Over the next six chapters I will share my experiences in buying and integrating over 30 software and business services companies and selling 7 companies over the past twenty-five years as a CEO, President, CFO and an investor/board member. These articles are written by a former CEO and current venture investor for the benefit of sitting CEO’s that are going through similar experiences. My goal is to share some of the tips, successes, failures and lessons that I have learned over the past twenty-five years and help you, the CEO, prepare for what might happen in your own business and investment. The focus on this series will be the transaction cycle and not the many other hurdles, opportunities and successes that the CEO will endure from leading the company and building a successful business with great people over its life cycle
Chapter 1: Attracting outside investors to your company
Most entrepreneurs pour everything they have into their company. It starts with the dream, putting your own money into the business, tapping into the friends and family pool. But at some point, you will need to raise outside investor money. There are a variety of sources in today’s market. The process of raising outside money will usually take longer then you set out to and you will have to compromise on many things you did not think you would. You should also make sure that you have the right advisors at your side that you can count on for independent advice during each stage of the investment cycle. These include legal, accounting, tax, financial and estate planning. Setting things up right the first time is essential. Pairing up with the right investors that share your strategy, time-line, chemistry and understand your business model is critical. Don’t just go for the money if all else is equal. Sometimes you won’t have a choice but it you have the luxury chose wisely (even if the terms are not quite as good) as you will have to live with your new investors for a long time. I have experienced it both ways – call it the good, the bad and the ugly. Don’t be in the ugly cart. I can assure you that getting the right investors early on will make your life much easier.
Here are a few tips that can help your process
along to attract the right investors to your company.
(a) Most investors will look at how much you have accomplished so far. This can range from attracting a small team that either you have worked with before or has a track record. Put together the best team that you can and show that the chemistry is there between your group. A least a prototype or beta version of the software is critical, will increase your valuation and the quality of the investors that you can attract. In addition to the prototype having some initial product orders or customer references will show investors that you have gained traction and are on the swing upwards with momentum. If you have a beta or prototype be sure to have filed some of the early stage patents or patents pending to both protect your investment and demonstrate to your investors that you have something unique. Don’t just have a PowerPoint presentation with a bunch of ideas tossed about – make sure you have substance.
(b) Consider subject matter expert investors. Identifying investors who have expertise in your industry and have made investments in your space in the past will make raising money easier. You will not have to educated them about your industry and they will bring valuable advise, networking and expertise down the road. When it comes time to consider a sale those with industry expertise will know who to contact first and what their reputations in the market are. Remember that you will most likely spend years with your initial investors. You will need to feel comfortable with them and be able to trust and rely on their judgment to help you build your business to each stage.
(c) Don’t try to solve world peace. Too many times an early stage company tries to boil the ocean rather then create a unique product or software that can displace or solve a critical issue in the market. If your mission is too broad, then investors will not buy in. Take it one step at a time.
(d) Know your competition. I have seen so many companies that ignore that they can be displaced by either someone else in the market or a larger player. Coming into the fundraising process with a solid understanding of who your current and future competition is will show that you know where others already are and how you are going to be better. Always assume that your competition is thinking about the future and how to create displacing product, technology or services – they won’t be standing still in today’s market.
(e) Know your market size and addressable market. By identifying your manageable market size you will create credibility with potential investors. If you reach too far into the hundreds of millions or billions most investors will think that you are casting a very wide net rather then focusing on the opportunity in front of you.
(f) Don’t try to raise all the money you will need at once. Investors will like to invest in small bites that are aligned with measurable milestones. This is going to allow you to expand your investor base as your company grows. Most early stage investors will be encouraged to have name brand investors in your company. As you raise subsequent rounds, having more than one firm will make it easier to raise more funding. The firms you bring in will also be able to help you network and build your company.
