In our prior post, we outlined the various high-level, key milestone steps involved with getting acquired. This time we are going to focus on one of the most critical steps, the engagement ring, Step 01. Specifically, we are going to unpack the key terms included in perhaps the most fundamental deal document, the term sheet or letter of intent (“LOI”) (note that we will use these terms interchangeably throughout).

Many founder-CEOs may have never seen a term sheet for an acquisition. And, depending on the deal type, some acquisitions may not even include such a document. For example, most talent/ acquihires will simply have offer letters, while other fast-moving, larger deals might even go straight to papering up the definitive agreement. However, more often than not, for a majority of acquisitions, there is a term sheet involved. Outside of an NDA, it is usually the first deal document that is negotiated between the companies involved in the acquisition.

First, a very quick refresher, the term sheet is a non-binding document which outlines the key business, structural, economic and legal terms of an acquisition agreement with the buyer. Importantly, this will include the deal consideration (i.e., valuation of the company being acquired), amongst other terms, to which this post is devoted to uncovering. If you are a CEO, these are the terms that you will spend time negotiating with the buyer, typically with their corporate development (“Corp Dev” or “M&A”) leadership team. Next post, I will go into more of a “who’s who” when dealing with strategic acquirers, but for now, know that the M&A team will be a critical point of direct contact with any acquirer.

At the point that a buyer issues a term sheet or LOI, they will likely already have done much of their first-order, primary diligence, and you should have clarity around alignment with a combined vision & roadmap, and perhaps even agreed to some of the high-level terms, including a potential valuation of your company. The buyer will have also received their internal approvals necessary to proceed with the deal at a proposed maximum valuation threshold and also have a very good sense for what both starting and ending terms might look like. These buyers have precedents of their own and likely established internal guardrails that serve as their north star for key terms. Your job is to bend their reality closer to your expectations, and to never settle by simply splitting the difference!!!

As mentioned in our prior post, before signing a term sheet, any seller should be sure to ask the buyer how many times they have walked away from a deal after signing a term sheet? If the number is non-zero, you better understand why! This will give you a good understanding of how seriously they are considering the acquisition. As importantly, be sure to find out how often have they changed either their terms, and potentially their deal valuation after signing a term sheet. Some do, most don’t, and again, if this number is non-zero, you should be concerned, dive in and understand how you can get comfortable together moving forward with these increased levels of uncertainty. Trust is critical at this phase, but so is staying paranoid.

Your job as selling CEO is to make sure that the buyer does not sign term sheets simply to perform primary diligence or to learn more about your business, IP or other competitive/ sensitive information (a.k.a. ‘tire kicking’). If they do, or if they change terms or pricing often, then there is significant reputation risk for them and their M&A brand/ program as a serial acquirer. There is also significant risk and uncertainty now for you and your shareholders, so be sure to get clarity prior to signing.

NOTE: One more thing… before signing any term sheet, or sharing any sensitive documents or information prior, you should ensure that you have an appropriate NDA in place with the company. Obvious, but just making sure the proper housekeeping is in order.

Okay, enough of a pre-amble, let’s get to the terms. Again, if you are fortunate enough to have gotten to this point, congratulations! Now, let’s get to the contents and nuances around what terms are included.

Let’s go through the looking glass of term sheet terms…

One of the most confusing things about acquisitions is that founder CEOs often have no idea what to expect, or when. In fact, since each deal is truly different, it can be really difficult for any buyer to even communicate to a selling CEO exactly what to expect. The good news is that there is a common “order of operations” that are followed, most of the time. Really, the biggest variable is not the order but the timing (and certainty) that each step takes along the way.

Of course, we will use the marriage analogy here. A favorite of mine and one that others who are familiar with acquisitions are likely have come across.

Step 00 - Dating

To zoom out for a moment, I am writing this assuming that selling founder CEOs have already been “dating” their prospective buyer(s) for some period of time. This varies from days to years, and I will have plenty to say about that in a later post, but today let’s assume that has already happened and you are prepared for the next phase of the relationship to commence. I also am going to assume that this “order of operations” is for an acquisition that involves more than a people/ talent deal.

