The Sell Side Transaction Process
Whatever the motivation may be, the owner or
principal of an insurance distribution entity may decide
that they would like to explore the sale of their business.
Many are curious about the steps involved with selling a
business and what is entailed in order to successfully
complete this process. The following section is provided as
a general overview intended to help familiarize those with
this process. This outline applies whether the business
involved is an insurance broker or agency, an employee
benefits operation, a managing general agent, or another
type of insurance distribution entity. Included are basic
principles and steps typically followed throughout the
process that aid in the successful consummation of a
transaction.
The three broad phases of the process are
Preparation, Interim Evaluation, and Final Execution, which
are set forth below. A decision to sell is not always
easy. Owners and principals must fully understand the
financial implication to the sale as well as acknowledging
the potential changes that lie ahead. Owners and business
executives involved with the sale must remain apprised of
the market dynamics which impact valuation, obtain the most
favorable terms, fully understand the tax implications of
the transaction, as well as have a clear grasp of
post-transaction events and changes so that they are well
prepared.
The
Preparation Phase
Below is
an illustration of the initial stage in the process, The
Preparation Phase.
Four key
steps in the Preparation Phase involve determining
shareholder goals, understanding the value of the business,
performing research on the acquisition marketplace as well
as developing the confidential memorandum. This phase sets
the foundation for all of the remaining stages of the
process. Active discussion of goals among the owner(s) and key
business executives will help to facilitate ideas about how
to accomplish certain objectives, who the ideal transaction
partner(s) would
be, what amount of financial consideration would be needed,
and other relevant issues important to this group.
Performing research and being aware of the typical values
offered in the marketplace will help during negotiations
with a potential acquirer as well as help to ensure that
fair value is being received for the business.
Another
key aspect in this phase is the preparation of a
confidential memorandum. This book resembles a combination
of an annual report and marketing brochure. Within this
piece contains a general overview of the business,
historical financials, and positive attributes that would be
enticing to an acquirer. Having organized financial
statements will aid greatly in the preparation of the
confidential memorandum. It is important to note that it is
common practice to adjust the financials for any excess
expenses that are not expected to continue
post-transaction. Examples include excess compensation for
owners and principals, extra fringe benefits such as country
club dues or vacation trips, and non-critical business
expenses. Adjusting for these expenses has the effect of
increasing profitability for the firm, which will enable the
owner(s) to obtain a higher value for their business in a
transaction.
The Interim Evaluation Phase
The illustration below is of the next sequential set of
events in the process, The Interim Evaluation Phase.
The Interim Evaluation Phase is essentially the period of
time when the seller of the business goes out to market and
contacts potential acquirers. The Preparation Phase
previously discussed is important because by this time a
list of viable acquirers has been already prepared and
agreed upon. In order to keep matters confidential when
talking with a potential acquirer, only high level
information is revealed such as amount of revenues, general
geographic location, and current lines of business. If the
potential acquirer is interested in learning more about the
business, they usually agree to sign a confidentiality
agreement that allows them to receive the confidential
memorandum.
After receiving the confidential memorandum, the potential
acquirer may then want to set up a conference call or
physical meeting to talk with the owners and key
executives. These initial calls and meetings serve as a way
for both parties to get to know each other and answer any
questions that may arise. Afterwards, initial negotiations,
reverse due diligence, receipt of initial offer(s), renegotiation
of salient items contained in the initial offer(s), evaluation of
all offer(s),
and selection of the transaction partner occurs. Again, the
Preparation Phase is important because the seller will be
armed with information about the going value for their
business as well as typical transaction structures
involved. It is important to note that this phase also
includes negotiations of post-transaction employment terms
as well as role definition within the acquired entity.
The Final Execution
Phase
The illustration below is of the final
sequential set of events in the process, The Final Execution
Phase.
Key steps in the Final Execution Phase
involve:
-
Execution of the Letter of Intent (LOI).
The LOI is a
non-binding document put together by a prospective
acquirer that outlines general terms of a transaction
subject to due diligence.
-
Preparation for and execution of legal,
financial, operational, and regulatory due diligence.
-
Negotiations and drafting of all
definitive contracts, schedules, and disclosures.
-
Closing of the transaction.
This phase is typically the most daunting out
of the entire process as the number of professionals
converging on the transaction increases and refinement of
all deal terms are negotiated for the final time.
While the whole transaction process may seem
intimidating, the rewards will be substantial to those who
have a clear understanding of their objectives and are fully
informed about the process. Preparation is key and even if
one is not ready to sell now, being cognizant of the issues
and factors involved will help to make the process smoother
once it is undertaken in the future.
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