Doing a distressed sale
We just watched a company go through a very intense, distressed M&A process that fell apart in the final hour. Below is what we observed.
Protect your team from getting poached. An acquirer is about to learn a lot about the company and the team, and in some cases they may conclude it’s cheaper to hire some of the key team members as opposed to paying a premium for the whole company. Make sure your NDA or LOI includes a provision that the acquirer cannot hire any of your current employees now or in the future.
Try to keep the secret sauce a secret. The acquirer is going to want to access to your code at some point. If you agree, they’ll have the roadmap to your product which can be replicated in 3 to 6 months with a big enough team of developers (don’t kid yourself that it can’t be). Do everything you can to keep critical components of the code/tech a secret so the acquirer doesn’t decide they’re just going to go build your product themselves as opposed to pay you a premium for the company.
Your team has to stay quiet. Make all employees who know about the deal sign confidentiality agreements that they will not tell anyone about any M&A. Your current employees are often friends with former employees, and all it takes is an attorney working on contingency and a frivolous claim from a former employee (wrongful termination, sexual harassment, age discrimination, etc) to put you in a position where you’re forced to settle a lawsuit before close. You can bet the acquirer won’t allow the lawsuit to remain outstanding, even if it’s an asset purchase, and insurance will drag their feet too slowly for EPL insurance to cover you before close.
Silo your employees from the acquirer. The only people that should be in touch with the acquirer are the CEO and the investment banker. Other employees shouldn’t be accessible to the acquirer. As the deal drags on, it’s not uncommon for the acquirer to reach out to the employees he really likes and try to steal them, especially if you didn’t follow the rule in the first bullet. Likewise, your employees should not have the acquirers contact info. If they do, you need to monitor emails.
Make sure there is a release date. It’s not uncommon for the acquirer to have a breakup fee should you decide to sell to someone else. This is typical, but make sure there is a release date that is reasonable. You want the release date to be short enough so that should the deal fall apart, you have cash to pursue other options. If you’re not profitable, an unscrupulous acquirer will drag you out until you’re out of cash then change the deal. You’ll be out of cash to pursue other options, and that’s their plan.
Above all, don’t naively go into a deal thinking the acquirer is going to treat you well. Even if your point of contact is a good person, there will always be a bad guy (his/her boss, corporate counsel, the board, etc) that can throw a wrench into your deal.
