With M&A activity on the rebound since the pandemic-induced downturn of 2020, a growing number of GovTech business owners have become interested in selling their firm. In earlier posts in this series, we’ve discussed some of the crucial considerations for GovTech owners looking to create liquidity — from the most important business metrics to planning an exit strategy.
Are you a GovTech firm owner or federal contractor? This third and final post in the series will advise GovTech firms on the various phases of an M&A deal, so you know exactly what to expect throughout the process. Depending on your speed and efficiency, you can take your GovTech firm from early stages to final sale in as little as 180 days. In this article, we’ll go over the five stages of market readiness for your GovTech business.
Phase #1: Preparing Information
The preparation stage typically lasts 30 to 40 days, depending on the amount of research required. The activities during this stage may include:
- Building a financial model and analyzing your government firm valuation.
- Identifying potential investors to target, and holding preliminary discussions with a few investors to gauge the potential success of a deal.
- Creating a “virtual data room” for potential investors to access. A virtual data room (VDR) is a secure online repository for storing and sharing confidential information, often used during M&A deals to protect sensitive documents.
- Preparing marketing materials such as a teaser and a confidential information memorandum (CIM). A teaser is a one to two page document with (anonymized) company information and a few key highlights. A CIM is a more in-depth document, given to potential investors after signing an NDA, that covers the company’s products and services, competitors, and financial information.
Phase #2: Marketing the Offering or Evaluation
The marketing stage typically lasts 30 days or more — as long as necessary to attract high-quality potential buyers. The good news is that marketing your GovTech business for an M&A deal isn’t too dissimilar from something you already know how to do: winning federal contracts by playing to your strengths and capabilities. However, M&A marketing also needs to focus on external factors such as your competitors and your company’s future viability in the market.
The activities during this stage may include:
- Initiating your marketing and sales pitches to potential investors.
- Distributing teasers and CIMs and granting VDR access to investors who have signed an NDA.
- Conducting in-depth discussions, conference calls, and video meetings with potential investors.
- Obtaining Expressions of Interest (EOIs), also known as Indications of Interest (IOIs). EOIs are documents written by potential buyers that formalize the company’s interest in purchasing the seller, with a request to perform complete due diligence. EOIs usually contain information such as the buyer’s valuation (including the methodology and key assumptions) and offer to the seller (including cash, shares, and performance bonuses).
Phase #3: Negotiating Term Sheets
A term sheet is a non-binding document that outlines the most important terms and conditions agreed to by the buyer and seller in an M&A deal. Companies such as Atlassian have publicly released their term sheet templates to help incorporate visibility and guidance into the negotiation process, especially for first-time sellers.
This phase can often occur simultaneously with the previous phase, as different potential investors may be at different stages of the buying process. The activities during this stage may include:
- Guiding potential investors throughout the negotiation and submission process.
- Reviewing the submitted EOIs/IOIs from potential investors and advising the issuer on the offers.
- Managing the due diligence process from potential investors and following up on requests for additional information.
- Holding meetings with firm executives and managers to update key decision-makers on progress and consult on strategy for the final stretch of the process.
Phase #4: Investor Due Diligence and Final Proposals
In this phase, potential investors wrap up the due diligence process and present a proposal if they are still interested in the transaction. Throughout due diligence, investors may consider all aspects of the business, including:
- General company information (owners, shareholders, articles of incorporation, etc.).
- Finance and accounting (balance sheets, accounts receivable/payable, audits, debt, forecasts, etc.).
- Products and services (including competitors, vendors, suppliers, partners, etc.).
- Sales and marketing.
- Customer base.
- Human resources.
- Technology (hardware, software, IT outsourcing, etc.).
- Legal (contracts, intellectual property, real estate assets, applicable laws and regulations, past or future litigation, insurance, etc.).
The activities during this stage may include:
- Requesting Letters of Intent (LOIs) from potential buyers. LOIs are M&A “marriage proposals”: non-binding agreements that outline the terms and price of the proposed transaction.
- Evaluating the conditions of each LOI, including price, representations, and warranties.
- Seeking input from key decision-makers in the firm.
Phase #5: Negotiating the Final Agreement and Closing
Finally, this phase focuses on sealing the deal and closing outstanding proposals. The activities during this stage may include:
- Reviewing potential investors’ final offers and negotiating on any points of contention.
- Working with financial and legal experts to refine the ultimate agreement.
- Obtaining signatures from all required parties and transferring the agreed-upon assets (e.g., stock, assets, or cash).
With so many different stages to go through, and so many activities at each stage, selling your GovTech firm can be an intimidating prospect even for experienced owners. That’s why it’s a wise move to work with a seasoned GovTech M&A advisor who can assist you along the way.
Do you need strategic guidance for your own GovTech company? Whether your goals are growing the business, maximizing value, or finding the right seller, we can help. Get in touch with our team of experts today for a chat about your business needs and objectives.