Date: Monday , April 01, 2013
Navigating through the sale process of your start up is a combination of art, process and focus. It needs to be handled strategically, thoughtfully and with a clear focus. Recently, one of the companies that I have advised for last couple of years was acquired by a strategic large player in the industry. Without naming the company due to the confidentiality reasons and also, having gone through this process myself in the past, I would like to outline four key take away (4KTA) points for this process.
I believe that after working long hours for couple of years and delivering first release of the product, there comes a point of realization for entrepreneurs that they have arrived at the last mile in their journey. It is crystal clear that they need to find an exit option for the company. They need to become mentally and psychologically ready for it otherwise any attempts to sell the company will fail. How does an entrepreneur arrive at this conclusion? The reasons could be numerous including not having enough capital to continue, not getting enough traction in the market with the product, customer love the breakthrough technology but not willing to adopt right away, it's looking harder to get the next round of funding or key employees have started quitting or there could be some other reasons. Any or a combination of these must create urgency in entrepreneur to act upon available options for this company.
Once you have identified the strategic buyers with a shared vision and strategy and have ensured that it is the best fit for your company, you need to now become clear in terms of the process that will help you complete the sale. The strategic acquirer could consume the deal in these forms - either licenses your technology or product; does distribution deal as part of their solution; or does a white level deal in which they sell it under their brand or outright acquire both team and technology also known as acquiring for talent and technology. How do you take it to the next step? Depending upon the nature of the deal or option you take, you need to come up with a timeline of action items that you can execute rapidly with a laser focus. I will focus upon the acquisition scenario here. The key steps are valuation and price that you both agree upon; incentive and retention plan for the key employees; responsibility of the current team and future organizational structure; and budget and resources. Many companies these days acquire just for the talent. Once they acquire, they will kill the product developed by the team and integrate the team into an existing product line and use the talent to enhance the capabilities of their product. Make sure to understand that there is clarity why acquirer is doing the deal. Listening intently is essential and critical during the steps which will lead to the final price. Typically, your team will be interacting with three groups – product, technology, corporate development and finance group. It's important to involve respective team members knowledgeable, who can discuss intelligently with the counterparts in the acquiring company. You as the CEO are the main negotiator leading through this process listening to the other side, handling objections, responding to them with urgency and keeping it moving forward to next step from articulating a crisp value proposition and deal's value to the product group, seamless integration of your technology into their architecture and key price point with the corporate development team. Always remember to write down tricky questions. Stay away from the urge to answer right away. Suggest politely that you would get back to them after discussing with your board and team. Make them feel that you are on their side and are excited to work with them to make the deal happen. Use your Board and team as your final decision makers in the eye of the other company so you can stay unemotional, objective and focused.
While the process of initial due diligence and negotiations are going on, you must review all company documents and have them ready in neatly kept binders in chronological order. These will include your articles of incorporation, board and shareholder meeting minutes, investor documents, shareholder documents, capitalization table, employee, customer and vendor contracts and agreements. Create separate binders consisting of all intellectual property documents including patents, patent filings, trademarks, service marks, your solutions and unique technological invention and innovation, tax returns, financial documents and bank statements. Any awards, marketing documents, white papers, customer use cases and applications should be provided as well. These accomplish two things: Firstly, you do not have to scramble at the last minute to get all these documents in place and secondly, prospective acquirer is impressed with the fact that you keep your books in order. It exhibits that you manage your operational functions cleanly and efficiently despite being a small company.
Ensure that you and your acquirer have agreed to a timeline for completing the transaction and action items. Make sure that your legal counsel is available and responsive during this time period. Similarly, ensure that the other company's legal counsel and corporate development contact person working with you are committed to meeting the deadline. One of the points that may come up is the escrow amount and timeframe. This is to cover any undiscovered liabilities that may have got overlooked during the due diligence process. As a rule of thumb, the escrow amounts are about 10-15 percent and for 12-18 month in duration. Your goal is to get the minimal amount set aside for minimum period of time. These are essentially some of the important points to be kept in mind. Now, go ahead and close your deal successfully!
In summary, the four key take away points are getting mentally ready, understanding the process, keeping your company documents in order and executing it systematically to close the sale.
Naveen Bisht is Co-Founder of Auriss Technologies, Inc, a serial entrepreneur and Board Member, Chair- Programs, The Indus Entrepreneur(TiE), based in Silicon Valley, California.