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It’s a heady time for M&A professionals. Deal volume is skyrocketing, and cash and equity are flowing. We are bouncing from one deal to the next and loving it. For a founder or CEO, there may be little you can do to prepare yourself for the chaos of selling your company, but that doesn’t mean you shouldn’t try. Here are five tips to help prepare for the onslaught.
1. Prepare yourself. You’re considering selling the company into which you have poured immeasurable amounts of money (not just dollars invested – pizza for the entire team at 2 a.m. adds up), time (which gets double-counted when it’s time at work and time away from family), energy (or lack thereof), and love (yes, it’s possible to love a company and its employees).
First, familiarize yourself with the deal process, rhythm, players, points of leverage, and when to exert them. While there are many resources out there, your board (see number 4 below) and your lawyers (see number 5 below) are the best places to start. They have been through this many times before and can bring you up to speed quickly – you just need to be willing to ask, learn, and acknowledge what you don’t know. The most acquisitive companies have sophisticated and well developed playbooks. As with any negotiation, you need to know the rules of the game and, if you’re well-advised, a heads-up as to what is in those playbooks.
Second, there are difficult decisions ahead for yourself (personally and professionally), for your investors, and for your employees. If you are the hands-on/micro-managing type, the volume of work necessary will overwhelm you, so you will need to delegate more than you ever have before, both the work and some of the decision-making. To be clear, you’re not a stranger to hard work, but you can’t negotiate a purchase price and update your board all while populating a data room. If you are a hands-off/“trust the team” type, you’ll be frustrated by the level of input and involvement expected of you. In either case, you will also need to accept that selling your company means not being the boss anymore and being part of a larger organization. A successful transition will require you to embrace it and encourage your team and employees to do the same. All of these shifts in approach and thinking don’t happen overnight. They take time. So, prepare yourself.
2. Build an “under-the-tent” team and reward them accordingly. Selling a company is a “secret” process. By the time a deal hits the papers, it is fully baked and as good as done. The very small universe (relatively speaking) that know about the transaction before announcement consists of the buyer, its advisors, your board, your lawyers, your banker (if you have one), and most likely your accountants. Inside the company, it’s an even smaller universe. You need to carefully select the team you will need to get through the process. It shouldn’t just be your closest, most senior advisors, e.g. CFO and COO. You need individuals with certain detailed knowledge and the capacity for large volumes of work, e.g. people in the weeds in HR and finance. Your CFO can’t expect their best finance administrator to start churning mountains of unusual reports without triggering speculation (and rumors kill deals). The “privilege” of being on the deal team will double their workloads and require them to work walled off and in secret (despite the best “open-culture” you may have fostered). These individuals will also have advance notice of a transaction that, in their minds, may mean the end of their jobs (despite your best efforts to convince them otherwise). So carefully consider each of their compensation packages and personal situations. Ask yourself what will motivate each of them to work harder, longer, without complaint (for the most part), and importantly, stay through closing and beyond. Also keep in mind that, while not ideal, a buyer may expect certain key employees to revest some, if not all, of their equity (yourself included). Early on, you’ll need to think through what is fair to the team and what you’re willing to ask of them.
3. Get your house in order. Remember promising shares to that coder who helped you out early on? Forgot to tell your lawyers? Tell them … immediately. Have you classified all employees as Exempt because they are all vital to the company and all make important and independent decisions? Rethink that. Have all of your option grants been entirely 409A compliant? Do you have PIIAAs from every single current and former employee, consultant, intern, advisor, etc? Not sure? Find out (but be sure to check with your lawyer about the best way to get them now if there are some missing). Don’t know what a PIIAA is? Your company is definitely not ready to be sold. What about those emails from your lawyers advising “When you get the chance, we should really think about instituting a policy for [XYZ].” You know the ones. You never really “got the chance,” had the money, or understood why you should care. If it was absolutely necessary, your lawyer would have said so, right? It’s time to go back and ask.
4. Make nice with your VCs. The bigger ones have been with you since the beginning. Opinions on strategy and other matters may have clashed, but their investment dollars – if nothing else – reflect their true confidence in the company. You can’t do it without them, and they can be truly valuable assets throughout. They’ve most likely sold several portfolio companies before yours and will be on the lookout for important issues that crop up. They are also a fantastic hammer when you need one. Nothing cuts through the nonsense faster than the following sentence (when judiciously used): “My investors just won’t approve this deal with this term in it.” They want this as much as you do and can help, so talk to them early and often. Bringing them a fully baked term sheet or final deal will make them feel blindsided and can create resentment and distrust that will slow down the transaction.
5. Trust your lawyers … or get new ones. You’re going to be relying a lot on your lawyer(s) throughout the deal, and how available they are to you can make a huge difference in how fast and how well the process goes. If you’ve only had a lukewarm relationship with your existing company counsel and have found it hard at times to get their attention, now is the time to make a change.
Alessandra Simons is an associate in Goodwin Procter’s Business Law Department and a member of its M&A/Corporate Governance and Technology Companies Groups, where she focuses on mergers and acquisitions. Alessandra is a key contributor to Goodwin Procter’s Founders Workbench, an online resource for startups, emerging companies and the entrepreneurial community.
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