An M&A Love Story in Three Parts – The Final Part!

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In our previous posts, we’ve talked about

Today we cover Tying the Knot! - the final part of our 3-part series called "An M&A Love Story".

Part III - Tying the knot!

You have a signed term sheet from an acquiring company in your hands.  The hard part is over!

Well, not exactly. This last stage of closing an acquisition requires some heavy lifting, and you want to complete it quickly.  As the saying goes, time kills all deals.

Target to close within 4 – 6 weeks of signing your term sheet.  The longer it takes, the more likely something will come up to kill your deal.  Here are some things we’ve seen come up:

  • your “sponsor” leaves or is reassigned and corporate decides not to move forward
  • the buyer’s business takes a dip and all acquisitions are put on hold
  • you lose a key client and the buyer walks
  • a competitor swoops in and agrees to be acquired on better terms
  • the broader economic environment takes a nose dive and everyone gets jittery
  • your sponsor just changes her mind!

You can’t control everything.  But there are some things you can do to keep the deal moving.

Get your data room ready

The data room is a document repository that the acquiring company will review as it conducts its diligence of your company and operations.

If you’ve followed our three-part M& process, then your buyer will already know a lot about you. But due diligence of a private company goes way beyond what is normally disclosed before a term sheet.  Your buyer will go through a deep discovery process to understand your business from multiple perspectives: commercial, technical, financial, IP related, legal, people and more. This helps the buyer validate its strategy, justify the valuation and start to build an integration plan.

Many sellers wait for the buyer to ask for documents.  Don’t be that seller.  Collect and organize your diligence documents while you are negotiating your term sheet so that you don’t waste any time once that term sheet is signed.

Don’t know what documents you need to collect?  Ask your M&A lawyer and advisor.

Get your financials in order

Buyers want to see standard financial statements by quarter going back at least 3 years.  This seems obvious to most.  And yet, we’ve seen many startups that do not have adequate financial statements for their businesses.

In addition to historical statements, a buyer will also want to construct a financial projection of your business.  Don’t let them do this alone!

Guide the buyer’s thinking by preparing your own 3-5 year projections on a stand-alone and pro-forma basis covering the top-line revenue, bookings, expenses and cash flow.  Expect experienced buyers to go deep into these projections and challenge your assumptions. Make your projections reasonable - you will surely see them after the deal closes!

Beginning to clean up your financials after you sign a term sheet is not only going to delay closing and give an acquirer some serious doubts about your financial acumen, but it can also blow up your acquisition costs with emergency accounting fees.

And while we’re talking about acquisition costs…

You might be tempted to choose the cheapest lawyer to run your deal.  Legal fees for private company acquisitions can run as high as a few hundred thousand dollars. But the value of getting a lawyer with M&A experience on deals in your industry and geography will far outweigh the problems that arise from using inexperienced counsel.

Having said that, once you pick the right lawyer, you can do a number of things to manage those legal costs.

  • Run point on as much of the due diligence process as you can.
  • If the lawyers get stuck on an issue, work with your counterpart to make a business call.
  • Keep the bigger picture in mind.  When you’re neck deep in legal details, it’s hard to remember the forest for all the pine needles being thrown back and forth.

As your company’s chief executive, you still have a business to run. It’s hard to keep up with each and every detail of the acquisition negotiations.  If you don’t do it yourself, and you don’t have a trusted representative doing that for you, you’ll find that it’s even harder to jump back in if you’re needed to solve a dispute before it blows up your deal.

Don’t underestimate the volume of legal docs!

We’ve emphasized that this stage of the M&A process involves more work than most acquisition newbies can imagine.  For a sense of just some of documents that need to be generated, take a look at this post from the M&A Lawyer Blog.

 © Can Stock Photo / fotodesign_jegg

© Can Stock Photo / fotodesign_jegg

What you can do now (that will help you later)

 You can immediately start doing a few things that will help you have a faster and less painful experience during the actual acquisition process.

  • Keep your corporate documents updated and in a single place - include incorporation and organization documents, cap tables, investor agreements, option agreements.
  • Watch out for change of control clauses in your agreements with vendors and customers. They will play a large role when you sell your company since that is a change of control!
  • Keep your IP related documents, patent filings, licensing agreements, open source agreements organized and up to date.
  • Get a sample due diligence list and set up an document repository that you keep updated as your business grows.

While closing an acquisition isn’t exactly like planning a wedding, it has some of the same characteristics.  You learn a lot about your “new family” during the engagement process – some of the things you learn may surprise you.  There are a ton of details to navigate – and the longer the engagement goes on, the higher likelihood the wedding won’t happen. 

Perhaps M&A Advisors are a bit like wedding planners.  We’re know where things could go wrong and negotiate around those pitfalls, we attend to the details that you don’t have time to deal with and recommend the best course of action for the decisions you need to make yourself.  And when emotions run high, we’ve learned how to bring them down and focus on the value that brought you both together in the first place. Our goal is to help you tie that knot and live happily ever after…

Mona Sabet and Sandeep Mehndiratta

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AN M&A LOVE STORY IN THREE PARTS – The First Part!

