What’s the best way to prepare in advance for a possible acquisition?

Charles Swan

Charles Swan

Question: What should I do ahead of time so that my company is ready should an acquisition offer come through?

Answer by Charles Swan at The Virtual CFO

Preparation! G&A is often overlooked in favor of R&D and Sales and Marketing in developing companies. In order to be acquired, you will need to comply with basic corporate governance requirements (not all inclusive):

  • Shareholders meetings, documented
  • Board of Directors meetings, documented
  • Articles of Incorporation and By-Laws up to date
  • Stock options documented and reconciled
  • Stock registers documented and reconciled
  • Patents and other intellectual property documented
  • HR policies compliant with Federal and State requirements adhered to.
  • The ability to produce timely and accurate financial statements.
  • Copies of major contracts
  • Listings, activity and contact info for major customers and suppliers.
  • The above list highlights some of the items that will be reequired durng the diligence stage, and at closing. It can be very time consuming to gather these documents, and inability to provide them will delay a close>

    It is best to start early, maintaining files(electronic is now becoming the standard) containing supporting documents, and reconciling them on a periodic basis so that you are ready to repond ASAP. This will make the process less painful, make it proceed faster, and provide a good impression on the potential acquirer.

    Depending on the releative sizes of the entities, audited financial statements may have to be provided in the case of acquisition by a public company. Also, the ability to comply with SOX can be a factor during the close process.

    That said, good luck!!

    ADDITIONAL ANSWER:

    Ethan Stone

    Ethan Stone

    by Ethan Stone, Stone Business Law

    Chuck’s answer is great. I’ll just elaborate a bit on a couple of points.

    On the sixth bullet point (“Patents and other intellectual property documented”), remember that this includes making sure that everyone who has created IP for the company (including contractors and consultants) has executed effective, written IP assignments, preferably before they started, and that everyone who has access to trade secrets (again, remember the contractors and consultants) has executed an NDA. Also, don’t forget the need to keep track of IP you have licensed in and licensed out. Acquirers are becoming especially sensitive to open source code, so they’ll want to see a robust process for keeping track of your open source code and the licenses that apply (see this post for more information: http://www.foundersspace.com/tech/what-issues-should-i-be-aware-of-when-using-open-source-software/).

    On the ninth point (“copies of major contracts”) its worth tracking some kinds of contracts that acquirers want to review comprehensively (or want to be reassured that you have paid attention to them comprehensively): NDAs (in and out), exclusive dealing agreements (binding you), agreements not to compete or not to solicit employees or customers (binding you), agreements to indemnify (binding you), and the “assignment” provisions of all of your contracts (the exact wording of assignment provisions is important in an acquisition, so the best practice is to keep a spreadsheet listing the section number and text of each provision).

    It’s worth mentioning that once you start keeping track of these things systematically, they can prove useful in conducting your business. Systematic controls over IP are, of course, crucial to protecting it and avoiding problems, such as violating the license terms of open source code or exceeding the permitted uses of software you have licensed. Having a centralized system to check whose confidential information you’ve agreed to keep secret or whose employees you can’t poach, for example, can avoid embarrassing (if not worse) mistakes. So if an acquisition isn’t imminent and you’re not sure which of these tasks to tackle first, start with the ones that seem most useful to managing the business.

    Comments & Advice:
    1. Larry Davis says:

      You should begin preparing for the possibility of being acquired (or any liquidity event, for that matter) the day you launch your company. On that day alone, you should already have articles of incorporation, bylaws, a federal tax ID, state of incorporation ID, sales tax number, issuance of founders stock, and a very simple cap table….and you haven’t even done any business yet!! You may even have a lease agreement for your office space. As Chuck mentioned, all this should be stored in a data room so that you can easily grant access to any potential buyer.

      Next, stay on top of documentation as your business develops: licensing agreements, patents, tax returns, annual audits by your CPA firm, copies of all documents related to subsequent rounds of financing, etc.

      The window of opportunity can open and shut very quickly when dealing with a potential buyer. You are either prepared for “game day” or you are not – it’s that simple! As an additional incentive to “be prepared,” my experience has been that companies who ARE prepared to be acquired command higher prices from purchasers than those who need months to get ready.

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