M&A: From LOI to Deal Closed

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Yair Snir is a managing director at DTC focused on investing in early-stage companies across Israel and Europe. His current investments include companies such as Lightbits Labs, Pecan.ai, Swish.ai, and VAST Data.

Good companies get bought, not sold, cont’d.

Bought, sold. This may be splitting hairs. But how does an M&A transaction get done for venture-backed startups? There are planned acquisition processes and there are opportunistic ones. Planned is a process you kick off, opportunistic would be initiated by a buyer. In either case, it starts with having a strong list of potential acquirers (as covered in M&A Part I). Then, it’s a sprint with those potential acquirers that (hopefully) results in Letters of Intent. From there, it’s due diligence time which can last several weeks. With some luck and a lot of hard work, the deal closes and you’re onto the post-acquisition integration.

 The Shopping Sprint
In an opportunistic process, you’ve been approached by an acquirer. If you decide to pursue a path to acquisition, there’s a compressed timeframe to continue that conversation and to reach out to the other companies on your potential acquirers list. In that initial conversation with the active buyer, you can expect to learn how much the buyer intends to offer and a framework for the process.

For a planned process, you control the timing but you have to consider what might be your triggering event that creates some time-bound pressure. In the opportunistic example, the triggering event is being approached by an active buyer. For venture-backed companies in a planned process, the triggering event is often a funding round. You might become interesting to the companies on your list if they think they can acquire you at today’s valuation versus at a higher valuation after you’ve raised another round.

Then things get hectic.

Road to an LOI
Regardless of how the process started, you, along with your board and advisors have a few short weeks to negotiate with all interested parties. As a founder, you’ll either reach out to potential buyers yourself or will direct board members to do so on your behalf. Buyers will often want to work with a founder/CEO directly but running in parallel is unavoidable. Realistically, the entire process from start to a signed Letter of Intent (LOI) could be done in as few as one to three weeks.

The goal of these short, stressful weeks is to get the best terms possible in an LOI from one or more potential buyers. Companies that are active acquirers will move fast, responding in a day or two with interest. Then the vigorous negotiations begin to determine price, timing, team retention and other high-level terms.

When you are working towards an LOI, keep in mind that you are determining the next phase for your company and team. Even if the sale price isn’t going to break records, you have the opportunity here to create a successful outcome that will maximize your long-term impact.

The Shopping Sprint ends when you sign an LOI, putting you in a ‘no-shop’ mode and the due diligence process with the selected buyer begins. An LOI is not a legally binding agreement; it does not guarantee a sale. Generally speaking, either side can walk away by simply letting the LOI expire.

Note: This is not an open-air auction. There should be NDAs in place throughout the Shopping Sprint. You are not sharing details with buyers of who else you’re in discussions with or how much others are willing or likely to pay. This is to both secure any current offer and to optimize the price of any potential offer.

Bring in the Bankers?
Potentially. Acquisition processes can be run with or without bankers. The more complicated the situation, the more benefit there will be to working with a banker to drive the process. The variables here include timing, cost, the competitive landscape, your company’s momentum and the public and private markets. Your board and advisors should be helpful in deciding bankers or no bankers.

Diving into Due Diligence
Buyers will have a defined due diligence process that they work against. The goal of this phase is for the buyer to get to know the company from multiple aspects. They’ll ask hard questions and discover discrepancies – many of which exist not because of deficiencies but because no two companies are set up the same. As CEO, it’s your duty to have all the needed info ready and organized for this to be an expedited process.

The diligence process is as much for the buyer’s full M&A team as it is for the deal owner, i.e., the relevant business/product executive championing the deal internally. It’s the deal owner who will convince the rest of the stakeholders to proceed or to walk away from the deal. This is also the person who will on the “Day After” take on the acquired company and will wear its success or its failure.

Defining the Day One
After the LOI is signed, details around employee retention, team integration and reporting structures are decided. There can be a tendency to over-index on the deal terms and not spend enough energy on the integration or “day after” experience. As CEO, you should be digging just as deep into understanding the “Day One” experience for your team.

Your team successfully navigating an M&A transaction depends on how many certainties you can define and deliver for them. Focusing on the minutia now sets you – and your team – up for success in the next phase.

Questions to consider:

  • What are the buyer’s expectations for the success of the acquisition? What would be your business targets?
  • Who will you and your team report into? What is your team’s charter and who defines it?
  • Who on your team stays? Who goes? And why?
  • What does the compensation structure look like? Will there be parity in benefits?
  • Where does your budget come from? Is there room for headcount growth?
  • How integrated will you be with the “mothership?” Or will you continue to operate independently? It’s important to understand this from both a product & business and a cultural frame of reference.

The goal is to build a roadmap for your team that reflects what the next one to three years will look like. Ideally these conversations will result in agreed upon integration plans. These important details aren’t usually written into the acquisition deal itself, but they are crucial to having a smooth post-close integration of team and product.

You’ve been acquired!
These two articles (read Part I) are a thumbnail sketch of what happens during an M&A process. The goal is to spark thought and conversation way ahead of any M&A activity. From experience on both sides of the table, we know the best outcomes happen when strong leaders of good companies have planned for all eventualities. While IPOs may get more of the headlines, a well-timed, well-planned acquisition can mean even larger opportunities for you, your team and the technologies you’ve built.

This article originally appeared as a part of the TechCrunch+ series on building startups. 

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