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Last week, we covered Part II of our three-part series “An M&A Love Story”. Today we go back to the beginning to talk about how to start the M&A story. 

If you’re a private company thinking an acquisition might be in your future, our experience is that you jump directly into Part II of the process - what we call “Getting Engaged”. 

But the most important step you can take towards a successful acquisition is strategically “Playing the Field”.  This is what we are covering today.

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Part I - Playing the Field

Building a long-lasting & rewarding relationship is equal parts: knowing your prospects; putting yourself out there positively; perseverance in finding the right partner; and timing.

If you are a larger business with substantial revenues and a strong growth trajectory that is meaningful for potential buyers, then you’ll probably engage a traditional investment banker to help you sell.  The banker will follow a standard process:

  • building a new financial model to position you for a sale
  • developing a list of prospective buyers
  • preparing a teaser and a full confidential information memorandum (CIM)
  • blasting the teaser out to the prospect list
  • following up with potential buyers to move the conversation to the next step.

This process has its place.  But it’s not for everyone all the time.  To maximize your exit, you should be working with prospective buyers long before you are ready to sell your company.  This is especially true if you’re a smaller company and your revenues aren’t going to be driving the buying decision.

First, develop your own prospect buyer list

Think about the different industry segments that your business could be a strategic fit for.  Normally, you should target at least 3 different industry segments with a range of players in each segment. 

Going through this exercise – what we call landscaping – early enough in your acquisition planning might open your eyes to new opportunities and help refine your business strategy.  Perhaps you don’t exactly fit with a particular segment today but by adding just a few features to your product or pursuing a few different customers, you can become a better strategic fit.  This is how an acquisition strategy can combine with a business strategy to create additional value for the company.

Second, develop a strategic rationale for your value to a buyer in each segment

This is comparable to creating a teaser, but you’re creating a customized version for each segment.

Don’t make the mistake of getting ahead of yourself here.  If you spend too much time customizing a pitch for each prospect, you’ll likely find all that effort wasted.

The biggest mistake we see companies make in this step is succumbing to the “Sims Effect” – creating an entire world filled with strategies they have created in their mind for their prospective buyers without any real world input.

A buyer isn’t going to adopt your strategy for how they should operate.  They are going to assess whether you fit into their strategy.  So, at this early stage, use your best intel to define how you fit into their strategy – and then test it, just as you would test a beta product with potential customers.

Finally, reach out and start talking to your prospects.

You might be thinking that it’s too early to talk to prospective buyers.  But at this stage you’re not asking them to acquire you (and hopefully you never will!).  Approach these discussions as business development discussions.

In these discussions, you want to introduce your company and impress the prospect with what you’ve been able to achieve.  Focus on positioning what you’ve achieved to fit the strategic rationale you’ve developed for the industry segment your prospect is in.  Test to see if the rationale sits well with your prospect.  If it doesn’t, ask questions so you understand where your theory departs from their actual strategy.

Use the information you learn to reassess the likelihood that this prospect would acquire your company at some point in the future.  It’s better to live in the real world than spend months or more imagining a relationship that isn’t going to happen.  Uncovering this information might also get you thinking about how to modify your business strategy in a way that not only helps your business but also positions you better for a possible acquisition by this prospect.

If successful, these discussions might lead to some partnership opportunities.  Partnerships are great ways for companies to “date” and develop an appreciation of what they bring to the table.  That lays a strong foundation for future acquisition discussions.

If incredibly successful, you might even find that one of your discussions leads to an acquisition conversation.  If so, this could drive a higher valuation and a better fit than any you’d get from a “spray and pray” approach of sending teasers and CIMs.

Of course, these steps take time and resources, both of which every business is in short supply.  This requires you as a leader to make some priority decisions.  Strategically preparing for an acquisition is an activity often put in the important-but-not-urgent category – until it become a fire drill.

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Laying the groundwork for a possible future acquisition by “playing the field” is going to help you get a much better valuation down the road.

In next week’s concluding post on the M&A Love Story we will discuss how to close the deal by “Tying the Knot”.

 

By Mona Sabet and Sandeep Mehndiratta

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An M&A Love Story In Three Parts

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We get a lot of questions from private companies asking what to expect if they were to get acquired.

The process of getting acquired is a lot like the process of finding a partner and getting married.  While the details are different for each person, the overall process is usually very similar, and often not the fairy tale hook-up we dream about.

If you’re a private company thinking an acquisition might be in your future, this story is for you.

An M&A Love Story in Three Parts

  • Part I – Playing the Field
  • Part II – Getting Engaged
  • Part III – Tying the Knot

Today, we’ll cover Part II – Getting Engaged, even though Playing the Field is the most important step towards a successful acquisition.  Like Star Wars, we’re not afraid of starting in the middle of our story.

