May 14, 2005

Being prepared for getting acquired

Advice from a recent panel discussion organized by IBD Network on prepating your company for M&A:
* Don't...
o ... run your company without contemplation of a sale
o ... sell from weakness, not from strength
o ... be piggy: don't expect to double the initial bid
o ... tip your toes in the M&A pond: be in or be out

* Issues that make buyers walk away from a deal: the buyer's lack of comfort that may not stem from anything as dramatic as fraud or misrepresentation, but from a feeling that the seller's processes are not solid

* Valuation
o Sellers tend to use public market comparables or deal comparables: they are easily obtained and tend to increase the valuation
o Buyers prefer to use multi-year discounted cash flow (DCF) analyses

* Structuring deals
o Buyers do small deals for cash, not for shares; if they want IP or a team, they will structure the deal as an asset purchase
o If they are buying an ongoing entity with revenues and customers, they will do a stock purchase
o Unanimity that earnouts don't work and inevitably lead to bad blood and disagreements

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.