Set up your business from day one expecting growth and an eventual exit. The following checklist will help guide you through the process with practical tips along the way.
- Stay organized. “Due diligence” is one of the most time-consuming and important steps of any corporate finance and M&A transaction. To prepare for the due diligence phase and to ensure it goes as smoothly as possible, be sure to keep fully-executed and complete copies of all documentation, contracts and corporate records organized by type in an electronic format.
- Know the priorities of your stakeholders. Every company has several categories of stakeholders, each with their own goals and priorities with respect to your business. Stakeholders include, for example, founders, creditors, investors, directors, customers and employees. Have conversations with your stakeholders in advance to understand their goals and priorities, and always assess deal terms being mindful of those priorities.
- Build your all-star team. You will need a core group of internal and external members who are deeply invested in the success of the business. Well in advance of an M&A transaction, build your team of people who are dedicated, aligned, maniacally-focused and possess an expertise critical to the success of your mission. The team should consist of the CEO, CFO, controller, lead negotiator and external advisors such as legal counsel and accountants. Also, consider hiring an investment banker who can literally add dollar value to your enterprise by connecting you with potential buyers, checking market comparables, and otherwise streamline the process and advise on important deal terms and issues.
- For tech companies: Manage your IP carefully. Usually for a technology company, a core aspect of enterprise value stems from the strength of its intellectual property portfolio. This includes patents, trademarks, copyrights, trade secrets and related rights. Be sure to get proprietary information and invention assignment agreements from all employees and contractors; get NDAs with everyone who has access to proprietary information (customers, vendors, employees, contractors, etc.); protect your IP in commercial contracts by making clear who owns what; and know the strengths and any potential weaknesses in your IP portfolio by doing periodic reviews with the help of experts.
- There will always be at least 3 surprises and the deal will always take longer than expected. It is a well-known truth in M&A that all deals encounter at least 3 major issues that come up unexpectedly. The goal is to be prepared and identify potential issues in advance with the help of knowledgeable experts to help ensure that any surprises are as low-impact as possible. Similarly, since almost all deals take longer than expected, you should expect to be in it for the long haul. Don’t schedule any vacations until after the deal closes.
- Keep your eye on the ball. The M&A process is distracting, time-consuming and stressful for the company and its employees, so don’t let the company’s performance suffer in the interim. Any dip in performance will be used against you in deal negotiations, and could lead to a reduction in the overall value of the company.
- Have realistic post-closing expectations. You should have conversations with your stakeholders about their expectations for what will happen post-closing. Many transactions involve “earn-outs” which are post-closing payments contingent on some future milestones (for example, revenue targets), and about 50% of the time the “earn-out” pays out less than expected. Also, almost all private company M&A deals involve escrows or “holdbacks” of 5-15% of the overall deal value to cover post-closing indemnification claims. Claims are made in about 3/4 of all transactions with such features, so expect that to be the case in your deal and plan accordingly.
For an excellent detailed guide to Mergers & Acquisitions, see the FAQ written by global consulting firm Protiviti at http://www.protiviti.com/en-US/Documents/Resource-Guides/Guide-to-Mergers-Acquisitions-FAQs-Protiviti.pdf. For more information on M&A post-closing escrow claim activity, see the 2015 SRS Acquiom M&A Claims Study at http://www.srsacquiom.com/studies-post-type/2015-srs-acquiom-ma-claims-study/.