Roundtable: How Can You Prepare NOW for M&A/IPO?

We tracked down seasoned representatives from some of the top investment banking firms in the business to get their advice for early and expansion stage technology companies. In the first of this three-part series, Philip Ianniello, Michael O’Hare, and Alex Hart discuss how young businesses can get a head start on prepping for the merger, acquisition, and IPO processes.

Next week: What should management teams look for in an investment banker or lawyer?

What should startup and expansion stage companies start doing NOW to prepare for M&A/IPO?

Philip Ianniello, Managing Director, Needham & Company, LLC

Philip IannielloThe general advice we have for companies looking to prepare for either of these paths is to be as organized as possible in your day-to-day operations. Keep your legal and financial documents in order, and institute best practices with regards to forecasting, quarterly closes, NDA tracking, PR activity, etc., so when the time comes to open up these materials for outside scrutiny, the preparation and review process will be simplified. If the company is in an IP-intensive space, keeping up with patent filings and conducting regular reviews of the patent landscape is an important practice as well.

For companies looking to eventually enter M&A conversations, it’s important to generate some level of dialogue with the companies that may be eventual acquirers.  These relationships can help promote “unsolicited” inbound interest.  However, it is critical that any product roadmap or estimated financials be scrubbed before they are shared casually outside of a process.   These documents typically have a way of resurfacing during sale processes, and if you haven’t met plan, there will be an immediate strike against you in negotiations.

More on mergers, acquisitions, and IPOs:

Check out our M&A/IPO topic page for even more insights and ideas from around the industry.

For IPOs, it is helpful to have independent valuations performed during the two years prior to your targeted IPO timeframe to validate your stock option pricing. This has consistently been an area of focus by the SEC during the IPO registration process. Also unique to IPO prep is structuring your board of directors with the right mix of independent industry professionals and financial experts. These experts can be very valuable as you grow your business, and are required by the SEC.

Finally, regularly refining your company’s pitch and making sure the messaging is targeted toward potential investors (which may be materially different than your everyday pitch to customers) is a good practice. When you finally get in front of investors and potential acquirers, all of these preparatory steps will make your company come across as more professional, instilling confidence

Michael O’Hare, Managing Director, Head of M&A, Pacific Crest Securities

Michael O'HareStartups and expansion stage companies don’t have to prepare for an M&A exit or IPO until they are within a year or two of a potential transaction. However, they can incorporate certain operational best practices that will prove to be invaluable when the investors do consider a capital raise or sale.

First, the company should identify potential channel and technology partners, and attempt to develop relationships that will accelerate revenue growth and build market credibility (e.g., OEM, reseller, technology, and integration partnerships).  Over time, these partners may become likely M&A buyers.

Second, the company should implement systems that allow for efficient collection and analysis of financial and sales information.  Specifically, the executives should define which data needs to be collected so that early trends can be established.  In addition, the company’s CRM system should be tightly integrated to the financial reporting system so that all data is consistent and relevant.  Potential buyers will ask for detailed analysis and it will be difficult (or nearly impossible) to collect data on historical customers and transactions from years past.

Finally, the company should organize every executed legal document (including all license agreements and other operational agreements) into an electronic repository and maintain a comprehensive index.  Any document executed by any employee of the company (corporate, option, non-competition, confidentiality, license, etc.) should be scanned and added to the repository.  The company should make sure that there are no missing pages, including signature pages.

(Editor’s note: For more from Michael, check out our breakdown of his paper on the 8 rules of sell-side technology mergers and acquisitions.)

Alex Hart, Managing Director, Morgan Keegan Technology Group

Alex HartThe most important thing you can do as a startup or early stage company is develop a proactive corporate development plan to spend constructive time with your most logical buyers outside of an M&A discussion.  This can be done through developing commercial partnerships or even just staying in touch on developments in the industry.

Allow your most logical buyers to know your company and develop an affinity for the way you do business. The best acquisitions happen when companies are “bought” not “sold.”

Next week: What should management teams look for in an investment banker or lawyer?

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