(g) Be reasonable on valuation. Understanding where you are in the lifecycle of your business will drive what the enterprise value of your pre-money value of your company. Things like: Do you have a unique product or service, do you have customers or purchase orders, do you have revenues, what are your costs today and how will they evolve, what will you spend the money on, when will you be cash flow positive will drive your valuation will be considered in your valuation. Finally looking for comparable transactions will help you determine the range for valuation. Finally, don’t try to get every dollar in value in each round – the investor needs to see upside for their constituents or they won’t invest. When on the road pick a range rather then a specific amount. Leave something on the table – everyone will be much happier down the road.
(h) Know your numbers. Too many times the entrepreneur is a great engineer or sales person but does not have a sound grasp of the numbers. Don’t just rely on your financial guy but know them yourself. Create financial scenarios around external factors that show a low, most expected and high version of your numbers with cash needs and when the cash will be needed – but build some buffer. Most of the investors you meet will be experts in finance. If you don’t know your numbers, you will lose credibility very quickly.
(i) As you get ready to raise money – whether it is public or private funding – you will need a crisp and focused business presentation. Raising public funds is much more complicated. These articles will only deal with private financing and not try to tackle the public financing process. Try to keep your presentation deck short and punchy so that you can talk around it rather than have the presentation talk for you. When starting out think of putting together your elevator speech – can you get your vision and point across in just a few minutes or a couple of pages. The goal here is to get a meeting to talk in greater depth about your company. Remember that investors see hundreds of decks a month. It’s just like when you look at resumes for new hires. You have to catch their attention before you get the interview. Another key is to have someone you know make the introduction for you rather then cold calling. Credibility is key in the early stages. If you can get referenced before you come to the meeting your chances will be much higher of getting the right investors into the company. Once you get the meeting then you can put together the longer version of your deck, still being less than twenty pages – consider two minutes per page as the norm. You should think about being able to make your longer pitch in thirty minutes.
(j) Don’t get discouraged as you will meet with and pitch many different investors. Get used to hearing “not for us at this time”. That doesn’t mean that your business and plan is not great, but that you just have not yet met the right investors for you. Keep at it and keep pitching your story. Be enthusiastic each time and go for the win. Take the feedback when you can get it and modify your plan or pitch. Many times, I have seen entrepreneurs come back with a modified plan and having some progress to then get the investors and investment that they want. Some of the best advice you can get is from those who don’t make an investment in your company but may invite you back down the road as they see you are keeping at it and changing your plans as you get more feedback from the market place. Try to find out what they thought was needed in your plan that would get them to make an investment.
Lastly, think about what can go wrong or change in your business plan of today. Over the years I have led so many strategic planning exercises and raised money where what we thought or hoped would happen did not. Have a Plan B and know the impact on your business and financial results might be. Most investors have been around long enough that they know that what can go wrong, will go wrong. Thinking this through will give you credibility.
Chapter 2: Congratulations, you have just raised new equity. What next to expect from your investors.
Now that you have raised new money your world is about to change. In the past you made most of the decisions but now that you have taken in outside money things will be different. Most of it is positive and will help you build your company. Let’s first assume that you have brought in multiple investors and you have not raised money through an IPO. If you are one of the ones who is a CEO of a newly publicly listed company you now have a host of new things to focus on such as shareholder communications, regulatory compliance and employee expectations plus you are now on the quarterly earnings treadmill with the Street – don’t surprise or disappoint. With private investors you can usually expect more patient money that looks beyond just the next quarter. Here are some of the changes and benefits that you can expect.
(a) Governance. Most investor groups will seek a position on the board of directors. This will entail more governance ranging from decision making on new executive hires and compensation, to definition of strategy, R&D progress, sales and customers, spending and key decision-making. Most investors will want you to create a monthly reporting package that details milestones and progress, customer progress and pipeline, product development, financials – monthly forecast and actuals, competitor status and key operating metrics. You should spend some time up-front to agree on expectations with your new investors.
(b) Future exit path for your investors. Most investors as they come into the company as new investors will be thinking about subsequent fund-raising and how/when they will exit. This may be years down the road but most times they are looking for an M&A exist at some point. These options might include a range of alternatives from going public, to selling to other investor groups (especially in the private equity world) to selling to a strategic buyer. Remember they have investors (LP’s) too with usually a ten-year fund timeline to return all capital, who expect to make money at superior return levels to what is available in the stock market or even from private equity funds. When bringing on new investors you should understand where your investment fits into the lifecycle of the fund. The best spot to be is in the first three years so that you have the runway to perform before they will need to sell their position.
