Startups exiting through M&A is incredibly rare. Indeed, you can expect at least 70% of companies that raise money to either fail or become self sustaining. There are also different stages where you can sell for an optimum outcome – miss the stage and it becomes more challenging to achieve valuation goals.
But if you are lucky and do go through an M&A transaction, it’s worth being aware of what’s going to happen. The process is set up for the buyer’s advantage. Just like buying a house, the founder/CEO probably only experiences M&A once or twice in their lifetime, but the other parties do it regularly. With the possibility of a life changing financial outcome, the psychology of selling is important to keep under control.
There’s quite a lot of M&A advice online, but it tends to focus on the vagaries of “how to get acquired” or what the formal process is. Having gone through this earlier in 2018, I thought I’d share some of the specific things I’ve experienced that might help other CEOs. This post is about the transaction itself. It’s too early to comment on post-close integration but this post by Steven Sinofsky with lessons from Microsoft is great.
Signing the LOI/termsheet is just the beginning
It’s easy to fall into the trap of thinking that once you’ve negotiated and signed the termsheet, the rest is just a formality. Actually, it’s just the beginning.
Due diligence is about the buyer confirming what you’ve said is true, and trying to find reasons not to do the deal. Of course, everyone is acting in good faith but this is a formal legal discovery stage to understand risk.
We only hear about the successful transactions. Deals fall apart all the time, even at the very last moment.
If there is anything unusual in your business it will be discovered in due diligence, but that is the worst place for surprises. Disclosing anything upfront that you think might worry the buyer allows you to control the messaging and avoids surprises and questions about why you didn’t reveal it sooner. The whole exercise is about trust, which is all too easy to break.
You have to be a project manager
There are so many people involved in a transaction that it can be easy to assume someone else is driving things. You will have teams of lawyers from both sides, tax advisors, executive and technical team members doing due diligence and probably your own M&A advisor as well. There’s a lot of keep track of.
However, just like when you are buying or selling a house, it is up to the principals to keep on top of everyone and make sure things are progressing speedily. Advisors are paid by the hour so their incentives are somewhat misaligned with your own.
Your goal as the seller is to close as quickly as possible so you must keep things moving at all times. Be relentless in chasing your own team as well as the buyer.
Lawyers will only follow your instructions
Your lawyers are paid to execute your instructions. They are usually good problem solvers but will not necessarily come up with creative or wildly different solutions.
We had an instance where our lawyers discovered a problem with a particular aspect of the transaction. They spent half a day going back and forth with the buyer’s lawyers and came to the conclusion we needed to engage additional external advisors, pushing back close for several weeks. This was on the Friday before we intended to close the following week!
Upon being informed, I was able to instantly change the instructions to our lawyers because this wasn’t actually important to resolve right away, and we could deal with it in the post-close process.
The lawyers were doing their job – trying to follow instructions – but they can’t adjust those instructions in the same way the principle can.
Maintain open communication with your counterpart
I was in constant communication with the main person on the buyer side by phone and text. Providing status updates and asking/answering quick questions using informal messaging really helped us keep things moving.
This helped when there was a particular check the lawyers were doing to verify signing authority from one of our investors. It was clear that this investor had authority by looking at the public company records, but it wasn’t quite sufficient to prove authority for the lawyers. Strictly speaking they were probably correct but I was able to get the buyer to instruct their lawyers to lighten up the requirements thereby unblocking a sticking point.
There will be lots of little questions and problems that should be dealt with directly and not via lawyers or advisors. Be careful not to become too friendly because you are still in a transaction, but having a trusted counterpart you can work with closely really helped us close quickly.
You will need to engage with all of your shareholders because you have to get them all to sign, probably physical papers as well as electronically.
We did this in stages.
A few weeks after the LOI was signed as we were getting towards close, I sent out a general message to let everyone know that a transaction was in progress and what the intended close date was. Everyone was then kept up to date because the last thing you want is for someone to disappear on holiday or be away from connectivity.
You also want to minimise any unnecessary involvement, especially from minority investors. It’s difficult enough to close a transaction without random investors trying to negotiate with their own agenda.
This is where it is helpful to have professional investors who have seen transactions before, and angels who have been CEOs. They know what it’s like and keep out the way, being quick to reply and helpful when needed.
Others cause problems. They think they should be involved as if they were board members or majority investors. All that does is make you never want to work with them again. The last thing you want to do is use your drag-along to force the deal: it’s a red flag to the buyer, creates legal risk and ramps up your fees.
The lesson is: reference check your investors. Find out what they were like for the entire lifecycle of an investment.