Smart M&A Issue 2: How to Respond to an Unsolicited M&A Offer
On average two out of three technology businesses receive at least one unsolicited acquisition offer during their growth phase. This is as true for small tech companies as it is for big giants like Google and Groupon.
Bois Capital has seen that unsolicited offers are hardly ever the best offers. This is not to say that an unsolicited offer should be turned away as it is often a strategic acquisition by a firm that sees real value in the underlying asset and ultimately might represent an ideal home for the business. However in the absence of a formal M&A process, multiple bidders, and the “voice of the market”, the acquired company is almost always leaving substantial money on the table as the acquirer holds all the power in terms, structure, negations, and ultimate valuation.
In this article we discuss the top three rules to interpret and respond to unsolicited offer.
Smart M&A Issue 1: How to Maximize the M&A Valuation of Your Company
Many CEO’s and Boards focus almost exclusively on the revenue growth of a company to maximize the M&A valuation. While revenue growth is important in the M&A, it is critical to initiate a robust M&A process and examine the M&A market and its effect on the M&A valuation of your company. In this article we discuss the five guiding rules to maximize valuation.
Sell Side Transaction Steps and Timing
The sell side transaction steps and timing are broken down into four sections: preparation, marketing, selection, and closing the M&A transaction.
Sample Capitalization Table
Below is a sample capitalization table that tracks shareholder dilution in successive rounds.
How to Structure Effective Earnouts
An "earnout" is an acquisition payment mechanism where some portion of the purchase price of the selling company (Seller) will only be paid by the acquiring (Acquirer) company if the seller attains agreed-upon performance goals after the closing. There are three key elements in creating a successful earnout. First, the earnout should be based on achievable performance goals that increase the value of the target in the hands of the Acquirer after the closing. Second, the seller’s management team should receive adequate compensation for creating that value. Third, the earnout should provide the Seller’s management with the resources and operating freedom necessary to achieve its performance goals.
The elimination of the limits fixed by pooling rules gives buyers more flexibility on indemnity, escrow, and survival provisions, but targets still push for the old pooling rule limits with escrow (and generally the indemnity cap) not exceeding 10% of deal value and generally no general indemnities (or survival of representations) beyond the first anniversary of closing.
Negotiating Working Capital
Negotiating working capital is one of the most contentious issues in closing a deal. Determining the amount of sufficient working capital needed to fund ongoing business is a complicated exercise. From the time a letter of intent (LOI) is received to completing a purchase agreement, working capital never stays static, but one still need to pinpoint an appropriate amount of working capital to be left in the company at closing. After all, a buyer is going to want more than enough, even if the seller is only interested in the bare minimum. Every dollar one can negotiate to reduce working capital at closing means an extra dollar in your pocket. Here's what one need to think about to strengthen your negotiating position.
Due Diligence Checklist
Due diligence is a very important part of the M&A process. Preparation on the sell side is critical.