(c) Take care of your people. This means equity, base salary, bonuses and separation protection on a change of control. Now that you have raised money you will need a great team to meet your goals. There are various approaches to incentives, both equity and cash. Talk it over with your investors. Create an equity pool that will last for several years and be priced accordingly. Too many times investors want to price the option strike process above where they came in. This not only is not fair but it will demotivate your people. There are different points of view on issuance of equity – either to everyone or to the top executives. If you are an early stage business I would recommend granting some equity to each employee but make sure that the bulk still goes to the people that are key in terms of making you and the company successful. In terms of incentive compensation, try to tie payments to results, not just revenues or earnings but deliverables, key metrics and achievements. Make sure they are measurable metrics. MBO’s don’t work unless you are prepared to just pay out 100% of the incentive amounts, as they are too subjective in nature. Lastly, you are going to want to have a concise conversation with your investors about your own compensation, salary, bonus and equity options. You will usually get one chance to do this and should have market examples available when you sit down with your board/investors.
(d) Networking. Usually the investor group that makes an investment to your company is there not to just provide money but has subject matter expertise and can help you with matters ranging from new customer introductions, creating strategic partnerships, government relations, banking introductions, professional service provider sourcing and identifying potential key employees. Make sure that you sit down with them early on and understand what they can add and also what other investments they might have that they can introduce you to drive new business opportunities.
(e) Manage expectations. Don’t be tempted to be a hero and over promise what you can deliver. No investor likes to be disappointed and see a miss. This can range from product introduction and launch dates, new revenues, hiring models and most importantly your financial results. If things do start to go off the rails, make sure you start to talk to your investors early and have action plans to deal with the change of circumstances. Most investors understand that things change but surprise without notice is not acceptable.
(f) Your new investors will want to know where the money is going. Make sure that it aligns with what you said you were going to do in the fundraising process. Cash is going to be king. Make sure that you spend it like it was your own money and that it adds to the value creation and return on investment of the company.
The last and perhaps most important matter is to use your new investors as a sounding board. Sometimes being a CEO can be a lonely spot to be in. Create a great relationship with your investors where you can share ideas and challenges that come up in the business. Remember their goal is for you and the company to be successful. They have invested in you as a leader and decision maker. By including them in your process they will be able to help you and understand when you succeed or face the next challenge.
Chapter Three: How to prepare to sell your company.
At some point in time in its life cycle every CEO of a company gets approached by a strategic buyer to sell or your investors conclude that it is time for them to exit their investment. This is like sending your child off to college. You have to get ready for both the event and the emotional change that will occur. Let’s focus here on the functional steps to prepare your company for a transaction. There are plenty of transactions that get close to the sale finish line, the founders and investors start to count their money but then something goes wrong and the deal dies. A long time ago a very experienced private equity investor gave me some great advice, “Deals that drag are Deals that die”. In order to keep the momentum going you have to create the proper sequence of events. I will deal with the documents that the CEO needs to focus on in a future article. Here I will discuss the selling process not the deal itself. Many early stage companies have the opportunity to acquire other companies or assets along the way to add to their value proposition. This is something you should consider and work with your investors/board on the right strategic fit and means of financing. This article will not specifically deal with this option as each one will be unique for each company.
(a) Professional Advisors. Usually it is best to hire an investment banker/advisor to assist with the sale. Even if you get approached by only one strategic buyer, an investment banker can help manage the process and maximize value. Their job will be to create a competitive process and identify other bidders (even if it is an illusion that there is more than one buyer at the table). Your investors will usually have some great investment banker contacts with industry experience. Most likely they will drive the selection process and the terms for the banker, but you should make sure that you and your team have a nice chemistry with the banking team as you are going to spend lots of time with them. The investment banker can also have the tough discussions with the buyer groups so that once completed you will have a great relationship with the new owners. This is another area where your board and investors will be deeply involved in the activity. Most investors come to the table with lots of transaction experience. Again, you should leverage and rely on them in this process.
