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Mergers and acquisitions are complex business processes that require significant due diligence from each parties. In fact, mergers and acquisitions are so complex that 70% to 90% fail the examin accordance with Harvard Business Review. That’s why it’s critical that founders have the right tools when talking to potential buyers to know what’s at risk — and mitigate that risk where possible.
What does a successful transaction appear like?
A successful M&A deal relies on the discipline and internal organization developed throughout a company’s fundraising cycles. Successful founders treat each fundraising round as an iterative exercise to organize key executives and stakeholders for the consuming nature of the M&A process.
Founders must balance the competing interests of running the business with providing the information crucial for the buyer’s due diligence and, ultimately, transferring the knowledge management crucial for the smooth integration of the acquired business post-closing into the buyer’s organizational structure.
It is also essential to build good relationships and trust with key stakeholders on the buy-side so that founders can build on these relationships when negotiating key deal issues later in the M&A process.
What are the reasons for terminating a contract?
Several aspects contribute to a failed deal: founders lose credibility with key buy-side stakeholders; key customers do not renew contracts; founders fail to anticipate risk allocation and compensation issues; and investors do not align.
Founders lose credibility with key buying stakeholders
Most startup M&As require founders and key executives to remain with the buyer for at least 18 months after closing or otherwise forgo significant consideration for the deal. If the buyer senses any potential day-to-day friction or trust/transparency issues, they might be more more likely to walk away from the deal than negotiate the issues that inevitably arise during a transaction.
Key clients do not renew their contracts
The M&A process is all-consuming, and founders who lose focus on the core business—or don’t delegate day-to-day oversight appropriately—risk losing key revenue levers that may drive the overall value of the deal for the buyer. If the buyer anticipates problems with key accounts, they could walk away.
Failure to anticipate risk allocation and compensation issues
It is in the founder’s best interest to get ahead of any issues and be prepared to clarify the potential scale (or lack thereof) of negative scenarios which will arise after the transaction closes.
Therefore, founders should conduct a thorough audit of their business to discover any major red flags which will arise during the due diligence process and that would potentially cause compensation issues. However, if the founder is not thoroughly prepared to clarify the root reason behind the problem early in the due diligence process, the buyer may insist on dollar-for-dollar compensation to resolve the issue, and the deal may now not be as attractive because it once was.
Investors disagree
By not engaging key investors early in the M&A process, founders risk losing investor support when it comes time to hunt shareholder approval for the deal. Founders should concentrate on valuation inflection points for investors who may have invested at different valuation points to make sure they are aware of the investors’ share of the sale proceeds. Founders must also plan why a sale is the most suitable choice for the company.
Be careful when disclosing information to potential buyers
While it is essential for business founders to rigorously prepare the appropriate information to share with potential buyers, some of this information could prove damaging if the deal falls through.
- Customer Forecasts/Roadmaps:If the buyer has not yet sold to your customer base, they’ll use internal customer forecasts/roadmaps to re-establish their internal sales goals and claim this information was public knowledge.
- Employee Performance/Evaluations:Be wary of sharing too much information about star employees. If a buyer doesn’t know who they need to hire from your team before they begin due diligence, they’ll easily create a very detailed job description to focus on those employees if the deal falls through.
- Product Development Plans: Be especially careful about sharing detailed product roadmaps until you know for sure that the deal will close. If your buyer is selling a competing product, one of the goals of the deal could also be to eliminate you as a competitor.
How to be careful before finalizing a transaction
Negotiate a very detailed letter of intent/term sheet
If key negotiation issues are conducted up front (before detailed due diligence requests are made and internal information is shared), there is less likelihood that key information might be shared and the deal will ultimately collapse as a result of some fundamental issue later in the process.
Create non-downloadable or redacted versions of your data room documents
If there is information that is particularly sensitive, make sure it can’t be retrieved during the initial due diligence phase and consider redacting key information comparable to detailed customer numbers and/or names. Additionally, founders can ask to limit access to specific members of the buying team on a need-to-know basis.
Request two-sided information
If the founder is getting shares in the buyer as consideration for the deal, the buyer must be willing to offer the founder with information about their business. If they are not, it might be a sign that the partnership is not going to work out, and the owner must be careful not to disclose too much information up front.
Summary
There are countless complexities involved in mergers and acquisitions. However, founders can successfully navigate these complexities with proper preparation and contingency planning.