Ideally, of course, this dating should be at the point where you and your potential life partner (buyer or seller) have spent countless hours ensuring that there is enough A.I.R for your relationship to thrive in creating value and realizing your vision together. If you are not familiar with A.I.R., please take a moment to quickly read my prior blog post here: https://www.kokua.ventures/blog/pair

Step 01 - You’re Engaged!!!

It’s time to make a commitment to one another. This proposal comes in the form of a Term Sheet or a Letter of Intent (“LOI” for short). First, a couple of important things to understand about this form:

it should highlight the value being proposed

it is non-binding

it assumes you are now exclusive with/to one another

it has an end date/ expiration

… just like an engagement ring, kind of :) the analogy continues.

Since there is far too many other terms & details to cover here, in my next post I will go into what to look for in the actual terms of a term sheet/LOI. And, if you want someone to coach you through the intricacies of negotiating an engagement, drop me a line, I would be happy to help out.

If you are a seller, I would encourage you to do two important things before you sign a term sheet/ LOI.

Ask the buyer how many times they have walked away from a deal after signing a term sheet. If the number is non-zero, you better understand why?

Make sure you have not left any $ on the table and are truly committed to the buyer. If not, pause, and always ensure you have a BATNA (“best alternative to a negotiated agreement”) by making a few phone calls prior to signing, since exclusive indeed means exclusive.

Negotiating a term sheet/ LOI usually takes anywhere from a few days to weeks, depending on how in-depth it is with outlining the business terms of the deal. Just be prepared that once this document is signed, it is off to the races with due diligence in order to get to the next phase of the M&A process, getting married.

Step 02 - Let’s Plan A Wedding

Now that you have signed a term sheet/LOI, you are likely wondering what actually happens next? As mentioned, you have entered into a “period of exclusivity” which varies, usually from 30-90 days, and is the timeframe in which the buyer will conduct its (confirmatory) due diligence. All of this happens usually with discretion and strict confidentiality, with a limited group of disclosed employees and advisors.

What this means in practice is that several things will be happening in parallel, here are a few:

your lawyers will be drafting and negotiating the purchase agreement

functional teams will be preparing and uploading (seller) and reviewing (buyer) documents pertinent to the deal

you (founder/CEO) will be reviewing and drafting disclosures

code, finances, board docs, and all of the things will be reviewed

joint planning sessions for the future should take place

both teams will jointly and separately prepare communication plans

buyers will be working on payout schedules and offer letters

…and many, many more things

Needless to say, there is a lot of ground to cover, and momentum (or lack there of) can kill deals. Much like planning a wedding. Prioritizing, caffeinating and keeping track of all of the things, all of the time will definitely feel painful, relentless and never ending. Just remember, there is light at the end of the tunnel.

And, the best advice I can offer is to delegate responsibly (you should have a great legal counsel that is well deserving of their fees), and over communicate with your buyer. Regarding the latter, there are often things that you or your team are being asked to prepare…simply because the buyer has asked some other company for them, or because their best junior partner from the buyers counsel sent over a blanket diligence list. Not everything is needed, nor in the detail you think, so just communicate, ask and get clarity to move on.

The important thing to look out for is the commitment, from both parties. For those buyers out there, to quote Andy Grove, “only the paranoid survive”. Simply put, at this phase, a lack of communication will kill deals and usually indicates that someone is spending time in the wrong places, either emotionally, physically, or both.

Assuming you have a great engagement / period of exclusivity, and if you are both committed, then there is no doubt you should enter the next phase will be a breeze. This is the time to actually sign the next documents, those for the marriage.

Step 03 - We’re Married…ish

If you made it here, you can breathe, kind of. Your board has approved the deal, the buyer has completed and signed off on diligence. It is time to make it official and announce the deal internally to employees and externally to the world. All of the planning sessions have hopefully paid off, you feel confident, coordinated, and likely exhausted all at once.