(b) Be careful to involve only a select group from your management team. Key players such as your CFO, legal team and top sales and product executives. I would only involve the CFO and legal counsel until the end of the process. They buyer is going to want to meet key employees and conduct due diligence. Until you reach the general terms of a deal and the buyer has conducted financial, legal and other due diligence it is best to let your team do their day jobs and operate the company. You are going to work some long hours here as you will essentially have two roles – run the company and participate in the deal process. There is nothing worse than the team getting distracted and the business falls off and then the deal dies, or the buyer drops price at the end due to a downtrend in the business due to distraction of the team. Another advantage is that your customers and business partners across the industry need to hear the deal communications in an organized manner from you and the buyer so that they don’t bolt after the close. Lastly, many deals that start, even as auctions, don’t close. It’s no good getting your broader management team both excited and anxious and then see the deal fall apart and have to deal with the aftermath.
(c) Once you get the opportunity to pitch your business you will need a presentation that describes your company. This should focus on the key elements of your business such as strategy, products/services, sales and pipeline, operations, technology initiatives, the market and competition, financials and especially describe why your business is unique in the market and why a buyer should be interested. You may need to tailor this to particular buyer groups whether they are strategic or financial. If there is a larger due diligence meeting you may want to break the deck up into sections and have others present various parts. Just like when you raised your initial investment don’t make a book of this deck. Use it to facilitate your presentation and make key points.
(d) Make sure that you have good diligence information and use one of the online data sharing sites where you can control access and authenticate users. I would recommend keeping key documents in the database on an ongoing basis so that due diligence does not require a mountain of work as you will be either raising money or providing due diligence information pretty regularly. In many cases the information that you use to run the business should be the same that goes into a due diligence information process. Don’t create a lot of new information unless the buyer absolutely insists. You should be sure to have not just legal and financial information but also operational metrics and product/service information available. If a company cannot produce good and timely due diligence information you will spook potential buyers and they will bolt. Your investment bankers can help organize this process and expectations with you and your key executives and also keep the number of buyer requests to a minimum.
(e) When it comes to your customers, remember that they are a core asset of your company that you have taken years to build up. The buyer will want to see contracts, pricing and interview your customers early on in the process. Usually the answer should be “not yet” or if you disclose general contract terms do not name the customer and provide a only general description of the terms of the contract and redact pricing information. These activities should usually be kept to the end of the diligence process, particularly if the buyer is a competitor or strategic buyer. Customer interviews should be done at the very last just before everyone picks up their pens to sign on the dotted line. You can even have a third-party consulting firm conduct the interviews rather than the buyer and approve a specific list of questions that can be asked with someone from your executive team participating. Regardless of how these interviews are done, someone from your team needs to be on the customer calls to control the content and direction – make sure they stick to the script.
Most importantly when someone offers to buy your business for a fair price or even a great price you should consider it but done get too excited too fast. Be coy and thoughtful. A little hard to get works well in this situation. It’s kind of like dating. Too many times CEOs fall in love with their company and never want to sell – I call this Founder’s syndrome. Don’t be stubborn or wait too long until the market and valuation has shifted. You don’t want to be the last man standing in your industry. Make sure you share any offers or indications of interest with your investors/board for their input and get the initial terms and pricing in writing from a qualified buyer. I have seen CEOs that don’t engage their board either on a buy or sell and then subsequently get fired.
