protects the
buyer resource in a small auction population.
If a business which is for sale has dozens of potential buyers, a
poor management presentation may scuttle the interest of the first two or
three buyer-attendees, but many more remain.
Where the interested parties are far more limited, however, each
buyer resource is crucial to maintaining an auction environment, and
shouldn’t be wasted on what could become a poor management dress
Phantom Due Diligence builds the
confidence of managers before the crucial presentations.
Having learned from the Phantom Due Diligence experience and critique, the remaining management presenters (some do occasionally get
dropped during the process) will be far more confident in answering the
prospective buyer’s tough questions.
Phantom Due Diligence results can
be tested against and integrated into the entire transaction process,
from valuation expectations to negotiating strategy and from deal
structuring to handling of the remaining due diligence. For
example, if in the presentation session a “buyer” focuses on how to
merge sales forces because the valuation is greatly affected by expense
reduction, the presentation will likely be revised to indicate how a buyer
would go about merging sales
forces, and the due diligence room would likely contain a good deal of
information on sales force expenses and structure.
Enhancements to the Management Presentation
We believe that Phantom Due Diligence is the single most important action that
selling managements can take, beyond the usual deal process, to enhance
the financial results of their selling efforts.
There are, however, other specific actions which a selling company
can take to prepare the management team for the selling effort.
the selling decision to key management.
Clearly, to the extent that key management is aware of the selling
decision, they can be of assistance in marketing the company effectively,
and keep the company stabilized during a challenging period. The selling
owner is usually well advised to consider stay bonus contracts, spelling
out the obligations of management, what they will and will not do during
the selling process in order to better delineate the line between current
loyalties and future opportunities. Management can then be enlisted to identify strengths to
leverage and weaknesses to deal with, before such issues are surfaced by
the prospective buyer.
2) Write the
offering memorandum to provide the unique value proposition that buyers
will find attractive, and discuss at least in general terms any issues
that would keep buyers from perceiving full value.
For example, if a patent is about to issue, it is better to state
that a patent issuance is imminent and is expected to have a favorable
impact on market share, than to have the offering memorandum leave the
impression that the technology is not patentable.
Further details can be provided during the management presentation
or during due diligence.
unique value in the management presentations.
It is better to assume that the buyer has read the offering
document and to give powerful presentations which enhance the content of
that document, than it is to rehash what the prospective buyer has already
read. Anticipate questions.
It is better to say in a presentation the reasons that the gross
margin should increase, rather than wait for the question and then respond
defensively. The management
presentation should show-case the company primarily, and the management
4) Assemble the
data room and perform all the internal due diligence in advance of the
first buyer’s beginning due diligence.
A surprise in due diligence, found by the buyer instead of the
seller, can be a very expensive error that diminishes value and
credibility. When a company
conducts its own due diligence in advance, it has the information to be
able to leverage its strengths and proactively address the weaknesses or
business challenges. To wait
for the issues to be raised by the prospective buyer is to yield the
advantage of proactive discussion for the passive answering of questions.
Best practice would be to have the results of the seller’s due
diligence and data room preparation available before offering memoranda
As an extension of our phantom due
diligence work we are sometimes asked to
comment on our response to the offering document, and if it is at a
draft stage we are often able to point out what was confusing, irrelevant,
misleading or diminishing of value. After
the management presentation, we have been asked to evaluate the
presentation results from a buyer’s viewpoint, suggest areas to
strengthen the presentation, especially the answers to questions. We have
also given input regarding information a prospective buyer would expect to
find in the data room, based on a review of the offering document and the
management presentation. Such
supplementary assistance in Phantom
Due Diligence further enhances the positioning of the business for
sale. Sometimes the selling
owner is our client, sometimes an intermediary advisor is our client.
In either case, the goal is the same:
to prepare efficiently and effectively for the selling process to
C. Harris is Founder, President and CEO of Hypotenuse Enterprises, Inc.,
1545 East Avenue, Rochester, NY 14610 (716-473-7799 and after January,
2002 585-473-7799), firstname.lastname@example.org. (Phantom
Due Diligence is a service mark of Hypotenuse Enterprises, Inc.)
As Vice President of Corporate Development at Bausch & Lomb,
Diane C. Harris led the global corporate growth program through the
completion of over 230 deals – including 47 acquisitions and 25
divestitures – with a total value of over $1 billion. Her tenure at Bausch & Lomb was one of expansion, new
sector entry and roll-ups. Half
the company’s year to year growth for ten years came from corporate
development initiatives. In
1996, she founded Hypotenuse Enterprises, Inc., a mergers and acquisitions
consulting and advisory firm that works closely with companies to
negotiate, structure, and implement transactions.
Hypotenuse has completed over a half-billion dollars in transaction