Successful entrepreneurs regularly think about their exit plan, which may involve a merger or acquisition. Whether a potential buyer calls looking to see if the company is in play or the management team makes a conscious decision to begin looking for a potential buyer, every entrepreneur should take the three following steps to prepare for an M&A exit.
A strong deal team of both company representatives and external advisors is critical to help prepare for, negotiate and execute a successful M&A exit. The team will often include the following individuals with knowledge of the company and its business, the wherewithal to analyze and evaluate deal terms and the power to make significant decisions:
- The CEO: A company’s CEO typically leads the team, as he or she likely possesses the most institutional knowledge and can play a vital role in selling the deal to the company’s board of directors and shareholders.
- The Board of Directors: Because a company’s board of directors must approve the final negotiated deal, board members should be involved from the beginning of the M&A exit process. In particular, the board should actively participate in the evaluation of any potential transaction and stay up to speed with significant deal developments.
- Other Employees: Other key employees or members of management are also often involved, as they can provide alternate perspectives and assist with the due diligence efforts and negotiations. As a caveat, it is generally advisable to limit as much as is reasonably possible the number of employees that are aware that the company is in play.
- Investment Bankers: Investment bankers may play an important role on a deal team. By having the pulse of the market, bankers can help the company determine its value and reach out to potential buyers in order to get the best deal. Even if the company has already been approached, bankers can conduct market checks by engaging with other strategic buyers or private financial acquirers and possibly secure a better deal or confirm the existing financial terms are fair to the company and its shareholders.
- Lawyers: Lawyers play an essential role in the deal team, providing advice on deal structure and terms, and negotiating and drafting the transaction documents.
- Accountants: Companies typically enlist their accountants to advise on accounting and tax treatment issues.
- Other Consultants and Specialists: Additional outside experts may also be involved to assist with the due diligence process or provide other needed expertise.
From the outset, the team should consider their objectives for the transaction and how to best structure the deal to meet those goals. In many cases, shareholders may simply want to dispose of their entire interest in the company, whereas in other instances, shareholders may wish to sell off only a certain portion of the company’s business. Shareholders may be interested in receiving either cash or shares of the buyer’s stock in exchange for their interest in the company, or a combination thereof. Also, depending on the nature of the deal, the seller may wish for all or a portion of the management team to stay on after the transaction. When evaluating potential transactions, sellers should then consider whether their objectives align with those of a prospective buyer.
In connection with an M&A exit, potential buyers will want to take a close look at the company by conducting comprehensive due diligence. Companies can expedite this process and help build the potential buyer’s confidence in the investment by conducting some pre-M&A exit house-cleaning, which may address:
- Corporate Governance: Corporate records and accounts should be up to date. Board and stockholder minutes and resolutions should be reviewed to ensure all major corporate actions were approved or ratified and that the directors and officers were formally appointed. All equity grants should be approved by the board of directors and comply with Section 409A. Former directors and officers should have executed resignation letters and any share cancellation or repurchase should be appropriately documented.
- Cap Table: The cap table should accurately reflect all stock issuances and equity grants.
- Permits and Filings: The company should be in good standing in all jurisdictions in which it conducts business and all necessary permits should be active.
- Financial Statements: Yearly and quarterly financial statements should be readily available. Given the size of the company, a potential buyer may expect the yearly financial statements to be audited. Additionally, buyers may want to see a multi-year forecast of operating performance.
- Taxes: The company should ensure it is in compliance with all federal, state and local tax obligations (or at least be aware of and be able to discuss any deficiencies).
- Intellectual Property: The company should register and have good title to all intellectual property (IP). The company should also be able to provide evidence that agreements with adequate IP assignment provisions have been executed by every current and former officer, employee and consultant.
- Employees/Consultants: An audit of employees and contractors (or exempt vs. non-exempt workers) may be useful to uncover any misclassification issues.
- Lien and Litigation Searches: Consider conducting IP, lien and litigation searches of public records to help identify active and inactive liens and outstanding litigation.
A little preparation goes a long way in an M&A exit. In particular, sellers may be able to steer the process by enlisting the right help at the outset, identifying their business objectives and performing thorough due diligence. Through these relatively simple steps, companies may help ensure a successful transaction that minimizes time, hassle and cost while maximizing deal value.