Over the years I have sold seven businesses. Each one has been different but has created a lot of value for investors and employees. As the CEO of the company being sold you should not get too wrapped up in the social issues of the deal – things like who is going to do what or have what title (if you make enough money they can call you the janitor if they want to), what is the name going to be of the subsequent company or how long you are going to be asked to stay, if at all. Remember your investors invested in you as the CEO to create value for them and their limited partners. What matters most is the money and getting to closing – don’t get bogged down in the other minutia of the deal that in the end you won’t care much about. Even if you leave some money on the table getting a deal done is most important and having a buyer that is happy is extremely important to your reputation and what happens to your employees down the road will help you in the future. You only have one reputation – don’t waste it. I have even found myself in the situation many times as CEO where former great employees came back to work with me in subsequent companies because they were treated right and made some money. Your investors will remember what you have done for them and be ready and willing to invest in you the next time around if everyone leaves happy.
Chapter Four: Tips to help get the deal over the finish line.
As the CEO you want to be sure to play a key role in the transaction process. You need to be close to the deal but don’t be the only one and even sometimes don’t be there as you can be the reasons why a decision cannot be made immediately and you and the investors can mull it over. I call this being the “Empty Chair in the Room”. It gives your negotiators an out to ponder the options and potential responses or counter offers. Plus, by not being there you can be seen as the go to person to get the final decision made. There are also times that you are going to need to step in to negotiate business issues that the lawyers and bankers get stuck on. Pick your battles carefully. You won’t get everything you want. Even make some asks that you are prepared to give on so that you can give on them and then fight harder for the ones you really care about. Also keep an eye on the lawyers. Sometimes I have found they will argue about some mundane legal point just to see who is the smartest lawyer in the room or who can win – this is just plain silly. Step in to stop this waste of time and money and just agree on simple business wordings.
Also, don’t just rely on the bankers and the lawyers to tell you what is going on in the documentation process of the merger agreement. In the end you are going to have to live with what is in the merger agreement and will be held accountable, while they all go onto the next deal. I am going to point out a couple of key areas that I liked to focus on as the CEO of the selling company.
(a) Major business points from the term sheet. Some deals have a term sheet. The risk here is that you can spend more time on the term sheet then the deal documents, but the benefit is that you can negotiate the major terms of the deal such as price, consideration, earn-out, reps, working capital targets, indemnifications, escrow agreements, employment terms etc. that provides a nice map for the lawyers. I would recommend doing this and then have the legal team show you where the business terms are included in the legal merger agreement.
(b) Representations and Warranties – how long do they last and how extensive are they. These are the statements that the merger agreement will make as to facts and circumstances regarding your company. The buyer will use these to make sure that any material facts about your company are known and disclosed in the merger agreement. If you can get them to terminate on the deal closing that is the best for you. At most a representation time frame of one year following closing and including at least one full audit is a reasonable time frame for termination of the representation and warranties. Fewer representations are better than more of course. Another option is to include “Knowledge” in here so that if you don’t know about something you are not accountable. Fewer of your executives to have to make the representations are better. You the CEO, the CFO and General Counsel are reasonable to include in the knowledge representations. The seller will try to expand this list to sales, technology and operations people but you should push back on this request. I would recommend a cap dollar amount for the indemnification for breaches on representations and warranties. At most you should cap it at the deal value. Remember that if there is a material breach in the representations between signing and closing the buyer can try to terminate the deal or litigate.
(c) Break-up fees. There will also be a break-up fee in some deals. I have seen these be around 2% to 3% of the deal value but should only be due under specific circumstances such as a higher bid coming in. You will find that in a private deal there will be little outs as the buyer will require the majority of shareholders to agree in advance to the deal to de-risk the outcome.
(d) Escrow. This is the amount held back to cover for any breaches in representations and warranties in the contract. Usually this is a set amount of say 10% to 20% of the deal value and held for a period of say one year but is sometimes longer. Lower percentage and shorter time again is better and having the maximum payout for any breach of the representations and warranties be limited to the escrow amount is optimal.
