Advisors in Your Venture Company's Exit
Even the most seasoned entrepreneur will have direct experience with only a few exits of venture companies. This lack of experience can put you at a disadvantage when you are negotiating with professionals who work full time in mergers and acquisitions (M&A).
To balance the relationship, you’ll need a team of advisors to take you through the process. Your VC can help make introductions to the people they’ve worked with in the past who would be right for you.
M&A is complex and requires a lot of preparation. Before you put yourself out there, you need to get your ducks in a row. Getting ready for an exit is similar to getting ready to raise venture capital: You want to be ready for what’s coming so that you don’t lose momentum in the process.
Certified public accountant (CPA)
The best way to handle your accounting is to do it right — and early — the first time rather than wait until you’re on the doorstep of an exit and need to restate five years of financials.
Your CPA can work with your internal accounting staff to set up policies and procedures for proper GAAP (generally accepted accounting principles).These are the standards your acquiring company will look for to ensure that your financial statements represent reality.
Your VC may require audited financial statements every year to demonstrate to her limited partners (LPs) that she’s conducting proper oversight of their investments and to facilitate a problem free exit. Auditing financials represents a significant cost, though it’s relatively low for start-ups that have fewer transactions.
Yes, attorneys is plural. You need these attorneys to walk you through the exit process:
A corporate attorney: This attorney will want to work through your articles of incorporation and bylaws to make sure everything is clean. She’ll organize any contracts you may have and ensure that your closets are free of any legal skeletons that would disrupt a deal.
A securities attorney: This attorney will oversee the process of the securities transaction, transfer of stock, board responsibilities, and other technical aspects of the transaction.
An M&A attorney: This attorney will perform due diligence on both sides, advise on company structure post sale, and deal with legal ramifications for all parties after the closing.
Investment bankers are effectively the salespeople for your exit. They help you with valuation and developing a marketing plan. In addition, they can extend your reach and get more offers on the table (a real benefit unless you already have a direct connection to an acquirer).
In return for their services, investment bankers receive a commission ranging from 3 to 10 percent of the total IPO or acquisition price. Although the amount may sound pricey, hiring an investment banker who can bring you the best buyer available at the best price will be the best investment you can make.
When negotiating, you want to have as many offers at once as you can so that you’re creating excitement and buzz about your deal. Bidders who know that they are competitively bidding for your company are likely to offer 25 to 50 percent more than bidders making unsolicited offers.
Why the CEO shouldn’t lead the exit
You may think that the CEO should lead the exit process, but nothing could be farther from the truth. Here’s why:
Leading the exit is a fulltime job, and no time is more vital for the CEO to be at the helm than during the exit when the performance of the company will be under more scrutiny. An active and engaged CEO can ensure that sales targets are met and that the company is running smoothly.
A CEO distracted by all the details of an acquisition may lose track of what’s going on, and the penalty for that could be a drop of 10 to 25 percent in the company’s value.
Unless they were investment bankers during past lives, CEOs don’t have hands-on experience with more than a handful of exit transactions, and they won’t be as attuned to what’s going on as someone who has 10,000 hours of M&A experience.
If the acquisition is successful, the CEO will become an employee of the acquiring company. This potential relationship puts the CEO at a disadvantage in the negotiating process. Negotiation is not always pretty, especially when both parties are driving for the best deal. The relationship between the CEO and her future bosses could be damaged in the process.