Tag Archives: Range

How Do You Prepare for a Potential Acquisition? Three Areas of Focus

Situation: A CEO has been approached about a potential acquisition of his company. The offer was a surprise, and the team within the company is split on whether they are interested in a sale. They are currently very happy with what they do. How do you prepare for a potential acquisition?

Advice from the CEOs:

  • How does a company best position itself in advance of discussions?
    • Rebrand the company to boost the value proposition. Make what the company does best the focus of its value proposition. Position the company as the “experts” in this area.
    • Look at a series of possible scenarios that could develop and determine who on the team can best contribute each scenario. This will help to evaluate the implications of each scenario and to rank them in terms of favorability on the company’s terms. It will also help to quickly exclude certain scenarios if they come up during discussions with acquirers.
  • What research should the company conduct on the acquirer?
    • Do a deep dive into the potential acquirer. Research is simplified if the acquirer is public. Go online and look at their SEC and public filings. Look at their revenue trend as well as their profitability or losses.
    • What is the acquirer’s history of acquisitions? Interview people from companies that they have purchased.
    • Don’t pitch anything to the acquirer until you understand what they want to buy – this is critical so that the company positions itself well.
  • What is the best approach to take once the conversation starts?
    • Quick first step – send the company’s financials to the acquirer with a 3-year projection. Ask them, based on this, for a price range that they would consider for the company. If the range is outside of expectations, the conversation is over.
    • Determine whether this looks like a strategic vs. a financial buy. A strategic buy yields a higher price.
    • Cut a deal structure with a bonus tied to success post acquisition. This means a reasonable upfront payment with big payments for future success. This creates golden handcuffs to motivate the company’s staff to stay post-acquisition.
    • There should be multiple options on table – addressing both financial considerations and the future of team.
    • Always be ready to say no!

How Much Should Management Own Post-Financing? Five Points

Situation: A company anticipates closing a Round 3 financing this year. The CEO has an idea of the range of management team ownership that is likely at this round. He seeks advice from others with experience. What can the team do to assure that their ownership is at the upper end of the range? How much should management own post-financing?

Advice from the CEOs:

  • The numbers change depending upon both company valuation and the funding environment. Currently, Silicon Valley venture capital firms are becoming more cautious and risk averse. This is because many companies that have received financing over the last 2-3 years have underperformed. Many have yet to even produce and release a product. In this environment, the chances for maintaining a larger share of ownership for management are not as good as in headier times.
  • Seek two outside counsel to generate two independent opinions on a fair management option pool, and to assist in negotiations. These will likely be boutique firms.
  • Approach the situation as an executive option pool objective. Determine what needs to be in place to attract new executives, as well as to replace existing executives should they leave or be unable to serve.
  • When discussing this with your board and investors, phrase the challenge in win-win terms. The objective is to lock-in key personnel and assure that key positions will be filled to meet company objectives. This is the best way to assure future financial success.
  • Key members of the executive team may want to seek independent advice, apart from the company or executive team.