(e) Earn-out. Many times, the buyer and seller just cannot agree on the sale price. One way to resolve this is to put in an earn-out that increases the purchase price or proceeds based on achievement of certain events. This has multiple benefits for the buyer such as retaining key executives, higher probability of achieve the goals in the first year, making the integration smoother etc. I have seen many of these earn-outs end up in dispute because the buyer would make changes to the business, integrate resources or change personnel in your company that impact your ability to achieve the earn-out. My advice would be to make the earn-out targets simple and easily measurable. These can include such things as a product rollout, revenue target or gross margin target. Don’t make them too complicated or everyone will just argue or worse litigate once the time to measure success comes about. Make sure that whatever the earn-out measurement targets are that you and your team have control over them. If the buyer changes the conditions and environment, then there should be a clause that you have earned the earn-out amounts. Another consideration to discuss with your original investors and board is to have a higher proportion of the earn-out go to the management team as you and your team are the ones that are going to make it happen. If a member of your team leaves then they should not participate in the earn-out payments. This is a good way to keep your team together during the initial phase of the integration while everyone is getting over the nervousness that logically comes post-closing of the sale.
(f) Disclosure Schedules. These are usually the last and most complicated to prepare and relate to the representations and warrantees that you have made in the merger agreements about details of your business or exceptions to the representation and warrantees. They include general business matters that are referenced in the merger agreement such as contracts, employees, employment contracts, outstanding litigation, customers, vendors, leases, tax audits, intellectual property and trademarks etc. As the CEO you have the fullest viewpoint to make sure that these matters are fully disclosed. If you leave out material items, then you run the risk of misrepresentation of the representations and warranties. If you are unsure about something you are better to include it as it will protect you from buyer claims later on after closing. You should read these carefully for accuracy and completeness.
(g) Employees. Most importantly make sure that you make provisions to take care of your employees. This can range from vesting of stock options, employment contracts that include severance provisions, earning of bonuses and future roles in the combined company. Remember these are the people that helped you get to where you are and you could not have done it without them. Your future reputation will depend on how you take care of your people in the deal and whether they might work with you again down the road.
Once you come to the deal terms and sign the agreements you will need to be ready to field a fair number of calls from customers, vendors, employees, investors and the press. Make sure that you have a select number of dedicated employees that are allowed to speak on behalf of the company and a tight script of content that can be spoken about. You can also expect the buyer to want to control or be involved in the communication of the deal.
Chapter Five: You have just closed the deal – what to expect next.
Congratulations your deal just closed! You have had all the high fives and recovered from the closing dinner. Now what should you expect next? There are two approaches to integration that I have followed. First is to leave the company and the team intact, including in some cases its brand, people, technology, back office and locations. The other is to integrate many parts of the company into the buyer’s operations. The second is usually what the buyer opts to do as there are lots cost synergies to achieve and they can leverage the business they just acquired into their sales channels and geographies to expedite returns. Most buyers acquire companies for strategic reasons such as to enter new product markets, supplement their existing offerings, enter new geographies, achieve economies of scale or to leap frog the competition in the market. You should understand the motivation of the buyer of your company. Lets assume that you are going to stay on for a while. Most CEO’s will stay at least for some time after closing and some will stay for many years. Many entrepreneurs have independence and start-ups in their blood and cannot be part of a larger company for long after the deal closes. But at least you should plan on staying for a while to make the deal a success for the buyer and your employees. Understand that your earlier investors are gone the day after closing and you are now on your own. Let’s assume that your company is going to be merged and integrated into the buyer’s business.
Here are some of the things to expect and how you can help educate the buyer, influence the process and help your employees and customers through the process. Most deals look great on paper and strategy but then it seems that so many fall apart during the implementation and integration stages. Parts of the integration plan can begin before final close, most of which is planning, but other parts such as customer information, pricing and technology development will have to wait until after closing due to Hart-Scot-Rodino competition rules. You should be sure to involve your legal advisors in these decisions. Some of the key integration steps that you should keep an eye on or even be directly involved in include the following.
Communications. This is the first and sometimes the most important part. Communications will go out to many parties that include customers, vendors, employees, press, investors and your competition will see it too. You will have one opportunity to set the stage here and need to make it crisp and complete. Communicating with your customers, vendors and employees frequently throughout the integration will be key. Most people become nervous after a deal closes, even if they are your best people. The high level of uncertainly will become water cooler discussion fodder and will take people away from their day jobs, hence put the business at risk. You can solve this by communicating by email, one-on-one discussions, team and town hall meetings and stomping out unwarranted rumors as quickly as possible. Even if you don’t have all the answers upfront, which you won’t, you should tell people you don’t but will tell them as soon as you can.
