Dealmaking should be a team sport

As the M&A marketplace and capital markets begin to show signs of life in 2010, many companies will want to be poised to maximize shareholder value by a sale to a private equity or strategic buyer, or an initial public offering. In this volatile market for big deals, there is very little margin for error. When the stakes are high, getting the details right and executing in every phase of the transaction could be the difference between a successful closing and going back to the drawing board. When the right moment arises, will you and your management team be prepared to execute?

Preparation is Essential

The due diligence process during a liquidity event can be overwhelming and grueling. Whether you are contemplating an IPO or the sale of your company, you can be sure that a team of lawyers and bankers will be turning over every stone and checking every closet for skeletons. Tactically, it’s critical to get ahead by allowing your team of professionals to help you make essential legal, accounting and financial preparations long before a deal has started.

It’s no surprise that executives do not get excited about paying their advisors before they start the deal process. So why should you? Many business owners find out the hard way that a savvy M&A buyer will try to use any potential liabilities, or even a hint of concern, as leverage in negotiations or to reduce the purchase price. Even if you’ve agreed on the purchase price, you may find it being chipped away through more buyer-friendly escrow and indemnity provisions. You will certainly be asked to make very detailed representations in any liquidity event contracts regarding a board range of business and legal matters. An inability to make clean representations may result in a purchase price reduction.

Unfortunately, a purchase price reduction may be the least of your problems. In a recent negotiation over contract terms, a buyer told our client in no uncertain terms that his company only does completely clean deals. The message was clear-we’ve been burned before and if we find a problem, the deal is off. Common problem areas include intellectual property, employment and benefits, state sales taxes and permits. Don’t be blindsided by lurking due diligence issues because you haven’t adequately prepared.

Time to Clean House

What items will your buyer want to be squeaky clean? Pretty much everything, but in particular, make sure that:

• your financials are accurate;
• your capitalization records are accurate;
• you have complied with state and federal securities laws in prior issuances of equity or debt securities;
• your board and stockholder records are in order and accessible;
• your contracts are signed, current and organized;
• your company (and not a founder or contractor) owns all of the company’s intellectual property and the company has protected it;
• your employment relationships are in order;
• you address any lurking environmental concerns and address them before the deal starts; and
• your company clears up any title defects with respect to its real estate.

Dealmaking is a Team Sport

The success of your company’s liquidity event hinges on flawless execution, and not only by the people in your executive suite. Going into an M&A transaction or IPO without the right deal professionals around you is a recipe for disaster.

The right investment banker can help you pitch the deal to the right strategic and private equity suitors and help you manage the liquidity event process in a manner that maximizes value. Working with the right accounting firm will allow your company’s management team to have greater confidence in standing behind historical financials. Retaining an experienced and skilled deal lawyer will help protect your company or shareholders from unnecessary risks and liabilities, and help you navigate the deal process. This type of a team will work with you to help clean house.

If you help run a successful business, you likely have a broad array of professional relationships. However, as you build your deal team, it’s important to fill your starting lineup with the right mix of sophistication, deal experience and bench strength. You may be able to get a deal done without a first rate team of advisors, but there is a good chance you’re leaving money on the table and taking on more risk than necessary. And in this economy, you may not even get the deal done.

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Categories: Management & Leadership