This article marks the first in a series exploring key aspects of the M&A process — from gearing up for a sale and evaluating a bid to providing a general overview of the deal process.

Having recently acted for several founders in the sale of their businesses and provided end-to-end support throughout the transaction, we begin this first instalment by sharing key considerations for prospective sellers who may be contemplating a sale but are unsure where to start.

1. Knowing your objectives

Sellers should be clear-eyed about their objectives and intentions in selling their business. For example, if a seller intends to retire and exit the business, their key priorities will be quite different from those of an individual looking for growth capital while wanting to continue playing a role in the management of the business. In our experience, buyers generally prefer to retain key employees of the business — often including the founders themselves — for a minimum period after the acquisition so that the transition and knowledge transfer are seamless. A seller’s objectives may also influence whether the sale is full or partial and how the transaction is structured.

We have also noticed that some sellers would like to ensure that their long-serving staff do not have their employment terminated after a sale. While a buyer would not typically commit to refraining from retrenching or terminating staff, it would be worthwhile for a seller to have a conversation to understand the buyer’s plans after the acquisition so that, where possible, preparations for and communications with affected staff can take place.

2. Knowing what buyers want

In high-value M&A transactions, once sellers have identified their objectives, they will typically undertake an internal exercise to ensure that the business is in proper shape to be sold. Such an exercise can significantly improve the attractiveness of the business to prospective buyers. Some desirable elements are relatively consistent across any M&A transaction — for example, having a clean set of financial statements and proper record-keeping practices, especially for material contracts.

Illustration: If a seller with subsidiaries in Australia, Malaysia, Singapore and Thailand would like to retain its business in Thailand, it would ideally undertake an internal restructuring exercise before any acquisition so that the Thailand operations are easily separable from the rest of the target group. This would enable a buyer to acquire the remaining subsidiaries in Australia, Malaysia and Singapore without complications arising from the retained Thailand operations. Making this clear to the buyer at the outset also narrows the scope of due diligence and streamlines the M&A process.

Especially for founders who want to retire or exit the business within a prescribed period, establishing a strong management team that can run the business independently of, or with minimal oversight from, a founder is crucial. This would alleviate the buyer’s concerns about key-person risk.

On the other hand, if a seller wants to remain involved in the business and retain an ownership stake, understanding the plans and strategy of the potential buyer is paramount. If the parties are not aligned on the future growth opportunities and direction of the target group, a partial acquisition may be inadvisable and alternative means of raising funds may need to be explored. If this is not discussed, there may be significant implications for the future of the group — especially if the parties subsequently disagree on strategy, such as one party seeking a quick IPO while the other views an IPO as unappealing due to the significant costs involved.

Buyers also want clear documentation and policies. Sellers can enhance transparency and reduce deal friction by focusing on several key areas:

  • Contracts with material customers and suppliers should be kept in an organised fashion, and provisions that require the counterparty’s consent before a change of control should be highlighted at the outset. This allows buyers to identify and resolve key risks promptly.
  • If intellectual property is fundamental to the business, sellers must ensure that those IP rights are thoroughly protected and that intellectual property registrations and records are kept up to date.
  • Where employment contracts contain golden handshake clauses or employees have been granted share options, these are liabilities that buyers will typically want addressed before taking over the business.

3. Preparing for an M&A transaction

Having identified what buyers want, sellers can take steps to ensure that they are well placed to proceed with an M&A transaction efficiently.

Before any confidential or proprietary information is shared with a potential buyer, sellers should ensure that an appropriate confidentiality agreement or non-disclosure agreement (NDA) is entered into with the potential buyer. This is crucial to protecting the business’s rights and confidential information, which can significantly diminish in value if it is no longer confidential. The potential damage is especially significant if the prospective buyer is a competitor of the business.

Illustration: A seller intends to sell its software business to a large multinational corporation. To evaluate the opportunity, the buyer requires access to the seller’s source code, customer data and financial information. The parties do not enter into an NDA, and the buyer subsequently decides not to proceed with the acquisition. Without the NDA, the seller does not have adequate protection against the buyer developing competing software using the seller’s source code or reaching out to the seller’s customers to offer that software.

One key aspect of any M&A transaction is the due diligence process. As buyers want the exchange of information to be as seamless as possible, all documents to be reviewed should be organised and stored in a virtual data room. This facilitates ease of access and minimises friction when responding to the buyers’ information requests.

Conclusion

If you are thinking about how to prepare for a potential sale of your business or have concerns about an ongoing M&A transaction, please contact our Corporate Team at JurisAsia LLC, comprising Tan Choon Leng, Vincent Tan, Prashaanth Rajandran and Clarissa Wong, who would be pleased to guide you through the process.