As your company grows, the prospect of being acquired, or acquiring another company, can be overwhelming. These are complex transactions, often involving market challenges, human resources issues, extensive diligence review, stockholder obligations, and tax considerations, among other concerns. No matter the size or age of your company, it is never a bad idea to consider your company’s readiness to move forward with a transaction.
If the opportunity arises to engage in an M&A transaction, key considerations and transaction terms to consider include:
||Take some time to understand the status of your company’s records and any clean-up that should be completed prior to undertaking a transaction.
|Process and Key Stakeholders
||It is important to become familiar with deal process, timing and who the key stakeholders will be. Also identify where the interests of key stakeholders may diverge and strategize with your counsel regarding how to address the issues that may arise as a result of any divergence.
||You may already have a data room from prior financings and it is good to keep it updated so that your company can move quickly and be organized.
|Form of Purchase Price
||The acquisition consideration will likely take the form of cash, equity, or a combination of both. There are many tax and securities laws considerations that should be evaluated when structuring a transaction, especially if equity will be part of the consideration.
||Buyers in technology M&A transactions will sometimes ask founders and key employees to “revest” a portion of the proceeds to which they would otherwise be entitled. There are complexities involved with revests and they should be discussed at the outset of the transaction.
|Key Employee Non-Competes
||Depending on a number of variables, it may be expected that founders and certain key employees be subject to post-closing non-compete restrictions. The principal terms to be negotiated include the length of the non-compete, its scope, and the persons to be subject to the non-compete.
||Taking the time to understand your company’s working capital needs and trends will help to avoid negative purchase price adjustments.
If your transaction will involve an earn-out to bridge value, secure employee retention, or assist with future performance or integration, you will want to take the time to understand and define the material terms of the earn-out, such as the applicable milestones and payments due upon achievement. You will also want to identity any protective covenants that should apply to the earn-out.
||Indemnification is a major topic in any transaction. Both parties will want to clearly lay out the amount of the purchase price that will secure any liability obligations with respect to the acquired company. Liability caps, liability baskets, purchase price escrows, survival periods and other appropriate limitations should be clearly described in the letter of intent to set expectations and avoid issues later in the transaction when the definitive purchase agreement is negotiated.
|Timing Issues/Closing Conditions
||At the initiation of an M&A process, the parties should discuss their expectations for the transaction’s timing. Both parties should be committed to moving quickly and efficiently. If there are any material conditions to closing and closing deliverables, these should be discussed and agreed early on. Ambiguity increases the closing timeline, which leads to increased costs and deal risk.