Over the past 12 months, Patriot Capital Vice President Sean Bilbrough says they looked at around 700 deals that met the firm’s mandate — and about 1,200 if that includes desk kills, which are eliminated by reading the CIM and determining that it doesn't fit their criteria. Those 700 get filtered down to 30 issued term sheets. So, what happened to the 670?
“Most of those fell out for financial reasons,” Bilbrough said at last year’s Baltimore Smart Business Dealmakers Conference. “That could be structure of the deal — the LBO is just too levered, doesn't make sense for the credit structure of the business. That's probably 50 percent of the things that get killed are killed for that reason. And it's go to market, strategy, ops, that's going to be 40 percent of it. But then there's about 10 percent there that it makes some sense, but it's just death by 1,000 knives.”
Once a term sheet issued, it’s under LOI with the sponsor, they’re working towards a close and they’ve got all their diligence streams running, what can tank a deal at this stage is often and unexpected, last-minute killer.
“In my career I’ve had three deals fall out for background checks,” he says. “You do a background check on management and you find out a guy went to jail for 10 years for bank fraud. You just never know.”
When they find a deal that they think they like, the first two weeks of the process is underwriting. They’re exploring how flexible the business is from a downside scenario and how that downside can be protected, mainly. They put together an underwriting memo, go through the sources and uses, make sure things make sense, take it to their team to get a initial green light with the goal of issuing a term sheet. Usually, once that's issued, that's going to be a two-plus week negotiation before there's something actually signed. All this is on the debt side, primarily, not on the control.
Once they sign that figure, it’s six-plus weeks of buy-side diligence through various advisers. Through that process, they're working on their final work product to present to their firm to get a vote on the deal.
“We're working towards close, putting together this book explaining the deal to our team — it could be 30 to 50 pages, with a pretty robust financial model behind it, a bunch of different scenarios,” he says. “And we try to vote on that about two weeks before close. It's a two to three month process. It's a couple weeks to get a term sheet out the door, and then the heavy lift begins.”
For someone considering the sale of their business, Bilbrough says starting early is really important.
“Once you've rationalized it to yourself that you want to sell your business, it's at least a two-year process,” he says. “What can I do today to maximize value two years from now?”
He also advises getting a sell-side quality of earnings report done. It’s something that, because of the cost, many sellers balk at. But having an accounting firm come in and look at the earnings potential the business, do a quality of networking capital, generally look at the financial health of the business is a great practice run for the sale, he says, because the buy-side quality of earnings is going to be more extensive than the sell side would be.
“I spent a couple years as an investment banker,” he says. “When you get sell side (QofE), it helps you sell that business. You have more conviction in the numbers. You can give data faster.”
He also suggests hiring an M&A attorney rather than using a general counsel, even someone who has been working with the business for a long time, because their inexperience could cost the owner down the line.
“If you're selling into private equity, we do this for a living, so we're going to have an M&A specialist, from a legal standpoint, on our side,” Bilbrough says. “So, just coming into that transaction from a position of power and limit your weaknesses.”
