We just watched a company go through a very intense, distressed M&A process that fell apart in the final hour. I want to share some of the hurdles that came up so that when you’re ready to sell, you’ll be prepared:
Protect your team from getting poached. An acquirer is about to learn a lot about the company and the team, and in some cases they may conclude it’s cheaper to hire some of the key team members as opposed to paying a premium for the whole company. Make sure your NDA or LOI includes a provision that the acquirer cannot hire any of your current employees now or in the future.
Try to keep the secret sauce a secret. The acquirer is going to want to access to your code at some point. If you agree, they’ll have the roadmap to your product which can be replicated in 3 to 6 months with a big enough team of developers (don’t kid yourself that it can’t be). Do everything you can to keep critical components of the code/tech a secret so the acquirer doesn’t decide they’re just going to go build your product themselves as opposed to pay you a premium for the company.
Your team has to stay quiet. Make all employees who know about the deal sign confidentiality agreements that they will not tell anyone about any M&A. Your current employees are often friends with former employees, and all it takes is an attorney working on contingency and a frivolous claim from a former employee (wrongful termination, sexual harassment, age discrimination, etc) to put you in a position where you’re forced to settle a lawsuit before close. You can bet the acquirer won’t allow the lawsuit to remain outstanding, even if it’s an asset purchase, and insurance will drag their feet too slow for EPL insurance to cover you before close.
Silo your employees from the acquirer. The only people that should be in touch with the acquirer are the CEO and the investment banker. Other employees shouldn’t be accessible to the acquirer. As the deal drags on, it’s not uncommon for the acquirer to reach out to the employees he really likes and try to steal them, especially if you didn’t follow the rule in the first bullet. Likewise, your employees should not have the acquirers contact info. If they do, you need to monitor emails.
Make sure there is a release date. It’s not uncommon for the acquirer to have a breakup fee should you decide to sell to someone else. This is typical, but make sure there is a release date that is reasonable. You want the release date to be short enough so that should the deal fall apart, you have plenty of cash to pursue other options. If you’re not profitable, an unscrupulous acquirer will drag you out until you’re out of cash then change the deal. You’ll be out of cash to pursue other options, and that’s their plan.
The team needs to be ready to move. If your acquirer doesn’t have an office in your city, no matter what they say initially, it’s unlikely they will not require the team to move. If the team is moving from a low cost city (the Midwest) to a high cost one (San Francisco), the team is going to need help selling houses, moving, and buying a new house in the higher cost environment.
Above all, don’t naively go into a deal thinking the acquirer is going to treat you well. Even if your point of contact is a good person, there will always be a bad guy (his/her boss, corporate counsel, the board, etc) that can throw a wrench into your deal.
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