Tactically, the purchase documents are now signed by both parties and you will now have a set of requirements, referred to as the “closing conditions” which must be met in order for you and your shareholders to get paid. This list may be short and those conditions can indeed be waived at times. However, there are things, such as government approvals, which may take from days to months, and could impact both the deal closing and its timeframe. The scope of these are deal specific and far more nuanced for the scope of this blog post to discuss.

Know this…you are now bound to be married. Most of the time, your deal will close either simultaneously with or shortly thereafter signing the deal documents, which are binding by the way, unlike the term sheet/LOI. And, announcing the deal to the world should happen at the same time as that signing. Why? Why not? Wouldn’t you rather control and communicate the narrative for your combined vision than have someone else speculate. Truth be told, at this point, so many more people will have learned about the acquisition that the likelihood of it leaking now is exponentially increased. So best to get ahead of the messaging and announce it yourselves.

Now, about making it official.

Step 04 - Finally, Officially Married!!!

Assuming there were some closing conditions in place, outside of government reviews, you should be on top of them. They are what stand between signing, getting paid and finally getting back to the real work.

This could be obligations that the buyer wants (or needs) the seller to perform prior to considering the deal official, and may include things like:

winding down customer(s) contracts

transferring ownership of IP

removing or paying off specific liabilities

performing employee evaluations

having certain employees accept offers

reaching specific shareholder thresholds

…and countless others

Remember, many of these are negotiable, everything is after all. Usually, buyers may only want or need to see a “good faith” effort being made towards completing certain closing conditions. Other times, you might need the buyer’s assistance, for communication, economics or persuasion, or all three.

The good news is that, once these conditions are met, you can finally get to live happier ever after…and get paid for the deal!

Step 05 - Let’s Live Together

The real work and fun can finally begin! You can finally start working together as one company, as a couple. Your days of planning will need to be revisited, and it is likely that you have an entirely brand new set of challenges and opportunities before you now that the reality of being together, forever, is starting to kick in.

These might include, amongst a BIG list of integration imperatives, which will evolve and vary by deal:

relocating to a new office location(s)

figuring out visas and immigration

shutting down prior leases

getting IT services and emails in place

new employee onboarding

merging functions…

… the list goes on

Needless to say, there is a lot that can and should happen during integration. And, that will evolve over time.

One VERY IMPORTANT piece of advice, be sure to remember that while many of these things are tactical and indeed have a financial outcome, that there are real people, real emotions and real human & personal consequences to many of the decisions that are made throughout the process. Being empathetic, aware and pausing to understand the human impact throughout, especially during Steps 4 & 5, will pay dividends throughout your lifetime, both personally and professionally.

Recap

I tried to synthesize the order of things without being too tactical, and hope that highlighting some of the complexities involved will shed light on the nuances involved with each M&A transaction.

As I alluded to earlier, I am going to provide visibility into some the terms of a term sheet/LOI in my next post. My hope is that these posts continue to provide greater visibility into what is often an opaque part of the tech world, navigating acquisitions.

If you are thinking about pursuing an acquisition, in the midst of one, and need an advisor/coach to help you navigate, you can always reach out to me gary@kokua.ventures

Every acquisition or merger requires two parties, a “pair” if you will. This pair is in many ways similar to that of an actual human couple coming together for the rest of their lives. It is a marriage. And, these merger-marriages often yield divorce or failure rates that match.

But, there are ways to increase the probability of success. Over time, I have developed an acronym that serves as a reminder, and useful tool, for both entrepreneurs being acquired as well as buyers seeking to improve the quality, economic outcomes and performance of their investments.

That acronym, is appropriately labeled “A.I.R.” Just as we need air to breathe, acquisitions need air to survive and thrive in generating long-term value!

In the world of consumer technology, 2005 was perhaps the most transformative year for the smartphone. No, I do not have the dates wrong. I was working at Apple that year, and am well aware that the iPhone did not launch, we did not announce it to the world until two years later. Nor did Google have a presence in the industry. Their first Android phone was the HTC Dream which would not be announced until September 2008.

So what was so special about 2005?

Introducing Kōkua Ventures