 

Part II – Getting Engaged

This part of the M&A process starts with an Expression of Interest(a là dating) and ends with a signed Term Sheet (a là when your partner says YES). It should feel exhilarating.  But sometimes, it feels more like negotiating a prenup. Let’s find out why.

The “Expression of Interest”

In this phase, your goal is to move the conversation from product demos and partnership discussions to a verbal commitment that the buyer is interested in acquiring your company within a certain price range.

This phase can often be awkward – like trying to find out whether your love interest wants to get engaged before actually popping the question out loud.  It takes strong negotiation skills to guide a discussion towards an actual offer.  If you don’t do it right, you could find yourself in a continuous loop of show and tell with the buyer.

As you work on securing an expression of interest, watch out for these three things:

1.  Come to the discussion with convincing proof points of how you will help their business, rather than how they will help yours.

Companies often spend time showing potential buyers how much more they can sell through the buyer’s channel.  That might be persuasive IF the buyer was already looking for a product like yours to sell to sell through its channel.

If your products are interesting but not something the buyer’s sales team has been clamoring for, then selling more of your product is less interesting to your buyer than selling more of theirproduct.  Can you show them how your business can help them sell more of their product?  Now that’s a killer proof point.

2.  If you have less than 9 months of runway before you run out of cash, don’t pretend everything is going great.

You should balance marketing your company with maintaining your credibility.  In due diligence (discussed in Part III), the buyer will learn nearly everything about your company.  If you overdo your marketing efforts in your “dating phase”, the buyer will eventually figure it out.  It could be enough to break their heart – and your deal.  Since everything will come out in due diligence, you are better off controlling the narrative up front.

3.  If the potential buyer is a competitor, be careful about providing customer or financial data.

You’ll have to tell them your revenue numbers (otherwise they won’t be able to get to an offer) but instead of giving them detailed financials, consider giving them unit business metrics (gross margin ratios, conversion ratios, etc..). Instead of providing customer names (that you haven’t otherwise published), provide data about the % of revenue your top 5 (or 10 or …) customers contribute to total revenue.

Can you get to an expression of interest on your own?  We believe that CEOs shouldn’t try to negotiate their way to an expression of interest themselves.  If you have strong negotiators on your executive team, use them to negotiate with a buyer.  Otherwise, consider hiring an M&A Advisor.  To understand why, see our answer to this Quora post.

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The Term Sheet

Once you have an Expression of Interest, you’ll begin negotiating a term sheet. A term sheet is like an outline of your prenup.

A term sheet with minimal terms normally takes a couple of weeks to negotiate.  This kind of term sheet sets out the basic framework of the acquisition including how much the buyer will pay, what they are buying, and how they will pay for it. It will normally also include an exclusivity clause but it will stay away from outlining the more controversial terms of a deal.

However, there are situations where it is in your interest as a seller to have your term sheet cover more controversial terms.  These terms are going to be negotiated eventually and might reduce the actual dollar amount you receive on the closing date.  It’s better to know up front the real numbers you get on closing your deal.  It also puts you in a better position to give your investors a realistic understanding of what they are getting on closing.

If you decide to take on these more controversial terms up front, we’ve seen term sheet negotiations continue for a month or more, so factor this timing into your overall timeline.

Here are the typical set of controversial terms we’re referring to.

  • whether the Buyer will be deducting debt or liabilities of your company from its purchase price;
  • if the purchase price includes shares, and the vesting terms for these shares;
  • if the Buyer expects you to sign a non-compete agreement (normally yes) and if so, for how long;
  • will the Buyer require a minimum number of your employees to sign offer letters before close;
  • will the Buyer require some of the purchase price to be held back (normally yes) in case it determines after closing that some of your representations where inaccurate, and if so, how much of that purchase price do they want to hold back and when will they release it;
  • what else could the Buyer sue you for after closing?

A great explanation of these issues is set out in this post by our legal friends.

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This period of negotiating an engagement – from the time you have broached an acquisition discussion with a potential buyer to the time your term sheet is signed – can take two or more months.  Be prepared to put a good amount of effort during that phase, and seriously consider lining up experienced external advisors and legal counsel to make sure you aren’t leaving money on the table.

In next week’s post, we will go back to the beginning of the M&A Love Story and discuss how to find the right partner by “Playing the Field”.

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Mona Sabet and Sandeep Mehndiratta

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Combining Agile, Design-Thinking and Lean to unlock greater business impact

written by Marion Groh Marquardt and posted on LinkedIn

 CEO Web Croissants | Builder of Cross-Discipline Innovations

Digital transformations, including digitizing business processes, results in increased profits, and an ability to remain competitive and innovative in the face of disruptors. In addition, collaborationinnovation, and customer-empathy are all recognized as fundamental building blocks of effective organizational cultures and effective business.

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