The best way to increase the success of implementing the integration is to appoint a senior project manager from each company, assign joint task forces from each company for each major area to review the issues and make decisions and recommendations, track the progress every two weeks and potential cost savings and have a reporting mechanism to senior management.
Executive and Board. This usually involves straight up cost savings in personnel, insurance such as Directors & Officers, Board expenses. These costs can usually be consolidated fairly quickly with low risk. You should understand the levels of authorization at the buyer and what level of authority you will have for spending, hiring and decision making in the new company.
Human Resources. This can be very complicated. Areas like combining payroll, selecting benefit plans to consolidate, changes in availability of benefits such as donation matching, education matching, 401K plans and contributions and incentive plans are going to be critical as they impact wallets. I usually assemble a joint group from each company to go through and review each company’s programs and select the best fit and make recommendations to an executive group. Even small customs that might exist in a foreign country are important. In one integration process we made the mistake of eliminating ham sandwiches at Christmas for employees (a small cost) and it caused a huge uproar in the employee group leading to higher attrition and job dissatisfaction. So understand the local customs. Other small things such as business cards, email addresses and logos will impact your people. The human resource changes should in some case be done gradually or at a natural cut off point such as the next year-end for both reporting and tax reasons.
Facilities and Procurement. There are usually some big dollars that can be gained here. Combining the purchasing power of the two companies can bring both better pricing and terms. Evaluate spending from annual dollar spend and start from the top with each vendor. There may be facilities that are closed or consolidated after a transaction. This should have a detailed plan, timeline, and definition of where the work is now going to be completed, understand the facility lease terms (including any buy-outs or sublease opportunities). The ROI and payback of closing a facility should be carefully evaluated.
Operations and Customer Service. Depending on the company these areas can be consolidated quickly. Benefits will include scale, purchasing power, and availability of better technologies. When merging customer service and warranty services you should be careful to have the proper training for your staff, script the message, evaluate the coverage plans to be sure that they are consistent. Usually the transfer of any manufacturing should be beta tested first to make sure that there are no bugs from the migration and any artwork or film be uploaded properly to build to scale.
Sales and Marketing. The messaging to customers is key. Sometimes contracts will even have a right of the customer to approve/consent or at least be notified of a change of control in your company. Review the two companies for common customers and evaluate terms and pricing for differences. You should be aggressive on approaching any differences to head off conflict. There may be opportunities to cross sell to separate customer accounts with the buyer’s sales organization or yours. The sales pipeline should be reviewed to make sure that potential new sales deals continue to move along and that your competition does not use the change of ownership as an opportunity to steal your new business opportunities away. Another area of concern is sales commission. Each company may have a different structure. I would try to combine these over a short period of time but wait for a natural shift point such as quarter end. In terms of marketing this is another area where over communication is important. This can include press releases, talking points for sales reps, sales literature to adopt the new brand and update of your website to reflect the changes. Talking points should include why the merger is good for your customers. This can include scale, additional technology or services, geographic expansion, greater financial scale, quicker go to market for new products etc.
Technology and Product Development. This is an area that you need to protect and preserve. I have seen many situations where an entire development cycle can be lost by tinkering with the R&D of the target company. Whether it’s simple distraction or loss of key employees it will slow down launches. I find that is best to try to keep your R&D function as intact as possible post-merger. Try to find ways where you can bring new tools to the table to make the new deal exciting for your developers. More pizza meetings are good in this instance.
Information Technology Systems and Telecom. These areas usually allow the target company to upgrade its IT systems and telecom systems. They will also usually be one of the last areas completed in the integration as the buyer does not want to lose historical information. There are a number of areas here such as procurement, telecom providers, ERP systems, sales management tools, HR systems etc. that should be combined. This is where the buyer can achieve both dollar savings and increased efficiencies. Even combining data centers is a great way to save money. Another option depending on the size of the buyer is to use this as an opportunity to upgrade IT systems or re-negotiate existing maintenance agreements that are in place.
