Introduction and Background
Craig Slayter has more than 30 years of experience as a Silicon Valley startup entrepreneur. He has functioned as CEO, Founder, General Manager, and Mergers and Acquisitions executive in his many professional capacities over the years. He has raised over $50 million in venture capital, and has assessed hundreds of companies for potential acquisition. He has participated in acquisitions between $5 million and $100 million. The first company Slayter founded was when he was 31. He was CEO of Softstyle, an embedded software company which he sold 5 years later to Phoenix Technologies. There, he participated in taking the company public. He was the cofounder and first CEO of Odesk, now known as Upwork, the world’s largest freelance marketplace. He is also host Jeffrey Slater’s father.
Is This Deal Even Closeable?
A key thing to keep in mind in the world of mergers and acquisitions is that a company usually has to look at around 80 candidates to be able to close one transaction. So if your company makes the cut as one of those candidates, you have 79 other contenders also wanting to be the chosen one. It stands to reason you want to remove as many of the roadblocks as possible to the potential acquisition or merger. Every deal requires a lot of time and attention, so before they dig too deep, they are going to ask themselves, “Is this deal even closeable?” And then, right on the heels of that will be, “Is it even worth closing?” Craig Slayter shares his decades of experience to help you get your business in shape, which is a huge part of a successful exit strategy. Following are his list of 5 deal stoppers, as well as a few bonus ones, to help you get ready for your exit.
Deal Stopper #1
In reviewing your company for acquisition, the buyers may check it out themselves, or they might hire an experienced investment banker to do the search, mitigating time and risk. Either way, a great deal of time and effort are put into it, and there are specifics that they look at to help them make their decision.
Top of the list for deal stoppers are founders and investors who are in conflict, or are not aligned. Some are so far apart, they can’t even agree that they want to sell the company. It’s vital to get yourselves together over this before you go into any meetings or negotiations with buyers. “If you have a board,” advises Slayter, “don’t go rogue as a CEO, and make sure that at least your chairman is aligned with it. We all know that in the end, everyone has to sign the acquisition documents.”
Make sure you’re charging the proper amount. Overcharging with no basis in fact can be a real dealbreaker. This is usually dealt with early on in the negotiations. The buyer will ask what your price range is. “It should be reasonable based on factors,” Slayter advises, “like your last 12 months, at a normal revenue multiple. If it’s outrageous, you’ll kill the deal almost immediately.” One way to assess the price range is to look at what has been acquired in your area. Most of it is public, so it is readily available information. Check the filings and you can quickly see what they sold for. You will find all the transactions and the dollar values. “Another approach,” says Slayter, “is to hire an investment banker to shop your company, and first thing, he will put together a list of comparables, or you could do that yourself.” Either way, you will know if your expectations are reasonable.
Deal Stopper #3
Clean up your cap table. “Most smaller companies don’t do a good job on the cap table, (how they are capitalized), but that’s usually a very early-on request. They want to know who controls the shares and what special provisions there are, in doing any potential transactions. This defines who owns the company. If you have shares that are not listed, take care of it. If it’s not done, it’s unsaleable.” You should have this cleared up before you go into talks. A clean cap table makes it easier to trust that it’s worth the effort to proceed. The other side of the table doesn’t want to run into a major snag down the road, so be upfront about any problems, and clear them up right away.
Deal Stopper #4
Get your messy books in order. There are numerous signs that your books are a mess, things like delinquent tax returns, not having closed out your books from last year, and even your answers to questions posed to you. This isn’t just a little problem. This is a huge red flag to buyers.
Craig Slayter has some suggestions for you. “If you’re smaller, get a CFO to come in from outside and clean them up. Audited or unaudited financials need to have your operating level financial statements in some kind of order. If you can give your last quarter’s financials before you have the current ones, you can give them a weekly operating or sales report, advising them if things are looking good in this quarter, and letting them know that as soon as you have the final figures, you’ll get back to them on that.” The company doing the acquisition may bring in auditors, and they do help speed things up. Any delay increases the risk of a deal not going through, so it’s just good business sense to get everything in order.
Deal Stopper #5
“If you don’t have clear title to intellectual property or product specs and you can’t prove that you do, no transaction is going to occur. Let’s say your company has been around for 5 years, and let’s say that something happens in the very beginning, and one of your partners left and they still have a proprietary interest in one of your key products or technologies or markets. If that isn’t cleaned up, the transaction is not going to close. If there is no clear title to your key assets that help make up the valuation, this is going to have an impact. The value of the deal could go down, or it could crater the deal.” Slayter has seen many examples of that over the years.
Bonus Deal Stopper #6
Keep integrity in all your dealings with your buyers. Maintaining integrity all the way is the most important thing, so there is trust building. “They’re going to find out eventually, so if you haven’t paid payroll taxes, or you have a lawsuit pending, bring it up.” When trust is broken, it often results in deals broken.
Bonus Deal Stopper #7
Many companies may also have entities in foreign countries. Make sure they are all in order and organized as part of your cap table. You had better understand the structure of your company, so you can explain it, and be able to whiteboard it for your buyers. At some point, you’ll have to explain the cross-ownership, and draw up all the various entities, and who owns what percentage of each. A lot of international companies who are entrepreneurial may not have made the boundaries clear, or issued all the shares, or filed their taxes, but you need to be open about that. It builds trust.
Bonus Deal Stopper #8
Can the cultural merger be a deal stopper? Sometimes it can, according to Slayter. You’ll need to find an agreement with buyers for a cultural integration strategy that works for both parties. Slayter explains that there are 4 ways to deal with this.
- You can merge them into an existing culture.
- You can integrate them, ending up with a hybrid culture.
- You can run them separately, think Zappos and Amazon.
- You can assimilate them into a new culture, and abandon the old one.
Parting Words of Wisdom
“My background and experience have taught me that it is important for leaders of companies to always be thinking about an exit strategy. It’s a win/win. Most of the value in a company comes from some sort of exit.” If someone came looking to acquire your company, what about it would give them reasons to want to buy it? Have you rectified the deal stoppers?