Selling your company
Preparation is fundamental to success. Here are some things you can do before the M&A process has begun in order to improve the outcome:
Assess your company’s readiness and management team’s M&A capabilities and create an internal team or task force. Make an honest assessment of your company together with the management team, its current challenges and bandwidth. How much exit experience is around the table? Create an internal task force with appropriate representatives from key functional areas (e.g., finance, human resources, legal). Identify who should be in charge of the readiness process, assign clear deliverables and deadlines after consulting with any desired outside experts.
Supplement internal task force with qualified external experts. Companies often work with outside counsel and professionals to prepare for an exit. In addition, some companies retain an investment banker to assist in the sale process. Read about some of the considerations you should have when deciding to hire an investment banker.
Understand how buyers generally value companies in your industry and be prepared to explain your own valuation model. Essentially, you need to understand how buyers typically arrive at a purchase price for companies in your space. Stay current on precedent exit transactions in your company’s space to better understand how buyers value important business attributes (e.g., multiples of sales, , number of users or discrete views per month). The details of many of these transactions may not be public so it may be difficult to discern the valuation metrics used by the buyers. Investment bankers can supplement this piece of the process and assist you in building a credible M&A valuation for your company.
Perform “reverse due diligence” on your company. Essentially, you need to understand the risks and liabilities a buyer would worry about in acquiring the company. Outside counsel is well-suited to assist with your efforts here. You can
Focus on key risk/liability areas:
- Who owns the company’s equity? Working with counsel, ensure that equity ownership and those that have rights to acquire equity ownership are clear.
- Who has a claim on deal proceeds? After reviewing the company’s and other documents, prepare a “waterfall” spreadsheet showing by class and series how deal proceeds will be allocated. Identify any shortfalls for potential unhappy constituencies, and consider how and where interests/incentives diverge (e.g., preferred vs. common/option holders).
- Who can block or hold up the deal? Check the and other documents for blocking positions and material contracts for third-party consents. Are there any practical blockers like key employees who need to be part of the deal?
- Does the Company have its assets, particularly intellectual property, in order? Check that you have all your assignment of inventions agreements signed. For many companies, periodic IP such as an open source should be part of a sensible risk minimization plan.
- Are there any key liabilities or other areas of concern? Is there any actual or threatened litigation/allegations of infringement? It’s always better to be prepared to answer those anticipated questions from buyers rather than react in response to a buyer’s inquiry off the cuff.
- Are there any other third-parties/governmental entities to consider? Review key customer and vendor agreements. Be wary of broad and potentially upstream non-compete clauses (provisions that would bind the buyer and/or its other subsidiaries) that might concern a buyer. Are there any existing founder guarantees?
- What will a close review of tax returns and financial statements show? Can you produce all tax elections, returns and filings? Are there any issues noted in letters or in the returns?
- Ensure that your company’s insurance profile, especially its D&O coverage, has been reviewed and paid.
- Assess whether the company has sufficient controls in place to comply with the operating applicable once you are “under agreement”. Acquisition agreements often place burdensome restrictions on the operations of target companies between signing and closing, and the consequences of breaching those are serious. This can be a real concern depending on your company’s internal controls and compliance culture.