Legal, Finance and Contracts. The legal, finance and other admin areas usually are areas of cost savings and increased efficiency. You will however have to get used to not having legal and finance down the hall. Legal should make sure that they have a full inventory of contracts and understand renewal dates as they come up. The finance department is usually one of the last to integrate due to regulatory and audit requirements. Assigning a lead in each of these areas is important as well as milestones to meet each deliverable. Keeping good historical records will be key for audit and tax requirements. Don’t let these things get lost in the shuffle of integration. I have had some situations where we have kept a handful of finance people on-hand for several years as they have the historical memory that will be needed by the buyer.
The most important thing that I can emphasize during integration process is communication. If you don’t get out there and talk to people, they will fill the vacuum with speculation that will be harmful to both companies. The buyer should also be involved in this part as your employees and customers will want to get to know them and remove the natural anxiety that comes along with the uncertainty of not knowing what is going to happen.
Chapter Six: Now you are part of someone else’s company.
Now that your deal has closed you are now part of someone else’s company and no longer the CEO of your own independent company. What happens next will vary depending on your ongoing role in the combined company. This can range from your departure right after closing, to a three month to one-year transition, to a long-term permanent role in the combined company. Even sometimes the acquired company’s CEO might become CEO of the combined company. You should be sure to have a clear understanding of your role after the closing. There are a lot of natural emotions that the CEO experiences following the deal closing. Let’s hope firstly that you have made some money in the deal. A little tax planning and investment advice might be in order. Things from no longer having a board that you have come to rely on, getting to know a new company’s culture, having a new boss or maybe just having a boss, you are no longer the leader and main decision maker and some of your team may be leaving are natural events post a deal closing. These are a normal part of selling your company, but you should expect them to happen. I have compared it emotionally to sending you child to college (you have raised the company and put your heart and soul into it for years) but you don’t have to pay the bill or get as many visitation rights. One thing that you should realize, the buyer has paid for the right to be successful or fail. Your job is to make them as successful as possible, but you cannot force them to do the right thing or what you believe is the right thing. You need to become an influencer and understand the decision making process of the buyer. Even if you don’t plan on staying with the buyer for a long period of time, it is important for your people and your reputation to stay tuned in to what is happening and when things go off the rails work with your buyer partner to put them right or at least make it known to the right people.
If you don’t plan on staying long it is best to be upfront with the buyer, even if your intention changes a few months into the post deal phase. They will appreciate your honesty and work a transition plan with you. This may also be an opportunity to negotiate some type of transition bonus or option vesting plan if you do it professionally. Most buyers have the leadership team of the target sign a non-compete and non-solicit agreement as part of a deal. You should clearly understand the terms and may be able to loosen the terms if you are upfront and agree to a moderate transition plan.
Remember many of your employees will be staying with the buyer company. How you conduct yourself and what you say will be watched and heard by many. Keep your complaints to yourself or your spouse but don’t complain around the office. Be positive even when there are some bumps in the road of integration, which there always are.
Remember that your early investors still operate in the deal world. How you and the success of the deal are perceived will endure to them as well. In the event that you decide to start or lead another company your prior investors will most likely be your first call. How they perceive your conduct and professionalism will be a big part of whether they will invest in you again. Finally, congratulations on your journey. You have put your heart and soul into your company and hopefully have now put it into good hands for its next step in its evolution and growth. Become a cheerleader for their success!
About the Author. Scott Murray is the Founder and a Partner of Trillium Ventures. He has been a C-Level Executive for the past twenty-five years. He has been the CEO of Stream Global Services, Global BPO Services, 3Com Corporation, Modus Media International, President of Stream International and CFO of The Learning Company. He has completed over 30 acquisitions and 7 sale transactions valued at over $7 billion and raised over $2.5 billion in debt and equity – both in the private and public markets.
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