order of operations
post #0004
november 15, 2022
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.
Disclaimer: M&A deals, like marriage, the mileage, setting, venue, participants and timing (and duration) may vary.
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 FINALLY 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