7 Steps to Prep Your Company to be Acquired

December 2, 2010

While most expansion stage software CEOs aspire to hit the IPO nirvana, the reality is that most of those ventures end in one of three outcomes. The company is either acquired, wound-down, or experiences a non-event.

Let’s focus on the acquisition. Regardless of whether a company experiences an IPO or an acquisition, both require significant preparation. Companies need an exit strategy and they must prepare for every possibility. I recently read a blog post written by Backblaze CEO Gleb Budman, who went through a six month acquisition process, only for it to eventually fall through. That’s half a year’s worth of time and preparation, flushed down the drain.

The truth is, the longer you wait to prepare, the more complicated and expensive acquisition becomes. Budman and Backblaze experienced a unique situation, but it speaks to the complexity of acquisition. I typically recommend that CEOs begin laying out their company’s exit strategy 18 to 24 months before the desired event. So, while that seems far off in the horizon, here’s a sequence of steps you should begin to follow sooner rather than later:

Hire a CFO and Get Your Financials in Order

I’ve written about this before, but hiring a CFO is an essential first step. Early stage software companies are typically just beginning to develop their finance departments. I’ve worked with companies that had finance departments with very few resources and people in place, to ones with experienced CFOs.

In my experience, companies that invest early in an experienced CFO are much more effective in navigating the evolution from basic finance function to a finance structure that’s strategically critical to expansion stage businesses. A great CFO helps transition the company from basic cash financials to GAAP based, including the completion of audited financials on an annual basis. As companies prepare for acquisition, the days of Quickbooks and cash accounting must be far behind them.

Early stage CEOs have a tendency to forgo hiring a CFO because of cost constraints. Yes, CFOs are expensive (in the United States salaries range from $175,000 to $225,000). But companies must also consider the potential opportunity loss of not having that expertise in the company.

Build Your Economic Model and Operating Dashboards

You can read more of my thoughts on this here and here, but I’ll summarize the importance of this step quickly. Financial and operational dashboards help companies make fact-based decisions, rather than ones based on gut-feel.

Capital efficient growth is essential if a company hopes to be acquired, so CEOs and management teams must develop a sound economic model and high level operational dashboards. With your operational dashboard, focus on bookings, revenue, renewal and upsell, distribution economics, operating cash flow, cash and accounts receivables, and day sales outstanding.

Have a Reputable Accounting Firm Perform a Financial Audit

There’s nothing like an audit to ensure your company’s compliance with basic financial accounting. Make sure to dive deep in to the audit firm’s assessment of your financial operations and processes to determine areas you can improve on.

Have a Reputable Law Firm Perform a Legal Audit

In an acquisition, your company will undergo extensive legal due diligence, which will uncover all sorts of issues that can delay the closing of a deal. A mini-version of this due diligence usually occurs when a company raises an institutional venture capital round. But in the case of a VC audit, companies typically don’t do much with the findings after the investment is complete.

I encourage companies to do their own audit with their own law firm. Use any information that audit provides to make process and documentation changes that will clean up the company’s legal infrastructure.

Start Meeting with Investment Bankers

There is plenty to be culled from investment bankers that cover your space. For instance, those bankers have a wider lens turned to your market, the larger companies in it (the ones that might acquire you), and your competitive landscape. As they get to know your company, they will be more likely to bring it up in their own discussions with potential acquirers.

Get Your Board of Directors in Order

Last year, I wrote a blog post about expansion stage companies’ need to build a balanced and cohesive board of directors. During the start-up to growth stage metamorphosis, a company’s board of directors should undergo a significant transformation. The board must migrate from being comprised solely of that company’s founding team members, maturing into a formalized, structured, and diverse group of advisers to whom the company’s management team is held accountable.

As your company prepares for acquisition, it becomes even more essential that this evolution has occurred. The board needs to be highly aligned around a set of key corporate objectives. We tend to favor having five board members — two from the company’s management team (CEO and another executive), one or two for investor representatives, and one or two for independent board members. A balanced board will objectively represent and protect the stakeholders’ interests and ensure the company remains on course for whatever its exit strategy may be.

The Home Stretch

As you get closer to the acquisition, make sure that you allocate at least 12 months to a few final steps. After you’ve spent the time to make sure the aforementioned ducks are in a row, here are the final steps you must take:

  • Pick a banker that best covers your market. Use that relationship to gain perspective on all of your potential acquisition prospects, their priorities, their appetite, and how best to engage them.
  • Start building relationships with your prospects through product integrations. The most effective way to get a prospective acquirer’s attention is to demonstrate how your product can build an incremental revenue stream for them. So get a product integration built first.
  • Start building relationships with prospects by following up with joint selling. Once you have an integrated solution, start marketing and selling it. Then, engage the prospect’s sales team in the process.
  • Retain the banker for a “soft sell” process. Have a banker go out and solicit interest in partnership or “strategic” funding. It provides the banker with an excuse to reach out and have the conversation with the prospect, without giving the impression that your company is actively looking for an exit.
  • Take an inbound offer and shop it around. This is where it gets tricky. The cliche of “great companies are bought, not sold” holds true in acquisitions. But I like to say that “greater companies are bought in a competitive bid.” Ideally, you would receive an inbound offer for acquisition and use it to allow your banker to shop around. That would, in theory, create a bidding situation that maximizes your outcome.

Your preparation and strategic planning to this point will help make your acquisition much more appealing. Remember Budman and Backblaze’s situation?  They learned the consequences of a crumbling acquisition on the fly. And, in the end, the deal wasn’t to be.

The good news is that Budman learned some valuable lessons in the process. With all of the planning and due diligence the company completed during negotiations, it’s now in a much stronger position to move forward. I think his experience is a great read for early expansion stage CEOs.

If you have the time, here’s an interesting and relevant video from Techcrunch that Ken Ross from ExpertCEO.com sent to me. It features business development executives from Cisco, Facebook, Google, Microsoft, Twitter, and Yahoo discussing acquisition strategies. The video runs about an hour, but it’s well-indexed and well worth your time if your considering acquisition.

The Chief Executive Officer

Firas was previously a venture capitalist at Openview. He has returned to his operational roots and now works as The Chief Executive Officer of Everteam and is also the Founder of <a href="http://nsquaredadvisory.com/">nsquared advisory</a>. Previously, he helped launch a VC fund, start and grow a successful software company and also served time as an obscenely expensive consultant, where he helped multi-billion-dollar companies get their operations back on track.